Episode 86 – Year-End Tax Planning with Sandy Botkin, CPA, JD

Episode: 86
Originally Aired: August 12, 2014
Topic: Year-End Tax Planning with Sandy Botkin, CPA, JD

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Year-End Tax Planning with Sandy Botkin, CPA, JD
James Lange, CPA/Attorney
Special Guest: Sandy Botkin, CPA, JD/CEO of the Tax Reduction Institute
Episode 86

Click to hear MP3 of this show


  1. Introduction of Guest – Sandy Botkin, CPA, JD
  2. Plan on Substantial Tax Increases
  3. Understanding Medicare Surtax
  4. Possible Spike in Dividend Rates
  5. Take Advantage of Capital Gain Harvesting in 2012
  6. Investment Planning Tip: Diversify Your Portfolio
  7. Roth IRA Conversion Before Tax Rates Increase
  8. Importance of Income Tax Planning
  9. Possible Change in Estate Exemption
  10. Understanding Gift Tax

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1. Introduction of Guest – Sandy Botkin, CPA, JD

David Bear:  Hello and welcome to this edition of The Lange Money Hour: Where Smart Money Talks.  I’m David Bear, here in the studio with James Lange, CPA/Attorney, Attorney and author of two bestselling books, Retire Secure and The Roth Revolution: Pay Taxes Once and Never Again.  Our subject today is income taxes.

No matter who wins the coming presidential election, it’s time to develop strategies to minimize your 2012 income tax return.  Joining us by phone is Sandy Botkin, CEO of the Tax Reduction Institute, an organization that specializes in the creation and distribution of information to help independent contractors and small business professionals legally, morally and ethically reduce their taxes.  An attorney and CPA, Sandy has extensive financial and legal experience, including five years in the office of Chief Council for the IRS.  He’s also the author of the bestselling book, Lower Your Taxes Big Time and the just released, Achieve Financial Freedom – Big Time!: Wealth-Building Secrets from Everyday Millionaires.

Since our show is live, Jim and Sandy can answer your questions.  To join the conversation, call the KQV studios at 412-333-9385. Again, that’s 412-333-9385.  So stay tuned for an interesting and informative conversation.  With that, I’ll say hello Jim and welcome Sandy.

Sandy Botkin:  Well, thank you.

Jim Lange:  For our audience, Sandy has been on several times before.  He has provided wonderful income tax information and also some big picture financial information and it is a real pleasure for me to have him on again.  So, thank you for agreeing to come, Sandy.

Sandy Botkin:  Believe me, I’m honored.

Jim Lange:  This year, perhaps more than other years, I mean every year it’s always prudent to do tax planning.  This year is a particularly difficult year because of uncertainty.  So we have uncertainty as to what is going to happen with the income tax rates.  We have uncertainty with what’s going to happen with the estate tax exemptions and there’s a lot of talk about different alternatives and I thought, who would be better at analyzing some of the possibilities, some of the probabilities of what may or may not happen, and perhaps more importantly, what you should do, than Sandy.

So let’s say, under the general heading of how to plan with uncertainty, that’s really the big question.  Sandy, if you like, I have a series of, let’s say more specific questions, but do you have any general feelings on planning with uncertainty before we get into some of the specifics?

Sandy Botkin:  Yes, I do.

Jim Lange:  By the way, knowing Sandy, that’s not a surprise.  Sandy has an opinion on everything.

2. Plan on Substantial Tax Increases

Sandy Botkin:  I am pretty opinionated on some of this stuff.  There’s no question there’s a lot of uncertainty and a lot of, not only uncertainty, it depends on what the IRS will be coming out with, which presidential candidate will win, what they will get through Congress, there’s lots of that.

I think the only way to plan, honestly, is to forget about what could have, should have, would have might happen and take what is currently scheduled to happen and plan for that.  Just keep in mind that there may be some changes.  And people have to adjust their planning accordingly. But that’s what I would do.  And that’s the way I think we should focus on this.

Jim Lange:  OK, so you’re basically saying, hey, right now, and let’s just talk about income taxes for a moment and not estate taxes.  Right now, the Bush tax cuts are set to expire and even though we have heard Congressional rumblings that, no, they are going to be extended, you think it would be more sound to assume that they are going to expire and act on that basis.  Is that correct?

Sandy Botkin:  Yeah, I think it’s very sound policy to assume taxes are going to go up.  Especially, when you consider that we have a 16 trillion dollar deficit, and rising, and I haven’t, frankly, heard any presidential candidate in any debate, describe how they are going to start paying off that deficit.

Jim Lange:  Alright, so notwithstanding the possibility and, by the way, usually I like to keep these shows ever green but right now we’re broadcasting before the presidential election so we don’t know, we just heard President Romney, I’m sorry, Governor Romney, in the debates, say that he would like to cut taxes by 20% and let’s say make up for that by closing some of the loopholes, which he hasn’t been fantastically descriptive about which ones he would close and what you’re saying is, yeah, that sounds very nice, but the reality, he is just not going to be able to pull that off and we should plan on what the law is right now.  Is that fair, Sandy?

