HOW CAN PILOTS PAY LESS IN TAXES? PART 1: START WITH THE RIGHT NUMBER

Tim: [00:00:00] You’re listening to The Pilot’s Portfolio, the show dedicated to guiding professional pilots towards a future of financial success and stability. Fly along with your host, Timothy P. Pope, as he provides financial planning insights and answers to your burning questions and dives into real-life stories from fellow pilots who share their successes and cautionary tales.

The Pilot’s Portfolio takes off now. Welcome to this episode of Pilot’s Portfolio. Guys, glad to have you along with us today. My name is Timothy P. Pope. I’m a certified financial planner specializing in the planning needs of the professional pilot and principal here at 360 Aviation Advisors, where we help successful pilots plan with a well-rounded focus on retirement, investment, and tax planning.

Our goal is to help our clients plan for and navigate life’s inevitable transitions. So [00:01:00] today, I wanna talk about something that I hear often. In fact, you have probably encountered it yourself. You’ve probably said it to yourself, but it’s something we hear often from successful pilots and their families, and it’s usually something like this: “Hey, Tim, last year I paid six figures in taxes.”

And the natural question is, “How do we pay less?” You probably remember, like, the first time where you looked at your pay stub, maybe your W-2, and you’re like, “Whoa, that’s a lot of money just going out of the door.” Or you’ve got your 1040, your CPA has prepared it, and your eyes kind of drift down to line twenty-four, and it’s like, “Hey, here’s your total tax.”

And you look at that, and you realize that six-figure amount, and that can be painful to see. And a lot of times the natural reaction is like, “There has to be something that we can do. Are we missing a deduction? Should we own a business? Should we buy real estate? Is there some account that we’re not using?

Should we be doing something completely different with our investments?” And if you’re on [00:02:00] social media, like, there’s folks that are telling you, “Absolutely,” “You should do all these things,” right? There’s a magic bullet. But before we start looking for deductions, I think I wanna slow down for a moment and just ask a different question, like which part of the tax bill are we actually trying to solve?

Yeah, because I think there’s a really big difference in, “Hey, I owed six figures in taxes last year,” or, “I paid that throughout the year.” There’s a difference between that and, “Wow, I had to stroke or write a really big check in April.” And then the third thing is, “You know what? We’re paying more tax than necessary.”

Now, those are three different problems, and the planning conversation around each one is different. So today, I wanna walk through how we think about this. And let’s talk about what that tax bill actually means and why or why not or why there may not be a magic deduction waiting to be discovered, and why sometimes the biggest opportunity [00:03:00] may have less to do with one year’s tax deduction and more so how we lower your lifetime taxes over the next twenty or thirty years, right?

So that, that’s gonna lead us to a tax planning conversation. As always, the things that we talk about in today’s episode is for general education, right? Your financial facts are certainly unique to you, and they’re going to require a unique review. So take this as education, but really, you’re gonna want somebody to take a closer look before implementing any of these strategies.

So when I hear, “Hey, we paid six figures in taxes last year,” my first question is like, “Okay, so what does that mean? Like, what– when did you pay that? Was that your total tax liability? Is that the amount that you had withheld from your paychecks? Was that the amount that you had to write a check in April when you filed your return?

When you paid six figures in taxes, are you looking at your federal income tax, your state income tax, the [00:04:00] Social Security and Medicare taxes? Are we including capital gains taxes in that?” So when we start to break that down, those numbers tell us different things. For example, like we could have two pilot families who have the same exact income and the same exact total tax liability, but maybe the first family had enough withheld throughout the year, and so they receive a small refund when they file.

And then the second family has a lot less withheld throughout the year, and so they have to write a really big check in April. Now, those two families might have paid the same exact amount of taxes, but one family feels fine ’cause they got a small refund, and then the other family feels like, whoa, something went really wrong here.

That doesn’t mean that the second family necessarily had a tax planning problem. They might have had a withholding problem That probably they had. But it doesn’t necessarily mean that they’re paying more taxes than they should be. And then the opposite can be true, right? Like receiving a large refund doesn’t automatically mean that a great job on tax [00:05:00] planning was done.

It could simply mean that, hey, you had way more money withheld throughout the year than you needed to, and so there could have been some missed opportunity. If you’re getting a sixty-thousand-dollar refund, that’s like five thousand dollars a month that you could add to your cash flow, and I’m probably pretty sure that you could do something with that, right?

