Solving The Tax Puzzle (Podcast)

Melinda Kibler
Good morning, Amy. Thanks for having me.

Amy Laburda 00:33
Last season, I talked with our colleagues Ben Sullivan and ReKeithen Miller about federal income tax and state income tax, respectively. Meanwhile, you were the lucky winner who got to write the chapter on both those things for our book for younger adults, The High Achiever's Guide to Wealth. Now, tax planning is a major practice area for our firm, and obviously, it can get complicated. We're not going to get into every single in and out today. And you couldn't get into every single in and out in the book chapter, either. It would have taken over the entire book.

01:00
So when you sat down to write this chapter, did you have any sort of big-picture approach that guided you or major points you wanted to hit?

Melinda Kibler
Yeah, when I began outlining, my thought process was to set the chapter up to align with the client experience. So there's basically three major stages for a client. You have the starting stage: You're figuring out what paperwork they need to submit to the tax preparer.

01:23
And you've got the second stage of reviewing a prepared return to see what types of taxes they're subject to and how much it's going to impact their overall tax liability. So basically, the understanding of the why behind the number. And then finally, we have the discussion with the tax preparer on planning techniques and ways to minimize tax for the current or the future year. So that was sort of my approach for starting.

Amy Laburda
OK. Well, given our podcast name and that lovely intro you just gave me, let's start with sort of something on the personal side.

01:51
If you're sitting down with a new or prospective client, and you're starting on that building block number one, what are some of the things you're going to talk about in that opening conversation?

Melinda Kibler
So I start with the big-picture questions. I want to know: Where do you live? Are we dealing with U.S. residents? Is there going to be potential state filings? What do they do for work? Are they an employee? Do they own their own business? Do they travel a lot for work? That can play into some tax issues.

02:15
I ask, do you have investment accounts? Do you own partnerships or real estate or have any other income flows? And then once I have a gauge of what level of a complication we're dealing with, then I want to understand what brought them to me. Do they already have another tax preparer? Have they been doing it themselves and want to hand off the reins to someone else? If they have a previous preparer, what made them unhappy? That's really important so that I can not make the same mistakes or have similar issues.

02:43
Is it communication problems? Do they feel like they're getting a surprise tax bill in April? Or maybe they want someone to look at their return from a planning perspective and see if there's techniques they can use to minimize the liability. And of course, as we're talking, if ideas come to mind, I think… things that could be maybe addressed better on their return or something that I think their current preparer is missing, I'll of course dive into those issues too. So I always ask for copies of the previous year’s filing, so I can really look through them and flag whatever I think should come to mind.

Amy Laburda 03:13
Now, I'm going to assume many, if not most of our listeners have filed their income taxes at some point. Hopefully, hopefully they have. But as life changes, you're going to have to navigate situations that can have a pretty major effect on your income taxes. We've mentioned a few earlier this season, and you mentioned a few just now. But can we sort of focus in on some things that might be a moment that you either want to sit down with a professional or really just take time out to sort of rethink your approach?

Melinda Kibler
Yeah. So I think it's the three.

03:41
There's a list of three I always say. Your changes in your personal life, changes in where you live or work, and then changes in your income source. So on the personal life factor, for starters, you've got — think marriage, divorce, birth of a child, death of a spouse or a child. Or you have a child and they're moving out into adulthood. All of those things can change your tax brackets, your availability for tax credits. If you get married, the tax brackets for married filing jointly are

04:11
generally advantageous. There's some exceptions. Might be circumstances where maybe one spouse has little to no income and is receiving some benefits with student loans. And due to their low income threshold, when they marry someone with significant income, there might be some planning to do there. But generally speaking, married filing jointly is helpful. So that's something that would change your situation. On a morbid note: Your spouse dies. Assuming you don't remarry within that tax year, you can file married filing jointly.

04:38
But after that, surviving spouses who have a dependent child may be able to use a qualifying widow status in the two tax years after the spouse has died. So there's some planning, and some things to know about, that are worth talking to someone, to figure out best ways to file. We all know that having kids is expensive. And so, you know, if someone is pregnant and thinking, you know, oh, they're planning for their nursery and, you know, the best stroller to buy. But...

