Sean is a tax-focused financial planner. He helps individuals and small businesses with financial planning, tax strategies, and tax return preparation.
The discussion we have is not intended to be financial, tax, or investment advice for any particular individual. You should consult your own advisor regarding your specific situation.
Welcome to the money mindset podcast where you will find the inspiration and motivation you need to manage your money better so you can stress less and live the life you want. I'm Ashley Patrick with budgets means easy and the money mindset podcast. Today we are talking to Shawn Malaney. He is a tax focused financial planner and he helps individuals and small.
This is with financial planning tax strategies and tax return preparation. And today we are going to talk with him about preparing for your taxes so that you can lower your tax bill. Now it may be a little too late to lower your tax bill for this year, but these are some helpful tips in planning for next year. So if you're getting a big tax refund, there's even some tips in here with what to do with the money to lower your tax bill for next year. Now, as a disclaimer, you know the discussion we have is not intended to be financial tax or investment advice for any particular individual. You should consult with your own advisor regarding your specific situation. But of course he's got lots of different ideas and helpful tips that kind of help you, uh, lower your tax burden for the coming year and possibly years down the road.
So before we jump in, I do want to mention that the seven day budget challenge will be changing. I plan to change it by the end of this month. So this is airing in January of 2020 and right now the budget challenge is a pay what you want, challenge minimum of $5. So I am going to be changing mat. I'm going to be turning it into a mini course and the price will be going up. Now I may have another budget challenge where I shorten it. Um, but you know, for those of you who have taken the budget challenge, you know, it's um, pretty detailed videos, step-by-step videos on how to do everything. So I am going to be adding to that and increasing the price probably and by you know, next month. So if you haven't already, go ahead and check that out. You know, if you've been waiting, you know, people on average that do the seven day budget challenge save almost $500 every single month.
I think the math is like $493 on average whenever I take out the average. So almost $500 a month just by doing their budget. And then there's lots of helpful tips, a Facebook group and everything like that. So if you have waited to jump on the budget challenge, if you are overwhelmed and you just really don't know where to start, this is where you start. This is where you start to save money. It's where you start to pay off debt is where you start to build longterm wealth. It all with your budget. It's the foundation. If you hate the B word, you know, call it a cashflow plan, you know, call it whatever you want, that'll get you to motivate you to actually do it. So, you know, if you just really hate the word budget, think of another word. Uh, you know, a lot of people call it a cash flow plan, which you know, is what it is. So go ahead and check that out at budgetsmadeeasy.com/budget-challenge. And now we will jump into Sean's interview.
Hi Sean. Thanks for being here today.
Thanks so much for having me Ashley. It's a pleasure to be with you today
and I am so excited. You know, it's, it's beginning the new year and Tech's time and you know, you focus on taxes and so I'm really excited to talk to you about, uh, ways that people can prepare for taxes or maybe even, you know, next year, things that they can do throughout the year to kind of get ready for tax season because you know, it's coming whether you like it or not, you gotta pay your taxes so it's better to be prepared than surprised come tax time. Right?
Absolutely. Ashley, you know, I think there are two things people should think about, right? One is every year you must file a federal income tax return. And in most States you're going to have to file a state income tax return too. And that's an important exercise, right? The IRS is a high priority credit or so you don't want to be on the wrong side of the IRS current in your filing obligations. But even more important I think is the longterm planning that I think some teachers, sometimes people get lost, you know, they say, Oh, I've got this tax return. You gotta make sure it's prepared on time and I'm all anxious and concerned about that. They get that done whenever they get that done. And then it's like, okay, I'll think about taxes some other time and then that other time becomes next year's tax return. But it's important to do some strategic thinking around your own tax situation. And that's true whether you're just starting out in your career or if you're much later or if you're, even if you're retired, uh, I think all people can benefit some from some intentional action on the tax front.
Yeah, absolutely. I mean, and it's so easy to just kinda put it off and think about all, I'll do it later. But you're right. Preparing for is the best thing, you know, especially if you think that you're going to owe money or you know, you're close or you typically owe money or something like that. Um, what are some ways that people can prepare and just kind of make adjustments through the year?
Yeah, so I think for younger workers, I think to my mind I'd have four top priorities and then we could talk a little bit more about some tactics in terms of making tax season itself better. So the first thing is if you work for an employer, you should absolutely contribute up to the employer match in your 401k. Um, I say that because one, it's a way to reduce your taxes, but to, it's a way of a guaranteed return. So think about if your, if your employer says we will match dollar for dollar up to 5% of your salary or maybe we'll match 50 cents up to 5% of your salary, you'd be a fool not to take advantage of that. And unfortunately in America there are plenty of people not doing that. And the reason it isn't so much a tax reason as it is a financial reason, which is a guaranteed return on your money, right?
