Tax Efficient Investing & Noble Grapes

Welcome to another edition of We're Talking Money Live, the show dedicated to illuminating blind spots in wealth management and financial planning. I'm Phil Clark, your host, and I've got Sarah Haynes Hess alongside. Yes. My great co-host, as usual. So Sarah, how you doing?

I am doing wonderful.

Yeah, well, you are, you have good reason to be. The weather's perfect. Exactly, exactly. Your husband's back from wherever he was on a mission with the Marines. Yeah. And my car is working. Did they get your battery fixed?

Yes, after a couple tries they said, oh, you know what, there's a bad cell, just replace it. It just took a couple days for them to figure that out.

Sarah has a fairly new, I don't know what it is, it's Volkswagen. It felt like an SUV. It's an SUV. So I thought about you this morning because the, is it Flow? Is that the name of that? Yes, Volkswagen. So there's a commercial on this morning. I'm getting ready for work and this commercial comes on and it talks about how incredibly focused they are on customer service and the experience, and how they never want you to feel like you've had anything except an experience that is unlike any other.

Like you've got forgotten, because that's how I feel every time I go in there.

Well, they kept going on. That was really the entire commercial was focused on how focused, or how sensitive they are to the customer. And I was thinking, Sarah didn't sound that way yesterday, but no, maybe they're going to redeem themselves.

So they haven't yet. I'll give them a couple more chances, but yeah, they have not redeemed themselves yet. If I would not have bought my car there, we would not be continuing to use them for things.

Well, their commercial says the right things, but sounds like they might need to work on putting action with that commercial. So now, well, I'm glad you got your car fixed. Yes, yes. Ubering to work in the morning does not start your day off correctly. No kidding.

Well, yesterday, you probably don't know this, but Monday morning I dropped my car off for some repair. And so if any of you are wondering who's driving the black Nissan Armada, that's me. Gosh. Yeah, so this thing is pretty nice actually. It's a rental, scratched all the pieces, it came out of Pennsylvania, but Enterprise rented this car to me through my insurance. So unfortunately I backed my car into a sign, and it's amazing how much damage you do with that. But the little sensors didn't tell me that this sign was behind me and I wasn't paying attention.

So nevertheless, I dropped it. Well, they didn't, I didn't arrange for a ride over to Enterprise, and so I'm thinking, all right, how am I going to get over there? And finally I called them and they said, no problem, we'll swing over and get you. And this guy, he's from up north somewhere, he moved here retired, and he does this just in his spare time. It looks like it's just somebody who wants something to do. And nicest guy, comes over, picks me up, brings me back to Enterprise, but he talked my ear off, and we had a nice conversation. Fortunately it was only a short drive.

So I know what you mean about service, but so far the guys over at, what is it, Pro City or Port City, Port City Collision is where I dropped my car, and they have been really good so far. The greeting that you get, the folks that work in there, and there's lots of them, it's a big place, but they were just extremely welcoming and made me feel like I was going to get a great outcome. So looking forward to it, although they did tell me I did a nice number on my car, but they would get me back on the road.

You did it, it didn't pull your paint off though, did it? It just pushed it in?

Correct, pushed it in, but on the bottom of the bumper where you're not looking, it's pretty damaged. So I felt terrible about it, but at least they're going to get it fixed. So there we go. Okay, our car sagas.

But hey, so real quick, check us out on social media. I know a lot of you are. We've been seeing more and more folks on our social media pages, so keep doing that, and lots of new stuff out there every week. I know Blake and the team here, they do a great job of adding new content, so make sure you do that. It's LinkedIn, Facebook, Instagram. One that we don't usually mention is YouTube, but we also have a YouTube channel.

Yeah, so go there. Also, all of our videos and a lot of our content is on our website. We put out blogs all the time. Sometimes it relates to the things that Phil and I speak about, but sometimes it's something different, so definitely go check those out.

Yep, it's a good one. It's hard to remember all that stuff, there's so much of it, but at any rate, check us out on social media, check out the website. We're going to talk about some tax stuff today. It's that time of year. Hard to believe, but we're fourth quarter. Oh yeah, we're into it. Time to start thinking about how do you save taxes. Perfect time of the year to begin preparing, because December 31 will be here before you know it, and then it's probably a little bit late, unless you're self-employed. In that case, some things can be done after the turn of the year. But this is the right time to be thinking about strategic planning for avoiding unnecessary taxes.

Absolutely. When I was speaking with a client recently, we were talking about his interviewer review, and I said we'll probably get you in October, November, end of October, beginning of November, because we want to get these things knocked out. Yeah. We don't want to wait until December. People are busy, or they're traveling and they can't get to their bank, or they can't get this money wired to this place. There's always some sort of chaos if you wait until December, even if you are a business owner, depending on cash flow. But if you can get it done prior to 12/31, I think it's the best decision.

Well, there's so many tools and techniques, and I'm not saying that taxes, we're not talking about avoiding them. Everyone's got to pay their fair share of tax, and I'm all for that. But there's nothing wrong with planning from a strategic standpoint, just positioning yourselves better to take advantage of things that are available. And if they're available, they're legal, why not use them?

And I think that's one of the biggest, it's probably one of the greatest mistakes I see every year with investors, or with just people in general. They don't know what they don't know, and there's so many things in the tax code that allow you to receive some real good benefits at year end. So hopefully we can illuminate some of those blind spots today and maybe get folks thinking a little more in line with what are the things that you can do, and which ones fit into your style of planning and the things that mean a lot to you. Is there a tax benefit that you should take advantage of?