Sandy Botkin:  That’s not only fair, but I actually spoke with some people that teach tax policy and all of them felt that there is no way that he is going to be able to pull that off.  Not if he’s going to have a 20% tax cut.

Jim Lange:  Well, frankly, at the risk of going beyond my expertise and predicting future tax rates, it’s certainly beyond my expertise, I think that he would have a very hard time.  And the other issue that comes with tax rates is, one of the scheduled tax increases is the medicare surtax.  You might want to call it an Obamacare tax that will be levied on unearned income for married taxpayers of $250,000 and more.  Could you, first of all say, do you think that we should just plan as if it is going to come?

Sandy Botkin:  Absolutely.  First of all, the healthcare reform act has been approved by the Supreme Court, so we no longer have to worry about whether the Supreme Court is going to through that out or not, it’s absolutely been upheld.  So I would say it’s highly likely that there will be an increase in a couple things.
First thing I think you can assume that the last two tax brackets are going to go up by 3%, which means, if you are currently in the 33% bracket, it will be 36, if you’re currently in the 35%, which is generally people making around $350,000 or so, it will be 39.6%.   In addition to that there’s a lot of taxes coming down the pike.

Jim Lange:  So right there, that’s 4.6 right there for high income taxpayers.

Sandy Botkin:  That’s right for high income taxpayers, that adjusted gross income.  It’s called modified adjusted, but basically if your adjusted gross earnings is over $200,000 single, or $250,000 married, or $125,000 if you’re married filing separately, so much for tax simplification, you’re going to be hit with .9% increase in self-employed income and in wages.  In addition to that..

Jim Lange:  I forgot about that, social security and self-employment tax.

Sandy Botkin:  That’s correct.  And then in addition to that, you’ll be hit with a 3.8% medicare surcharge on dividends, interest, rents and other passive type of income and then number 3, they’re probably going to get rid of the lower capital gains rates on dividends.  They’ll probably raise that to at least 20%.  So people are going to see a very substantial tax increase, I believe next year.  And in future years.

Jim Lange:  Alright, and so your thinking is, hey, this is coming.  If we get some relief that’s a break, but hey, this is coming and that you should at least plan for these tax increases.

Sandy Botkin:  Absolutely.  That’s the way I’m doing, not only with my family, but with my parents and everybody.

Jim Lange:  Alright.  And by the way, I will tell the audience that you have been very forthcoming about what you do on your return, including some stuff that would not be considered fantastically conservative, but are out there.  So you walk the walk when you put some of your proactive strategies in your book.  And by the way, I will mention and David mentioned it briefly, but the book that you have that I know you have another new one, but the book that you are famous with that I buy every year and I was a little bit unhappy to see that the new edition isn’t going to be available until December, but the..

Sandy Botkin:  By the way, the reason for that is the IRS hasn’t come out with the latest changes, I have nothing to change.

Jim Lange:  Right.  There’s nothing you can do about it.

David Bear:  But you can plan ahead, can’t you?

Jim Lange:  Well, you can plan ahead, but anyway, I will mention the book is Lower Your Taxes Big Time, the last year was 2011 to 2012.  Obviously the one coming up that will be available December 7th, is 2013 to 2014 and one of the things that you could consider doing is, you could consider ordering it now, that way you forget about it and then, boom, it appears in either your mailbox or your kindle, depending on how you buy your books.  Anyway, I will just tell you that it is a wealth of information.

Today, since we don’t have his, we have more individuals and small businesses, we’re going to concentrate mainly on tax changes for individuals, but I will tell you that Sandy’s information for business owners, and particularly small business owners, is worth 100 or even 1,000 times the cost of the book, probably even more.  And he has a lot of great ideas and some pretty proactive ideas.  Things that a lot of people would not necessarily have the courage to put in their book.

So before we talk about some of the taxes, the tax increases, could we talk for a minute about the details of the medicare surtax.  Because this is going to be the first year that this is going to be around and I think a lot of people don’t really know what it is and how it works.

3. Understanding Medicare Surtax

Sandy Botkin:  Ok.  Well, first of all, somebody has to pay for this healthcare reform.  This isn’t a free deal.  Alright, it’s not neutral free, somebody’s got to pay for it.  And the way we’re going to pay, partially, for it is 1) they are going to try and get the doctors to take less and that’s going to be a whole discussion about whether we’ll have two medical systems, two tiers of care, but that’s something else.

The way they are going to pay for it is with a medicare surcharge and, well, it’s two types of medicare surcharges.   One will be a .9% increase on self-employment income and wages for anyone who makes over $200,000 adjusted gross income, single, or $250,000 of adjusted gross income and married.  So you just got a .9% increase on all your earned income, basically.

David Bear:  And there’s no upper limit to that?