There's no investment that I or anyone else can guarantee you a return on what if your employer is going to make a an a match to your 401k or your four Oh three B or your TSP. Then you need to be taking advantage of that because that's guaranteed money. The second you put in the first dollar you get back from the employer, 25 cents, 50 cents a dollar, whatever, the match percentages. So I'd say that's the first thing you should do in terms of organizing your tax life. The second would be if a health, a high deductible health plan makes sense for you. You want to cut that are a high deductible health plan with the matching health savings account. And Ashley, I don't know if you've talked about that previously with your listeners. Maybe might want to take a a S a minute to step back and just explain what a uh, an HSA is and just why it might be so powerful for your,
Oh yeah, go ahead. I have not talked about it. Um, I actually have a high deductible plan and an HSA. Um, but I'd love to get your perspective on it.
Yeah. So what this is, is it's a special kind of insurance that typically has higher deductibles than most people are used to, but there are some trade offs for that, right? So the deductible means it means you might have to pay more out of pocket, but if you're young and relatively healthy, that may not be such a bad thing, right? Because you're essentially a calculated risk. And on the other side you're getting benefits for, for taking that risk. One is the insurance premiums themselves typically are lower. Second is you have the ability to contribute to a tax advantage account called a health savings account. And that account lets you put in for an individual, it's up to 35 50 and 2000 or 2020 for a family it's 7,120 20 you can put in 35 50 every year of tax deductible contributions, which is really cool, right?
So you see income tax around that. Not only do you save on the income tax around that, if you do it through your workplace withholding, you save on your payroll tax, so your FICA and your Medicare, you save on that stuff as well. So it's real neat tax saving tool. And then the, the money sits in the HSA, it builds up over time. You can invest it and hopefully grow it that way. And then if you take it out for qualified medical expenses, the money comes out tax and penalty free. So you get a tax deduction the way in and then the money comes out tax and penalty free. It's the best of both worlds, right? It's, it's like a Ronk and that you get a deduction upfront and then it's like a Roth IRA or a Roth 401k in that you get the money out tax free.
Now you have to manage it correctly, right? You can't just take that out for a vacation or things like that. Um, and I also say make sure if you don't have major medical expenses, the only thing you got in the year is a cold and maybe a sprained ankle. Try to not take out from your HSA so you'll let the money sit and compound tax-free for many more years. Um, but I, I think if your circumstances warrant using a high deductible plan, the HSA high deductible plan combination is very powerful. Those who might not want to take this path would be people with chronic medical conditions, things like Crohn's and colitis, things that will have predictable high annual medical expenses. Um, these plans are great for the relatively young and the relatively healthy because their way of reducing your medical insurance costs while at the same time building tax advantage wealth and many employers are actually trying to move their employees toward these plans, which is, you know, good and bad. But if you're young, it can be very powerful, partly because the employer will usually make a contribution to the plan as well. So you're, you're making your own contributions and then the employer might put in 600, 700, a thousand bucks. And that's more tax-free compensation and more tax-free wealth building if you magic correctly.
[inaudible] yeah, we had, um, at my previous employer, which is a, um, it's city government, uh, we had both options. We could stay on the regular plan, which, you know, cost more per month or go to this and they would give you so much for your HSA. And then, uh, my husband's plan, um, previously they had moved to it and then they contributed, but now they don't, uh, he moved to a different employer and they don't contribute anything and then they have the high deductible. So actually for like our family of three kids, so we meet our deductible every year and so it costs us quite a bit of money really. But the plan itself is pretty cheap. Like we don't pay that much per month for the plan, but I'm also putting, I have to put in like $500 a month into the HSA just to cover all the medical bills through the year. Like it's, it's a lot.
Yeah, it's interesting actually. You say you're making this calculation around, well, okay, yes, we're going to pay more at the doctor's office, but we're going to pay less every pay period for the health insurance premium. We get all these tax benefits from funding the health savings accounts. Right. You're making, you know, it's a trade off and you know it, you know, so that's your family where, yeah, you've got three kids and there's a lots of, a lot of doctor's visits and those sorts of things. But think about your, your listeners who are 25 years old, right? Who maybe have any children, right? And maybe they're very healthy. Why would you pay a whole lot? For a gold plated insurance plan when you're doctor, hopefully twice a year if that.
Oh yeah, absolutely.