05:03
also, there's tax things that are going to come into play. So you get a tax benefit if you have kids. So that's something. Lessens the blow of costs. You get a Child Tax Credit for up to $2,000 a kid right now. There's also the Child and Dependent Care Credit. So depending on your income, taxpayers can get a credit worth about 35% of the total qualifying child care expenses. And at a minimum, it's 20% of those expenses. So you should track

05:31
if you have child care expenses and bring that to your tax preparer for that first year when you're transitioning to filing and reporting a child. That max credit is $3,000 per child, $6,000 for two or more. So it maxes out there. So that's the first item, right? Like I was talking about, the changes to your personal life. The second category I mentioned is changes to where you live or work. If you start traveling for work frequently, you should start tracking your locations, since depending on your sources of income,

06:00
a portion of your income may need to be sourced to the states you're traveling to, which means you suddenly have new state filings you maybe didn't have in previous years. If you move, this can change where you need to file as a resident. If you buy a home, you might need to now report your property tax expenses and mortgage interest to get the deduction. So thinking about what happened with where you're living and where you're moving is item two.

06:23
And then finally, where is your income sourced from? If that changes, it's worth talking to someone about how that's going to impact your taxes. So if you change jobs, start a business, buy a rental property and start renting it out, any of those can change your tax situation. As an employee, you need to review how much is being withheld on your paycheck to ensure you don't have a surprise in April. No one likes finding out that they've been under withholding on their paycheck all year.

06:49
Maybe you have one huge, one-time bonus that pushes you into a different tax bracket. If you start your own business or rent out a property, you might need to be running what we call quarterly tax projections, which means once a quarter, you're running estimates on what your income is going to be for the year, and then you need to pay in estimated tax on a quarterly basis to avoid getting hit with penalties and interest. So communicating with your tax preparer when you have life changes is extremely important.

07:16
In certain situations, there's advanced planning that we can be doing for our clients that helps minimize the tax liability, and also avoid penalties or interest.

Amy Laburda
Thanks. That was a really comprehensive answer, and you covered a lot of ground. Some of those topics that you touched on are things we've talked about earlier this season: marriage, kids, buying a home. But I would like to stop a little bit on moving to another state, because that's really not something that's come up on its own as a separate topic so far.

07:43
So if you're moving between states, what are you looking at that could change in your tax picture?

Melinda Kibler
You know, it's funny you bring this up, because this is probably one of the top things we get calls in for. So it's definitely a hot topic. A lot of people have this issue, want to talk about it. So yes, let's dive into that. So if you live and work in a no-income-tax state, like me here in Florida, individual state tax findings are a non-issue. Florida, of course, isn't the only state. You've got Alaska, Nevada, South Dakota, Tennessee and Wyoming, too.

08:11
New Hampshire only taxes dividends and interest income, and Washington just on capital gains tax, but there's no other income [tax]. But if you put that aside, for the people who live in all the other states out there that do charge income tax, or people who travel a lot for work to these states, it's a totally different story. So let's say you live and work in New York as an employee, but you also travel to California for work one week per month, year round. California is going to want their cut for income if you are earning it related to work in their state.

08:41
So you would need to file in California as a non-resident and source a portion of your employee income to California. Then you would file your New York resident tax return, because that's where you live full time, and take a credit against your New York state tax for the amount of tax you paid to California to help avoid the whole double taxation issue there. Depending on your state's tax rate, the credit you receive may completely offset the tax or...

09:07
it may not. It depends if your home state charges a higher tax rate. But it at least helps minimize the issue. Some states have what we call reciprocal agreements with each other, usually when they're geographically close to each other. So these agreements exempt earned income of residents in nearby states for income tax. So if you live in Virginia and you work in Maryland, that's very common.

09:31
You can file an exemption form with your employer in Maryland asking that they only withhold tax for Virginia purposes. Then at the end of the year, you only have to file in Virginia, which is your home state where you live, instead of reporting in Maryland and Virginia. So this is of course, assuming you don't have any other ties to Maryland, you know, other income sources up there other than your employer. But it does help simplify the tax filing process across states.

09:56
And since we're on the topic of state filing, you should also consider if you have investments in a partnership and where that partnership is sourcing income. So partnerships issue Schedule K-1s. That's the form that you have to give to your tax preparer when tax time comes. Those go out to the investors, and that sometimes can include a state source K-1 as well. If the partnership has income from a state outside of your residency, you may need to file in that state, depending on the materiality of the income and whether or not the partnership paid in tax already for you.

10:26
So think if you owned a real estate partnership and it had properties all around the country, and then you …. that partnership sells one of the properties for big gains in, we'll call it Arizona. But you live in Georgia and are a Georgia resident. You'll need to file in Arizona to report the income, pay tax accordingly, and then you'll receive a credit on your home state, Georgia, tax return. So a lot of nuances between states.