Sandy Botkin:  No upper limit to that.  The second increase, and this is in addition to the regular income tax increases, by the way, will be a 3.8% medicare surcharge.  So it’s a little bit confusing because they both sort of like surcharges with medicare, but 3.8% medicare surcharge on passive income.  Things that normally, you don’t pay social security on.  And that involves things like interest, taxable interest, not tax exempt, interest, dividends, rent, sale of your home above the universal exclusion.  Any passive type of income.  And basically, you’re taxed on the amount of passive income or investment income that you have or the amount that exceeds the threshold, which is $200,000 or $250,000, depending on whether you’re married, whichever is lesser.

Let’s take an example.  Let’s say I make $240,000 a year of adjusted gross earnings and I am single and I have $30,000 of interest, that comprises that $240,000.  I pay, there’s a $40,000 difference between the $200,000, which is the threshold and the $240,000, but I only earned $30,000 of interest, so that $3.8% will only be on the $30,000.  It does not apply to pension distributions.  We can talk about Roth rollovers and things like this.  It does not apply to pension distributions, when you pay tax on it and it does not apply to tax exempt interest.

Jim Lange:  OK, and it also doesn’t apply to wages or earned income.

Sandy Botkin:  The 3.8% doesn’t apply to wages, the .9% does.

Jim Lange:  Right, and for anybody that is keeping score:  so, let’s say you are in the top tax bracket, you have a 3.8% rise on your unearned income, you have a 4.6% rise in your bracket, you have a .9% income tax rise on your social security, and if you’re self-employed you have two shares of that.  Is that right?

Sandy Botkin:  That’s correct.

Jim Lange:  So I total

Sandy Botkin:  Not to mention increase in capital gains rates.

Jim Lange:  Right, right.  So I’m at 9.3%, and if you’re talking about a change in the capital gains rates, that’s really significant.

Sandy Botkin:  Top rate will be about 43.6% or so, not counting states.  But let me mention something.  People are saying, oh, how high can tax rates go?  You know I remember in the 70s when tax rates were as high as 70%, believe me when I tell you.  Tax rates can go up.

Jim Lange:  Yeah, and you’ve seen it in your career and we’ve become, I won’t say complacent, but it’s a little bit like, we don’t have to think about that as much, but I think that we do.  So, one of the things that we can talk about is some of the strategies that you can use to avoid this.

Sandy Botkin:  Absolutely.

David Bear:  Or to minimize it.

Sandy Botkin:  To minimize it.  That’s correct.

Jim Lange:  That’s probably a better

Sandy Botkin:  Again, you’ve got to, I think you have to take the position that tax rates in the future are going to go up.

Jim Lange:  Alright.  So even if, let’s say that there is an extension of the Bush tax cuts that might have some short term bearing, you’re still saying, in the long term, you picture tax rates going up.

Sandy Botkin:  Oh, even if all the Bush tax cuts are reinstated, even if every one of them, you’re still going to have the 3.8% medicare surcharge, you’re still going to have .9% medicare surcharge.

Jim Lange:  Right, that’s a good point.  So there’s 4.7% increase right there.

Sandy Botkin:  And I think you’re going to see an increase in income tax rates again when you’re talking about a high deficit, somewhere along the line, they’re going to have to raise taxes.  Even if Romney gets in and has a 20% tax cut, which I think is highly unlikely, but assuming that he does that, I think what you’re going to see is going to be huge deficits, there’s going to be a whole revolt in Congress and then they’re going to institute and go back with the same tax rates, if not higher.  So I think that you can make a pretty good fair assumption that taxes are going to go up in future years.

Jim Lange:  Alright, and let’s say you’re a middle income taxpayer and you say, oh well, geez, I’m not in the highest rate, this doesn’t apply to me, but even middle income taxpayers have an issue with qualified dividends and capital gains, don’t they?

4. Possible Spike in Dividend Rates

Sandy Botkin:  Absolutely.  Absolutely.  And retirees too.  My dad’s retired, he gets a lot of dividends.  Right now he only pays maximum tax rate of 15% and he’s in Florida so he doesn’t pay a state tax.  The dividend rates are proposed to go up to regular, normal income tax rates next year unless Congress does something.  That could be as high as 39.6%, plus the 3.8% medicare surcharge.  So dividends can take a big beating unless Congress does something.

Jim Lange: Alright, and so one thing is, unless Congress does something, the dividends are going to be taxed as ordinary income, so let’s even say for a 25% taxpayer, before they were taxed at 15%, now it will be taxed at 25%.  Is that right?

Sandy Botkin:  That is correct.

Jim Lange:  Alright, and then, let’s say you were a 15% taxpayer.

Sandy Botkin:  Well that’s another interesting point.  It used to be if you were in the 15% bracket or less, your capital gains rate was zero.  You pay nothing.  I think the proposal is, again, it will go back to your  normal rate, so if  you’re 15%, you pay 15%.

Jim Lange:  Alright, so let’s assume that you’re taking the basic position, hey, taxes are going to go up, you should plan accordingly.  I will be honest and fair to say that there are other people who say, well, we don’t know what’s going to happen, maybe you should wait.  And I guess one thing you could do if you really wanted to split the baby is to have, to kind of stand and be ready with a whole bunch of moves you would presumably implement if we knew a little bit more.