I think these, these HSA is, can make a lot of sense, um, for folks in terms of getting their tax life in order and saving on income tax and on payroll tax.
Yeah. I didn't realize the payroll tax part, like I knew we saved just on taxes, but I guess I didn't realize that aspect of it. I'm not big into, you know, all those fine details.
Think about that Ashley though, is you need to get the payroll tax saving. You need to do it through employer withholding, right? So if you just say, Hey, I've got this HSA, but yeah, you know, employer don't take any money from my paycheck every two weeks and put it in the HSA and then you get to the end of the year, there's no money in the HSA. What you could do is you could say, well, all right, I, you know, I've got this HSA I didn't contribute say for 2019. Right? Maybe you didn't contribute, but you are covered by a high deductible plan for the whole year. What you could do is then write it, check in early 2020 to your HSA and say this is for 2019 you would get the income tax deduction on your federal tax return, but you wouldn't get the payroll tax safe if you can do it through your employer withholding, which most employers will facilitate that right through your HR portal. Right? You set that up. Um, it's a, it's such a powerful tool, especially if you're below, right? If you're below the social security threshold, you're gonna save not only the Medicare tax, which is 1.45% of every paycheck, but also the social security tax, which is 6.2%. You know, a lot of younger workers, they pay more in payroll tax and they pay an income tax. So the HSA can be very powerful for them as a tax planning strategy.
Yeah, that's, those are really good ideas. I didn't know about all that, all those details. So that's why I'm so happy you're here talking to us today. Um, so those are really great options and things to plan. Um, did you have a couple more? I'm trying to think how many you said you had.
I've got at least four to start and then at least one tactical run one. The third one is the Roth IRA. And I know you've talked with your listeners before about the Roth IRA, but you know, as long as you're making a relatively modest income, the Roth is a very powerful planning tool. And actually I remember you talked about the experience you and your husband had a few years ago with a 401k loan. To refresh your listeners memory, please correct me if I'm getting any of this wrong, but if I'm remembering correctly, you and your husband did significant home renovations and you found yourselves cash strapped. And so what you did was you said, okay, well we've got money in a 401k, we'll take a loan from the 401k and yeah, sure we'll pay it back and we'll get the house, you know, built and [inaudible] and then we'll repay the loan.
And then your husband left his job. And so that required you guys to either pay back the loan very quickly or to have the loan show up in your taxable income and have it be lip on your rate. You know, on your one year big slug of taxable income plus a 10% penalty. Right? Right. So let's think about if, what if you guys instead had had a Roth IRA at that time? You know, if you had had a Roth IRA and say you'd borrowed 40,000 of, well let's say each of you had a Roth IRA, you would contribute each $5,000 for the four years previous. So you each had 20,000 worth of contributions to that Roth IRA. What you could have done is you could have taken each the 20,000 of contributions out tax and penalty free, and you could have used that for any purpose. You know, under the sun, right?
You could've taken a vacation with that. You could have done medical expenses, you could have, you know, rebuilt your house, whatever you want to do, 20,000 you just withdraw your old contributions. That's it. You don't withdraw the earnings. You now have $40,000 you can redo the house. Now, that's not exactly great tax planning and that you're going to lose the future growth on that $40,000 that would have been tax free, but at least you could have used that money, gotten the house repaired, gotten all those renovations done, and now tax time, there's no income tax hit, there's no penalty and you walk away from it and you say, well next time we go through that path, hopefully we'll have money in cash or other taxable investments to pay for it, but at least we don't have this huge penalty and this big slug of taxable income this time. Right. So I think the Roth IRA is powerful one because it's tax free growth for your retirement, but two, because the contributions that you've previously made could be withdrawn tax and pound, be free at any time for any reason. Not to say that that's something you should be planning on doing, redrawing early. But if you had to, it's a nice life raft where you are a tax hit and a penalty hit on top of an already difficult financial situation.
Yeah. Cause our taxes, I mean it was crazy. We should have got back, you know, I think it was around $4,000 and we ended up owing over 6,000 so it was like a 50% hit. It was crazy. Cause I mean it just, it costs us a whole lot. And so like give you, like you said, if you have the other option then you don't take that big hit.
Yeah. So I think the Roth IRA is just such a powerful tool. Four, pretty much all Americans have at least some access. You know, there are some who make too much to make a direct contribution. There's some strategies around that. You can also have a Roth 401k or four or three B Roth TSP. So I think for most Americans, and certainly for younger Americans, having Roth accounts is imperative because it just gives you so many more options and opens that door to tax free growth in the future. That's very powerful.
