Guest: Sandy Botkin
Originally Aired: April 5, 2017
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Sandy Botkin of the Tax Reduction Institute
- Tax Tips Before and After Filing Deadlines
- No Distribution Required on Roth IRA
- Big Tax Cuts Today Could Mean Big Tax Hikes Later
- Cut Corporate Taxes, Tax Dividends as Income
- Congress Likely to Kill the Stretch IRA
- Start a Legitimate Business to Save on Taxes
- Limit High-Interest Student Loans to $31,000
- 529 Plans Offer Tax Savings for College
- ABLE Accounts, Special Needs Trusts Serve Disabled Children
- Change Residency to Pay In-State College Tuition
- Medicare Advantage May Limit Network of Doctors
- Taxbot App Makes Tracking Expenses Easy
Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
Dan Weinberg: Welcome to The Lange Money Hour. I’m Dan Weinberg along with CPA and attorney Jim Lange. Well, Tax Day, April 15th, is fast approaching, and over the next hour, we’re going to bring you some tips and techniques on how to legally and ethically reduce your income taxes and protect yourself from some of the latest tax scams and frauds that are out there, and we can’t think of a better person to provide you with insider tax savings secrets than our guest tonight, former IRS attorney, CPA, syndicated writer and best-selling author, Sandy Botkin. Over the past 25 years, Sandy has taught thousands of taxpayers how to save millions on their taxes through his seminars and lectures. Sandy spent five years as a legal specialist in the office of chief counsel for the IRS. Today, he’s the chief executive officer and principle lecturer of the Tax Reduction Institute, a tax-education company that creates and distributes valuable tax information to independent contractors and small businesses. He’s got two books you should check out: Lower Your Taxes —Big Time! and Achieve Financial Freedom —Big Time! There’s a new edition on Lower Your Taxes — Big Time! We’ll talk about these books a little bit more in just a bit. You might have also caught Sandy on various syndicated radio shows. He was also recently featured on Fox Business News. So, over the next hour, you’ll be treated to a lot of valuable advice, but Jim and Sandy would like to hear your specific tax questions as well. To join in the conversation, give us a call here in the studio. (412) 333-9385 is the number, and with that, let’s say good evening to Jim Lange and welcome back to Sandy Botkin.
Jim Lange: Welcome, Sandy.
Sandy Botkin: Well, hi there, Jim. Good to be on.
Jim Lange: Well, it’s great to have you because you have a rare combination of some great tax-cutting ideas, but also legitimate. You know, it seems to me you kind of get much pretty close to the line, you don’t go over it, but you have given our listeners some great information over the years, and it’s really a pleasure to have you back on.
Of course, you know we’re going to file in a couple days for the 2016 tax year, so before we get into some of your more interesting ideas, can we just cover a couple basics? What can people do now that they … you know, so obviously, it’s well past year-end, but what can they do now in terms of IRAs, Roth IRAs, 401(k)s? What should people be thinking about to reduce their taxes now that it’s after year-end and it’s filing time? And maybe they’ve already even filed. What can people do to save some money?
Sandy Botkin: There are a couple things. Obviously, with IRAs particularly, they can make contributions, as long as before they file their tax return and get a deduction for it if it’s a deductible one for last year, or they can put it into a Roth IRA and it won’t get a deduction, but they can still put the money in, it’ll start accruing tax-free, and they have to make that decision as to where they want to make that contribution. That’s one of the first things they want to think about. If they have a 401(k) plan with their employer that’s in existence, they certainly can consider doing that. I think you can make the contribution before April 15th and get the deduction for last year, I believe. But basically, with that in mind, I guess the only other thing you can do is that tax planning is an all-year deal. It’s not one of these things you want to think about at the end of the year, and certainly you don’t want to think about it after the year’s over. You got a prior year! So you want to get started now. You want to start utilizing various tax-planning techniques. And estate planning, I’m not just limiting it to income tax. I’m considering both. Probate planning, it’s affecting so many people, and I can give you all kinds of mistakes that I’m starting to see in probate issues. So these are things that you really want to consider, and you can either do it now for pennies on the dollar or you can do nothing and pay the full dollar, and the question is: Which do you want to do?
Jim Lange: Well, I think that you’ve given some really good advice. One quick thing: Even if you filed your tax return, you can still actually do a Roth IRA contribution because, like you said, you don’t get a tax deduction, but the money grows tax-free, and you can put one in for yourself, if you’re married, you can put one in for your spouse for $6,500 if you’re like, unfortunately, us, 50 and older, and you can actually put it in for next year, that is 2017. So, there are some things that you can do, but I didn’t mean to interrupt because you’re going to tell us some more great ideas on how to save some taxes.