Amy Laburda
That makes sense. Now to back up just a little bit

10:54
to talking about working in one state and living in a different state. I think working remotely has been a big game changer in that area. It's been possible, certainly, for many years, but I think it's become more prominent since 2020 for obvious reasons. I know you work from home sometimes. I also work from home sometimes, and unlike you, my home is in a different state than where my office is. So this is something that's especially pertinent to me. So if you're, like us, working from home, or you're like me and you're working from home and your employer's in a different state,

11:23
which state are you earning income in while you work in your house, at home?

Melinda Kibler
Yes, so COVID really brought these into light, these rules. And no doubt, plenty of taxpayers received surprise audit or deficiency notices from states if they were unaware of how these rules work. So step by step, every state has their own state rules. So I'll start with that. And you have to look at the state-specific rules for your situation on how to report income when you work from home in a state different from your employer.

11:51
Many states follow what they call a “convenience of the employer” test, meaning if you work from home for the convenience of your employer — so hypothetically the employer doesn't want to spend money on establishing a full-time office in your area, they just want you to work from home and be that person in that location — then you can generally source your income to your home state. However, if you are working from home because it makes your life easier, and your employer merely has agreed to allow you to live the sweatpants life, but you know, you'd also,

12:21
they'd be happy for you to come into the main office location, then generally your income should be sourced to the employer's main office state. So, for example, Connecticut changed their rules in 2019. So if you work remotely for a Connecticut employer for your own convenience, you have to treat the income as Connecticut-based if your home state follows similar rules.

12:43
So if you're a New Yorker who works for a Connecticut-based company, but you work from home most of the year, you will still owe Connecticut tax on those wages, even though you rarely go into the office.

Amy Laburda
Makes sense. And I'm glad to discover on air that I have been doing it correctly.

Melinda Kibler
[laugh] The nice relief with that.

Amy Laburda
That would have been an embarrassing discovery. So whether that's your situation, you're filing a non-resident return because of your work or because of the Schedule K-1s you mentioned for [a] partnership, or some other reason,

13:11
you mentioned that a lot of people get credit for tax you pay to your non-resident state. Now for a lot of people, the state you live in is an easy question, a question that will not cause you to lose any sleep at night. But some people regularly split their time, and split large amounts of their time, between states. So if you're spread out a little bit more in your lifestyle, how do you know what your state of residence is?

Melinda Kibler
So there's really two things to focus on here. You've got domicile

13:40
and you have residency. So those are two different things. So domicile is your primary home state, where you intend to live permanently. When you're proving your domicile, always have a paper trail. It's very helpful. So a paper trail could include things like, where do you have your driver's license? Where are you registered to vote? If you own a home, where did you make your homestead exemption filings? What's the address on your bank statements? Where's your primary care doctor? Where's your accountant?

14:10
So those are all kind of tied to your domicile. Then you have residency, which is really more based on time spent in a particular state. So most states follow [a] 183-day rule. So if you spend more than 183 days in the state, and you have a dwelling of some sort in that state, they'll view you as a resident. Some states are very strict and they'll even include partial days, or even if you're just passing through as a day. So...

14:37
if you're taking a road trip and you happen to pass through that state and you're watching your 183 days, that could potentially… just passing through could be included on that day count. We've talked about employment bringing you to different places, but something else I see that's very common is — maybe it's particular to me living in Florida — is retiree travel. Sometimes we have retirees here in Florida. They've created their Florida domicile. They've done all their filings. They've changed their...

15:01
driver's license and they register to vote. They've done all the things, like good students checking off the box here. And then their first grandbaby comes along, and their kids are up North, and they decide they want to be up North with the baby a lot. So they get a little apartment in New York and are going there frequently for extended periods. Suddenly they've surpassed the 183 day count for the year between visits and holidays. And

15:26
now, all of a sudden, all of their income is subject to New York tax because of the residency issue. So they might have been domiciled in Florida. They might have done all the things to check that box. But if you have surpassed that 183-day count, there's not much we can do. You owe a New York tax return for that year and you're going to pay the New York tax on your income, which is not a surprise anyone wants to deal with. So we always say… Anytime I hear that I have a client that's doing a lot of travel up North, I do a gentle reminder to keep track of those days.