And I think a lot of employers are moving to give the option of Roth 401k. Um, but if somebody didn't have that option at their job, like how would they go about opening a Roth? Like could they, you know, sometimes I see, um, just you know, at banks they have IRA accounts but those really aren't the same thing are they?
Yeah. So these days to open a Roth IRA is relatively simple. There are plenty of discount brokerages and I'm not recommending any one particular brokerage or financial institution for any of your listeners, but just to list some examples that are commonly cited, Vanguard, fidelity, Schwab, there are others, right, where you can go to their websites or call them off and say, Hey, you know, I have earned income for whatever year it is. And in fact your, your listeners, if you're listening in January of 2020, you could still make a contribution to a Roth IRA is assuming you qualify in before April 15th of 2020. So there's still time in 2020 to do some tax planning for 2019. And the way yet, the way you would do it is you would contact one of these discount brokerages and say, you know, I want to open up a Roth IRA and their websites are usually pretty user friendly in terms of navigating you through that process.
You'll have to link a bank account, right? Cause they all need some stores of funds to get the money. You know, in the contribution limit. If you're under 50 years old in 2019, uh, in 2020 is six thousand seven thousand. If you're over 50, you know, so you, you know, and this is done person by person, right? So even in a community property state, I live in California, retirement accounts are individual accounts. So you know, you can do it and then your spouse can also do it too. I'm assuming that you have, between you and your spouse, there's a neuro [inaudible] earned income there for a Roth IRA. And the threshold is pretty low, right? It's about $12,000 if you're under 50 years old. Um, but assuming between you and your spouse, you have 12,000 of earned income, you can go to one of these websites and set it up. Yeah. You link a bank account, the funds come over and then you invest them, you know, obviously for a younger investor that's gonna probably be, you know, skewed towards a, a [inaudible] equity portfolio. Um, perhaps if you're older you might want to do it in a more conservative portfolio. But you know, the, the brokerages are generally pretty user friendly. You know, some people will critique certain websites, but generally speaking, they're pretty user friendly in terms of setting up a Roth IRA.
Great. And I do have a quick question because I see this in Facebook groups all the time and your comment about, um, having to have a $12,000 earn income. Like I see people in Facebook groups, obviously they're not, you know, they're just random people, uh, on the internet. So obviously everybody has different opinions, but they'll make comments about, um,
putting money in for your child into a Roth IRA, or how do you do that? Or can you do that? If they technically don't have any income, can you start a Roth for your child?
Yeah, that's a great question actually. So the answer is yes, as long as your child is an American with earned income, that's the big key earn income, you can contribute to a Roth IRA for them. So a lot of kids don't have earned income and thus wouldn't be able to do it. Right. Where this comes up a lot is if you know mom or dad has a small business and as long as it's a sole proprietorship or partnership owned by mom and dad, then theoretically that business could hire you know, junior or daughter and you would then, you know, pay junior daughter, there's a payroll tax exemption if you do it the way I said you did it. And as long as that compensation is reasonable for the activity, right? So we're talking about relatively low value services, but you know in most cases you could justify, Hey, you know what, somebody who's got cleaned this office or you know, you know that mom and dad used for their, their trader business, you would then pay them.
And based on the tax rules, you would not owe payroll taxes on that compensation because they're working for their mom and dad and their mom and dad's trader business. And then they would have, you know, if it's $1,000, 2000, 3000, whatever their earnings for the year are, that's the cap, right? So you would say, okay, and you could, you can just gift them that piece of it, right? So you can pay them the $3,000. They then put that in, you know, their savings account or you know, they do whatever they do with it. And then you could separately then say, Oh, well you had $3,000 worth of earnings, I'll just gift you the other 3000 to actually put in the Roth IRA account. Um, or you just use the earnings that they actually took home. Um, yeah, so this can be a powerful tool. I would say though, you want to be careful because if you're saying, Hey, you know, my 12 year old has, you know, school and soccer practice and swim practice and Oh by the way, my, my 12 year old earned $10,000 this year, the IRS might start looking a little scance at that.
And the issues there can be that they would deny your business the deduction for that compensation, and they might even say, Oh, you made your child made an excess contribution to your return to his or her retirement. So you want to be careful and logical here with this stuff. But it certainly can be, you know, it's one of those things where, yeah, a thousand this year in 2000 next year, these aren't big numbers, but if you start stacking them on top of each other and you give your child, you know, your child's 10 years old and they don't touch that money till they're 60 or seven years old, all of a sudden it can be quite impactful.
