5 Tax Environments

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Hey, good afternoon, everyone. Welcome to We're Talking Money live, coming to you from the Wilmington studio. I'm Phil Clark and I'm going to be your host today. I'm with OmniStar Financial Group. Thank you so much for tuning in, and I sure hope you get a lot out of today's episode.

We're going to be talking about something pretty important. We're only a few days away from tax filing deadline. That's the fifteenth, so here we are on the third day of the. And we are literally just days away, so we're going to talk about tax environments. There's five of them as we see it, and we're going to go through the five tax environments, what they are, how they work, and what you need to know to take advantage of them.

A lot of people that we talked to, a lot of our clients, they don't take advantage of the benefits that are right in front of them, and that's because they're not properly or they're not aware of those things. No one has properly educated them on them, so I'm going to do my best to share some of what you might want to know or need to know as you get towards tax day.

Now, some of these things you can't use for the upcoming tax filing deadline, because we're past periods that would be considered a deadline for implementing some of these things, but some of them you can still use, so you want to be aware of those and preparing for it next year, so your 2021 year. Preparation is essential to reducing your taxes.

So let's get started. Again, we're going to talk about the five tax environments, and we'll go through each one from what I think is maybe the least complex, and then we'll go a little deeper into more complex things. But just because they're not complex, that doesn't mean that they're not important. For example, our first environment we're going to talk about: personal taxes.

All right, so environment one is your personal side. It's your personal taxes. So what do we need to know about this environment? For starters, it is the least efficient of the five. That's the first thing that you need to know. It's not efficient, and you'll see why in just a minute.

So when we speak of the personal environment, think about earned income, basic needs, basic living, food, shelter. Those things would come under personal. Tax advantages in this environment? They're limited. Why is that? Well, all of your expenses here are after tax. So anything that you're spending money on in this environment, it's always going to be after tax, and so that makes it one of the most expensive tax environments of the five.

Now, when you think about the personal environment, basically it goes like this: all of your income defaults to the personal level. So unless you've made other plans or you have other arrangements to trap some of those dollars or to shield them from the personal level of taxation, they're all going to head to this environment called personal. When they do, you're going to pay tax on that. And so things that you can. That you already know are going to flow into this area would be things like your earned income. Tax deductible flows, or is part of this environment.

Tax credits. Think about what's a good example. So child tax credits, for example. If you have children, you get a tax credit. Now, that's different than a tax deduction. We're going to talk about that in just a minute. So taxable income, taxes owed, all of those things at the personal level, you think about those in the personal environment.

And so what do each one of those really mean, and how do you mitigate tax inside this personal environment? Well, first of all, if you have earned income, the first thing you want to do is figure out what amount of that income can you shield from tax. And the first way to do that is look for ways to defer that income or to put it in other places. So things like a retirement plan, things like cafeteria plans that your employer, you can use those things to put some of those dollars away or into another area before they come to you, where they're going to be taxed. So that would be the first thought.

So check those things as you go through 2021. You can't change any of that for 2020, but you can certainly change it for 2021. So if you're not taking advantage of those things and you don't know what is advantageous or not, reach out to. We're happy to help you with that.

Tax deductions. Now, this one's very important as you're filing your taxes here, and even though you've only got a week or so to go, you can still talk to your CPA or your accountant about these tax deductions. Now, here's what you need to know: standard or itemized. Most files, gosh, probably 90% or better today, don't file with item like they once did. And that's because the tax changes over the last few years took the standardized, the standard deduction that everybody gets, they took that to a much higher level. And so when that occurred, item became not a thing of the past, but certainly not as useful as it was, and that has really changed the way people file their taxes. Much simpler if you're not itemize, and it's easier without a doubt.

So if you're married filing jointly, you've got about twenty-four, 24 thousand-ish dollars to use as your standard deduction. So if your itemized deductions don't go over that amount, then you can't itemize. So maybe you're wondering, well, which is better for me? Well, might not matter which is better for you. Might simply matter which one's going to reach that number, the limit on the standard deduction. You get the best of either numbers. So if your itemized deductions go over that number, you can take the itemized. If they. Below that number, you get the standard. So you get the bigger of the two numbers.