Right. And if you're not taking advantage of any tax benefit, I can almost, I'm not going to say the G word because I know everyone hates the guarantee word in our industry, but I can almost guarantee you that there is something you can do to lower your taxes. Across the board, no matter what your income or your business, whether you're a business owner or not, you can usually lower your taxable income.

Yeah, 100. That's one place where you probably could use the word guarantee and do it very safely. The fact of the matter is, unless you have zero income, there's probably a way to benefit yourself. Now, it gets really tricky as your income goes up. The higher your income, the fewer and fewer loopholes are available, or I should say fewer loopholes are available, plenty of them. But lower income, actually there is huge benefits for lower income. If you're 250k or below, there's a lot of things you can do to help reduce that tax burden a little bit. And the lower your income, I think the more important it is to try to reduce it, so that you have more spendable income.

Oh yeah, and being efficient. And usually when you're reducing your taxes, you're pushing it aside for yourself. The money's not just disappearing in the air.

Yeah, with the exception of charitable planning, you're really trying to save more for yourself. And if you think of it in that way, it's not that you're, look, the government needs tax in order to run our country, there's no question about that, but you need to take advantage of things that are available to you so that you get to keep more of what you're working for. And that's what we're talking about today. So with that, why don't we dig into what it looks like to improve your financial life by simply not avoiding, but simply reducing your tax exposure in a way that's fitting to your plan.

Absolutely. Our first one is very simple. We get this question a lot from clients, though: what are you going to do to reduce my capital gains for the year? And we do tax loss harvesting, which most firms, surely most of them are—

I would disagree with you.

Well, that's disturbing.

Yeah, I disagree, and here's why, Sarah. I think it's a great point. I don't mean to interject, but I'm going to say this. Most firms that we compete with, they're using mutual funds. True. As their investment vehicles, and they don't have the flexibility to do tax loss harvesting. That is out of their control, because the mutual fund manager decides when to buy and sell things. And frankly speaking, it not only takes you out of the control seat, it actually puts you in harm's way, because you can buy into a mutual fund, say, beginning of this year, and that mutual fund could go down in value. Therefore you would see a loss on your P&L, on your balance sheet, or I should say on your net worth. And in November that mutual fund manager might say, you know what, I'm ready to get rid of a few of these stocks that I've been holding, we've got a lot of gain built in those things. And all of a sudden you get a capital gain receipt. You're going to pay tax on that capital gain, yet your mutual fund went down in value.

Terrible. That's a terrible situation.

Well, that's a pretty bad situation, which is one of the reasons, that's one of the biggest reasons that we like individual securities, because you can be much more focused on tax planning and you can get a lot more focused on where you want to be invested. So you're not beholden to what the mutual fund managers want to do and when they want to do it. So definitely a different way to invest, but one that we think delivers a lot more control.

Oh yeah, nothing like being able to control your money. A lot of clients too, last year, obviously 2019 was a stellar year in the market for sure. We had a lot of clients that paid a lot of taxes. When we got to the end of the year, the answer was, we don't have a whole lot of losses to offset those gains, unfortunately. Right. That's the catch 22.

It's unfortunate and it's fortunate, because look, clients, when they're making a lot of money they're happy, but then they get frustrated with the tax. Yes. They're losing money in the market, if things are going down, we don't have a tax bill, but they never call us and say, "Hey, thanks for lowering my tax bill." No, they're all the pieces because their net worth is going down. So it's kind of hard to please everybody at all levels.

But the fact of the matter is, if you're paying tax and we've done a good job of tax loss harvesting and you're still paying a big tax bill, you did really well. You had a good year. You should be happy about that.

So yeah, that's a great point. You're right, we do, we hear that a lot. We do. And I'll even tell them, paying taxes isn't a bad thing. It does mean that you made money. And they always, they recognize that too. Oh, they get it, but nobody likes paying taxes. They hate it, so they have to vent and get it off their chest. If your net worth is going north, yeah, you're paying some taxes. The key is paying as little as you have to, which is this conversation. So yeah, that's a great way to dig into this.

So tax loss harvesting is just another benefit to individual equities. Yeah, I think not to belabor and certainly not to delve into how it works at a granular level, but here it is at a basic level for those of you listening that might not understand it.

Let's say that you've got some stocks in your portfolio and they've gone down over the last few months, and we think those stocks still represent a reasonable stock, but we don't expect them to rally anytime soon. We can go ahead and sell those. We might put them back in the portfolio, but we can sell those and lock in that loss. And what that does for us is we can now apply that loss anywhere across the rest of the year that we want or need. And so with all the gains that occur between that period and the end of the year, we've got losses now locked in that will help us mitigate or reduce the risk of capital gain tax.

So selling at a loss is not always a bad thing, although a lot of clients, they see it and they think, oh my goodness, why did you sell that when it was so far down? 31 days from now we might put it back in the strategy, or we might buy something that's very similar to it, so we avoid the wash rule. But bottom line is, if you can control taxes by simply taking losses and using them to your advantage to offset gains, net worth goes up, tax bill goes down. Oh yeah. And that's a pretty favorable outcome.