Absolutely. I mean, the younger you can start investing the better because it just has so much time to grow. I mean, it's just crazy how the compound interest work.
That is exactly right. Um, and, and yeah, they will love you if, you know, you put in, you know, four or five, $6,000 over their childhoods and then that grows for 50 years con, you know, tax-free. It can be a very impactful maneuver. And if you can get a business deduction for it because it was reasonable compensation for the tasks that your kids did, you know, all the better.
Right? Absolutely. Now would you recommend doing that as opposed to like an ESA or a five 29 plan for college?
So it depends on the purpose, right? So if the purpose is we want to get our child to a place where they're going to have a lot of wealth or a relatively high amount of wealth in the future to have flexibility, I tend to like the Roth IRA. If the purpose is I want to use that money for my child's college education, I would not put it in my child's Roth IRA. And there are two reasons for that, right? One, if the money comes out of the child's Roth IRA while they're in college. You know, like I said earlier, it could be a return of their contribution. So there'd be no tax and there'd be no penalty. Well that's fine, but one, you're going to lose decades of tax free growth on that money. And then too, for the purpose of the FAFSA form, right? So the form that determines the federal aid, the student aid that your kid will get, that money that comes out of the Roth IRA goes into what's called the expected family contribution.
The EFC. Yeah. So, and what happens is they say, Oh, that's income of the child, even though it's not taxable income, it's still income of the child. And we expect up to 50% of that income to go into the family's contribution for tuition next year. So you've just created essentially a 50% tax on a Roth IRA, which is not, you know, not advantageous planning. So if your goal is, look, I just want to fund Junior's college education, then I would look at alternatives such as you mentioned the ESA or the five 29 plan. The other thing to keep in mind too is we've got to take care of mom and dad, right? Mom and dad are going to get older by the time the kid is in college and it's gonna have a lot of time to repay the student loan, right? So, um, sometimes there's, there's a real benefit of just investing that money in a taxable account in the parent's own name and sure that that taxable account will generate interest and dividends and capital gain distributions over time.
That'll go on the parents' tax return. But now mom and dad have more of a cushion and their financial futures more stable so that when, you know, the child is 25, 30, 40, you know, 50, the child doesn't have to worry about mom and dad's finances as much, you know. So I think there's a, there's a bit of a balance that needs to be struck there. Um, and before, you know, fully committing to a large contribution to your child's college and Oh, you know, five 29, that sounds great. Or ESA, that sounds great. I think you need to step back and say, well, what about mom and dad? How are we doing in our finances? And if it's, Oh, we're living paycheck to paycheck and we've got a big debt and those sorts of things, then maybe you say, well, why don't we focus on mom and dad and pay down debt or whatever we need to do to build up our finances. And then we can think about mom or about junior or daughter and their college education.
So building off of that, would you recommend people, like if they're already in debt, living paycheck to paycheck to paycheck, should they still be investing or should they take that money and put it into debt? Like paying down debt, like even your company match or your 401k?
So I would be hard pressed in most cases to tell folks not to take advantage of the company match. Right. So let's say, because you know, let's think about your debts, even if it's credit card debt. So let's say you've got credit card debt and that's at 19% so that's not a good place to be in. That needs to get paid down, you know, as soon as possible. Yeah. But let's say you're getting a dollar for dollar match at your company 401k yeah, I, you know, so essentially every dollar you put into your 401k, you get another dollar back. Instantaneously. Every dollar you put towards the credit card debt, you're getting 19 cents back, right? Because essentially you don't have to pay down 19% in interest. So what I would tell a person in that situation is, first of all, you've got to meet your minimums right on your credit card.
That's number one. Number two. Then you've got to get that employer match on your 401k. And then after that you need to aggressively pay down the debt. And I know actually you subscribed to the debt snowball will say, well, you should look at the mathematics. What I would say is what's most important is behavior, right? If the debt snowball is going to be that thing that gets your behavior on the right track so that you're aggressively paying down debt, go for it. Right. Um, cause at the end of the day we want to get that debt paid off and if that's going to be that carrot that for whatever reason gets you particularly to get that pay down, absolutely go for it. Mmm. But you know, if some other say no, I've got my spreadsheet here and my spreadsheet says pay down 19% first and 8% second and 3% third and that's what I'm going to do and I'm satisfied with that. Then if that's what works for you, go with that.
Exactly. I mean as long as you're paying down debt, I don't care how you do as long as you're doing it.