Here's where a couple of key points need to be addressed. One, you can use a lot of things to reach this itemized status. Your state income tax, you can use that as part of your item, but it's capped at $10000. So if your state income tax goes above that, you can't use it. But let's say that. Have 10 thousand, then you've got mortgage interest, and then you've got maybe some charitable giving. You could easily go above the $24000 number, and if you do, then item clearly is a better way to go. But if those things don't get you to that number, then don't worry about it. Just take the standard deduction.

Now, taxable income. We talked about tax deductions. Those are things that you can still consider now, prior to your filing in the next week or so. And then taxes owed. So we just talked about that. You got a limit on the amount that you can use towards item. That happened in 2020. So if you're not sure about those things, check with your CPA, check with your accounting team, and figure out if any of these things can benefit you as we get closer and closer to the deadline.

And by the way, most of you already know this, the deadline was extended for a month this year, so we should have had this conversation several weeks ago. But instead of April 15th, they gave us an extra month, and you all know why. That's due to the COVID thing that we've all been dealing with now for the last year, year and a half.

So let's leave environment one, which is the personal side. Let's take a look at environment two, and environment two is the corporate world and corporate tax. So all you business owners out there, listen up. This is important. Anybody that might be considering a business, maybe you're thinking about buying a business, maybe you're going to start a business, you want to hear this part, because it's going to make a huge difference in how you might consider establishing your business or what you do with your existing business.

So with the right knowledge, this environment provides tremendous favorable tax treatment for excess income, depending on the structure, and there's lots of them. We're going to talk about a few of them in just a minute. Many advantages are gained through the exploitation of current tax laws. So these are all things that you would say are legal, or maybe there's a loophole, but however you want to describe it, the fact of the matter is all of these things should be considered if you're a business owner or soon-to-be business owner, because they make a huge difference on your taxes and on the bottom line.

So what do you need to know about corporate structure? First, entities. What are they? There's S Corp, there's C Corp, and there's. Sees. Those would be the basic three. Those are the ones that you've heard about. Now, there's partnerships, there's sole proprietorship. Those are not corporations. A partnership certainly can be taxed as a corporation. So there's lots of entities, and there's a number of styles that people will use as it relates to setting up their business structure. But the three main ones: S Corp, C Corporation, and an LLC, limited liability company.

So they can be used for lots and lots of corporate deduction. That's just the beginning, though, so don't think that that's all we're talking about here, is just setting up a structure and getting some deductions. There's much more. So literally everything which comes into your corporate structure, that's business income, and literally everything that goes out is a business expense. And so depending on the nature of your business, the structure that you use, as well as your. And objectives, risk mitigation strategies, those are right at home inside of these corporate structures.

So now we're not talking about just tax. We're talking about risk mitigation. So liability risks, as you think of it from the business owner's perspective, those are real reasons why you'd want a corporate structure. But if for no other reason, taxes, that's a big one. So let's stay on the track of taxes. So depending on what you are trying to accomplish, you need to decide which business structure makes the most sense for you.

So let's talk first about C Corporation. Why would you set up a C Corp? When would you set up a C Corp? This entity probably has gained a pretty bad reputation as it relates to tax, and I'm going to tell you why. But it has regained some popularity under the current tax laws. So it's not nearly as bad as it used to be. It's not as good necessarily as it could be. It can always be better.

