Join Bridget and John as they dive into the intriguing topic of "Rich Tax vs. Poor Tax" in this informative episode. Discover how the tax strategies and concerns differ between wealthier individuals and those with less income. Whether you're interested in maximizing your after-tax income or understanding more about tax planning and deductions, this episode has valuable insights for everyone. Remember to subscribe to our channel for more financial advice and insights.
John's firm website: https://www.trinfin.com
Disclaimer: The information provided in this video is for general informational purposes only and should not be considered as financial advice. Please consult with a financial advisor for advice tailored to your individual circumstances.
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TRANSCRIPT:
Bridget: Rich tax, poor tax. I think rich people think about their taxes slightly differently than people who are less rich. In this episode, we're going to talk about the ways that rich people and poor people differ on their taxes. Hi, I'm Bridget Sullivan Mermel. I'm a fee-only financial advisor from Chicago, Illinois.
John: And I'm John Scherer. I'm a fee-only financial advisor from Middleton, Wisconsin. And before we talk about rich tax versus poor tax and how to think about it, we want to remind everybody to hit that subscribe button. We're trying to reach 1,000 subscribers, and you can help us do that. And with that, let's get into talking about it. I love the play on words. Rich tax, poor tax. And I think when we're talking about poor tax, we're talking about not quite as rich as the super-rich people.
Bridget: Exactly. But to see if it suits you. So, first of all, I would say rich people focus on how much their total tax is, and poor tax is focusing on how much is my refund. People keep saying return, but it actually is a refund. Okay, so how much is my return?
John: Right.
Bridget: That's kind of confused me, but that seems to be in the popular lexicon now. What's my return? And I often think, “You mean your refund?”
John: How much did you overpay the government? And now they're giving it back.
Bridget: Right. But I would say that rich people focus on their total tax, not on how much refund they're getting or how much they owe.
John: Yeah. What's your actual tax? And to that point, I'll ask people, “How much did you pay in taxes last year?” They go, “No, I didn't pay. I got a refund.” Well, no, you paid taxes. It's just a matter of how much you prepaid versus not. So focusing on that line. I used to know what line it is, but I can't remember anymore. But on page two of your 1040, what was your actual total tax? That's the number that we're talking about here.
Bridget: Right. And the thing is that there's a reason why I would say rich people focus on it more, and that's because they have to make estimated payments. And I wouldn't say make estimated payments so you can be like a rich person.
John: Yeah.
Bridget: But estimated payments are when you have to pay quarterly into the government. So that means that you're not getting all your payments to the IRS through withholding. And sometimes we have people take money out of their IRAs with RMDs so that 100% of it goes to the government just to make their estimated taxes easy.
John: Maybe we could stop here just for a second. If I need to make quarterly estimated tax payments, why isn't enough money being taken on my checks?
Bridget: Well, I don't have a check. Maybe I'm self-employed.
John: There you go.
Bridget: I get money from somewhere else. It's not coming from a W-2.
John: Maybe it's from real estate.
Bridget: Right.
John: Maybe I get it from investments. And there's no withholdings on my investment distributions, capital gains and those sorts of things. So that's the deal we're talking about there. It's when you're getting income, it's not already withheld from you. And people who have more assets often have those other things. Their job is not the place where they make all their money. Maybe most of their money doesn't come from their job. It comes from their investments and other things that they do.
Bridget: Exactly. And I think that's the point. A quality of a lot of rich people is that they have some other things going on that are making money that don't have withholding requirements, so they have to make estimated payments. So then they think, “Wow, this is a lot.”
John: Yeah. I've always said we'd have tax reform and political reform in this country if on April 16 we had the elections, and on April 15, everybody had to write a check for their taxes. And if there was no withholding, you had to write a check every year for what you owe in taxes. People figure out, you know, hey, wait a minute, here's where my money is going, as opposed to it happening artificially. But that's another discussion for a different day.
Bridget: I think that's kind of the underlying point we're getting to. Rich people start a business or have real estate in California. I'm joking about California. I have friends in California. But I would say that's part of it. Often people who are rich have their own businesses. Another thing that rich people do is hire people like us (though we don't just work with rich people) to help them figure out how to get more money after tax. So they're focused on how much money do I get to spend? Not just how much can I build up in my 401k or in my IRAs? So how can I get money after tax? How does this get taxed? So they're more sensitive to figuring out ways of getting income as capital gains versus regular W-2. And they're thinking after tax.