15:54
This can also come up if you're traveling for medical treatments. Every state's rules are different on this. Generally, you're exempt from including days in your total count that were used for inpatient treatments. But outpatient services, and days maybe you spent recovering — you're not up, you don't need to be at the hospital anymore, but you're also not up for traveling all the way back down to Florida — days spent recovering in between procedures do count towards that 183-day count. So track your days is what I always advise.

Amy Laburda 16:24
So in addition to just the number of days, I spoke with our colleague, ReKeithen Miller, last season about how to reestablish domicile when you move, especially, like you said, if you still have family, grandchildren, other ties to a state. He mentioned that he's seen tax authorities even look at details like where you're storing family heirlooms, where artwork is, where your estate planning documents are. Have you also run into these kind of, like, really detailed detective work kind of determinations of where someone lives?

Melinda Kibler 16:53
I personally haven't dealt with that poor level of scrutiny. I don't know what you want to call it. But I have seen my fair share of audits for residency and audits related to sourcing employee income, particularly taxpayers with very large W-2s and travel for work. So I haven't witnessed a ton of that, but I have heard the horror stories, so to speak. I do find certain states are extremely aggressive in trying to get their cut of the taxes, looking for any and every excuse to adjust the number.

17:20
In cases like that, I always say it's best to remain calm and build your paper trail. We'll be sure to put together a strong file with locations, dates, what the travel was for, if necessary other support — sometimes airplane tickets, credit card receipts. So people often stress when they see a tax notice from a state. But just because you've received a notice doesn't immediately mean you filed incorrectly. It very well could mean the state doesn't have sufficient information and are just kind of digging around to see what comes of it.

Amy Laburda
Sure.

17:48
Turning over the couch cushions, as they say. All right, so we've spent a little time with state income taxes. Let's zoom back out a little bit more broadly. As a tax professional, either talking to clients or just in your everyday life if people know what you do, do you encounter any common misconceptions about taxes or any persistent myths that seem to crop up about how taxes work?

Melinda Kibler
Nothing gets my goat in tax season more than the phrase “surely we can get that number down.”

18:17
There seems to be a misconception you can always work the system to get the tax liability down. So I often remind people there is tax avoidance and there is tax evasion. I am happy to provide ideas of ways to reduce your tax liability, maybe retirement contributions, checking for eligible deductions or credits, timing when you trigger certain income, that kind of thing. Providing those ideas is part of my job as a tax preparer. But once everything is said and done,

18:45
the number is the number. Calculating your taxes is a formula. We can't just make the number disappear or get the number down. There's only so much we can do with this. There starts to be a point you're talking tax evasion. There are only so many tips or tricks in the book. I also think tax brackets are a big source of confusion for people. So tax brackets are graduated, meaning part of your income is taxed at the lowest bracket, then the next level, and then the next level.

19:10
So if you're in a very high tax bracket, it doesn't imply all of your income is taxed at 37% for federal purposes. A lot of it was taxed at lower rates and only the additional dollars of income will continue to be taxed at that 37% rate, that top rate. And I think the third common myth I hear often is, “Oh, I'm too small a fish for the IRS to bother me.”

19:33
Now look, does the IRS like the big fish? Of course they do. There's more on the line. If they have a win, they have a really big win. But I've seen audits and notices from the IRS for low-income level clients and wealthy alike. So if you aren't filing, or if you're underreporting income, the IRS will eventually issue a notice when the computer system matches up the income they expect you to report versus what you actually reported and see that it's off. So it is important to file accurately and timely, no matter how big a fish you are.

Amy Laburda
I think that's fair.

20:02
So you included tons of information in your book chapter, which I commend to our listeners. And of course, there are tons of other books and websites, the IRS's own website, out there that give you a lot of information about how to prepare your taxes. Many people year to year will find a pretty similar experience if nothing big has changed. But if someone were to ask you, would you say there are any particular signs or signals that it's time to seek out a tax professional, really get some advice from someone who knows what they're talking about?

Melinda Kibler 20:29
Yeah, I think for people who have relatively simple situations, a W-2 from an employer and maybe one simple investment account, then doing your taxes is simple enough if you're up for it and assuming you're disciplined enough to handle organizing and all. But when you are self-employed, you have partnership investments, you're working internationally, or just closed on a complicated business deal, it's probably time to hire an expert.