It's strategic, so 100. Whereas the client may not always see it, we are always thinking strategically for them, so that would be the purpose in selling things in a loss sometimes. Yeah, in the short term it's tactical throughout the year, but over time, as we look out two, three, four, five years, ten years, absolutely strategy is a huge part of that. And if it's not, you need a different advisory firm. Yeah, you might want to go shopping.

All right, so tax loss harvesting, that is definitely one way to lower your tax bill. The second, and this is an overarching, just deferring income, and there's a couple of ways to do this. The obvious one is pushing money into a retirement plan, but one that a lot of people don't consider that we'll touch on briefly is delaying a portion of a boldness. So you can say you already have a big earning year and your bonus is exceptional, it's going to throw you into higher bracket. Talk to your employer and see if you can delay that to the next year, where your situation might be different.

Yeah, that's a great point, and I think it's overlooked every year. I don't think people really consider that. And so if you're in a small, say if you work for a smaller employer and maybe they operate as a subchapter S, then it may not be something that they would allow you to do, because the employer in that environment has flow-through income. So if you defer yours, they pay tax on it now. They get to deduct it when they pay it out to you later, but they may not be set up to do that.

But particularly if you work for a C company, so if you're in a larger corporation, publicly traded or publicly held, if you will, in that case deferring income is oftentimes something that an employer will offer. So, what they say, it never hurts to ask. Doesn't mean you're gonna get it, but if you ask, you just might receive. So I think Sarah's right. If you have income that you don't need, see if there's an opportunity to defer. Absolutely.

So deferring income in that way, but then our favorite, retirement plan deferrals, which, if you know, we are constantly reminding people to make sure they max these things out. That's something before 12 31 for most people that we, if your employer offers it, always take advantage. A lot of times you'll get a company match as well, and that's almost free money. Absolutely, it is, to the employees. So absolutely make sure you're taking advantage of your company's retirement plan.

Yeah, I think that's a huge point. And gosh, Sarah, we do a lot of 401k plans around here, and I hear you some days say, gosh, I can't believe that person's not deferring. Oh, it drives me crazy when the employer is giving them a match. And a lot of our clients, their 401k plans offer 100 match. So why wouldn't you put your money into that, and you can afford to put something in it? And so if an employer is going to give you 100 match, not only is it free money, it just adds to your income, if you will. So it increases what you're earning, but it doubles, if you will, what you just put in. So if you put three percent in and your employer gives you three, that's a 100 return on your money overnight, and can't beat it. I don't know an investment that can do that, period. Every pay period, too. Every pay period. So that one is the proverbial no-brainer, and if you're not doing it, you are missing some free money and you're missing an opportunity to really help grow your wealth.

Absolutely. If your company doesn't offer it, first off, go to your HR, to the owner, and ask them why. But also you can open an IRA yourself. Very simple, basically any bank, you can go online and open a Roth or a traditional IRA within 10 minutes. Oh, it's quick.

But hey, you can tell your employer, you can blame it on us. Tell them you heard it on our podcast, that they need to open a 401k plan and allow their employees to defer, even if they're not going to match. You need the ability to defer more than an IRA would allow you to do if you had to open something on your own. So IRAs limit you. We're going to talk about that. Oh yeah, very pretty low at 6 000.

Yeah, 6 000 compared to in a 401k environment you can do, what is it, 19? Yeah, plus your catch up, so you can do 26. So it, yeah, that's a lot. It makes more sense to do the 401k. Always encourage your employer if you don't have it in place. It's going to benefit. If they're a business owner, it may just be something no one's ever brought to their attention. Yeah, they will benefit from it as well.

Nine times out of ten, generally they benefit in a huge way. But you're right, a lot of times I talk to employers every year and they say, well, gosh, I didn't realize that a 401k could give me that much of a benefit, and I didn't realize it was this easy. A lot of them have this, there's a preconceived notion there that having a 401k plan is this just onerous task, it's incredibly arduous to get it done and implemented, and it's just not.

No, and it's not expensive. They're not expensive, they're reasonably inexpensive, or relatively inexpensive. And compared to what you get and how you save on tax and what you do for your employees, it really is kind of, in my opinion, is foolish if you don't do it. So you're just leaving a lot of money on the table for yourself as the employer and your employees.

And if you think the cost of a 401k is expensive, wait till retirement. Check out that, and then just look at the confiscatory nature of our tax system. That by itself should make you say, I think I'll spend a little bit to put a k plan in place and avoid some of these 25, 35, 40 percent rates of tax that I'm likely gonna have to pay. Nobody likes paying taxes.

All right, so a lot of people, especially people that we work, well, I would say it's maybe half and half, but a lot of clients are self-employed, and they have very, very good options in terms of retirement plans, and we'll talk about two of those. The first one is going to be a solo k. So this one is going to benefit both the employee, which is you, and the employer, which is also you. So it's going to save tax on the business and on your personal. It's really a cool tool.

And 10, 15 years ago we didn't have all of these things, but the advent of solo k plans, and these plans designed specifically for self-employed people where there's only one or two people in the company, these things really, really had a profound effect, and they are being used today more than ever. So all of a sudden you get to feel like you're a great big corporation. You get the same benefits in this solo k plan that you would if you had a thousand employees. So why not take advantage of it? And operating that solo k plan is cheap. Those things come with a very low cost to operate.

Yeah, and your spouse can be included. Yeah, how about that? You can't beat it. No discrimination here. No, absolutely not.