That's exactly right. Right. And it's more about behavior than prediction. Right? Right. Yeah. I mean I think start good habits now, right. Contributing to your 401k to at least get the employer match, doing an HSA if you can, doing a Roth IRA. If you start those habits now, then it's just going to be so much easier in the future to keep doing that and to get the right results. You know, we don't know. No financial planner can come on and say, you know what, the S and P is going to return 8.3% for the next 10 years. Who knows? Right. That's just, we're all just guessing. Right. But what we can control today and what we do know today is your behavior today. So let's get that. If you're right and then go forward and you know what, the numbers are probably going to work out pretty good if we get the behaviors right. Okay.
You're exactly right and then you'll stay out of debt. Because I do see a lot of people that tried to take shortcuts or they say they paid off debt, but really all they did was move it. Like you know, he lock or refinance their mortgage or you know, 401k loan. Then they say they paid off their debt, but they really did it. They just moved it. So whenever you can actually like make those changes, you will stay out of debt
also and not go back into it. That's exactly right, Ash. My fourth point is just save, save, save. Right? So, you know, people will get, and this goes back to that, uh, behavior versus predictions, right? People get sort of, Oh, what should I be investing in? Oh, the market's high, the market's low. There's going to be a crash. We're going to have a recession. You know what, yes, the 401k to the employer match. Absolutely. The HSA, the Roth IRA, once you're beyond that, just start saving, right? And you could figure out what you're invested in tomorrow, right? Um, but just start saving. The more you save, the more wealth you're going to create, the more you're going to be in good shape. And the other thing about saving is if you were do, if you increase the asset side, you're also reducing the expense side, right? So every dollar you save today accustomed you to a little bit lower expenses.
And just that, forget the assets for a second. Forget the savings. Just building up that I'm getting used to spending less and less on once you're going to become much more used to, um, paying less for your wants in the future. So I'll give you an example, right? Say you're 22 years old, you're coming out of college, you got a good finance or tech job, right? Well, I would tell you do not get a BMW for your first car out of college because if you get the BMW, then it's going to be so much harder in your 30s and forties to cut back to the used Corolla. Right? But if you start off in your 20s with, I'm going to get a, a used accord and then, you know what, in my thirties, well maybe a slightly better used accord and now I feel rich versus, Oh, I started off with a BMW and now I'm cutting. You know, it's so much harder to cut back if anything, you're going to have lifestyle creep, but on successful. So I would just say, you know, focus on getting those expenses lower and getting those savings up and your taxes will be better because investments are generally taxed at a lower rate, then earned income and your finances are going to be so much better too.
That's really good advice. I mean, just keep living like a broke college student and pay off your student debt and then you can enjoy your money and buy the BMW later if you want. But it's not so much a status symbol, you know? And like you said, lifestyle creep and everything. So, um, you know, just keep saving now and then work toward it in the future and then that way you can, um, you know, instill those good habits as saving money and investing cause that's what's so important.
Oh, absolutely. Absolutely. And then you actually, you'd mentioned about what are those things you could do around tax season, right? To make your tax return a little more or a little less painful. Right. The big thing I think, I think it's two things, right? So one in January and February be very attentive to your mailbox because you're going to get very important documents, right? You're gonna get your form W2 from your employer. You're gonna get these fancy things called forms 10 99, right? It might be called a 10 99 int, which is for your interest, might be called a 10 99 div for your dividends. It might be called a 10 99 B. That's for your capital gains and losses from your financial institutions, right? So you sold, you know, a hundred shares of Apple stock and there's a gain and you got to report that on your tax return.
So January and February, sometimes in the March, be very attentive to your mailbox. Just make sure you're collecting that data these days. You can usually go online and grab those documents too. But either way, just be very attentive to that. And then during the year, be attentive to your expenses that could possibly be tax deductible. Um, but that said, you know, the landscapes changed a little bit here. Um, so it used to be that there was a relatively low standard deduction or you could choose to itemize, right? So to take your mortgage interest, your state taxes, your charitable contributions, those sorts of things. Well there was a tax law change in late 2017 and it significantly increased the standard deduction, right? So for 2019, the standard deduction is 12,200 for a single person, 24,400 for a married filing joint couple. And they even kept the amount of state and local taxes you can deduct for that purpose to 10,000 per year tax return.
