Tim:[00:01:13]Wow. Well, welcome to another episode of the pilot money podcast guys. It has been. a tremendous year. I think we spent 20 something episodes together. And you guys have been great. The show has been great. The guests have been great. The content that we have explored together has just been fantastic and I appreciate the feedback. So for those that are joining, another episode and for our regular listeners, welcome and thank you. If you’re new here, my name is Timothy P. Pope. I’m a certified financial planner specializing in the planning needs of the professional pilot. And on this show, we talk about all things personal finance for the professional pilot. [00:01:51]Now, as we are rounding out this first season today’s topic is going to be some year end things that should be top of mind for each of you. And what we’re going to do is let’s start with the items that have a shelf life. Do I mean by that? So these are opportunities that if you’re going to execute, you have to do so by the end of the year, that’s when the opportunity, the shelf life of that opportunity is going to expire. The first thing that we want to talk about is. a Roth conversion. If you have been thinking about doing a Roth conversion this year, you have until December 31st of 2024. And just as a recap and a reminder, a Roth conversion is where we take money from a pre tax account that we’ve gotten a tax deduction on, and we move it to the Roth account. [00:02:41]And then we pay taxes on the amount that we move over. Okay, so I’m not talking about a backdoor Roth, I’m not talking about a mega backdoor Roth, I’m just talking about a pure Roth conversion. This can happen in your IRAs, this can happen in your 401ks. And there’s a number of reasons that you might want to do one. Maybe your use case is that your income is lower this year than you expect it to be next year. Maybe there was interruption in income. Maybe there was a job change. Just the way things lined up, you’ve got lower income for whatever reason. And maybe you want to take advantage of that.
[00:03:13]Maybe you’re in the regular habit of doing tax bracket management. And you’re saying, you know, this year maybe I’m in the 22 percent margin. bracket, but I’m going to move from up the seniority one year or if I’m in business aviation, I’m expecting a raise or a bonus or what have you next year. So I know that’s going to put me in the 24%, but now I’m in the 22 percent and maybe I want to fill up the 22 percent with Roth conversion. And so, I’m going to pay 22 percent marginal tax on that and perhaps I fully expect in the future that my personal tax rates are going to be higher, So that’s another use case. Or maybe you’re, thinking about a legacy play and you’re saying, look, I need to leave these dollars behind and I do not want my children or grandchildren to be concerned with having to liquidate the account within 10 years. And so maybe it makes sense for you to move that money over to Roth and allow that to to work for them. [00:04:11]So there’s a number of use cases, but I think the point here is that if you’re planning to do a Roth conversion, if you’re planning to have it count for the 2024 tax year, you’ve got until the end of December to do so. The next strategy I want you guys to be thinking about is that has a shelf life is tax gain or tax loss harvesting. And this is exactly what it sounds like, the tax gain harvesting done by itself is probably most beneficial to an early career pilot because you need pretty low income to take advantage of this. And this is where your taxable income is low enough. that your long term capital gains rate is zero.
[00:04:54]So in 2024, if you are filing a single, that means that your taxable income needs to be 47,025 dollars or less. And if you’re filing as married, filing jointly, your taxable income needs to be 94,050 dollars or less. I suppose if you’re Not an early career pilot, but maybe you are a mid career or later career pilot who happened to be on disability and you were also
paying the imputed income on the disability policy. So your disability is not taxable to you. I imagine that this could also be a situation where you find that your taxable income is sufficiently low. to capture a 0 percent long term capital gains rate. What can we do with that? Well, if we are tax gain harvesting, we can look at our positions. We can sell something that’s at a gain.
[00:05:42]And if our tax rate on the long term capital gains is zero, well, we’ve just earned money that we didn’t pay tax on. And we like that. That’s almost as good as the Roth IRA. Right. If you need the cash, great. You just freed up some tax free income. If you don’t need the cash, you can sell that position, capture the gain, pay no tax on the gain, and then re invest what you just sold, essentially, you have just increased your basis on the new position. Now, I want to make sure I abundantly clear here. I’m talking about long term capital gains. This is on assets that you’ve held for a year and a day at least. So longer than a year. If you do this with short term capital gains, you’re going to end up paying ordinary income tax and you’re going to otherwise have just ruined a beautiful strategy. So make sure we understand that’s long term capital gains. [00:06:35]What about the tax loss harvesting And that’s, that’s where the opposite comes in. So we’re looking for positions that are at a loss. And the reason that we’re doing that is because we want to offset positions that we’ve sold at a gain. And if we really get in there and look at the cost basis on our positions, we can, you may be able to offset those capital gains with those capital losses. And then you minimize either your net capital gain, or maybe you have a net capital loss. This could be tough depending on your holding period. The market has been up in a fantastic way this year. So, I’m not ignorant that finding losses could be a challenge, but, you know, it depends on what you’ve been invested in.