And that max is going to be 57 000, and that's the employee in the employer match. Think about that, 57 000. So if you're self-employed and you're making a couple hundred thousand a year, you could in short order, with the stroke of a pin, you could reduce that taxable income by 57k. And if you put your spouse in there, reduce it again by about the same amount. Yeah, you're gonna be pretty happy.

That is definitely something that solo, so 1099 employees, do not think of. And I would say when we do planning and onboarding, that is a huge piece that people have forgotten, that these are opportunities for them.

Well, typically they'll have an IRA, or they'll have a SEP, a simplified employer pension plan, right? Or they'll have something called a SIMPLE IRA. So a little higher contribution limits as compared to a traditional IRA, but not even close to what you can do in a 401k with the addition of a profit share in there. You just, you can't get close to it. So it is truly a missed opportunity for a lot of people.

So if you're not sure what's available to you, check us out on social media, look at our website, you can find it, or just call us or email us, and we'll share whatever you need to help you get in the right direction here as you come into year end especially.

Look, we've been in a crazy, crazy year, and Sarah, a lot of people look at that and say it's been a wickedly bad year, and others say it has been an extremely blessed year. Absolutely. I gotta tell you, I'm more on the side of it's been a very, a year filled with blessing. Not because of just simply making more money in terms of an employee, but in terms of just people getting to experience business growth in spite of all these challenges. And we are seeing a lot of business growth. Now, there are pockets that are still suffering, but it's been a big year. And so in saying that, what I'm leading to is there's a lot of profit being made and it's on the table.

I was in the gym the other morning, and it's actually one of our clients, and he said to me, Phil, I think we're going to put a lot more away this year. We need to talk about that, because we have had this just gangbuster year. I can almost imagine who you're talking about. Yeah, yeah, I'm sure you can.

And so here he is saying all of us that the partner, there's three of them there that own this company, and he said, we've got to think about that. I said, don't worry, we're going to talk about it. But that's the story that's out there. A lot of self-employed people are making a lot of money, not on the backs of those suffering, but simply the conditions are ripe. In spite of COVID-19, we've seen an incredible year in things like banking, mortgages, real estate, builders, people that sell all the wares that go in these new homes that are being purchased or built. Gosh, the list goes on and on and on.

It's pretty amazing, because everyone expected, and this is interesting, and particularly as we come into voting season, everyone thought closed economy, it's going to be awful, the country's just in dire straits. We're not perfect. We've still got a little bit of a road ahead of us in terms of full recovery, but I got to tell you, I hear more good stories than I do bad. And so these kind of tax benefit, or these kind of tools that can benefit you from a tax standpoint, now is not the time to ignore them. This is the time to implement these things and have them working and be part of your plan. Absolutely.

All right, so deferring income. Always, always, always make sure you have something in place for deferring your income. Yeah, even if it's, if you want to make a donation to us, you can do that. Charity, hey, right? Well, wait a minute, we're not a 501 c3. Never mind, skip that work.

All right, so number three, which we'll touch on, this one can get you in some trouble if it's not planned on properly, but buying on credit. So if you've got a very large tax deductible expense and you want to capture it in this year, but you don't want to necessarily pull the funds from the bank to pay for it, you can buy it on credit and take that deduction in 2020.

Yeah, I think it's a great point. What a lot of people don't know, so we're talking more to the business owner right now, we'll take a medical practice or a dental practice, for example. Let's just say that you've got equipment needs here at the end of the year and you want to take advantage of those, but you say, gosh, I don't want to dip into my reserves. So you've got the cash, but you don't want to pay cash for this item just in case, right?

As long as you put that piece of equipment in service by 12 31, that's the key here. You can't buy it and then your vendor says, yeah, you'll have it in January or February. That doesn't pass the rule. But if it's in service, if you put this equipment in service by 1231, even if you buy it on credit, you can take the full deduction under Section 179 this year. So you get the tax benefit.

And as long as your cash flow warrants doing this, so your longer term cash flow, because now you're going to have a payment. You got to pay for this piece of equipment, so you want to be sure that your cash flow is in a position that gives you enough confidence to make the purchase, because now you're not going to have the deductibility of this equipment next year and the year after and the year after, but you'll still have the payments. Now you got to earn a little more to make that payment, because that'll be an after tax payment since there's no tax benefit. But if your cash flows are good and you need the equipment and you've had a really good year in 2020, it might be a worthwhile thing to consider for sure.

So the key here is planning, not just to be able to cover it cash flow wise, but also to get it into your practice. I know we talk a lot about dental practices, but get it in there. So don't wait until December to make this decision. Right now is definitely the time to be making that decision.

Yeah, perfect example. We had a client last year ran into this same thing, and they decided, hey, we're going to put in this really cool x-ray technology, and already it's, I'll call it radiology. So they want to put in this thing called a CBCT scanner or CBCT unit, so it's cone beam technology. They want to put this thing in their practice. What they didn't realize is in December they made the purchase and they said, so we're going to go and buy it, and that way we can tax deduct it.

And I asked the question, will it be in service by 12 31? And they said, oh yeah, should be no problem, they told us they could get it installed in a couple of weeks. And I said, have you gone to the state and submitted your request for permitting for that unit? Do you have your space built for that unit? It has to pass certain standards. And the phone got really quiet, and they said, well, no, we don't have any of that done, but how long does that take? And I said, well, it can take several months. Government work, how about that. They had that thing installed in April or May of this year, right? So they were hoping to do it last year, but because they waited so long.