So C Corporation, the entity has regained some popularity under the current tax law, but you have to be careful here, because C corporations are known for double taxation, and that's not something that can easily be avoided. In fact, it's almost impossible to avoid it. Why is that? Well, all of the income to a se? Is going to be taxed at the corporate level. Now, in a C Corp, you can have retained earnings, but it's all going to be taxed as it comes in, and then it's going to be taxed as it goes out in the form of dividends to its shareholders. And anyone who collects income on a W-2, they're going to pay income tax. So taxed on the way in, taxed on the way out. And if we're strictly speaking of business owners, then they're going to be taxed on all the dividends that go out to them. So they're going to pay it at the corporate level when it comes in, they're going to pay it when it goes out. Selling that C Corporation, that brings about another set of double taxation.

So C Corp, when and why? Well, there's some reasons today why you could use a C Corp and use it very favorably. And so I would tell you, don't discount a C Corp, don't ignore it, because depending on your situation, it could be a reasonable way for you to structure your business. That would be something that we would want to talk about at a much. Level, because once you make that election, it's a little hard to undo it.

Let's talk about something that's more popular, which is the S Corporation. Now, everybody's heard of that, but I want to put a little something on the table for you to consider about an S Corp. A lot of folks say that they refer to that as a corporation, but an S Corp is an election, not so much a structure. It is an election. You can have a regular corporation and have it taxed as an S Corp. So it's a part of the IRS guidelines, or part of the Internal Revenue Code, and it is an election. So, for example, you can have an LLC taxed as a Subchapter S. So again, you make the election.

So S Corp, when and why? When would we have one of these, and why? So first, it's an election, not a structure. Second, you want to think about an S Corp when you are going to be taking income as an owner. It can reduce your self-employment tax. So if you're in an LLC and you've been watching your business grow, it's getting better, it's flourishing.

then you might want to think about taxing it as an S Corp, and you can't change that for 2020, but you can certainly make that election as you go forward. And the reason that's important is every dollar that comes into your LLC is a pass-through. It's going to flow right down to you at the personal level and. Going to pay self-employment tax on 100% of the income.

With an S Corp, on the other hand, if you choose that election, you can reduce a lot of that self-employment tax. Very, very important, because we're talking about a fifteen, a little over 15% tax on every dollar coming into that LLC that flows down to your personal tax return. Now, if you elect the S Corp, basically what happens is you take a reasonable salary, and everything beyond that you can take as a distribution, and that distribution to the owner does not pay the self-employment tax. So you can avoid some of those excess taxes just by making an election.

When would you make the election? If, let's say, for example, what most people have are LLCs, when would you make the S election there? A number of theories out there as to when you would do it, but I would say not so much a precise time on when you would do it. I would say it's more about your income. So the higher your income and the more your business is growing. If you've got several $100000 a year of take-home, if you will, or net out of that LLC, you absolutely should consider an S Corp, because you can reduce a lot of that taxation. Distribution to the owner, you absolutely want to think about the S.

Now, the LLC, so popular, everybody does it. Why? Why is that? Why does everybody have an LLC? Well, they're easy, for one. Super simple to set them up. They're pretty cost effective, but they're not always the best when it comes to taxation. They definitely give you some corporate feel, and they give you some protection as it relates to liability. So all of that's great, but they may not be the end all be all. You might want to consider an S Corp election, even though you have the LLC. And again, watch your income. When you start taking, say, 100 thousand a year out of that LLC, you probably want to consider an S Corp election to help you reduce some of those self-employment taxes. Excuse me.

So, in the corporate world, there's a lot of things you can do to reduce taxes. The corporate veil helps you from a lot of angles: liability, tax, and then the, excuse me, the reduction of the self-employment tax. Taking an LLC or a corporate structure and giving it some chapters election, which means the taxes become flow-through, if you will, much like the LLC, but you have the ability to tax some of it on your W-2, self-employment tax applies, and then the remainder would go to you as a distribution. No self-employment tax. Keep in mind, you can only have up to 100 members in that entity, so if you're going to go over that, S Corp may not be the right fit. But worth considering. So don't forget that. If you're an LLC, don't forget that.