Sandy Botkin: Right, as far as last year, that’s the thing that really comes to mind is to maximize your contributions to the 401(k)s, maximize your contributions to the IRAs or Roth IRAs, consider the possibility, if you made a deductible IRA, of converting that to a Roth IRA and paying tax on it, and that’s true by the way for a lot of people who are starting to get into their 50s and early 60s. Do you want to now convert your IRA into a Roth IRA and roll it over? Effectively pay tax on the money, but then get that money tax-free for the rest of your life? Not to mention, not having to make a distribution at any time. Usually, with a regular IRA, you’d have to make a distribution by the time you start hitting 70½. But with the Roth IRA, that’s not true. You can leave it in there for as long as you want.
Jim Lange: You can leave it in there for as long as your life, your spouse’s life, and, at least with the current law, it continues to grow tax-free for your beneficiaries, whether it be kids or grandkids. Yes, they have to take a distribution, but even the distributions will be tax-free. So, as you know, I’m a huge fan of Roths. My favorite time is after retirement, which means you don’t have the income from your wages or any other earned income, but before 70 because at 70, you’re going to have mandatory … well, there’d be no reason not to take Social Security, your minimum required distribution. So, I say do the Roth when you have those low income-tax years, after retirement, before 70.
Sandy Botkin: Right, I mean, there’s a lot of decisions that have to be made as you go. Decisions have to be made at all points in your life, whether you get a new family, whether you’re divorcing, whether you’re older and thinking about retiring. I mean, there’s all kinds of, I’d call, moments of decision that are very, very important to all individuals from a financial perspective that you really have to take a hard look at. But certainly, as you get older, those are those types of things. Should I, you know, get rid of all of my 401(k)s and IRAs and transfer them to Roth IRAs or should I do it on a pro rata basis? An interesting secret is, you don’t have to do it at once. If you feel there’s too much tax and you don’t want to pay all that money this year, you can do it over a period of a few years. You don’t have to do it in one year. But, you know, those considerations are things that people have to start thinking about.
Jim Lange: Well, I could not agree with you more. Of course, we’re big fans of what we call running the numbers, which means to quantify … let’s say, example Number 1, you don’t do any Roth conversion. Example Number 2, you convert everything. Example Number 3, you go convert up to the amount that will take you to the top of the 15 percent bracket, or the top of the 25 percent bracket, or the top of the 28 percent bracket, and you actually do 30-year, 40-year projections often beyond your own life expectancy, see where you end up, and then that might give you a better idea. But a very good point that you made, that it’s not an all-or-nothing deal. In fact, I’d say probably 80 percent or 90 percent, maybe even more, of the conversions that we have recommended, after running the numbers, there’s hardly ever a big chunk, but it is a series of small ones.
Sandy Botkin: Right, I see that, too, but there’s one other factor you have to take into account, unfortunately. You know, there’s now a new Trump administration, and one of the things he wants to do … now, admittedly, he hasn’t been very successful in getting through things he’s wanted to do, but one of the things he wants to do is to reduce the top federal tax rate, which is currently 39.6 percent, to 33 percent. So, now you’re talking about a very significant drop, plus get rid of those surcharges, like the 3.8 percent Medicare surcharges for people who make over $250,000 a year and so on. So if this happens, then you have to make a decision about, well, gee, whether I want to start paying taxes on all that money now while the rates are relatively low, because you heard it from me, that’s going to create a huge deficit, and once Trump is out of office and you see a deficit increasing by $3 to $4 trillion, you’re going to see tax rates go up again. You heard it from me!
Jim Lange: I happen to agree with you, Sandy. I think that if President Trump is successful in lowering rates, particularly on individuals, that it is not a permanent condition, and that would be an even greater incentive, particularly for high-income earners, to make Roth IRA conversions during these years. Let me ask you this — now, of course, nobody has a crystal ball — but you were on the inside for many years, and I suspect that you have at least a better than average viewpoint. What do you suspect, given today’s environment, given the failure to make a significant health-care change, what do you think’s going to happen with tax law in the future? Because I know that’s what’s coming up next.
Sandy Botkin: Well, I never thought that they were totally going to be able to get rid of Obamacare. I’ve always felt, you know, this was an uphill battle for the Republicans. I mean, when it was first passed, yeah, there was a lot of anger and there was probably a lot of support to get rid of it, but now the people are kind of getting used to it and a lot of people are being covered. I don’t see there’s a lot of support among the American public, and I knew there was going to be a big backlash, and that’s one of the reasons why they got into so much trouble.
Jim Lange: Well, you were right!
Sandy Botkin: Yeah, I was right!
Jim Lange: Well, now that we’ve established your expertise, what about taxes? What’s going to happen now?
Sandy Botkin: I think you’re going to see … let’s put it this way. I’m giving you a crystal ball. I don’t know this for sure, OK?
Jim Lange: Well, of course.