Sandy Botkin:  You know my response to that is, if you fail to plan then you’re going to plan to fail.

5. Possible Spike in Dividend Rates

Jim Lange:  I think in either case, you should, in effect, have your hand, you should have everything ready to go. So why don’t we talk about a couple specific things.  We probably have time for one thing before we are going to have to take a break, but one of the things that we have never really done very much of in the past, other than an exceptional situation, is what I have heard other tax experts call capital gain harvesting.  That is, accelerating capital gains into 2012 so you don’t have to pay the higher rate when you, if you are planning on selling an asset in the next couple of years, 2013 or 2014.

What do you think about somebody who has an appreciated stock or some type of capital gain property, and, let’s say they weren’t planning on holding it for the next 10 or 20 years.  Should that person sell it, prematurely, pay taxes sooner, or pay taxes now, as opposed to just hanging on to it and taking your chances on what capital gains rate will be in the future.   What do you think about that?

Sandy Botkin:  Well, if you are going to assume the tax rates are going to go up for 2013 and thereafter, then this is more than just about capital gains.  This is true of income too. You want to accelerate your income this year as well.

Jim Lange:  Well, we’re going to get to that one, but David is waving his hands so I was just starting with one very specific thing…

Sandy Botkin:  The answer is yes.  I would sell the capital gains property this year.  And I’ll tell you something interesting, let’s assume, you somehow love this thing, you think this stock is going to do phenomenally, you think you should have held on to this.  There’s no such thing as a washed sale rule, there’s nothing prevents your gain from being taxed.  You can sell the stock and if you want, a day or two later, buy it back.  And you pay tax on the gain and you can still hold on to your asset.

Jim Lange:  Right, so what people sometimes remember, is the wash rule, but that applies to capital losses, not capital gains.

David Bear:  Well, on that note, let’s take a break now and when we return, Jim and Sandy will continue the conversation, if you have a question or comment you can call the KQ studios at 412-333-9385.


David Bear:  Welcome back to The Lange Money Hour, I’m David Bear here with Jim Lange and Sandy Botkin.  Before we get back to the show, I want to make an announcement about a special upcoming show on November 28th, The Lange Money Hour will host a very special guest, John C. Bogle, Founder and longtime CEO of the Vanguard Group, the world’s largest index and mutual fund company.  Jim Lange invites you to have your investment and retirement questions answered by one of the best minds in the business.  To submit a question, go to www.paytaxeslater.com and click on ask John Bogle.  As a thank you, whether or not your question is used, you’ll get a copy of the audio file and the transcript of the entire show.

Jim Lange:  Welcome back, Sandy.  So what we were talking about was, in effect, capital gain harvesting, that is, if you have an appreciated stock that you are planning on selling in the next couple of years anyway, Sandy is recommending, and it makes a lot of sense to me, also, sell it now, enjoy the lower capital gain rates and then also, step up.  And then, as Sandy mentioned, if you really love that particular stock or fund, you can buy the exact same thing and, in effect, you increase the basis at the relatively low, current capital gain rate.  Is that correct?

Sandy Botkin:  That’s correct.  By the way, it’s very contrary to what we CPAs and estate planning attorneys would have recommended in prior years.  In prior years, you recommend, hey, take all your losses against your capital gains and you don’t have to pay tax on the gains, or little tax on the gain.

Here, if you assume that tax rates are going to go up, which I think is very, very likely, we’re actually taking the gain and not offsetting the losses this year, we’re waiting until next year.

Jim Lange:  Yes, and by the way, that’s also contrary to the subtitle of my book, is, the name of my main flagship book is Retire Secure: Pay Taxes Later and now this is, no, you pay taxes now because you pay it at a lower rate.

Sandy Botkin:  That’s exactly right, which is the thesis of, product thesis of what I covered in my new book Achieve Financial Freedom Big Time too, by the way.  I discussed this as well.

Jim Lange:  Yes, and by the way, I am a big fan of your books.  I have not spent as much time with Achieve Financial Freedom.

Sandy Botkin:  Well, it’s brand new.

Jim Lange:  It is new, but I will just say that I like your writing style; you have kind of a little but of a quirky sense of humor.  You also have, frankly, more guts than virtually any author, tax author I know.  A lot of times people say, well, this is the black letter law, you should really kind of fall within it and you’re more like, well, let’s push this to the limit to get the greatest tax savings that you can morally, ethically do.

Sandy Botkin:  Well I have two things going for me Jim that most people don’t have.  First thing, I can be independent, I don’t take clients.  I don’t have a practice.  And the second thing is that, if you take a look at my Lower Your Taxes book, and the same thing is true with the Achieve Financial Freedom, but more in the Lower Your Taxes Big Time book, everything is footnoted to the Internal Revenue Code regulations, rulings and case law.  So I back everything up based on some authority.