So I think Sarah's right. Don't wait to the last minute. If you know there's things you're planning on purchasing this year and you're doing it partially for the tax deduction, whether you're a dentist or whether you're any other business owner, plan a little early. Make sure it fits based on income for the year. Make sure it is strategic. Make sure it works for your longer term needs. And if it does, great.

If it doesn't, then I'll tell you, like we've said in many of our white papers, don't rush out and buy something just because you get a tax deduction. Make sure there's a useful, that, make sure there's a need. You still have to pay for it. You got to pay for it. Make sure there's a need and make sure you have a plan by which this new tool or piece of equipment or automobile or whatever it is, it's going to benefit you and your business.

I thought you were going to say toy, because I feel like we speak to a lot of dentists that want the newest, greatest invention, and it's really just a toy. They haven't planned to say, how is this going to make me money, what does this look like long term? It's just, oh, that looks really fun.

It's cool. Yeah, it's so cool, let's get it. They can be gadget driven, but really that, I don't want to pick on the guys, but that's kind of a guy thing.

Oh, I agree.

They love them. They love toys, whether it's in their practice or their business or at home. I'm guilty in a lot of ways. But you've got to have a plan for whatever it is that you're purchasing, particularly at the business level when there's a deduction involved. So don't be rash, but let's talk about it, make a plan, and if the plan is, if it's plausible, then let's go for it. If not, then just know you might pay a little more tax, but that tax that you pay, you get to keep the part that you didn't pay. But the cost of the equipment is a hundred percent of whatever it cost, and that's going out the door, so whether it's on credit or not. So just be careful with that one.

Right, so this might change that 24-hour rule that we've talked about in previous sessions to 48.72. Just give your advisor some time to think and talk it over with you before you make that decision.

Well, that's a key point, that's a key point. Let your advisor know. Don't, yes, don't just think about this and you make the decision and then tell us after the fact. Let us know before you write the check or before you swipe the card. Let us know so that we can put that into your planning. As all of you know, we're constantly building plans for you and updating those plans. Let us build that into your planning to be sure that it's a good purchase and that it fits within what it is that you're, it, that it is an in alignment with what you're trying to accomplish.

And if it is, great. If it's not, be willing to hear that, hey, it's probably not a good time to do that. Either answer is okay. Just know that it, one answer might be that we tell you don't do it, because it might not really be a good fit financially or might not be a good fit professionally, because it could take your eyes off of what's a very good road at the moment.

Oh yeah, so sticking to goals. All right, we've just got a couple more of these and then we'll touch on some wine.

I love it.

So we're going to talk about charitable giving, which, after that we're going to talk about gifting, and just keep in mind those are very, those are different things.

Yeah, that's a good point. Charitable giving and gifting, yeah, really two categories there. Charitable is exactly what it says. We're giving to a bona fide charity, a 501c3, so someone that can receive money from you where you get a tax deduction, where just simply gifting to someone, there's no tax deduction for that. Some tax benefit, but not a deduction.

Right, your child is not a charity.

They might feel like one. Believe me, they might feel like one, but they don't give you any kind of major deductions. So yeah, so let's go through these and see if we can lay out the differences.

Sure. So charitable giving, one of the tools to that is going to be a DAF, so a donor-advised fund. Fidelity has them, Schwab has, everywhere has them. So whoever you work with, they can most likely open that up for you.

Donor-advised funds have gained a lot of momentum in the last 20 years.

Well, I've heard a lot this year.

Oh yeah.

I don't know why, but someone's pushing marketing for donor-advised funds this year.

They're out there. And so a lot of that is coming as a result of so much gain being seen in the markets, in spite of a decline this year during COVID, but there's lots of pent-up demand to do something. There's also tax benefits in doing this. And so when you've got lots of gains, this could be one way to do it if you don't know specifically, say, a charity that you want to give to this minute, right? So you want to take advantage of the tax deduction and you want to be able to direct the money, but maybe you're not sure where you're going to send that money today. So you could use a donor-advised fund.

And as Sarah said, Fidelity, our custodian, they have one of the largest in the world, and Schwab, so many others. Virtually any custodian is going to offer a donor-advised fund. And then there's much smaller ones. There's regional groups that offer these things, there's small investment groups or small charitable planning groups that have bona fide DAFs set up. You can use those. We have one here in North Carolina that is very popular, and a lot of small charitable groups and foundations use them.

So a donor-advised fund, huge advantage is you get the benefit of getting the deduction now, you can give huge amounts, and then you can direct where that money goes as you see fit over time.

Right, and into those, a lot of times you're going to be gifting those appreciated assets.

That's right, that's the key. Yeah, it's either appreciated assets or it's IRA assets or qualified money, where you get to take advantage of these very large distributions now. Up to a hundred thousand in a year you can move off of your IRA platform direct to the donor advised under the charity, and it never hit your tax return, which is another huge piece of leverage that a lot of folks don't know about.

Right, it's direct to charity.

Yes, custodian to custodian or institution to institution. If you missed that part, it's going to show up on the tax return and you're going to miss a little bit of that benefit. You still get to deduct it, but it's not, a deduction is not the same as a dollar for dollar transfer, and a lot of folks miss that as well.

Absolutely. And when we're talking about appreciated assets, donating appreciated assets does not just have to be stocks, right? You can, personal property, something else that you can donate, that you can take off of your balance sheet and pass along to someone else.