Sandy Botkin: But let’s be accurate on this. But I think you’re going to see … corporate tax reform is long in coming. I have said for many, many years. I’ve written about this, I’ve written letters, I’ve done everything, I’ve written articles, I’ve done everything I could to drop the top corporate tax rate significantly. I felt that was needed in order to really spur this economy, and I would also make a change to help offset that deficit by making dividends as ordinary income instead of capital gains. So that’s what I’ve been recommending for many, many years. But I think the time of corporate tax rate is changing. This is the time, I think it’s really possible to make a substantial change in the corporate tax rates, and that’s why the stock market, by the way, is going ballistic because I think people believe that it’s going to happen, and if it doesn’t happen, you’re going to see the stock market drop in the same way. But if it does happen, I think you’re going to see some very significant even further stock increases, and I think it is going to happen. I think you’re going to see the top corporate tax rate going from 35 percent down to probably half, by 15 percent to 20 percent. Actually, around 20 percent is probably what he’s proposing. So I think you’re going to see that. In terms of the individual tax rates, hard to tell if that’s going to pass because that’s going to create huge, huge deficits, and there’s a lot of people in Congress that are very nervous about that. But do I think it could happen? Yeah, I think it’s very possible.
Jim Lange: What about capital gains? You mentioned that if you were the czar, that you would fully tax dividends. What about capital gains? Do you see those changing in, say, the next year?
Sandy Botkin: Well, according to Trump’s proposals, he’s going to basically more or less leave capital gains the way they were with Obama, where instead of a 15 percent maximum rate, he would have a 20 percent maximum rate. So, I would assume if they do change, it’s going to change with that in mind. I don’t see any significant major changes in capital gains. I don’t think that’s going to happen. I know Trump himself didn’t propose that, but who knows? You know, we’re in a strange time. Anything could happen! But no, I don’t think you’re going to see major changes in the capital-gains rates or anything like that, especially since it affects a lot of wealthier individuals. So, I don’t think you’re going to see that.
Jim Lange: All right, but you do see tax reduction for the corporate, maybe for the individual? I have been warning that to make up for these reduced taxes that they’re going to start taxing dead people’s IRAs. That’s my big thing, Roth IRA conversions and stretching IRAs, and I fear that since his Senate Finance Committee already voted 26-0 to, in effect, to kill the stretch IRA, that is, make your kids pay tax on your IRA within five years of your death, I would see that as something that would partially pay for some of these other tax cuts. I don’t know if you have run into that piece of proposed legislation?
Sandy Botkin: No, I was talking to some congressman, by the way, about this. Yeah, I think that’s going to happen, and let’s face it, dead people don’t vote. That’s really the bottom line, and I think you’re going to see these stretch IRAs be eliminated. By the way, just for the listeners, they may know what this is because I know you talk about it a lot and you write about it a lot, but just to make everybody be aware of this, with an IRA, as I said, you don’t have to have a distribution, basically. You can leave it as long as you want, for your life, your spouse’s life, even the kids’ lives. The stretch IRA refers to that, going beyond your life, your spouse’s life, kid’s life and beyond, and I think Congress wants to put a limit on that where it can only go so far, at which point, it has to be curtailed. They’ll either put a tax on it or a penalty on it or force you to distribute it, but there will be a change probably in the tax law. If you’re asking my opinion, do I think that’s going to happen? Yeah, I do. I think it is.
Jim Lange: Well, by the way, in a minute, we’re going to talk about your book, but while we’re on the subject, I actually wrote a book predicting this was going to happen before the Senate Finance Committee voted. People can download that book for free, by the way, at www.paytaxeslater.com. It is a book that talks about the acceleration of income tax that will happen within five years after the IRA owner’s death, and I have a five step program to…you can’t stop and change the law, but you can, let’s say, reduce the impact. So, I think that that also is coming up.
Sandy Botkin: Yeah, I think you’re right. But I want to emphasize something here to everyone listening. Even if they make that legal change, it will not affect the status of your current Roth or new Roth IRAs. They will still be tax-free for the rest of your life, and probably be tax-free for your spouse’s life, although it’ll be interesting to see if that happens.
Jim Lange: I think you’re right. I think the spouse will be protected. That’s what the legislation, which by the way, has already been drafted. I mean, it hasn’t passed, but the Senate Finance Committee voted 26 to 0. They have the entire law written out, so this isn’t just like a flimsy idea, and you are right, Sandy, it will protect your spouse. There will be no impact for your spouse, but for a traditional IRA, they’re right now proposing a $450,000 exemption. But without that exemption, your kids or any non-spousal heir will have to pay income taxes on the entire inherited IRA within five years of the IRA owner’s death.
Sandy Botkin: And we’re talking not just a regular IRA, which they have to pay income tax anyway, but we’re talking now the Roth IRA, too.
Jim Lange: Well, with the Roth, the way it’s going to work is you’ve already paid tax on the Roth, so your kids aren’t going to have to pay tax again, but within five years, your Roth IRA will, in effect, be distributed. No, you won’t have to pay tax on it, but now, after the distribution, all of the money will now start to generate the income in the forms of dividends, capital gains and interest. That will be taxable.
Sandy Botkin: Yes, that’s correct. But the regular IRAs are taxable now when they’re distributed to the beneficiaries. They’re not exempt.
Jim Lange: No, they will not be. So right now, when it’s distributed, the whole thing now is you get to stretch it over the life of the beneficiary.