So think about if you live, say in Texas, right? Yeah. And you ha so you have no income state income tax and say you have a relatively modest home and so you're paying, I dunno, say 8,000 in mortgage interest. That might not be all that modest of a home in Texas, but just say 8,000. Well, that means in order to deduct, uh, itemized deductions [inaudible] and say you're married, you and your husband at that point would need over $16,000 worth of charitable contributions in order to do the itemized deductions. Otherwise, you and your husband are just going to take the standard deduction. So if you think, well, Oh yeah, we easily donate 20,000 a year, then yes, throughout the year, take good notes of all your charitable contributions, do an Excel spreadsheet or a Google doc or Google sheets, you know, a file and just track all your charitable contributions and then you should get a receipt from the charity in most cases.
Um, that's, it's a really effective way of handling that. But you might say, you know, yeah, we, we contribute $10,000 to charity every year and we have low mortgage interest and no state income taxes and we're married. We're not going to be anywhere near that 24,000. Well then there's not a whole lot to track. Right. You'll get your, you'll get your W2 and your 10 99 and those things in, yeah, during the year or in January. And February, and then you just use those and you use the standard deduction. The exception to what I just said is business owners, right? So if you're a business owner, even if it's a small business, that's a very different situation, right? If you have a small side hustle, you might be able to get away with tracking your expenses in Microsoft Excel. But the second you have a significant business, you probably need some sort of accounting software to track those throughout the year so that you can, you know, report your business income on your tax return.
[inaudible] absolutely. Um, now what about like, do you recommend people get a big tax return or would you recommend adjusting your withholdings throughout the year so that you get a smaller tax return?
Yeah, so I generally recommend adjusting your withholdings if you can. Right? So, um, and this is a great time of year to think about that. And you know, what I would do is yet do your 2019 tax return and see where you came out. And if you wind up with a large refund, what you've done is you've given the government an interest free loan and that's not an optimal path, right? Because the government had used to that money. You could have had that money and earn interest or invested earlier and earn more investment returns. So what you could do, the app, the IRS actually has a pretty good online calculator around that and that would be my first, um, stop is I would Google IRS w four withholding calculator. It's IRS w four withholding calculator and the software, you know, the IRS software will ask you some questions and it's, it's a pretty good calculator. And what it'll do is we'll say, okay, through 2020 thus far you've made this much and you've had this much withheld and here's what your withholdings are right now. And it'll tell you, okay, this is what you should do to, um, make sure you're having the right amount withheld every year. Um, yeah, the withholding structure is a very sort of screwy structure.
Yeah. It's taking me so confusing.
And so some people wind up with very large refunds and then other people wind up, Oh, a whole lot of money. And this was exacerbated by the tax law change and people who generally would get a small refund all of a sudden owing a lot of tax that was particularly true of married people in high tax States like my own California, um, where their tax profile is very much changed and the withholding tables changed but not enough to account for that. So, um, yeah, I, I think the best thing, I think the [inaudible] two action steps. There are one, see what your 2019 refund looked like or if you owed a lot in 2019 and then two, you may want to use the IRS withholding calculator. Um, it's certainly not perfect, but it's a good start. And then if you're in a situation where, wow, we owed all these penalties and we got, you know, it was horrible results, then you might want to consult with a tax professional. Somebody like me.
Absolutely. Um, you know, do you recommend that people, like just your average family contact a CPA, or do you think that that's more like if it gets complicated?
I think it depends, right? So there are, obviously there are thousands of tax return preparers out there. And to my mind, there's sort of two things that they're doing for you. One is literally the time and expense of doing their tax return. So if, if you've got, you know, three kids and you and your husband have jobs and one of you has a side hustle and you're just busy, it may be worth your while to offload that work to a paid professional, even if your return isn't all that complicated. Um, but then second is the judgment, right? So, um, there are times where you're going to need a professional's judgment. And that often deals with things like businesses, right? So if you have a small business or a side hustle, if you are setting up a small business retirement plan, I think that's a big one where you may need professional assistance.
So, yeah, you know, different people are different ways in terms of just how painful that tax return exercise is, right? If you've got some engineers in your audience, they might be like, well, we love playing with spreadsheets, but then what we do at work every day, you know, I'll, I'll knock this out while watching a football game. Right? Well, okay, fine. If you know what you're doing and you're using a good commercially available software, fine. I think that actually it's, it's hard to give a one size fits all. I think I will say this though, for your listeners, there are certain times where you should reach out to a tax professional and you know, this'll vary for folks, but sort of what I'll call him Disha of, Hey, this is a situation where I should reach out to a tax pro. I'd say if I'm starting a business, if you're starting a retirement plan for a business, right, like a solo 401k or something like that, or you think you should, that would be a good time to reach out to a tax return professional.