Now, where an LLC makes sense and perhaps you don't need the election is if you're simply using an LLC for liability protection. Maybe you've got some property that doesn't generate income, or maybe it's a small amount. If you want to own that property in something that gives you some planning for estate planning purposes, or gives you the ability, I should say, to do some pretty creative estate planning, or maybe you just simply want the liability protection in owning real estate in that LLC, that could be a great way to use it without having to make the S election.

Now, lots of thought around this. We can't cover all of it in one show, but just know that an LLC absolutely has a place. Very popular, and they do some really, really good things. S Corp, really, really popular. Not always used when it should be. I think that should be considered more often, and be nice for you to have your CPA or your wealth advisors or someone like OmniStar help you with that, so you make the right decision.

Let's move from environment two. Now let's head into environment three. This is tax. So, tax deferral. What does it mean? Everybody says, what exactly is tax deferral? I hear that question every year, and I think a lot of people get confused about what tax deferral is. Tax deferral should never be confused with tax-free. You hear it talked about in life insurance. Folks will say, oh, yes, this is tax-free. What they mean in the cash value, a lot of times, is it's tax-deferred. Now, some of it can be tax-free, but generally, once you get past what you've paid in in terms of premium, then everything else is potentially going to be taxed as ordinary income. So you have to be really, really careful when you hear someone talk about tax-free. Sometimes what they really mean is tax-deferred.

So we're going to talk right now, environment three. We're going to talk tax deferral. So let's talk about what it means to defer tax. And again, we've already said, doesn't mean to eliminate tax. It is deferring taxes. That means we're going to pay for them, or pay those taxes at some point, or someone's going to pay them. So when used properly, deferral is a great tool. So because it's not tax-free, it doesn't mean it's not good. It is a great environment. It's a great strategy when used properly. So deferred savings, without a doubt, they can improve your long-range wealth accumulation strategy, but you've got to know when to use them and how to. Them.

So when and how? The most common use of tax deferral, let's get everybody on the same page here, what's the most common form? Well, it's pretty much for everybody. It would be saving for retirement. So your 401(k) plan, that'd be considered a tax-deferred environment. You get to put money in before tax, so before it comes to us as taxable income, you get to put it in this vehicle, and it grows without tax, but it's going to be taxed when you begin to make. In retirement.

Now, simplified employee pension plans, or SEP, those are very popular, tax-deferred. Defined benefit plans, also known as a cash balance plan for some of you business owners, under pension rules. That is, it's kind of a hybrid. It looks and feels a little bit like a 401(k) but acts more like a pension plan in terms of how you fund it. Again, tax-deferred. So it's going to be taxed when the money comes out, but money goes. Before tax. So that would be a classic tax deferral.

Annuities. And this one, we've done some shows on annuities, and while they don't always have an appropriate use in everyone's situation, they are appropriate for some situations, so don't them out. Annuities have quite a stigma, but it doesn't make them all bad. I really think, as we've talked about on other shows, the stigma is more the people selling them, not the annuity contract. Annuities generally are a good tool, all about tax deferral. They're also a pretty good tool for income. That's what they were designed to do. So I don't want to make this an annuity show, but just keep in mind, when you hear that word, don't all of a sudden have this grimace thinking that they're bad. Usually annuities, or that they've been stigmatized because they've been misrepresented, mis-sold.

Now. On track with deferral, or tax deferral. So, one more thing that people think about, or forget rather, when it comes to tax deferral is real estate. And a lot of folks don't realize that investment in real estate can be deferred as it relates to the capital gain tax, and it's an interesting little environment. If you wanted to sell a property and move those moneys into another property, you can use something in the IRC, your Internal Revenue Code, called section 1031, and that allows you to sell a property, buy another one. And there's quite a few hoops that you jump through. They're not too difficult, but you've got to do certain things within a certain amount of time, and if you do those things, you can carry on that, or delay that capital gain tax bite. So another opportunity to use tax deferral there.