Jim Lange:  You do back it up incredibly well.  Anyway, before we leave capital gains, I want to bring up a particular group of people that should really take advantage of this, that aren’t.  So I have a lot of clients who have highly appreciated assets, they got it way back when and let’s say that there’s, they have basis of $10 and something that’s worth something like $100 and they say, oh geez, I don’t want to sell it because if I sell it now, I’m going to have a capital gain of $90.  And one of the problems that I see with a lot of clients is the total amount of one particular stock might vastly exceed the general rule if you don’t want more than 1% or 2% in your portfolio in any stock.  Sometimes it’s as high as 10%, 20% and even higher.  Would this be a particularly good time for people like that to sell the stock, and rather than buy it back, let’s say go into something like a better, well-diversified portfolio.

Sandy Botkin:  Yes, it’s funny you mentioned that.   I have a whole chapter, an investment chapter, when you read it, you’ll see what I’m talking about on Achieve Financial Freedom Big Time.  I get into that specifically, rebalancing your portfolio.  And I strongly believe that everybody should have a very diversified portfolio.  And if one stock is way more, way larger percentage of your portfolio, in my judgment they should definitely sell some of it and move it around to other things.

Jim Lange:  And it sounds like in 2012, as opposed to 2013, would be a much better year to do that.

Sandy Botkin:  That is correct.

Jim Lange:  Now to be fair, I guess we have to mention the one exception.  Let’s say that you’re in your late 80s or early 90s, you’re in frail health, and your plan is to never sell the stock until you die.  And that might be one of the exceptions that you might not want to sell it to incur capital gains rates and that you would plan to die with it to enjoy a step up in basis.

Sandy Botkin:  That’s correct, but I have to admit, it’s not my favorite technique, dying.

6. Investment Planning Tip: Diversify Your Portfolio

Jim Lange:  That’s actually pretty fair.  And the other problem that I have with that is, depending on how long your life expectancy is, you could really be risking a downturn, not in the market, but in that one particular stock.  And I’ll tell you the discussion that I heard a hundred times, is well, gee, it pays a great dividend, I really like it, I worked for the company.  And by the way, if you’re still working and you have stock in that company, then you’re doubly exposed because you could lose your job and your portfolio.

Sandy Botkin:  Funny you mentioned that because, again, I get into that as well.  One of the worst things you can do is, when you work for a company and the company says, uh, well give you this 401(k) and we’ll give you a special deal to buy our company stock, which people buy loads of because we’re getting a special deal.  And then what happens is, the company goes under like it did with Enron, you lose your job, you lose all your investments and now you are out in the street.  That is the big problem.  That is why you should almost never, actually, put a lot of money in your own company stock.

Jim Lange:  I think that that is very sound advice.  And one of the things that I think a good advisor will do, is not necessarily just try to get you the highest return on the upside, but will try to protect you on the downside.

Sandy Botkin:  Absolutely.

Jim Lange:  And avoiding company stock in your IRAs and retirement plans, or even just investments, is probably a good way of protecting you from the downside.

Sandy Botkin:  Absolutely.

Jim Lange:  By the way, I will tell you a personal story.  When I was married, my wife had a pretty high concentration in some regional bank stocks and they were sold to her by a broker who said, oh, these stocks are wonderful, never get rid of them, they pay a high dividend. They’re always going to appreciate, don’t let anybody ever talk you into selling them.  Life went on for a while, she had them, she enjoyed the dividends and when we met with a money manager, and you may or may not know, Sandy, my general business arrangement is, I work very closely with a number of money managers, one being an active money manager, the other being, actually several active money managers, and I also work with a low cost index advisor money managers.  But when we were meeting with the money manager, he said, and by the way, the upshot of that is that the client gets the best of my advice and we have at least annual meetings and we run numbers for Roth IRA conversions, etc.  The money manager manages the money and rather than paying us each a fee, we actually have one combined fee that’s as low, or lower, than you would expect from any one of us, rather than just two of us.  That’s basically my assets under management model, which has worked well for me.  But anyway, so we’re meeting with the money manager and the money manager is saying to my wife, oh geez, you have way more than 2% of your portfolio in this one stock.  I really think that we should sell it and diversify.  And she kept saying no for about two or three years and then finally, one day, and I don’t really like to nag her too much, but finally one day she relented and said OK, let’s get rid of it.  Or at least get rid of most of it, which she did.  And after she did that, those banks were bought by Citibank, that then proceeded to lose about 90% or 95% of its value.  So, she would have basically lost tens of thousands dollars.

Sandy Botkin:  And, that’s the reason you don’t want too much of any one stock in your portfolio.

David Bear:  So, no one’s going to write a book, put all your eggs in one basket.

Sandy Botkin:  And that’s what I say in exactly my book, Achieve Financial Freedom Big Time.  You’re going to love my book, it’s right in the court with you philosophy.

Jim Lange:  Alright, well we are in good.  Actually, right now, we’re really on the same wave length.  So you started to say, when I was starting to limit the cap, the discussion, the capital gain, you were starting to say, well maybe what you should be doing is, doing the opposite of what we do normally, which is to defer income, you’re saying accelerate income.  Is that right?