20:53
Not only will the tax professional make sure you're filing accurately and capturing your income situation appropriately, but they can also offer advice on deductions or credits or retirement plans that could help you save, ultimately, on your taxes. I've taken on my fair share of clients with tax messes. Missed filings, outstanding tax bills because of underreporting income, all kinds of notices. I've seen a lot. And when we get the mess cleaned up and they start filing accurately going forward,

21:20
they all comment how much lower their stress is, because they get to a point where there is predictability on how much they're going to owe. They can budget accordingly. And they're not worried about when the tax notice is going to roll through into the mailbox with some astronomical amount of interest and penalties attached to it that they now have to go try to sort out.

Amy Laburda
Now, you mentioned misfilings. I will personally confess I'm a person who every year intends to file my taxes in February. And then it slides to March.

21:47
The weeks pass by, may even get to April 1st, and you're sort of scrambling at the end there. Not proud of it, but it has happened a time or two. Now in a perfect world, we'd all be done long before the deadline. But if someone has cut it close and then something comes up and they're afraid they're going to miss the deadline, is there anything that they can do?

Melinda Kibler
There is always the option to file for an extension if you can't get the tax return together in time. And sometimes it's out of your control. For people who might be waiting on a Schedule K-1 from an investment partnership,

22:16
it takes some time for them to work through their books before they can get you your K-1. So you might not even have all of your data in time. So you absolutely can file for an extension. An extension is only filing for extra time to file the return, not extra time to pay the liability. That's something that not everyone understands. So you'll still want to get a general idea of how much you're going to owe based on the information you do have available in front of you. And then I would round up a little to build in some room in case

22:43
there's some adjustments or you miss something, and you need to pay that by April 15. And then if you overpay, you can always have it refunded to you when you file your final return, or you can apply it towards next year's liability, like an estimated tax payment. But you can extend, buy yourself some time, maybe work it over the summer when things are a little bit quieter for you. But you do still have to pay in on time by April.

Amy Laburda
Sure. And as you mentioned, sometimes,

23:06
you're waiting on a form or there's something out of your control. So it's good to know that that deadline doesn't mean that you are completely out of luck if not everything is to you by early April. So at Palisades Hudson, I know you and our colleagues on the client service side of the business help people in multiple areas of their financial lives. Many of your clients, you're not only helping with their taxes, but also investments or estate planning or other financial goals. So I wanted to talk for a minute about the way that tax and investing can

23:34
complement each other, if that's OK. I know we've talked about tax location as part of an investment strategy elsewhere in the past. So just briefly, can we touch on what that is and why it's something people might want to keep in mind?

Melinda Kibler
Yeah, this is something we see because we are not just tax advisers here. Some companies, you have a particular tax section, and you have investment advisers, and they're separate. Here, we're doing both sides, so we see a lot of it. So I serve on the investment practice side of the business as well.

24:02
And so often people forget about the after-tax performance of their investments. I'll have clients raving about their investment manager and how much money they're making them, only for a huge tax bill to arrive in April, and they're left flustered. Portfolios with significant trading could be racking up large capital gains. Sometimes it pays to wait a few weeks for an investment to cross over from being a short-term holding, which means it's been held for one year or less, to a long-term holding, because that reduces the tax rate that's applied to the capital gain when you sell that security.

24:32
And to your point about tax location that you were asking about, investment managers who aren't considering task consequences could also be placing certain investments in taxable investment accounts when their clients would be better served by moving that investment into a retirement account, because the rate [at which] the income is taxed. So interest income from corporate bonds is better served in retirement accounts, because interest income is taxed at a higher rate than

24:56
call it qualified dividends or long-term capital gains from an equity investment, like an equity mutual fund or a stock. So tax-efficient mutual funds or ETFs, and particularly index funds, are best placed in taxable accounts. So yes, this is why we often talk about the importance of having a full picture of [a] financial situation when we're making tax and investment decisions. It's why when I meet with a client, I want to see it all. And if we are only your tax preparer and not doing your investment work,

25:23
I'll often reach out to their investment adviser to get a gauge of what are capital gains looking like for this year, so we can see how much that's pushing up income and then maybe advise against making further trades or holding off on things if we can to try to avoid pushing up into a different tax bracket.

Amy Laburda
So it sounds like it's kind of a two-way street. Tax is easier if you know it's coming on the investment side. And investment can have better results if you're aware of the tax consequences.

Melinda Kibler
Absolutely. That's well said.

Amy Laburda
All right.

25:49
So I hate to shift gears to a word that is unpleasant for so many people, but we touched on it already a little bit. Let's go to audits. Whether you're a big fish or a little fish, what actually happens if the IRS is auditing you?