Yeah, it doesn't have to be stock, like you said, or securities. It could be a boat, it could be a piece of land, it could be a house. There's so many things. If you give it to a 501c3, as long as that 501c3 is set up to receive that kind of asset, you can absolutely take advantage of that. So gains are not only found in stocks or in securities. Gains can be found in a lot of assets, so yeah, don't forget that one.

And most 501 c 3s today are set up to receive virtually any kind of asset. Sometimes they steer away from things like art or certain fruitless, yeah, just things that I'll consider to be more of an odd investment, because maybe they're hard to value or whatever the case may be. But for the most part, things like land, residence or a home maybe that you're gonna sell, and you've just decided that, hey, I can afford to give this to the charity, and it meets, sort of goes along with my planning, so I'm gonna do that. There's lots of ways you can do it, lots of things that have gains in them. So don't think it's only stock, but stock definitely the most popular.

Oh yeah, for sure. All right, so that's going to be charitable giving. The other side of that coin is gifting. So what's the difference? Well, your annual exclusion is up to fifteen thousand. You're not going to get to deduct that off of your tax return.

So that fifteen thousand, that's what you hear people talk about when they say, now can I give my kids something every year and it doesn't cause any gift tax?

Yes, correct. So you're avoiding the gift tax if you stay below that 15 000 per person. So that means if you're married, so say Donald and I want to give someone 15 000, we can actually give thirty thousand because it's per person. It's also per recipient, so each person can get up to fifteen thousand. So you can gift to twenty people as long as you stay below that fifteen thousand.

So mom and dad with two kids could give 60 000.

Exactly.

And it doesn't affect anyone from the standpoint of a gift tax.

Right, and does not work against their lifetime credit.

Exactly right. And everything over that, though, that's going to kind of fill that bucket of your lifetime exclusion, which is 11.58 as of 2020.

11.58 million dollars. Yeah, not just 11.58, Sarah. I remember now, this is talking about age here a little bit and tenure in this industry, but I remember when the exclusion was six hundred thousand dollars. I don't know what to say about that. Six hundred thousand dollars when I got into the wealth management industry, at the beginning of my profession, it was like that for a long time. So estate planning was a really, really big part of my career in the early years, and it's still a big part. People are wealthier these days without a doubt, and so it's still an important part.

But at 11.58 million per person, correct, that's 20, almost 23 or so million dollars for a household, if you will, so husband, wife. That's a huge amount. So estate tax right now is a smaller concern, and in many cases it's of no concern. But the gift tax thing, you still want to pay attention to that, because every year as you're gifting, if you don't do it correctly, you're eroding that huge exemption that we're talking about. That's right now for a couple 23-ish million.

But here's the problem. In 2025, yep, we have a sunset provision that kicks in, and if this thing doesn't get extended, we could see that number fall to a million dollars. So we could go from 11 million, we could all of a sudden very quickly head back to something like a million. Who knows where it will land. I don't expect that to happen. I'm very optimistic and hopeful that our government will get that right, because I do believe when we say confiscatory, that to me is textbook definition. That is one of the worst taxes, in my opinion, because we pay tax on everything that we do, including owning a car, paying for goods and services. Everything is taxed, and you pay tax on what you earn. And then if you accumulate wealth, as you accumulate it, you pay tax on the capital gains. And then when you pass it to your family members, the government has absolutely done nothing to help you earn all of those dollars, yet they want 30 or 40 or 50 percent of those dollars, and I just don't think that that makes sense.

But you got a huge contingent out there, or a faction, that believes you shouldn't be able to pass wealth to the next generation without it being heavily taxed, and that's just simply a way to pass wealth around. And I get it in some ways that it's needed, but I disagree that you just go take from what—

Yeah, it's a legacy, and people have worked hard to create that.

I think that's kind of a raw deal, to be sure. But hopefully that gets extended. But if it doesn't, then this gifting thing becomes a much more talked about topic, and I think planning for it today and having a flexible plan as it relates to your estate plan is very important, because we will see the estate tax laws change. Maybe they won't get back to what they were, but we'll see a move without a doubt.

So good points here, and transferring to the kids though, to finish your thought, keep taking us through that, because just giving to your kids doesn't always result in a tax strategy that's quite as effective as something like charitable planning or charitable giving.

Absolutely. I don't think I understand your question, though.

Well, so you were talking about transferring to the kids, that you could give to them and you got this huge exemption and everything, but that doesn't necessarily, those little gifts don't necessarily take down your estate in a meaningful way. And so if you've got estate tax exposure, gifting to your kids probably going to remove it?

No, not at all. Right. So unless you're going to give them the farm. Now, one thing to keep in mind that Sarah brought up, I think that's important: that huge 11.58 million dollar exemption, you can pre-use that, which I think is really important. So if you did have a highly appreciated business that's worth 10 or 15 million dollars and you wanted to start gifting some of that to the kids, and maybe the kids are employed in the business or part of it, you can pre-use some of that. And if it makes sense, if you see growth for that company, you think it's going to get exponentially larger, then you might want to take advantage of using that exemption while it's here.

Oh yeah.

And get rid of the thing, and you could still be in control of the company, but your kids could begin owning it. So it's more of what used to be called an estate tax freeze concept. Might be worth considering. But little things, I see you hear us talking about a lot of nuances now, but that just tells you how deep the tax code is. And if you know it, there's lots of advantages that you can find there. Not in a bad way, but advantages that are simply there, and you should take advantage of them if you can.