Sandy Botkin:  That’s right.  Accelerating income and defer expenses, which I have to admit, I’m a little surprised that I’m saying this.  Because for years, I never said that.  It was the reverse.

Jim Lange:  Alright. Well, by the way, I think this is very interesting advice that you’re not going to hear a lot of.  Let me ask you another specific question.  The charitable deduction, what we have, and the numbers I’ve had run, have indicated it’s not a huge savings, but it is a savings, that people like to make charitable deductions out of their minimum required distributions.  For our listeners who are over 70, they have a minimum required distribution.  In prior years, you could direct, at least a portion of those minimum required distributions to the charity of your choice…

Sandy Botkin: That is correct.

Jim Lange:  And then what would happen is, you wouldn’t get a charitable deduction, but you also didn’t have to pay income tax on the distribution…

Sandy Botkin:  And that feature, I believe, is expiring this year.

Jim Lange:  Yes, that actually has expired.  So right now, you are not allowed to do that, but we’re hoping that that will change.

Sandy Botkin:  You can’t plan on a hope and a prayer.

Jim Lange:  OK, so you’re saying, right now, unless they make the change before year end, because they are talking about changing it, retroactively.  So let’s say that they might change it in January or February, 2013.  You’re saying that that is too big of a chance, don’t plan on doing that unless they actually pass it this year.

Sandy Botkin:  That is correct.  Or at least know that it’s in Congress, that it’s a bill already submitted and it looks like there is a good chance it will pass.  At least that.

Jim Lange:  OK.

Sandy Botkin:  By the way, I want to emphasize, you mentioned something about the guys who’s age 80 or 90.  I think you’ll agree with me, although I believe that everyone should own something, should have some stock.  Generally, the older you are, the less you should have exposed to stock market risk.

Jim Lange:  Well, I would agree with that.  One of the money managers that I work with, PJ DiNuzzo, of DiNuzzo Index Advisors, he talks about a glide path, where he over time, increases his clients’ portfolio exposure to bonds and fixed income so, for example, his clients in their 50s would have a much more aggressive and long term, and frankly more stocks than more bonds.

Sandy Botkin:  Right, than somebody who’s 80 or 90.

Jim Lange:  The only thing with that I would say with that is, I have a lot of clients who lead a relatively frugal lifestyles and, realistically, even let’s say somebody who is spending $5,000 a month and they have social security and they have, let’s even take the extreme, they have $2M.  There is an argument that, at least a portion of that money should not be invested, like a guy in his 70s or 80s, but should be invested for somebody who is in their maybe 40s or 50s, that is that client’s child.  And that would be a more long term investment.  And that would be also, that I would tend to save a Roth IRA and Roth IRA conversions for that money.

Sandy Botkin:  And that’s particularly true for this year, by the way.  We talk about Roth IRA conversions, again, you want to pick up your income this year and defer your deductions.  And you’re going to do a Roth IRA conversion.  Or even an IRA distribution.  I’m taking an IRA distribution this year.  This is the year to do it.

7. Roth IRA Conversion Before Tax Rates Increase

Jim Lange:  You know that that’s one of my favorite topics.  And I do have what, if you type in Roth IRA right now on Amazon, my book does come up #1, it’s called The Roth Revolution: Pay Taxes Once and Never Again.  So that’s obviously one of my favorite issues and I write about it and I think about it and I talk about it.  And we’re actually going to have a workshop on November 7th, which is not advertised on the radio or anywhere yet and that’s actually going to be on Roth IRA conversions.  Because I was actually in Las Vegas and I heard our friend, Bob Keebler, talk and he was saying some of the same things that you are.  He was saying, hey, this is a great year for Roth IRA conversions.  So notwithstanding your regular opinion on a Roth, although frankly I’m always interested in that.  By the way, I will tell the audience, my opinion.  My opinion is, you have to what we call, run the numbers.  So what we do is, with, actually two types of financial software and not only two types of Roth IRA conversion software, but also 1040 software we actually, in effect, model, let’s say, to simplify it, three scenarios.  One is do nothing, two is making a very significant Roth IRA conversion, and three, is maybe make a series of Roth IRA conversions based on tax bracket.  And then see which one does better.

So that’s our normal.

Sandy Botkin:  It’s interesting that you mention that.  Because when I do my seminars, which I do all over the country, that’s how I make most of my money with seminars and books and for years, I would say up to about this year, I recommended people set up a 401 (K) or a pension plan, get a deduction for it.  I changed my mind.  I think with the way tax rates are going to be going, I’m actually now in favor of people doing Roth IRAs and Roth 401(k)s, instead of the deductible ones or in addition to the deductible ones.  I feel very strongly about that.

Jim Lange:  Alright, and by the way, that is a change.  Because we have talked about this before.  So, let’s take that one step further.  You’re a fan of Roth IRA contributions and Roth 401(k) contributions for people who are still working.