John: Yeah. I think that's exactly right. And one of the things I always think about as we have our conversations here, Bridget, is how does this apply? What are the takeaways? And not every conversation has takeaways, but one of the things I'm thinking as we have this conversation is being mindful of the dollars. It's not about what kind of refund I get. It's about how do I maximize my dollars or minimize the dollars that go to the government?
And one thing I often hear is that there're loopholes that the rich use. And certainly, there are some of those, and we can maybe talk about some of those if it's useful. But at the end of the day, one of the reasons I think that the rich folks have advisors who tell them how to do some of these things is that their tax dollars are pretty substantial. You're talking about making these estimated payments. When it doesn't come out of your paycheck every two weeks and you've got to write a great big check every quarter, suddenly it hurts a little bit more.
And, frankly, when there’re more zeros in the tax dollars, trimming a little bit here and there makes a bigger difference. And one of the things we talk about in our practice, and I'm sure you do, too, when people are saving money in CDs and things like that, is, well, geez, this bank has 5.2%, and that bank has 5.3%. Where's the best place to have my money? And not to say it's not important, because it is, but listen, when you've got $10,000 in a CD, the difference between 5.3% and 5.2% is like $30 a year. That’s not nothing.
If I see $30 on the ground, I'll pick it up. But, golly, I'm not going to do hours of work to save $30. Whereas we just had somebody recently and they ended up with a lot of cash in the bank for various reasons. If you've got $200,000 in the bank, the difference between 5% and 5.25% is several thousand dollars a year. Hey, it makes sense to focus on this. If I've got a really big tax bill and there're things I can do to minimize it, it's worth it for me to spend time and effort, maybe even a little bit of money to hire somebody to help me optimize that. If my tax bill is much smaller, then maybe there are some things to do, but I don't want to spend dollar $500 to save $200, so I think that's part of it.
Rich folks have more zeroes in their portfolios, their investments, their taxes, so there's more bang for the buck for doing it. And I think some of the things that we talk about are not as important for everyone. It's not that somebody who's got a regular W-2 paycheck couldn't do it. But what are you getting for that compared to somebody who's got a bunch of real estate in California? The prices are skyrocketing and rental income, and it's a different story. So I think that's just useful to think about. All right, what dollars are we talking about, if you're watching this and thinking, “Well, geez, how can I use some of those strategies that the rich folks use?”
Bridget: Right. And the last one I have is that they donate smart. I consider donating smart with tax strategies. They do well with donating, but then they also do well with saying, “Let me take advantage of this from a tax perspective.”
John: Donating to charity you're talking about.
Bridget: Right.
John: Giving money to United Way or church or whatever.
Bridget: Exactly. They get a double bang for the buck with donations.
John: Talk a little bit about that. I think I know where you're getting at. What sort of things do people do along those lines?
Bridget: Donor advised funds. Okay, so a donor advised fund, which we have videos on, is a great tool for regular Americans to get a tax break and donate. That works great for at least 95% of the people. Between that and qualified charitable distributions, for 95% of the people, that's going to be great. When you get up higher, you might want to do a private foundation, but you can do so much just with these two tax smart strategies.
John: And that's what I thought you were getting at, and I totally agree. And this is one of the places I just got done saying. Hey, you know, people that have a lot more money, there're probably some other things that they can do that I just don't need to do. But this is one where I do see that it's a low cost, low barrier. You don't need a lot of fancy advisors or super complicated planning when you're talking about giving to charity and using something like a donor advised fund, or if you're over 70 and a half, giving money from your IRA to your church, to United Way, to whatever charities you support. I mean, that is one of those places where, yeah, maybe I'm not saving tens of thousands of dollars by doing that, but, you know, I can save hundreds of dollars with a very low cost of entry, low barriers.
We were just talking with a new client recently about giving money to charity, and I asked, “Well, how do you give money to charity?” And the client replied, “Well, we just write a check for it.” And they had some investments that had gone up. And it wasn't, you know, $10 million worth of investments, but if you have something that's gone from $1,000 to $10,000, you can give some of that stock or some of that mutual fund to the charity and avoid some capital gains. We can give it to a donor advised fund. So that is one of those places where, we can ask, “Do rich people do that?” Absolutely. But I think regular people can really take advantage of that, because there are lower barriers to entry.
Bridget: Right. So those are our rich tax poor tax clues. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And both Bridget and I are taking on new clients. We'd love to hear from you if you're interested, but if you like what we hear and you're looking for an advisor in your local area, check out acplanners.org to find advisors who think like Bridget and I do.
Bridget: And don't forget to subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.
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