Oh yeah, they're all legal. Everything we're talking about is very legal and encouraged. They're in place for a purpose.

That's right. And until they're not in place, don't ignore them, use them.

That's right. All right, so that's our tax efficiency chat for today. Got less than three months to be ready for year end. Much less. It's gonna be November.

What? I know it is. It's extreme. Halloween is in two weekends.

Yeah, isn't that something? Yeah, and I'm sad to say that at least my neighborhood is encouraging strongly that no trick-or-treating take place. And I'm not gonna say that we get into Halloween, but we do enjoy setting up by the street, and we have a cool table and funky decorations, and we love seeing the kids come by, and their costumes are always so creative. We enjoy it, and we love giving candy and having a good conversation, particularly with the parents when they come by. So I'm a little discouraged by that. I'm hoping that—

I'm kind of shocked. Well, I guess I'm not shocked, but I would think there's social distance and you're outside. I guess it's just handling the candy and passing everything around, that's where the fear comes in.

Yeah, I think so. There's definitely fear involved, but I'm a little disappointed on that one. So since we're disappointed on that, here's something that takes disappointment away, and that is wine.

No, it is wine. It always makes things a little bit better.

Not that—right. Yeah, exactly. What are we gonna talk about today?

All right, so we've talked about, we're covering a red and a white, and we're going through all of the noble grapes, eighteen of them. Now, yeah, and we've done, this will be eight. Correct? Have I lost my mind now? Let's see, we did Cabernet, we did Garnacha or Grenache, and now we're doing Malbec, this one.

Yeah, okay. All right, so Malbec today is sir you fine wine. Now don't try to rush the wine over here.

I don't have a rush wine. I might gulp it occasionally.

All right, so Malbec, and then, oh Phil, I hate this word, go.

Let me help you. Get streimer.

Yeah, it's a—yeah, that was terrible. Crazy word.

How about gu vertstrominer. Converts demeanor.

Yeah, it's a funky one. German pronunciation. Governs demeanor, how about that?

You know what, it's actually called that in France. They still call it goverts, which means spicy, and yeah.

Okay, yeah, so you did that. Converts, there we go. You just picked up on—you just said something, you probably didn't know it was a legitimate term, but a lot of places call it—

I did not. Converts.

Yeah, well, now we know. Yep. All right, so which one will we talk about first?

Let's hit Malbec. I think Malbec is such a great, it's a great grape. Produces a great wine and very affordable compared to its similar varieties, so things like Petit Verdot, Petite Sirah and Syrah. Those can be really, really expensive wines. And so Malbec, which really, if you think Malbec, you naturally think Argentina.

That's—yeah, definitely. That's where the bold, good stuff comes from that can stand alone.

Yeah, it's good stuff. And probably—what did I read recently? 75 of the world's Malbec grapes come out of Argentina. Something crazy. And Chile is picking up on it as well.

Yeah, I was reading that recently, that Chile is getting more of a Malbec presence. And obviously it all came from France, but the grapes in France, it's not the most ideal growing conditions, so that's more of a mixing grape over there.

It is. It's one that's been used in their blending of Bordeaux, particularly Right Bank Bordeaux, with things like Merlot and Petit Verdot. But Malbec essentially got rescued by the Argentinians, and now it's their flagship.

By and large it is their flagship, and like I said, they control the largest amount of the growth in the world. So I think something like 75 000 hectares.

Yes, it's crazy. Nuts.

Yeah, they've got lots of room for it. It's a thick-skinned grape, so it can also handle some higher temperatures. So it's not going to be found in freezing temperatures like our gavert says.

Exactly. Well, let's talk about this Malbec for a minute. So a lot of people like it, and they don't really know what they're drinking or why they like it so much. But you get flavors like black cherry, cocoa, milk chocolate, coffee, mocha. You get leathery flavors, some black pepper, tobacco, which you'll find in a lot of your Cabernets. So vanilla, it is aged in oak.

But here's something that most people don't know about the Malbec. It has such a good fruity character to it and lots of nuances without the need for long oak aging. So most Malbecs, believe it or not, don't stay in the barrels for 18 or 24 months like you find, say, a Cabernet out of California. Maybe six months would be a more reasonable amount of time that you would hear and see on a bottle. But you can get longer oak-aged wines made from Malbec, but you're going to pay for those. They're a little more expensive.

But these are medium to full body, medium tannins, so they're easy to drink, and you can drink them young.

Yes, which makes them very, very fun and approachable.

Medium acidity and lower levels of alcohol—excuse me, relatively high alcohol.

Yes. So these wines drink like big boy, big adult wines, if you will. And they love hot temperatures, like you talked about. Give them a cold night and you get perfect growing season, and that really describes Argentina.

Oh yeah, absolutely. Makes me want to go to Argentina and try some wine.

I'd do it. I would do it. That'd be a fun trip. And it can age a little bit as well. It's not a 30-year kind of aging wine, but you can certainly lay these down for 5, 10, 15 years in some cases. And good wine, great value.

We talked about Malbec, I don't know, many, many shows ago, but one of the party tricks is around the top of the rim, it's very magenta. So if you're doing a blind taste test, you can probably bet your bottom dollar that if it's got a magenta rim, it's Malbec.