Sandy Botkin: Correct.
Jim Lange: So, let’s say the beneficiary has a 30-year life expectancy. Actually, let’s use 33-year life expectancy, then they would only have to take out 3 percent and pay tax on it, and then a little bit more each year.
Sandy Botkin: I’ll bet you’re going to see changes on that eventually because the government wants to raise revenue, and I can see mandatory distributions, say, within five years of the owner’s death, or something like that. I’ll bet you’ll see something like that.
Jim Lange: Well, that’s exactly what the legislation says. You’ve already predicted exactly what they wrote!
Sandy Botkin: You know, it’s funny. When you work with the IRS and you deal with Congress, you get a sense of how people think, and it’s amazing how before I even knew there was legislation, it comes about the way I think it was going to happen. So it’s kind of interesting when you have that experience.
Jim Lange: So you have built a lot of credibility. The other thing is, I want to get to some of your more, I don’t want to say esoteric, but things that you don’t see every day. But before we go there, what are a few other tax things … and most of our listeners are probably not businesses. They are mainly individuals. Pittsburgh’s a working town. We have a national audience, but I think even the national audience are people who didn’t grow up with a silver spoon, they worked hard, they put money in their retirement plans, now they’re a little bit older, they tend to be retirement-plan heavy, still married to their first wife, couple kids that are grown — what can some of these types of people do and think about, both in terms of traditional tax planning, now that Trump is in, now that we have this death of the stretch IRA hanging over our heads, what are some things that those folks can do?
Sandy Botkin: Well, one of the important things to know, especially with the Trump administration, is they want to reduce taxes for small business and for large business, but the operative word is “business.” Corporations, they originally proposed a 15 percent maximum tax. That’s been changed to about 20 percent. For self-employed individuals, like LLCs or money leaving the LLC or money leaving an ex-corp, they want to have a top rate of somewhere between 15 percent and 20 percent. So that’s very different than, say, an employee who makes a lot of money, which is now paying 39.5 percent plus surcharges, it may be reduced to 33 percent if they get lucky with Trump, but it’s a lot more when they would be in business. And one of the things I’ve said, I’ve said this for probably 30 years, I’m probably more known for this than any single thing I’ve written about, and that is we have two tax systems in this country. We always have. We probably always will. One is for business, which is designed to create wealth, and one is for employees, which is designed to take your wealth, and the question is, which side of the tax system do you want to be on? And a lot of elderly people, after they’re retiring, they fail retirement, basically. I have several friends that failed retirement. They want to do something, and starting a business is not a bad idea. The tax benefits are enormous, you can write off part of everything that an employee can write off, plus part of your house, your spouse, the equivalent of your kids’ education and weddings. You can set up a pension plan that makes almost any government plan look small by comparison, and you get much, much better tax rates on your income than somebody who’s solely retired or receiving interest and bank-account interest or receiving a pension. So, you know, starting a business, I can’t emphasize that enough how great that is, a legitimate business, versus somebody who doesn’t have a business. And that’s true whether it’s full time or part time. It does not have to be a full-time business.
Jim Lange: I would agree with that, and even though I prefaced the comment by saying most of our listeners were a little bit older, my advice to young people, and particularly today where it’s a different economy. So, Westinghouse is going bankrupt. In the old days, you’d get a job for Westinghouse, you’d work there for 30, 40 years, you’d walk away with a seven-figure 401(k) and a pension. Well, those days are gone. So I would say for a young person, if they could figure out a way to get into business, get in the information age, get in the digital information age, frankly, you’re an information marketer, in effect. You know, you are selling your knowledge and your expertise, and I would imagine that it’s a dual purpose. Maybe A) you’re spreading the word of how to reduce taxes and how to live a better life, and B) you’re hopefully making a couple of bucks on the side. So I love to see people go into business, either young, old, and the tax benefits follow. And then, you don’t spend your life, frankly, listening to the Man, who might not have your best interests at heart.
Sandy Botkin: Oh, that’s absolutely right, and you don’t have to put up with a boss, that’s spelled backwards double-S-O-B, and you have a lot of time freedom, and there’s just lots of benefits, and you’re raising a very good point, which, by the way, was my first chapter in my book Lower Your Taxes — Big Time! My first chapter is “Why I’d Be Brain Dead Not to Have a Home-Based Business,” and one of the things that I was emphasizing is the days of my parents, where you worked for one company, you got this terrific pension; it’s not there anymore. I mean, even the federal government, you think, “Ah, the federal government’s got the best pension around” — those pensions have been cut in half, 50 percent of what they were even 15 years ago. It’s a new type of pension which is half of what it was.
Jim Lange: So, Sandy, I’d like to switch gears a little bit from taxes because … although actually, I guess it’s somewhat related to taxes, but it’s actually not, because you told me something, I guess it was a couple of years ago, or maybe last year, I can’t remember, that really impressed me, and I have given this advice to a lot of parents who have children who are going to school out-of-state, and they have these outrageous out-of-state tuition bills, and you had an answer or a suggestion for that, and if you could give that to our listeners, I think that that suggestion could save people so much money, and even if it’s not the children, maybe sometimes the grandchildren, or the grandparents might be listening. So, I was wondering if you could tell us a little bit about the college out-of-state tuition solution that you have come up with.