Like your family has needs and plans that you could do something with the five thousand dollars a month in your pocket as opposed to getting it all at the end of the year. So once I understand what that total tax liability was made up of, then I’m going to understand what created it. Was it your salary?

Did you– And was this unexpected? Did you upgrade to captain last year, and you were surprised by the resulting tax liability? Did you move over to wide body? Did you get lucky, and you were able to manage to pick up a lot of premium flying? Did your spouse’s income contribute largely to this? Does your spouse have variable income, stock awards, or bonuses or things like that that factored in?

Did you guys sell property or sell a large [00:06:00] chunk of stock with increased capital gains? Did you inherit an IRA, and now you’re having to unwind required minimum distributions? So once we understand where the taxable income came from, then we can begin to understand what is in your control and what may not be in your control as it relates to the income side of the equation.

Because I think it’s important to acknowledge that sometimes, hey, as a high W-two earning pilot, sometimes you’re paying a lot of tax because you’re earning a lot on your W-two, and that may not be a satisfying answer But it’s still a really good starting point, ’cause that tells us, all right, well, hey, if all of this is W2, and this is just from me waking up and going to work, then the control is not necessarily on the income side.

It’s going to be on the either the deduction side, the investment side, and really looking at lowering the lifetime taxes, not necessarily through a magic deduction, [00:07:00] but just how we manage your tax liability over time. If you’re earning five hundred, seven hundred thousand or more, we should absolutely be looking for planning opportunities.

But I wanted to make sure I didn’t start the conversation pretending that, hey, there’s this, like, super-secret strategy that is gonna make all of your high income disappear from a tax return, ’cause that’s usually not the case. So now that we know what the total tax liability was made up of, now that we have an understanding of which income sources have worked together to create that, now we start looking at the other side of the equation and saying, “Hey, like, what can we deduct?”

And here’s where I think sometimes expectations need to be reset. Most professional pilots, most of you guys are W2 employees. For most of W2 employees, your personal expenses do not suddenly become business deductions just because the tax bill is high. Now, there are some of you that are both W2, and then you also have some businesses that you’re involved with, and so there are legitimate deductions and tax advantage accounts available for both.

You [00:08:00] think about your traditional 401K, contributing to the traditional 401K. That can help reduce your current taxable income. You think about the HSA. That can help provide tax benefits, lower your income, your taxable income if the household is eligible, and you’re on the appropriate health plan. You know, you think about charitable giving.

That can create tax planning opportunities if the intent is there, and you’re itemizing the deductions. And quite frankly, think about itemizing your taxes. Particularly if you purchased a home from twenty twenty-two and beyond when interest rates have gone up, there’s a big chance that the amount of interest that you’re paying can help to itemize your taxes and bring that taxable income down.

Look, you’re already paying it. Let’s get credit for it. Or if you have a rental property, make sure that your CPA is taking the proper depreciation on that. Sure, it could help just on the passive income side, but it’s certainly gonna help when you go to resell it, and there’s depreciation recapture. So when you spend that money in pursuit of [00:09:00] deduction, we wanna make sure that it’s money well spent, right?

Suppose someone tells you, “Hey, you can spend a hundred thousand dollars in this investment, and you can get a tax deduction.” Well, my question is, hey, did you actually want or need to spend that one hundred thousand dollars? Because spending one dollar to save a fraction of that dollar in tax doesn’t automatically make you wealthier.

It doesn’t automatically make it a good decision. Sometimes a common misunderstanding around tax planning is that. I guess is folks will become so focused on lowering the number on the tax return that they may not make the best financial decision to get there. We see this a lot with business, right? So sometimes buying something that you don’t actually need is not automatically smart because someone calls it a write-off.

Like, hey, you would hear a lot, “Hey, my CPA told me I needed to go buy X.” to reduce my taxes. Okay, did you need X? Is X going to give you a return on your investment? Like, is that cash better spent somewhere else as opposed to [00:10:00] generating a write-off and a depreciable piece of property? When you think about making an investment, if it doesn’t fit your financial plan, maybe ’cause you’re uncomfortable with it, maybe the risk is too much, then think twice about plunging headfirst in that investment simply because it produces a tax deduction, right?