I remember you bringing that up a long, long time ago, and I thought, man, listen to her talking about these little tricks. And sommeliers use those tricks when they're going through their taste test or their blind test. There's certain tricks they can use, and then when they have to view a wine, they can look for that magenta-hued ring, because really with a Malbec, that's the only place you'll find that. The rest of the body, if you will, is really dark. It's opaque, very deep color.

Yeah, super dark. And so looking at that rim, that's a giveaway.

Absolutely. So we're talking about deep, heavy wine. It goes very well, which if you think about Argentina, you're going to understand it, with some beef and meat. They do eat some meat in Argentina.

Oh my gosh. South America and their meat consumption is impressive. It's off the chart.

It is, yeah, for sure. But you're right, a lot of meats, but also some mushrooms and some cheeses.

Mm-hmm. Yup. Funky cheeses. I actually wrote this part of our show, and I said funky cheese. Not to throw people, but funky cheese, I just mean cheese with, like a blue cheese.

Yeah, those kind of things. Cheeses that smell. They do have a funk to them.

And they have some fun. Yeah, they're so delicious, and great with the Malbec. My favorite with a Malbec, just so you know and our listeners know, I love bison burgers. You've heard me talk about them, we've had them here. Bison burger and Malbec, with, throw blue cheese on that bison burger, and I promise you will think that you just died and went to heaven. It's so good, and a great Malbec is perfect with that.

That sounds wonderful for a cookout. Bite people over, have some bison burgers, some Malbec and blue cheese. Could make it happen.

Well, let's move from Malbec and talk about gir reverse. That is a tough word.

It's ridiculous. Yeah, my pronunciation is not German, and my pronunciation abilities are not very German.

Yeah, neither is mine. But the crazy thing is, it's spelled with a W, but in the old language, Ws were pronounced with a V. So it's gevert straminar, and converts would be the short, and so perfectly okay to say it that way.

So thank God. Yeah.

The similar varieties on this grape would be Muscat, Riesling, things like

that and a lot of people confuse it with Riesling, another German-styled wine. So this thing is a powerhouse of fruit and floral bouquet, if you will. Just amazing, but very dry. You know what, it's an off-dryer wine, that's why. I've read it's just, that's the general consensus, off-dry wine. So I like that.

So off-dry, and a lot of listeners might say, what the heck does that mean? Well, off-dry just means it's got a little bit of residual sugar in it, so it's going to seem sweeter than it is. It's fruit, it's just because of the fruitiness, and because it doesn't have extremely high acid. It does have higher alcohols, so it becomes more of a sipping wine, more of an adult kind of wine. And so lower your children. That's right.

So when I say that, though, more adult-like means you got to go slow with it, otherwise it's going to knock you down. But it's medium-bodied, low acidity, easy to drink, but all of those fruit flavors come through with a little residual sugar, which creates the off-dry, but will seem a little sweeter.

Now, something to note: if you're buying this wine and you start reading a label and you recognize it's coming from a really warm climate, it's not going to be good, probably. I'd stay away from it, because you're going to get more of a dessert wine and you're probably going to be disappointed. I like to call it a sugar bomb. And these grapes in a hot climate, Sarah, they produce incredible amounts of sugar, it hints the higher alcohol, so you got to balance that. But a cool climate, high elevation is perfect. That's what they really love, that's where they thrive. And you can generate a wine from Gewurztraminer grapes that ages 10 15 years easily. Overlooked, but a great wine, particularly with, say, white meats, or chicken, pork.

Yeah, I read a lot about the other white meat, how it goes so well with that. Oh, it's awesome. It is a great combination. I like crab cakes, I like shrimp. All of those things with a Gewurztraminer are just perfect and can't go wrong.

So Malbec for your red this week, very, very good value here. And if you've tried Malbec, you know what I mean. If you have not tried Malbec, go out and buy some, whether it's from Argentina or other parts of the world. Experiment with it for a low-cost, great wine. And then don't be afraid to try Gewurztraminer.

Oh, absolutely. But they are saying do not go super low price with that. Like you said, it's going to be in those warmer climates, not the really cold, cool climate, and you're not going to get what you really want. No, you probably won't. I think you're going to get something that's more like a sugar bomb, as I said.

When you're buying your Gewurztraminer, just do me a favor: look on the label, look for the Alsace region of France. So if you buy any Gewurztraminer that's coming out of Alsace, you're probably going to get something that's good. That is the birthplace of this delicious wine. A little on the sweet side, but if it's done right, the sweetness is perfect, the fruitiness is perfect, the acid is perfect. Everything about it makes it a great wine. And man, it pairs so well with the meats that we talked about, not to mention some of your more bold salads with meat on them. You can make this thing work for lunch or dinner. So if you're retired, this might be your new lunch wine as well.

I like how you threw that in there. I'm not retired, but I'll have some for lunch. Listen, if you're not retired, I don't want to send a bad example, or set a bad example. So, but hey, that's our show for today.

So I just want to say thanks to everybody again for joining us. We have such a great time doing the show. Tax benefits, tax strategy, don't forget it. We're less than 90 days to the end of the year, actually just a touch over 60, as Sarah pointed out. And Sarah, if we had to tell everybody what to do at this moment, what would you say to them in terms of getting ready for the tax planning part of the year? You need to call your advisor and let them know what you have and have not done for the year.

I agree, that's perfect, that sums it up. And then for wine, go buy some Malbec, try the Gewurztraminer, let us know what you think, and we'll see you next week on We're Talking Money Live. Yes.

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