Sandy Botkin: Well, it’s funny. I have written a lot on student loans and things like that. I just actually did a speech on this. The student-loan industry is almost like a scam. I call it the “personal junk bond” industry. Number 1, you know, most guidance counselors will say, “Oh, have your kid apply to the best college they can get into. It’s really worth it. Don’t worry about it. They’ll meet your financial needs.” First of all, most colleges, I don’t know the exact statistics, but I think it was over 80 percent when I read something, do not meet expected financial need. They do not. Secondly, when you do get these loans, these are very expensive loans. Many times, these loans, I’ve seen them at 7 percent or 8 percent, which, when you consider today, you get a mortgage for 3 percent or 3 ½ percent, that’s pretty darn high! The third thing is, you know, the famous poet that once said something about people don’t mind incurring the debt, they get upset when they come to pay it. With student loans, when you start paying these things, you can only deduct up to $2,500 of student-loan interest, and that’s if you make under a certain income. So if it’s not deductible, these student loans become very, very expensive. Now, when you consider that the average student loan rate is somewhere between 7 percent to 8 percent, if you divide that amount into the $2,500 that you can write off, basically the maximum student loan that you should take should be no more than roughly $31,000, give or take a thousand, OK? $31,000 should be the maximum because anything above that will be non-deductible interest, will result in non-deductible interest to you. And let me tell you, having to pay at 8 percent non-deductible is a lot of money to have to pay for the rest of your life, or for a number of years. So I highly recommend that you don’t take out large student loans for any school for any reason, unless you’re going into a profession, maybe medicine, where you can make it back quickly. But even then, I would think about it.
Jim Lange: To interrupt for one second, interestingly enough, I had a guy named Jim Dahle on our show, and his big thing was you don’t have to go to the most expensive school. In fact, it’s usually not worth it financially; and don’t incur a lot of debt. He’s saying the same thing that you’re doing, but he’s adding even for physicians, you don’t have to go to the most expensive school, and it’s probably not worth it, even considering the potential increase over your lifetime. So I think that you and he are on the same wavelength.
Sandy Botkin: Oh, we’re on the same wavelength. There was a recent study by some Princeton professors, which has been kept very hush-hush by the Ivy League, by the way, which notes that really smart kids that would have had a chance at these ivy schools? When they go to their own state university, economically, they tend to do about as well over their lives as they would have done by attending an Ivy League university. Same thing. So that really reinforces his point.
But that raises the next point: Where do you save up for college? What is the best way to save for college? And the answer to that is, it’s a recent answer, and the recent answer is that most states that I know of have set up two types of prepaid or qualified tuition plans. The first type is a prepaid tuition plan for the state university where you put away a certain amount of money every year, or you could put it away as a lump sum, and essentially, you’re buying tomorrow’s tuition dollars in today’s dollars. So instead of having to pay these outrageous tuition rates that will be happening in 15 or 20 years, you can pay a lot less now, get the current tuition rates today, and avoid the increases for the next 15 to 20 years, and that’s known as a prepaid tuition program. It is available in most states. It is sponsored by the state and will cover tuition and required fees from most state universities.
Jim Lange: That is a variation of a 529 plan.
Sandy Botkin: That is correct. Now, the second type, which is the 529 plan I was going to specifically mention, doesn’t guarantee prepaid tuition or guarantee anything, although, believe it or not, there are private-school prepaid tuition plans as well. But the second type of 529 plan is sort of like a mutual fund where you put away money every year and the money accrues tax-free if used for qualified tuition, required fees, supplies, internet, computer, I mean all kinds of things, much more than the prepaid tuition. But it doesn’t guarantee any kind of guaranteed tuition. But the good news is, you can do both! And they’re fully transferable. If one child doesn’t want to use one and you want to do it for another child or you want to do it for a grandchild or you want to use it for an uncle, you can. If you want to take the money back and pay tax on the interest, you can do that if you want. So, there’s a lot of flexibility with these plans, so I do want to emphasize these two plans: the prepaid tuition and the 529 plans.
But there’s one more thing I want to emphasize that’s not well known, something I think most of your listeners probably never heard of, and that’s called an ABLE account. It came in in 2015. What’s an ABLE account? I bet nobody knows who’s listening because it’s not well-known. It hasn’t been publicized. You know, people like Jim and I and, I’m sure, many of you can have access to these prepaid tuition accounts for our kids, for our bright kids, and Section 529 plans, but there’s a lot of parents with severely handicapped children. Children who cannot get a job, where there was an early diagnosis before age 26 of a severe enough handicap where they won’t be able to work, and if they have this kind of handicap, there was nothing available for those parents to help them out. Well, Congress, in 2015, passed what is known as ABLE accounts, and these accounts allow you to put away money every year, up to a maximum contribution of $500,000 to be used for your kid’s support, maintenance, education, all of those things. It’s available for any child with an early-onset disability before age 26, they can be as old as you want, but as long as it was diagnosable before age 26 that they couldn’t work, then that money is tax-free for the rest of their life to support them and maintain them and so on. Again, the maximum contribution is roughly $500,000, but it’s a really good account. If you know anyone who has severely handicapped children, it’s something they absolutely have to know about.