[00:07:17]And so, you think about that, when you’re thinking about tax loss harvesting And, you can carry forward up to 3,000 dollars can offset your ordinary income. So, you know, it’s not a huge amount, but if you do it, you just want to make sure that you track it so you don’t leave any losses on the table that are unused. All right, moving on from tax gain and tax loss harvesting, next up is to charitable giving. All right. So if you’re thinking about giving to charity. Again, you’re not going to want to drag your feet here because you have until 12:31. Now, if you have already identified the charity and maybe you’re cutting a check to that charity, you’re going to need that check postmarked by 11:59 local time on December 31st. [00:08:01]However, if you have not identified a charity, but you have charitable intent, and you, you know, you’d like to offset some of your taxes this year, you can consider using a donor advised fund. So that’s a fund that you can open up at nearly every major custodian. You can fund it with dollars today, even if you haven’t identified a specific charity, you can take a tax deduction. Now I want you to note here, if you anticipate Deducting charity. You’re also going to need to itemize your taxes for 2024. Okay. So lot of you pilots, you have high W 2. You have few deductions, and that’s always a challenge, right? But maybe if you, if you bunch some, you know, your charitable deduction, you, you bunch it up with maybe the property tax that you’ve paid and the mortgage interest and so forth, you can overcome the standard deduction. [00;08:56]So just keep that in mind that you do need to itemize if you’re planning to take that, that charitable deduction. The other thing I want you to keep in mind is that, giving to charity, it’s not a silver bullet, it’s not a miracle tool. And it’s certainly not a tax credit. And what I mean by that is, one dollar given to charity does not decrease your tax bill by a dollar. It’d be nice if it did. It’s a deduction. So, what that means is, you’re going to see your tax bill lower. Very similarly to the way that it would if you chose the pre tax 401k election, right? So let’s say that you’re in the 24 percent marginal bracket, 1 into charity or your 401k equals 0.24 tax
bill reduced. Okay, so that’s how that works. And so keep those two things in mind. and I always say like, look, you know, you really, if you have charitable intent, that’s where the magic happens.
[00;09:50]Transcribed a lot of times it doesn’t make sense to give, or I shouldn’t say a lot of times, many cases it doesn’t make sense just to go, open up a donor advised fund or give to charity just because, just for the tax reason. so it’s nice when those things align with the charitable intent. up next, alternative investments. These range if you’re looking at one, you know who you are. These things are investment opportunities that can trigger an upfront tax deduction on the amount invested. But there’s a shelf life, right? So December 31 that shelf life for that kind of investment and that kind of tax deduction. So you can see that a lot of these year end, things to be aware of that have a shelf life. A lot of them are tax related, because for most of us that are calendar year taxpayers, when our tax year ends, is 12/31.
[00:10:29]And so, you know, you want to be proactive and be thinking about these things honestly throughout the year. But hey, if you just showed up to the game, that’s okay. Start thinking about them now because. When you go to your CPA and you go with your W 2s and your 1099s and you say, hey, like help me reduce my tax bill. Their hands are tied on what they can actually do because you really all the work has to be done up front and within the tax year. A lot of it does. And that’s why I tell folks that the value is really in the tax planning, right? If we know how to change our facts before 12/31. Then we can change our tax, so, The next couple of things that I’m going to mention I want you guys to think about is these things that I think increase your situational awareness. Okay, so they don’t necessarily have a shelf life attached to them. But one is how much is your tax bill going to be next year? [00:11:26]Okay, so if you’re a dual income family, Or if you’ve had irregular income or multiple sources of income this year, it’s always good to do a cross check, particularly as you get into Q4. You project what you’re going to owe for this year’s taxes. Number one, it gives you an opportunity to do something about it. If you don’t like the number, number two, it allows you to see what your tax withholdings throughout the year have been. And are you going to fall short, or are you going to get a refund if you’ve overwithheld? And by the way, if it’s a substantial refund, I typically suggest taking a look at that and realigning it so you come close and, it’s not a substantial refund there.
[00:12:03]Now, in some cases, if you fall short, it’s no harm, no foul, it’s fine. But in other cases, if you fall substantially short, it could trigger a penalty for underwithholding. if there’s multiple income sources, maybe you’ve sold some things throughout the year, property or stocks or you received bonuses or whatever. Again, irregular income, it could trigger an under withholding penalty. And so when I do this cross check, what I look for is, is what you’ve withheld sufficient to keep you in what’s called a safe harbor amount and, and what that does is it makes sure that, hey, you really don’t have to worry about paying any penalties. I’m not going to go into it here, but based off of, hey, are you filing single or are you filing married? What was your adjusted gross income last year? Was it above or below some thresholds? And then what percentage of that is 110 percent of last year or 90 percent of the taxes due this year?