Let’s talk about some of our retired listeners who let’s say, are no longer eligible for Roth IRA contributions because they no longer have earned income.  But let’s assume that they have, let’s over simplify and say, two types of money.  One is traditional IRAs, 401(k)s, 403(b)s, SEPs, Keoghs, etcs., which I’ll lump together and call retirement plans and the other type is, what I’ll call, after tax dollars, that is money that they have already paid tax on.  Are you now advocating that they consider Roth IRA conversions?

Sandy Botkin:  Well, a lot of it depends on how old they are.  I mean if somebody is 85, 90 years old, and they may not live more than a couple years, you know doing a conversion now, paying all the tax may not make a lot of sense.  But, if you’re talking about somebody who’s 50, 60, 70, yes, I am.

Jim Lange:  And let’s assume, in general, you’re a fan, but I might have a little disagreement with you for the older ones, but I don’t want to get into that because we have done what we call, death bed conversions.  But, without getting into that technical discussion, could you talk about, if you’re going to do this, does it make sense to do the conversion in 2012 or 2013?

Sandy Botkin:  Well, obviously, assume tax rates are going to go up, which I’m assuming, it makes a lot of sense to do it now.  Especially with the market doing as good as it is.

David Bear:  Take your profits now, basically.

Sandy Botkin:  Absolutely, you take the maximum profits.  And you pay minimum tax.  Sounds like a win, win to me.

David Bear:  And it does sound like a win, win. But it’s now time for one more break.  When we return, Jim and Sandy will continue the conversation.


David Bear:  And welcome back to The Lange Money Hour with Jim Lange and Sandy Botkin of the Tax Reduction Institute.  There’s about 10 minutes left to go in this show, but you can still join the conversion if you call KQV studios at 412-333-9385.

Jim Lange:  And before, because when Sandy and I get going, it’s hard to stop us, so before I forget, I want to just mention the books that are available, which I think are kind of like the bargain of the century, one, the first book that I know and love and always refer to, and I’ve actually given to my tax preparers and told them to read it is, Lower Your Taxes Big Time.  Now, if you want it immediately, because you want to plan, and a lot the advice, frankly, is somewhat timeless.  You can get the 2011 and 2012 version immediately, either on kindle or hard copy.  If you are willing to wait, the new book, Lower Your Taxes Big Time 2013 to 2014.

Sandy Botkin:  You mean Achieve Financial Freedom Big Time?  Oh, I’m sorry.

Jim Lange:  No, no, I haven’t got to that one yet.  That’s the problem with you prolific guys, he’s on his fifth edition of Lower Your Taxes Big Time.  That will be available December 7th and, what I’m doing, I’m pre-ordering it so it’s done while I’m thinking it about.  It’s $11.55 through Amazon.  I can’t even imagine such a good deal.  Alright, so that’s his classic book that has been around for a long time that I always like.  And then his newest book which is, Achieve Financial Freedom Big Time.  So it’s kind of like the Big Time, I guess as your moniker or your identification or logo.  But it’s Achieve Financial Freedom Big Time, and that has probably some more classic views, some of which you have brought up.

8. Importance of Income Tax Planning

Sandy Botkin:  Correct.  By the way, do you want to emphasize this is a very important year for income tax planning.  And I think everyone listening should really consider going to you, going to their accountant, really start looking at things.  To give you an example, it’s a small thing, but, you know, it’s just one example.  If you buy a new car that you use in business, or a new vehicle, and you get this year 50% bonus depreciation on the cost of the vehicle, on the business use of the vehicle, the problem is, if you expect tax rates to go up, you don’t want that 50%.  And it’s automatic, unless you elect out of it. And if you elect out of it, then you get the depreciation over the next five years instead of taking most of it this year. And there are issues like that that have to be considered.  There are dozens and dozens of issues like that that people really need to take a look at as a result of what I think is going to be happening in the next few years.

Jim Lange:  Well, again, I do think that your book is good for everybody, but the people who will get tremendous value from it are actually people who own small businesses because a lot of the advice is specifically for those guys.

Sandy Botkin:  That’s correct.  For the Lower Your Taxes Big Time, that is designed specifically for small business people.

David Bear:  How do you define small business, because I’ve heard in some of your other conversations that single practitioners are a small business?

Sandy Botkin:  You’re right.  Anyone who pays money to make money is small business, independent contractors, sole practitioners, doctors, lawyers, consultants, network marketers, actors, anybody who’s given a 1099, who pays money to make money.

Jim Lange:  Right, and Sandy’s obviously a big fan of actually figuring out some way to create your own business and take some of the appropriate deductions for that.

Sandy Botkin:  It’s got to be legitimate business.  I don’t advocate illegitimate businesses.

Jim Lange:  Well, sure, sure.  And, by the way, I don’t think we’ve ever talked about this, Sandy, but one of my favorite techniques, let’s say that we have somebody who has been working in a traditional job and they have after tax dollars in their IRA or retirement plan, I am a big fan of, if they can somehow get some independent income, start their own 401(k) plan and then we have a really fun maneuver that, in effect, isolates the after tax dollars in an IRA, put the other retirement plan money in a 401(k) and then we make a Roth IRA conversion for free.  So that would be another benefit of having a, being in effect a consultant.