Jim Lange: And it’s a very interesting issue when somebody does have a disabled child or a child who can’t work as to when that child is going to come into money. So what we used to do, and frankly, our office has done quite a few of them, is a Special Disability Trust, the idea being that rather than giving money to the disabled child in order to preserve a government benefit, it would go into a particular type of trust where the child is not deemed to be the owner but does have some beneficial interest, and the idea is, you can protect the government benefit and protect the child with that additional money. Now, with the ABLE account, which is growing tax-free, now it becomes a little bit more of an interesting issue. Do you fund your child’s, let’s say, well-being while you are alive with money that you have that will go into this account, or do you set up a special-needs trust, wait until you die, and then, at your death, money is transferred? And there’s arguments both ways, but just like you said, with the 529 plan, when you said you could do both, you can do ABLE and a special needs trust.
Sandy Botkin: That is correct, and I think in the ABLE-account regulations — it’s been a while since I’ve seen these ABLE accounts when they were originally passed — but I remember in the congressional history, they were saying that the monies going into the ABLE account will not affect the monies you will be receiving from the federal government, like Social Security. So you don’t have to worry about loss of Social Security if there’s an ABLE account, but that was in the congressional history. I don’t know what the final regulations have said on this. But that’s an important point.
Jim Lange: You’ve given us some great information, but it actually wasn’t what I had in mind. What I had in mind was your technique for having a child become a resident of a different state than their parent, and you even have the guts to say that you did it yourself on the radio. I thought, “Man, this guy has some stones!”
Sandy Botkin: Yeah, I’ll tell you what happened. It’s funny that you say this because somebody just asked me this question a while back, so I guess it’s very timely. Many of the states, unfortunately — I never really thought this was right, but it’s the way it is — charge one tuition if you’re a state resident and another tuition if you’re an out-of-state resident, and unfortunately, with the cutbacks in much state funding that’s going around in this country, many of these universities are taking more and more out-of-state people and less in-state people for the simple reason that the out-of-state people are paying a lot more money. It’s just financially great for them. So the key is, you want to establish some kind of residency. Now, there’s a couple ways of doing it. Some states have made it harder and some states haven’t made any changes, but essentially, if you can show that you are a resident, or, in many cases, you are an independent, which means you are not taking money from your parents and you’re living as an independent, then you can establish in-state residency and get in-state tuition, and a good example of that was my daughter, which is the example I think I gave you.
Jim Lange: It is. So, I don’t know if I admire you, but, boy, I’ll tell you what. You put it out there. You say, “Hey, this is my advice. I do it personally, and if anybody’s listening, including some agency, my information is bulletproof, so this is what I do.” So I admire that.
Sandy Botkin: Now understand, what I am saying was based on the rules that were in effect about eight years ago. Things may have changed. Some colleges may have tightened up some of this stuff, and each state has their own set of rules. You absolutely have to check your state rules and your state university rules that you want to do this with. So, please make sure you do that, OK? Now, here’s what my daughter did. Most state universities, and there are some state universities that will give you in-state residency once you’re there a year no matter what. You just apply for in-state residency, change your driver’s license, change your voter’s registration, they’ll let you do it. There are some states, however, that won’t let you do that. Once you establish as a student, you basically, if you need to change your residence, you’re deemed to be an out-of-state resident for the next four years, period. There’s one exception to the rule, and as I read these rules, I noticed there was an interesting exception. What if you have a kid who’s not living off their parents? What if you have a kid that’s self-supporting? They’re independent of the parents. And there seemed to be some rules in certain states, and this was true in Ohio at the time, that if a child was receiving no support by the parents, was paying all their own expenses from their own accounts, filed for residency with changing their voter’s registration, their driver’s license, did everything they could to get a bank account, then the rules prohibiting them from becoming a resident will change and they will allow them to become a resident if they are independent of the parents.
So what we did was about two years before our daughter applied to a university, we started looking into things and we realized that Maryland didn’t have the curriculum that my daughter wanted. So we put some money in her name to cover about a year-and-a-half’s worth of expenses, for her tuition, room and board, food, everything, gas, everything. Well, she then applied to school, and obviously, originally, she was an out-of-state student, so when she came in, she said, “OK, I’m paying out-of-state tuition.” But then she filed, after one year, an application for a change of residency due to the fact that she’s an independent student, that she’s receiving no money from the parents and she’s paying all her own expenses. All the university did was to look at her bank accounts, I think, six months before she started at the university, and looked at her bank accounts, what the checks were used for, within a year after she started at the university, and they found that everything came out of her account, no money was deposited by us, she filed for a new driver’s license, for a new voter’s registration, and they held that she was an independent student, and therefore, she could change residency and become an Ohio resident. And so, for 2½ years —actually, it was a five-year program, for 3½ years — we paid in-state tuition instead of out-of-state tuition.