So depending on the vehicle that you use, your money could. Saved before or after tax. In an annuity, generally, it's going to be after-tax money going in, but still tax-deferred on the growth. With 401(k)s or es, chances are that money is going in before tax. So in a standard set, if you will, or in a traditional kind of retirement plan, it's going to be taxed when it comes out. But when you put the money in, it's going to go in pretax. So huge advantage there. But again, don't forget, this is deferral. Good thing, but you are going to pay tax on it.

So what's the takeaway here? A lot is gained by deferring taxes, no question, particularly if you have a lot of years left in your career. So if your earning years are still pretty high, if you think you've got 1015 years to work, then a tax-deferred environment can be a huge opportunity for you. Now, what happens? Money when you reach retirement. Pay attention here, this is very important. You're going to be taxed on this money when it starts coming out in retirement.

What about if you're well into retirement? This is even more important today, and I want to speak to this for a minute, because some of you are trying to plan for your retirement income or retirement distributions coming from these accounts that have embedded tax in them. Well, there's a real problem with those accounts today, because we've lost what was known as an IRA stretch provision. And for a while we enjoyed this. Or provision, that said if you passed away and left your IRA to your children, they could stretch it over their lifetime. Tax required minimum distributions based on their mortality rate, and that would allow them to leave the moneys in that tax-deferred environment, in some cases, 1020 30 years, which really, really increases the opportunity. Them to grow that money.

That's been taken away. The most you can do today is 10 years. So if you leave an IRA or a 401(k) to your children, they've got to have it out of that environment with 10 years, and you can imagine they're going to pay a significant amount of tax. So if you've got a 1 million dollars IRA, you leave it, within 10 years it's got to come out of that environment and be moved into ownership of the beneficiary. Well, they're going to. Full income tax on that. So if they're already making a couple 100 thousand a year and you leave them a 1 million dollars, they're going to pay the maximum taxes on that money. So, better to have a plan for that.

So if you're already in retirement, what can you do? Couple of things. One, you can use the distributions from those IRAs. You pay the tax on it now. Presumably your tax rate is lower today, now that you're not working. You can use those money to fund other parts of your estate planning. The second thing you can do is don't worry about it. Just name that IRA to your favorite charities. Or you can use a charitable remainder trust, which would allow you, or rather your family members, to take income from that money for, say, 20 years, now getting effectively that stretch provision again. And then when their 20 years expires, there. Goes to a charity. All of the income tax embedded in that huge IRA is completely removed. You don't have to worry about that.

So if you are getting close to retirement, if you're in retirement, or maybe you're really late in the game and you're trying to figure out how do we reduce or eliminate, or at least strategize a little bit in terms of getting those taxes to be less onerous, if you will, there are some ways to do that. So let's think about that before you just ignore it. Think about it, and if you don't have anyone giving you advice on those things, reach out to us. We're happy to help. Lots of information here. Very, very controversial subject in some ways, but in my opinion, just simply one that doesn't get talked about enough. So a lot of opportunities here.

Generally speaking, let me just say this about tax-deferred accounts: they are going to be taxed on withdrawal, with the exception of the 1031 that we talked about for real estate exchanges. The withdrawals are going to be taxed as ordinary income. That by itself, in my opinion, warrants some planning. So ordinary income, much, much bigger tax than, say, capital gain. The 1031 tax deferral method, that is always going to be taxed capital gain.

All right, so that takes us through the first three environments. What do you? We dive into environment four, and we call this one tax-advantaged, right? So what does that mean? Well, for many taxpayers, itemize, it's still a useful strategy. We talked about that early in the show, in the first environment, personal. We talked about itemized and the standardized deduction today, which is somewhat removed. I think the most recent study that I read, seems like something around ninety plus percent of our taxpayers in the US don't itemize today, and it's because that standardized deduction is so much higher. But let's see if there is an opportunity here.

So when we talk about tax-advantaged, let's figure out exactly what we mean by that. So mortgage interest, for example, that would be a tax advantage. Charitable contributions, that's a tax advantage. A residential property taxes, but remember, I said the maximum is $10000. We'll say that again in a minute.