Sandy Botkin:  No question.  Having a business really opens up and there’s lots of deductions that small business people get that employees don’t get.  And that’s why I’ve been a strong advocate of forming a business and finding a legitimate business you might want to work, not to mention the fact that you might make enough money to quit your job.

9. Possible Change in Estate Exemption

Jim Lange:  Alright.  The other thing before we go and one of the nice things about talking with you Sandy is that you not only have the training and experience as a CPA but you’re also an attorney.  And we have some pretty drastic changes that may occur in the estate and now we have a current exemption of $5.2M and we also have what is called portability, which means that between a husband and wife, they could pass up to $10.4M to their children, but we’re going to lose portability and when it’s going to go down to $1M if nothing happens in 2013.

What should somebody who has an estate of more than $1M do right now?

Sandy Botkin:  Well, that’s really where the biggest uncertainty is.  There’s no question in my mind, if I have to bet, that income tax rates are going up; states another story.  Both candidates want to increase the exemption for estate tax.  Even Obama, whose lower than what Romney wants to do, wants to have a $3.5M exemption.  So I think you’re going to see an increase in the exemption.  I think we can assume that something will go up since both candidates want it.

Jim Lange:  Alright, so you’re not a big fan of making massive gifts right now?

Sandy Botkin:  Oh, no, I am because that’s not guaranteed.  It’s not guaranteed.

Jim Lange:  OK.

Sandy Botkin:  I am a big fan of making massive gifts right now.

10. Understanding Gift Tax

Jim Lange:  Alright.  So let’s say that somebody has several million dollars and, let’s take two examples.  One, they are in their early 60s, and obviously you don’t want to give away money that you don’t think you can afford to give away.  But let’s say that they do think that they could afford to give away a very significant gift.  And, let’s take that same question with somebody who is maybe in their 80s and 90s and quite frail.  What would your advice to each of them be regarding making a gift before year end?

Sandy Botkin:  Well certainly you know, as I said, we have two taxes.  We have the income tax and we have the estate and gift taxes.  There’s no income tax on when you make a gift.  You don’t get a deduction, the person receiving it is not taxed on the income; so that part’s good.  There are, however, gift taxes when you make gifts but the good news is you can give away up to $13,000 per person, per year, gift tax free.

David Bear:  How much is that again?  Repeat that, I think Jim was over you.  How much you can give?

Sandy Botkin:   $13,000 per person, per year, gift tax free. And if you’re married, you get a double, you can get what we call a split gift exemption.  You get double that amount, $26,000 per person, per year gift tax free.  And by the way, these numbers are going up next year.

Jim Lange:  And by the way, that does not eat into your once in a lifetime exclusion.

Sandy Botkin:  It does not eat into your once in a lifetime exclusion.  That is correct.  But you can give away $13,000 to your kids, you can give away $13,000 to their spouses, you can give away $13,000 to your grandkids, you can give away $13,000 to your cousins, and you can do this every year.

Jim Lange:  Right, and by the way, that’s $13,000, or $26,000 if you are married, per beneficiary, not per donor.

Sandy Botkin:  That’s correct.  Per beneficiary, not per donor.  That’s absolutely right.  So you can give away, if you’ve got two kids and each of them are married, that’s like four gifts at $26,000 a piece and if they have grandkids, that’s another couple gifts.  I mean, you can give away hundreds of thousands of dollars gift tax free, if you do it right.

Jim Lange:  Right, not only gift tax free, but even without eating into your exclusion.

Sandy Botkin:  And without eating into your exclusion, that is correct.

Jim Lange:  Now, let’s take this situation where you have a lot of money and the annual gifts, you literally can’t give away enough money, would you consider a, what might be called a credit consuming gift and we only have about one minute for the answer for that?

Sandy Botkin:  Yes, you can.  But one thing good about these gift taxes, one thing I want to warn you about the gift taxes is that, if you give away too much and it’s within the last three years of death, it could be pulled back into the estate.  That’s always a potential problem.  And, there’s a lot of things that people can do.  Life insurance can be planned for.  You can have life insurance included in your estate, or if you plan for it, you can have it excluded.  Seems to me, you’re much better off simply excluding it.

Jim Lange:  Yes, and by the way, I will also tell you that the guaranteed type of life insurance policies that I like, there are going to be new life insurance reserve requirements starting January 1, and we are going to see increases in the premiums for permanent life insurance of anywhere between 9% to 16% and in some cases, even more significant.  In fact, that’s probably worthy of a show right there.  That we’re not only getting increases in taxes and I am being waved at and so thank you very much, Sandy.

Sandy Botkin:  My pleasure.

David Bear:  Thanks for listening to this edition of The Lange Money Hour: Where Smart Money Talks and thanks to Sandy Botkin for sharing his financial insights.  You can reach him at taxreductioninstitute.com.  And, as always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can always access the archives of past shows, including written transcripts on the Lange Financial Group website at www.paytaxeslater.com.




jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.