[00:12:53]I’m not going to go into that for today’s talk. You can go to irs. gov, you can look at Safe Harbor and just walk yourself through, find the box where you fit and then you can look at that to see if you’re going to owe anything or if you’re going to owe a penalty. Now sometimes the penalties are, relatively small, a couple hundred dollars. Sometimes they can be a little bit larger depending on what you have going on. So that’s one thing to look at. There’s also a practical reason to do this cross check and that’s how you don’t get a tax season surprise. I don’t know about you guys, but. If I’m going to have to cut a check of 10,
20, 30 grand in taxes, I’d rather know that in advance so I can just mentally prepare. Not much less, you know, make sure that the cash is available to write the check. But so that mental preparation you know, does a lot, right? So nobody likes tax time surprise. So how much will your tax bill be next year? That’s an area I want you to be thinking about to increase your situational awareness.
[00:13:50]The other thing I want you to be thinking about is what is your savings and investment strategy going to be for the next year, okay? Sometimes this is on autopilot and that’s good, like it’s great, it was the same last year, it’s going to be the same this year and that’s okay. Sometimes it needs to be adjusted, so maybe we are decreasing our 401k contribution for some reason. Maybe we’re increasing the 401k contribution because we got, you know, year one, year two, we had some other things to take care of, or maybe we’re funding the emergency fund or whatever, and now it’s time to refocus our attention. Maybe we’re decreasing the 401k so we can focus on a brokerage account to increase our liquidity and provide options for ourselves, right?
[00:14:31]So there’s a whole list of reasons why this, your savings and investment strategy, may need to be adjusted. Could be account types and so forth. So what I want you to do is I want you to think about it. I want you to figure out what that plan is going to be and then say it out loud, right? In 2025, I’m going to save X percent of my income. And that just helps you bring it, you know, right to your attention and bring it in your forefront. You know, if you’re married, get your spouse involved. If you’re single, say it out loud, right? Like I said, 401k contributions, Roth IRA contributions, brokerage account contributions. Maybe it’s going to be your first year that you buy your first alternative investment, your first part of the placement, your first rental property, so be intentional because here’s the thing. Life moves fast. The other day I asked my wife, like, hey, can you believe that it’s like end of November?
[00:15:17]And neither of us, you know, could really appreciate it just yet. But let me get back on topic. Life moves fast and if it’s not in front of you and if you’re not intentional about it. Huge chance that it could just be, you know, set by the wayside. And then you, you know, you intend to come back to it, but you really, you don’t. Okay. So I want you to be thinking about what my savings and investing strategy is going to be next year. But think about that now and increase your, your situational awareness. The last thing that I want you guys to think about, I’m going to round this out is look how much that you’ve accomplished.
[00:15:50]The end of the year is a natural moment of pause and reflection, right, for me and for a lot of people, So think about what you’ve accomplished personally. Think about what you’ve accomplished financially. I like to think about what have I accomplished, who have I accomplished it with, and who have I accomplished it for, and then I like to follow up and ask myself, am I happy and at peace with my progress? Another temp tangent, but I believe peace is a very undervalued thing today. And I like to, I like to obtain it and hold onto it. So, am I at peace with my progress? And if I’m not at peace with my progress, what am I going to do about that?
[00:16:30]Sometimes life could be like, So if I’m looking at a stock chart, you know, and if I obsess over one trading session or one week or one month, I can really feel the ups and the downs, especially the downs, But if I zoom out and I look at a much larger time period, it’s like, wow, those events that seemed, you know, so large at the time, actually smooth out quite nicely on the way up. And so look at how much you’ve accomplished. this year and pat yourself on the back. I mean, seriously, you know, you don’t celebrate that. The other thing is life can be like looking at a stock chart when you’re sitting on a pile of cash, like, wow, I wish I could have gotten started yesterday.
[00:17:11]Or I wish I would have gotten started the day before. I wish I would have started a long time ago because you’ve looked at the market and it looks like it’s left you behind, you know? And the thing is, If you find yourself in that position, that’s okay, because you can still start today, so whatever financial habit you’ve been delaying, or whatever financial habit you’re thinking about starting, you can start that today. So, when you think about this past year, and you think about how much you’ve accomplished, appreciate all that you’ve accomplished and celebrate that. And then, when you’re done celebrating, acknowledge the work that remains and then get ready to get to work and knock it out of the park.