Melinda Kibler
Everyone's worst little nightmare when that pops up in the mail, isn't it? I always say if you receive a notice in the mail that the IRS is going to audit you, deep breaths. Deep breaths, OK? I know you want to panic, but this doesn't necessarily mean you've done something wrong or are going to owe money.

26:18
The best thing you can do is get a copy of that notice over to your tax preparer ASAP. From there, they're going to provide paperwork for you to sign to list them as a power of attorney to handle the audit for you. Let them handle it, let them run with it. Tax preparers are dealing with this more frequently. It's more comfortable for them to know the process and handle it for you. There's different types of audits. You have correspondence audits, field audits, and office audits. The bulk of audits, I think I saw recently, it's like

26:44
85% or something, are correspondence audits at this point. So that's really where most of these are coming in. So essentially your tax preparer will review the letter you got in the mail, confirming what exactly the IRS is looking into or taking issue with, and then they'll put together a response to the IRS. The response letter should explain the situation, provide support, might be copies of receipts or checks or statements or payroll filings or whatever else you need to support your response. Sometimes they're just looking for more information. They might not necessarily be saying

27:13
there's a problem yet, they're just looking for more information to evaluate if there's a problem. From there, you're going to await the IRS's response on whether you have no changes. Maybe you're due a refund. Wouldn't that be nice? Sometimes that happens. Sometimes it works out in your favor. Or if you owe additional tax with maybe interest and penalties. When they respond back, if you agree to the findings, you can sign off on the letter and pay the tax bill and wait for your refund, maybe, if you get magically lucky on that.

27:41
If you disagree with the IRS findings, you generally have about 30 days to respond and try to sort with the examiner, or you can request it goes to appeals. And if you miss that 30-day window, then you should receive another letter from the IRS warning you have only another 30 days to file an appeal. And then if you don't, results are final. Nothing you can do. So to me, the two most important things to know if you receive a notice is time is of the essence and hire a professional.

28:07
I strongly recommend against trying to handle the notice on your own. Professionals understand the process. I've done many, many a response. Hopefully, you know, any tax preparer you hire has quite a bit of experience with this. So we understand the process. We're not going to get bullied into assuming that the client has to pay the liability and that they've done something wrong. We know when to put our foot down with things. Sometimes you'll get a request for… the IRS will ask for you to extend the statute of limitations.

28:34
So there's a limited time period with which they have to audit you. And if they're coming up on that deadline, they might send you a notice that says, “Hey, we're still working some things through.” And in a very nicey-nice voice, “Could you please extend our statute of limitations? That gives us more time to dig around into your records.” Do you want to do that? Probably not. Maybe there's a circumstance where you want to. But generally speaking, you're probably not going to want to give them any more time to dig into that. And that's something that a professional can advise you on. But maybe most people,

29:00
you know, on their own wouldn't know or feel comfortable taking that kind of a stance.

Amy Laburda
Sure. I imagine working with a professional sort of has a two-pronged advantage, because on the one hand, you do this all the time. You just have a greater body of knowledge than most laypeople would. And also there's just one layer less of emotion. Obviously, you care about your clients and want to do right by them. But I think sometimes there's an immediate, as you said, like, stomach-dropping feeling of

29:23
“Oh, I'm under the microscope,” that you don't really have as the tax preparer one step away.

Melinda Kibler
Yeah, what's that — always that joke, that always goes around about, like, filing your taxes and how, “Oh yeah, well, the IRS knows exactly how much you owe. And if you get it wrong, you go to jail.” And you know, that's the instinct people have. I got it wrong and I'm going to jail. And that's not the case. Everyone take a breath. Let's look at this and see what we can do with it.

Amy Laburda
Yeah. As someone who

29:45
cared very much about their grades when they were in school, it sometimes feels like you got a test back with a bad number.

Melinda Kibler
Or you're in trouble. You've been called to the principal's office. Yes. OK.

Amy Laburda
Exactly. So we've gotten through audits. We've taken some deep breaths. Let's talk about something a little more pleasant and touch on refunds. I think a lot of laypeople feel like, oh, getting a big check as a refund is a great outcome. Obviously, it's better than having to send a big check to the IRS. But most tax professionals I know, and people we work with,

30:14
generally say you want to avoid a giant refund after you file, both for yourself and your clients. Why is that?