Jim Lange: Well, I think that’s a great tip for a lot of people, and I think that, you know, they would be well-advised, if they have a child of college years or maybe a little bit before that, to check out the particular rules of the state or the university that the child is planning on attending. I hate to jump around topics, but one of the things that you have some very good knowledge about that hardly anybody knows, that I think’s going to be very relevant, is some of the differences between taking Medicare with a supplement, because, you know, none of us want to get nailed with a major health-care bill, versus Medicare Advantage. So could you tell us a little bit about health-care costs for, let’s call it, the Medicare crowd?
Sandy Botkin: I did a lot of research on this because I myself became eligible for Medicare about three years ago, and I had a lot of questions myself, and there wasn’t a lot of answers. There really wasn’t. Basically, they said, “Well, here are the pros and cons.” And let me go over a little bit about how Medicare works and what your choices are before I get into what I’m going to recommend.
Jim Lange: I think that’s a good idea.
Sandy Botkin: Medicare consists of essentially four parts. The first part is Part A, which is hospitalization. That is free to everyone who has worked, I think, 40 quarters and has vested Medicare at age 65. And by the way, you do need to take Medicare, you need to apply for it right before you’re 65, usually within a month or two months before. Otherwise, if you don’t take it when you’re 65, there will be a penalty if you ever do try to take it later on. So be aware of that. But anyway, Part A is free. Part B, which you pay a premium for based on your income, and it goes up based on your income, is doctors, and I’ll absolutely recommend you do that as well. Part D, and you’ll notice I skipped Part C for a moment and I’ll get into that, is prescription drugs, and that is normally not as geared to income like Part B is, but it has various types of drug plans as well. Then, in addition to all that, you can get what they call a Medicare supplement, which is interesting because the supplements, they rate them from A down through, it was K when I looked at it last, but it may go beyond K now, and each one is a little bit different, but regardless, all A plans and all F plans and all K plans are the same. No matter where you are, if you have a K supplement, then everyone and every state has the exact same things in that supplement.
Jim Lange: And it doesn’t matter what insurance company you use either, right?
Sandy Botkin: That’s correct. That’s my point. So you might as well take the cheapest one there. But then, you also want to look at claims to make sure they don’t fight you, but generally, that’s the rule. So, essentially everybody, A is free, B pays for doctors and I recommend it, and D is drugs.
C came in because the problem with A, B and D is I got to write a check for B, then I got to write a check to somebody else for the drug company, for the drug portion, then I got to write a check for the Medicare supplement. So I’m sending out three checks. So a lot of these companies are saying, “We got a better idea. We’ll cover you with A. Essentially, we’re going to take all of Medicare and wrap it around with our private insurance. So, we’re going to give you A, we’re going to give you doctors, we’re going to give you drugs, we’re going to give you the equivalent of most Medicare supplements, and we’re going to do even better. We’re going to give you more things that Medicare doesn’t normally provide. We’re going to give you maybe a free gym membership, or maybe we’ll give you free eyeglass and dental insurance, or both. And not only will we do all that, we’ll make it even a little bit cheaper than what you’re paying for A, D and B and a supplement. We’ll even make it cheaper.” Humana has a plan like that, for example, and there are others. I’m not just singling out Humana. And it almost sounds like a no-brainer. Heck, I can get better benefits at a cheaper price. Why don’t I do that? Sounds like a winner! And there are many people who have done that, and there’s a name for it. It’s called Medicare Advantage. I’m sure they’ve seen that throughout the TV shows.
There is a catch that I recently found out about. I didn’t even know this until I started doing my research. It’s not written anywhere. I couldn’t find it anywhere in writing, by the way. I actually found out about this accidentally from a doctor’s office. One of the big advantages of Medicare is that it’s portable. Unlike most other insurance, which is based on that state, if you have Medicare and you go to a hospital or a doctor who takes Medicare, that’s true anywhere in the United States, it doesn’t matter, they’ll take you. Medicare Advantage is strange in that even though it’s Medicare wrapped around an insurance company, doctors who take Medicare do not have to take you if you have a Medicare Advantage. That is huge! That is absolutely huge because Number 1, many doctors who you’d might want to go to may not take you because you have a Medicare Advantage; Number 2, it may not be as portable as Medicare is because it’s Medicare Advantage. Yeah, it’s a little bit cheaper, not much, and yeah, you might get a gym membership out of it, and you don’t have to pay multiple checks, you’re only paying one check, but when you factor in the fact that some doctors may not take you, not to mention the fact it may not be as portable, in my judgement, the Medicare Advantage is not as good as doing the individual Medicare supplements Part D and Part B separately.