All of these can have a significant effect on your taxable income or on your adjusted taxable income. So keep in mind, as I said, most people don't itemize, and it's not always because they don't have enough to reach beyond that threshold for the standard deduction, but a lot of people just don't think they can itemize anymore. They've heard that the standard deduction is all you can take, and so they fail to consider. Item.

Recent law said that that standard deduction would give most taxpayers an advantage, and frankly I think it did, so every taxpayer can appreciate that. But it doesn't mean that you should not consider item. The standard deduction for married couples filing jointly, it's now 4000. 4800. $4800. That's for 2020. So why? You're getting ready to file your taxes here in the next week or so. Keep in mind, if you have donations, you have state income tax and other things that fall into that deductible category, you might want to double check whether item or the standardized deduction is the most sensible way for you to file. It could be that the most advantageous way is for you to itemize.

So 24800 is what you have for a standardized deduction in twenty 2020. It went up just a little bit, 25100. $25100 for the current year. Now your state income tax, you can use that towards your item, but again it's limited to $10000.

Don't forget that mortgage interest. Now I want to talk about this one for a minute. Some of you in the last year have gotten on the crazy train as it relates to real estate. Man, has real estate just gone crazy in the last, really, in a couple of months. Now, just before COVID kicked in, real estate was buying large healthy, but it wasn't rising at such a rapid pace. We didn't see all these transactions. Things were what I would say a little more normal. But after COVID, it seems like people just thought, well, gosh, if I can't go somewhere to spend money, I'll just go buy a house, and all of a sudden this real estate boom was in high gear and seems to be continuing.

I've spoken to a lot of realtors over the last several months, and they have, 2020 was a record year for them, and many of them tell me that 2021 is much the same. So that's a good thing, but keep in mind, if you had a good 2020 or in the last several years, things were good and you decided to buy a higher priced home, you can only deduct your interest on that home mortgage up to a 750. $750000 mortgage. If you go beyond that, so if you've got a 1 million dollars mortgage or a 1000001 or two or whatever it is, anything over 750 thousand, that interest cannot be deducted. Only the amount up to a 700. 750 thousand. $750000 mortgage can be used for your, for purposes of item.

Medical expenses. Now this one, everybody knows, it's been around forever, didn't really change. Your medical expenses, for you to use them for item, they have to be at least seven and a half percent of your adjusted gross income. Now, I'm just going to tell all of you, and I'm going to say this with zero reservation here: you don't want this deduction. If you are taking medical expenses as an itemized deduction, you're probably not healthy, and for that, if you are, I just simply say to you that I hate that you're dealing with whatever that is. If you're healthy, don't wish for this itemized deduction, because you're probably in a pretty bad spot from a health standpoint.

Long-term care premiums, they must exceed 10% of your adjusted gross income, but if they do, you can deduct your long-term care premiums. That's a pretty big deduction, potentially.

Charitable contributions. One thing I want to throw in here now: all of these are things that you can use for 2020. These are things that might very well be part of your tax return for 2020, and that deadline comes up here in just a week and a half. So keep in mind that these are some things that you could use, and so to determine anyway if you can use item, and if you can, by all means please do so. Long-term care premiums, we said if it exceeds 10% of your adjusted gross income.

A couple of new things that you need to be aware of. Charitable contributions, there is a $300 for everybody. It doesn't matter if you itemize, doesn't matter how you're choosing to file here, but $300 above the line for everyone. So that's more like a tax credit. That's literally like a dollar for dollar offset. Don't forget that one. Be sure that you ask your CPA about that. Most CPAs are going to remember that, they're going to put it on your return, but if not, just know that there's a three-hundred-dollar above the line deduction that everyone can take.