Melinda Kibler
So if you receive a large refund check, I get it. The relief, you're like, “I can buy that big screen TV I wasn't planning to be able to afford.” It's found money. But in actuality, if you materially overpaid, you've basically given the government an interest-free loan on those funds. So you don't want to give away your money. So what's the better route? The goal is to pay just enough to avoid any penalties or interest for underpayment for the year.

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So if you run quarterly projections, you can gauge how much to pay in throughout the year and also estimate what you're going to owe in April. So you can budget accordingly. But in the meantime, by holding the money in your own hands instead of paying it in early, your funds can stay invested, or at the very least be earning interest income. So I mean, years ago, I don't know, maybe people were a little more indifferent to this when rates were extremely low. But now that rates are back up and into the 5% range or so, it makes sense to hold off on paying in until you need to.

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Let yourself earn a little more money on the side.

Amy Laburda
Sounds good. So if you are routinely getting a large refund, what should you do to fix that?

Melinda Kibler
If you're an employee, you can ask to fill out a new W-4 to adjust your withholding down. If you want to be certain you've done it right — I know you look at those forms and you finish them and think, “I think I did this right. Let’s see what number comes out of it.” There's actually online free calculators available to test that withholding. And it'll be based on how you complete your W-4. So you go onto the calculator, you input how you filled it out, and it should spit out a number.

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You can kind of gauge whether or not that's lower than what you had before. If you're self-employed, you can run quarterly projections based on your income year to date to determine how much you're going to owe. There's two ways to handle estimated tax. You can either pay in 100% of last year's liability. For high income taxpayers, it's 110%. Or you can pay in 90% of your current year's liability. So if this is a year where your income is going to drop significantly, you're probably going to want to only pay in 90% of your current year income.

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If this is a year where you know you're going to have very high income compared to last year, you're probably better off following the 100%, or 110% rule, of the previous year's liability. And then just go ahead and pay the rest in April, but you've avoided the penalties and interest.

Amy Laburda
OK. So while we're touching on self-employment, are there any tax strategies that people who work for themselves should keep in mind that don't really apply to typical wage earners or people who are not working for themselves?

Melinda Kibler
Yeah, I think you can consider timing

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of income and deductions if you’re self-employed. That's something you have a little control over. So if you're having a really high income year, which is great for you, great, you may want to decelerate further income at the year end and push it into the following tax year if possible. So this might mean holding off on billing a client or two for a week or two, if you're getting into late December. On the flip, you might want to accelerate deductions. So if you've been thinking about purchasing a certain piece of equipment for your business,

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maybe you want to get that done before year end to bring that tax liability down. I will warn one thing about this whole decelerating income: You can't just choose not to deposit a check if you receive one during the year because you don't want to report the current year income. So there's a thing called “constructive receipt,” which means if you receive a check, so a client has paid you, you have to include it in your current year income, even if you

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don't make it to the bank to deposit it till January. So there's no gaming the system. You can't just hold a bunch of checks from clients in a safe, wait till January 1st, and then go ahead and deposit that, because it is constructive receipt. The money is in your hands. So just a warning with that system. You can also consider retirement contributions. One of the common choices for self-employed individuals is to use a SEP IRA. If you contribute, you can take an above-the-line deduction, which will materially lower your tax liability.

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“Above-the-line” means it reduces your gross income for tax calculation purposes. So in 2024, the limit to contribute was $69,000. So you can contribute up until the due date of your return, including extensions, which we talked about earlier. So just a few ideas to help with your tax bill.

Amy Laburda
So I think we've probably made clear that every individual or family has a unique tax situation. Listeners to this show for whom this isn't their first episode won't be surprised that “everyone is different”

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comes into play here like it does in so many other topics we talk about. I think a lot of people find tax planning especially intimidating, in a way, because to your point about the sort of nebulous feeling of getting in trouble, it feels, sometimes, like a lot of downside and limited potential upside. Or maybe they just don't want to think about taxes at all. They don't like it. They find it, you know, frustrating. No tax thoughts. If you fall into either of these, either you're sort of afraid of taxes or you just don't want to engage,

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is there any broad advice you have for sort of making the entire exercise a little less stressful?

Melinda Kibler
Amy, because you know me, my advice is not going to be a great surprise to you. I'm a bit of the queen bee of organization. So I like everything neat and orderly, because I am a believer that it helps reduce stress when things get busy. And it also helps minimize the chances of making mistakes. So my advice is almost always, when asked this question, get organized and early.