Jim Lange: I want to say that Sandy’s books are terrific, they really are. Sandy can tell you if you’re better off getting them on Amazon or through his website. He also has some software, now this is more for businesses, that helps track expenses, and he has some amazing statistics about how business owners, and I’m probably the guiltiest of them all, don’t do a meticulous job of tracking their expenses, particularly things like car and incidentals, and he has a handy dandy app. So, Sandy, why don’t you take the last couple minutes, maybe we’ll have time for more than this, but why don’t you tell our listeners how they can get your books, who your books would be good for, and then also a little bit about the app that you have that I think that people would really benefit, particularly for people who are in businesses, including some of the businesses that you had alluded to earlier, which is, let’s say, a retiree starting a little part-time business, and you certainly want to get the benefit of all your legitimate business deductions.
Sandy Botkin: Sure. Boy, time files when you’re having fun, Jim, I’ll tell you! First of all, I have a book called Lower Your Taxes — Big Time! which is a book designed for small business people, and it deals with a wide variety of topics on small business that I have talked about, from how to write off your vacation from anywhere in the world, how to handle an IRS audit and what you should be looking for, and home office, and should you have a home office and how does it work, and maximize it and bulletproof your records from these things. And then I have a book called Achieve Financial Freedom — Big Time! which deals with a lot of topics, it’s for everyone, not just businesspeople, and that deals with a host of topics from estate planning to probate to spendthrift trusts to avoiding those things to scams that are going on, some of the top scams in this country from tax scams to regular scams and how to handle it, identity theft and how to handle it and much more, and that’s in my book Achieve Financial Freedom — Big Time!
Also, every businessperson absolutely has to have a way of tracking their expenses. It is astonishing that how many people are not doing it according to IRS statistics. We have an application for a Smartphone, for either a Droid, Droid Tablet, iPad, equivalent Droid device, web, which automatically keeps track of your mileage tracking with an integrated GPS system. You don’t have to turn it on, it’s automatic. It also has an integrated expense tracking for all of your expenses, which is fully editable and customizable. It even gives you a map of the routes you’ve taken. It uses the camera on the phone and integrates it so that you can take a picture of all your receipts, and everything is attached wirelessly through your phone, so if you lose your phone, you don’t lose your data, and it’s all attached to the documentation. In fact, it’s one of the few applications out there that’s both expense tracking and mileage and it’s all integrated, and it’s got a whole library for all kinds of tips and tax tips, and like I just wrote a whole article on how to evaluate independent living facilities or parents, and everything to do with identity theft and who to contact and what numbers to call, and just a whole bunch of stuff there. So, that’s called Taxbot, and if you’re in a situation where you need to keep track of your mileage and expenses for either employer or for a business, there’s not much better than Taxbot. I designed it for me, and I want it simple, easy and fast, and if it’s that, I’ll do it, and Taxbot is as simple as it gets.
Jim Lange: It’s going to be very hard for me to imagine that somebody isn’t going to get at least about a 100-to-1 return on their investment if they buy and actually use it. And the whole thing, to me, is that you’ve made it so user friendly that it’s not like you have to sit in front of the spreadsheet for a half-hour to enter a 5-mile business trip.
Sandy Botkin: That’s true. In fact, Taxbot will turn itself on automatically. You don’t even have to worry about turning it on. I mean, it doesn’t get much easier than Taxbot. It’s one of the easiest things. My bottom line is, you know, especially if you have to keep track of mileage, do something. Taxbot, if you want something simple, easy and fast, it doesn’t get much easier than Taxbot. You want to keep a fireproof safe and use some other type of spreadsheets or some other expense tracking? Hey, go for it. But do something. Otherwise, your records will not be compliant, and I can promise you that if you get audited and your records aren’t compliant, you will not be a happy camper.
Jim Lange: Well, Sandy, you have given us some great information today. I’d love to keep going. Like you said, time flies. You’ve already given us great information. One final question: Where can people get your Taxbot and your books? Would you recommend your website? Would you recommend Amazon? What should people do?
Sandy Botkin: Lower Your Taxes — Big Time! and Achieve Financial Freedom can be gotten at Amazon or Barnes & Noble. Taxbot is even easier than that. You go to the app store for the Droid or for the iPhone. You can download it. It’s a 14-day trial where you can try it out and see how you like it, which most people do. It’s got a four-and-a-half star rating, and then you can download it and then, if you want, you just click on it to use it after that, so it doesn’t stop on you, so you can start using it. The other option is you call Taxbot on the web.
Dan Weinberg: All right. Jim, Sandy, I’ve got to stop you. Thank you both so much. We are just about out of time, and to our listeners, if you’d like to meet Jim Lange in person, give the Lange Financial Group a call at (412) 521-2732. To see if you qualify for a free initial consultation, you can also connect with Jim’s office through his website at www.paytaxeslater.com. For now, I’m Dan Weinberg. Thanks again to Jim Lange and Sandy Botkin and we’ll see you next time for another edition of The Lange Money Hour, Where Smart Money Talks.