Charitable contributions general cannot exceed 60% of your adjusted gross income. So if you are trying to itemize, and I think you should absolutely look at this, a lot of people made significant charitable contributions in 2020, obviously due to COVID. A lot of charitable entities or charitable organizations, they were under a lot greater pressure than in a normal year, and so the asks were pretty big. A lot of charitable organizations were asking people to donate more than normal, and a lot of people did. So if you donated a lot last year, then one, kudos to you for doing so, because I know you helped a lot of people, but if you didn't know it, be sure that you look at that for item purposes. But also you need to know that it cannot exceed 60% of your adjusted gross income.

Now, investment interest expenses, you can use that. So any investments that you've dipped into or poured some into, you can use that interest as part of your item. And then up to $2500 of student loan interest, and that's above the line, by the way. So another really powerful tax deduction there.

All of those things can go towards item. Don't take it for granted that you only get the standardized deduction. Look at these things carefully, consider them, because you might be missing a lot of tax savings that you didn't know you had, and so itemize would be the only way for you to capture that. Be sure that you look at all of those numbers. If you're not sure, check with your CPA, check with your accounting team, whoever does that work for you, or if you want a second opinion, feel free to reach out to our firm. We're more than happy to help you do that.

As we come into our last environment, what I want to say to everybody is, no matter what your situation, tax planning is a tremendous opportunity, but it's also detrimental to your wealth strategy if you're not doing it, if you're just taking for granted that your CPA is doing everything right, or that surely you're not in a position to take advantage of some of these things. Be cred enough to believe that none of these things are available to you. A lot of these things are available to a lot of people, but you've gotta do your part and verify that, or at least be willing to ask the questions of those who you trust to prepare your taxes. And if you're not sure, reach out to a firm like ours, or whoever it is that you work with, and get a second opinion on these things.

It's not that difficult. It just requires a little question and answering session, really understanding what you're trying to accomplish, and if those things are properly described to the right people, then those folks can absolutely tell you if standardized deductions make more sense, if an S Corp is a good idea, is it an LLC? Maybe that's better for you. Should you itemize? All of those things should be answered.

Let's talk about our last environment. I saved the best for last. This is not tax deferred. This is tax free. So what is that? A lot of people will say, oh, there's no such. Is a free lunch. Well, for the most part, that would be correct. I would tell you that I'm most of the time agree with that. There's very few times in life where you'll find something that's free, although you hear lots of commercials that tell you it's absolutely free, and then some people tell you that it's mostly free, but to me, free is either free or it's not. There should be no qualification there.

But here is what falls into environment number five, and that is tax free. So this environment, it's often missed because it's misunderstood, yet it. A lot of options for additional tax savings. So depending on your situation, everything depends, there's no question, but depending on your situation, things such as municipal bonds or municipal investments. 529 plans, you've heard of those, for college savings, preparing for higher education, maybe your or grandchildren, tax free benefits built into those programs.

Health savings accounts. This one gets missed all the time. If you are self-employed, if you are employed but have a high deductible health care plan, health savings account is in the colloquium. saying things it's a no-brainer. If you have a high deductible plan, or if you're self-employed and you have a high deductible plan, you should absolutely do an HSA. And the reason for that is an HSA does a couple of things. One, money goes in before tax, kind of like an IRA. Money grows without tax. There's that tax deferral that we talked about, but in this case, free if you're going to use it for medical expenses. So put the money in, you get a tax deduction. Grow the money, there's no tax. Take the money out for medical expense, tax free.

If you get to retirement and you've accumulated a lot of money in this HSA or health savings account, guess what, it's not a use it or lose it program. You simply roll it to an IRA, and now it's part of your retirement bucket of money. Now the taxation changes at that point. Instead of the money being tax free coming out, you will pay ordinary income tax, just like you would on distributions from your IRA or your 401(k), but you enjoy tax deferral to that point. And if you are using it for medical expenses, tax-free distributions, and everything going in was pretax. Tax deductible.