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Go over your tax documents from last year. Make a list of what you had, so you know what you need to keep looking for this year. Any paper documents that get mailed to you: Keep them in a folder. Just keep, as it comes in, just plop them in this one folder, so you have the same place it's all going. One of the things that's become more of a common issue for people with getting organized is that a lot of the documents are now coming through online logins. So it's easier to miss. You get spammed with a million emails every day.

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In that mix of emails was the email that said “your tax document is available” and you missed it. So look for those emails alerting you for your tax documents. When that comes in, I do like to mark them as — I might click through and read all my other emails, and I'll go back and mark that one as unread until I have time to go and grab the document. And then when I pull the document, I'll file the email in my tax email folder. You should also —

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if you didn't get an email, just in case, as a backstop — log into every investment account or bank account you own and check the tax section, usually there's some sort of a tax tab drop-down, for any documents they might have issued. And then if you're an employee, you should be getting a W-2. If you haven't gotten your W-2s by sometime in mid-February, reach out to HR. Ask about it. Try to get on it early. The earlier you can ask for these things, the better result you're going to have. You don't want people scrambling because there's some sort of issue with the tax document last minute, and now we can't get it.

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Also, as we discussed throughout this podcast, taxes are not just for April. Handling taxes is a year-round or, at a minimum, quarterly issue. So you should maintain contact with your tax adviser and your financial adviser to ensure you're budgeting appropriately for the tax liability and communicating any of the life changes we were talking about earlier, any changes in business or investment income. And all these things, if you're planning throughout the year, can make April feel a lot less intimidating.

Amy Laburda 37:04
Listeners will know I'm never mad at “communication” being the answer to a question. So obviously, we've talked about a lot today. Taxes could be the topic of a whole season of our podcast, if we wanted it to be. We covered a lot of ground already. But I like to have my guest have the last word on a given episode. So [are] there any parting thoughts or last topics you wanted to touch on that we haven't already talked about today?

Melinda Kibler
I would say taxes, they have a negative connotation, don't they? We talk about audits. We talk about the IRS.

37:34
Anytime I'm in a social situation and work comes up, people often say, “Oh, you do taxes. What made you want to go into that?” That is the very standard response. In fact, we were laughing… My husband sent me a clip a while ago from the “New Heights” podcast, that one with Travis and Jason Kelce. And they were interviewing Freddie Freeman, who plays baseball for the Dodgers. And he was talking about how, growing up, he wanted to do taxes just like his dad. And everyone thought this was

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absolutely hysterical, because he wanted to do taxes. Who would want to do that for a living? I mean, obviously, maybe he could have a second career someday when he retires from baseball. I doubt it, but you never know. But I would say this. Everyone had a good laugh about that, and I get it. But taxes are like a little puzzle. To me, you have to find all the pieces first, which, if you have a more disorganized client, might mean pieces are strewn all over the house. Picture that.

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And then you have to work through the bigger-picture items. So I think the border of the puzzle. We're making the border, all the flat pieces on the sides. Then you're filling in the details at the end. But to me, there is this method to the madness, as many puzzle lovers will know. And then there's the satisfaction of the final product, which I know is maybe the nerdiest thing I've ever admitted to, and on a recorded podcast, no less. But there is. There is this passion of, look at this beautiful product at the end, where you've taken all these missing pieces and you put it into there.

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So I will say hire a tax preparer who is passionate about taxes. We exist. We're out there. I promise. And we're not just passionate about preparing your return accurately, but also looking for ways to plan and coordinate with the rest of your financial life. So not all things about taxes are awful, I would say, as someone who does them for a living. There can be some fun to it.

Amy Laburda
I will use that puzzle analogy, because I think that really creates a vivid image as to why you might enjoy it. And I think it's

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lucky for the rest of us that some of you do.

Melinda Kibler
That's why everyone — everyone's brains are made differently. Thank goodness there's something for everyone.

Amy Laburda
Absolutely. Well, thank you so much for sitting down with me again today, Melinda. I hope our listeners feel a bit more prepared for the upcoming tax season, or at least take a little heart knowing that not everyone dreads it. Thanks for sitting [down] with me today.

Melinda Kibler
Thanks for having me.

Amy Laburda
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm

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headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books: Looking Ahead: Life, Family, Wealth and Business After 55 and The High Achiever's Guide to Wealth,

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which offers advice for younger professionals, entrepreneurs, athletes and performers. Both books are available on Amazon, in paperback and as e-books.