So spending a dollar to save a fraction on a dollar doesn’t necessarily mean that it’s a really good financial decision there. The other thing we see sometimes is, like, creating a complicated legal structure, and maybe it’s a legal structure you don’t quite understand. But folks say, “Hey, like, this is what people do, and so it’s good for you because it can help save on taxes.”

Usually what I see is, look, there should generally be a need for the legal structure that you put in place to warrant that structure that is independent or separate just from a tax benefit. ‘Cause if there’s not a need, primarily if the business is not generating enough income to warrant that [00:11:00] structure, then a lot of times you just spend money in creating the structure and maintaining the structure, and you’re not realizing the benefits of the tax deductions that you thought you were going to.

And then there are other examples that can sometimes be a bit more straightforward, but they certainly should not be overlooked. So Wade, you talked about, hey, a pre-tax retirement account can certainly help lower current taxable income and move the household closer to retirement. That can make sense. We talked about the HSA.

We talked about giving to charity, particularly i- if you’re charitable inclined, right? So for example, let’s say that you typically give $10,000 to charity per year, and something happens with your income to increase it this year. So maybe it makes sense to say, “Hey, you know what? I’m gonna bunch five years together.

I’m gonna do f- $50,000 all at once, and I’m gonna grab the, the charitable deduction this year.” And maybe you just open up a donor-advised fund. You put the money in, and you could still dole [00:12:00] out $10,000 a year to the charity. But you can take that, all of that tax deduction right now. So that can be available to you, and this is where I think high-earning pilots sometimes can become frustrated because we really want the deduction to improve the strategy that is creating the life that you imagine versus the deduction becoming the strategy, right?

So you’re doing things simply for the tax write-off. ‘Cause you guys have reached a point in your career where, hey, you’re earning substantial income. A lot of times a natural assumption is there must be another large deduction available. Sometimes there is Sometimes there isn’t. But when you move on from deductions, right, we think about the larger opportunity is sometimes somewhere else.

It could be how are the investments managed? It could be which accounts are we funding? It could be the timing of income. So this is like when you have W-2 income, and then you have other income that you can actually control the timing of. Hey, maybe we control [00:13:00] the timing of income, so it can land in a lower tax year.

It could be understanding what happens during the first few years of your retirement. This is where I really think understanding the financial life cycle of a professional pilot really helps because either you or the team that you’re working with can quickly identify, hey, these are some of the lower income years.

It might not feel like it, but particularly for clients who have spent a couple decades in the military where you’ve had more tax-free income, and then you come out, and you’re starting to see how much is taxed. But if you’re in the first couple of years at the airlines, usually those are still some of your lower tax years, right?

So if you identify that, the team, the advisors that you’re working with can identify these as lower income years, then you can use strategies that are gonna help you lower the lifetime taxes, and that’s really where the conversation moves away from tax deductions to tax planning, which is what [00:14:00] we’re gonna pick up in our next episode.

So with that, that’s gonna do it for today’s episodes. Guys, really big shout-out to Beacon Relocation. If you’re thinking about listing a property or buying a property all across the country, give them a call. And especially if you’re in the Charlotte area, you might get the opportunity to work with some of the founders, which is a real treat.

I can’t speak highly enough about them. So with that, guys, fly safe, take care, and we’ll see you on the next episode. Thank you for joining this episode of Pilot’s Portfolio. If you found this information helpful, spread the word and share it with a pilot buddy. Or if you have questions and there’s something that you would like to hear discussed on the show, send us an email.

You can find the address in the show notes. For those of you who are ready to learn how we help professional pilots with their financial planning needs, schedule an appointment. Until next time, keep the shiny side up, and we’ll see you on the next episode [00:15:00] Pilot’s Portfolio is hosted by Timothy P. Pope.

Timothy P. Pope is principal owner of 360 Aviation Advisors. 360 Aviation Advisors is a registered investment advisory firm regulated by the state of North Carolina in accordance and compliance to the securities laws and regulations. 360 Aviation Advisors does not render or offer to render personalized investment or tax advice through Pilot’s Portfolio.

The information provided is for informational purposes only and may not be suitable for all investors and does not constitute financial, tax, investment, or legal advice. All investments involve a degree of risk, including the risk of loss.