Tremendous opportunity. You can put thousands of dollars in these things per year. I believe in 2020, with your makeup provision, you could do 8100. $8100. If you're not over 50 years old, 7000. $7100 would have been your limit. Watch that every year and make sure you're funding it. Now keep in mind, you must have a high deductible health plan, but if you do, don't miss that opportunity. Another great way to save before. Accumulate tax free, and worst case, accumulate tax deferred and keep the money for retirement, whatever amount's left.

Best of all, depending on where you open your health savings account, you can invest. Used to be that these were only held in cash or money markets, something of that nature, but today, for example, all of our health savings accounts are held at Fidelity. Obviously they're our custodian on the wealth management. So all of our accounts are through Fidelity, where we can invest those monies any way you want. We can use mutual funds, individual stocks, you name it. So huge advantage for opportunities to grow that money.

And then Roth IRA. Let's talk about this one, because it gets missed a lot, and it really should not be missed. It's a tremendous opportunity. Roth IRAs can provide long-term tax reduction. It can be Tax. Pre-owned distribution. Roth IRAs, though, get missed because people think, well, I make too much, I can't put money into a Roth. Or they think, well, I probably shouldn't do a Roth, I like to save tax right now, so I want to get the tax deduction, so I'm going to use traditional IRA or traditional 401(k).

Well, what you really need to do is work with your tax preparation team or your tax consultant or your wealth advisory firm and figure out which one really makes a lot of sense. Sometimes it's both. Other times it's absolutely the. Off, and depending on your age or stage of life, your goals and objectives, it could be traditional saving, it could be a 401(k) or traditional 401(k) or traditional IRAs. So don't just decide, because of what you've heard or read, that Roth doesn't make sense for you.

Even when you make too much money to get a Roth in the traditional sense, you can do something called a backdoor Roth, which means we can fund an IRA and then we can turn around immediately. That transaction, and transfer the money to the Roth IRA, no penalties whatsoever, and everyone has that opportunity.

Inside your 401(k), if your 401(k) is set up properly, the limits in your 401(k) plan are much higher than an IRA, and believe it or not, you can do a backdoor to a Roth IRA in a 401(k). In fact, you can just use Roth 401(k)s on your 401(k) chassis if your employer. It, and you can put a lot of money in that Roth with no limit, or rather with no testing. So you can do that just like you could a normal contribution. Or if you want to do more than the normal contribution under section 415, you can put a lot more up, in some cases up to 60 thousand or more. You can actually do a backdoor in that 401(k), and we call it a mega backdoor. So instead. IRA contribution limits, now all of a sudden we would have 401(k) or section 415 limits, much, much larger as far as limits are concerned, and you could literally get the bulk of that into a Roth.

Why is that so important? When that money gets into the Roth, yes, it's after-tax in terms of money going in, but once that money is in, tax free on the growth, tax free on the distribution, No.

minimum required distribution at age 72, and when you leave that money to your heirs, so when you move on to your next world and it's left to your children or your family members, zero tax. Tremendous planning opportunity with a Roth.

So I hope that today's show has given you some insight as it relates to taxation, particularly the five environments. Every kind of tax falls into one of these environments. I would encourage you, know them, learn more about them. If you're not sure about some of what we talked about, feel free to reach out.

You can reach us via email at OmniStarFinancial.com on our website. You can call us; our local number in the Wilmington office is 910-319-7834. Plenty of ways to reach us. You can find us on Facebook and LinkedIn, so all kinds of social media channels, and hope that you'll reach out if you have questions. Happy to share this information with you. If it'll help you plan better, we're more than happy to share it with any of our listeners.

So that's going to wrap us up for the five tax environments. I hope you've learned a lot. It's been fun sharing this information with you. I look forward to seeing you on our next show. Until then, take care. Have a great day. Buh bye.

Thanks for joining us on We're Talking Money. Be sure to visit us at OmniStarFinancial.com, where you can learn more about how we provide value to our clients. Subscribe to the show and our newsletters, and drop us a line with topic suggestions for upcoming shows. If you enjoyed the show, we would appreciate you passing it on to a friend and providing a rating on iTunes.

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