And the other time would be if I ever received an IRS notice, so I owe a lot of money or it could be your state, you know, a taxing authority if you receive a note. So they're going to be sort of two sorts of notices, right? One is going to be, you get a notice from the IRS and it says you owe us 25 or you know, 20 more dollars in tax because there was a $67 dividend on a 10 99 div that you didn't report. And that might be just one of those that got lost in the mail. It got lost in your home office, whatever. If that happens and you think, yeah, they're right, I owe, you know, I got that $70 dividend and I owe some tax on it, fine. You know, write the check and move on. That probably doesn't need a professional's assistance.
But if you get a IRS notice saying you owe us $3,000 in tax, I think at that point you need to reach out. In most cases you absolutely need to reach out because one, you gotta make sure, you know, the IRS can be wrong on these things. So you need to make sure, you know, before you cut that $3,000 check, you ought to ask somebody. And then too, even if the IRS is correct, then there's something wrong in your process and you now have $3,000 worth of indication that there's something off in what you did and that needs to be corrected. So, you know, I think, I think those are situations, and again, this can't be comprehensive and we only have so long to chat. Yeah, those are sort of, I think, three situations where you'd really want to think about reaching out to a tax pro.
Absolutely. Um, now do you have any last words of wisdom? Last words of wisdom? I would say, um, a point I made earlier is focused on your behavior and the numbers will work out, right? So don't get obsessed of, Oh, we got to run a million different numbers and I need 8.25% return or no, don't be obsessed with that. Do what football teams do, right? So get your blocking and tackling right. And eventually the winds start stacking up, right? So do, do the, you know, pay down your debt, avoid debt, reduce your expenses, get your employer match in your 401k, get your Roth IRA set up, start saving and investing, you know, and those things will make your taxes much better and they'll make your finances much better.
Absolutely. Now I do like to ask people, um, at the end of every episode what their favorite nonfiction book is. Do you have any that you would recommend?
Yeah, and I'm going to do, some of your previous guests have cheated a little bit, so I'll give you a multiple answer. So the first one is obviously the Bible, right? So, um, that lays the predicate for all that we do on this earth, hopefully. So the Bible would be number one. And then in terms of financial books, I think there are two chestnuts that I strongly recommend to the listeners. One would be the millionaire next door, which is doctors, Stanley and Danko. I believe the author's names are [inaudible]. And that came out in the 90s. And that just goes over the mindset of most of the truly wealthy in this country, uh, against the millionaire next door. Just a classic and personal finance. And then the second one is a more recent book. It's called the simple path to wealth. It's by J L Collins. And the cool thing about this book is it started out as a series of blog posts.
So the author was thinking about his daughter who was about to go to college and he does these blog posts, which are essentially just short letters to his daughter about saving, investing, managing your taxes, managing your finances. And what he said was, Oh, you know, I've got a, you know, dozens of these letters. Now I could make that into a book. And so that's what the simple path of wealth to wealth is. It's a book that is based on these blog posts and it's written in a way that's not targeted for somebody who's financially sophisticated. Um, that said, I think everybody can get something out of it, but it's done in a very relatable way. And if you read only those two books, you would be well on your way to a very good financial future.
I have heard that the simple path to wealth, but I didn't, I didn't know the backstory. I hadn't heard that. That's pretty good.
Yeah, isn't that a, it's a neat, it's a neat way of writing a book, write a book. You've got this other material that you then translate into a book and because of what it was originally intended for, I think that gives the book so much power.
Absolutely. And I'm sure it's, it's a lot. It's easy for us to read it if he wrote it for, you know, his daughter going off to college. So it's not, you know, uh, complicated. Yes. Oh, right now before we go, where can people find you?
Okay, so you can find me three different places. One would be my firm website, which is Malaney financial.com. You could find me on my blog, which is five tax guy.com. I blog on the intersection of tax and financial independence. So that's five tax guy.com. And lastly on Twitter, I'm at Sean money tax. Um, I'm not on Instagram, I'm not on YouTube. Maybe one day, but those are the three main places you can get. You can find me.
Yeah, you should try YouTube or Instagram. I've just started learning Instagram and it's a lot of fun.
It's something I got to get to. But um, for now those are the three portals I'm trying to, uh, to optimize.
Absolutely. Well thank you so much for being here and talking to us about taxes and making it interesting and making tax not boring.
Thanks so much for having me, Ashley. It was a pleasure speaking with you today.
Thank you. Thank you so much to Sean for being with us today. And don't forget to go check out the seven day budget challenge before it gets its revamp in the price increases at the end of the month. So go to budgetsmadeeasy.com/budget-challenge to get it at the lowest price that it's going to be. I will talk to you guys next week.