Transcript Edited For Clarity

Scenario: “What are ways that I can utilize tax strategies through charitable giving?”

Enpo Tu: Alright thank you everyone for joining us back at My Financial Coach – Live! Today we have Bill Lloyd with us in our studios. I want to thank him, of course, for joining us, and a lot of our listeners are often concerned with overpaying on their taxes, and there are a lot of different strategies out there. As we get to the end of the year, this final stretch, a lot of those opportunity windows are starting to close. So we’ve invited Bill on to speak to some of that. I’d love to give the topic more details, but Bill’s been waiting here. So, Bill, we’d love to give you a chance to introduce yourself, what you do, the company that you have, and then we’ll go right into that topic.

Bill Lloyd: Enpo, thank you so much, and thank you to the listeners of My Financial Coach’s network. I am one of you! I have been in the financial space for 34 years, and I too am a CFP ® and have a few other designations and securities licenses. For the last, say, 20 years, a huge part of my practice has been trying to look for strategies to help clients mitigate taxes legally and help them by recovering money that would otherwise be lost either to taxes or expenses, and then help them recycle it towards whatever is important in their life and their business. There are a number that come into play, particularly at this time of the year. As you said Enpo, we’re getting towards December is not that far off, and people at this time of the year are starting to have a pretty good idea of where they’re going to finish from an income standpoint. So this is a great time to do planning.

Enpo: Well, on that vein then Bill, let’s go right into the topic: We’re starting to get to the end of the year. There’s a lot of different tax strategies that someone can take a look at implementing. A lot of our listeners have traditional W-2 income that they receive as an employee. There are also many with 1099 income, whether it’s through rental properties that they’ve acquired as wealth outside of work, as well as the practices that they have, where they may own their own business. Just for our listeners out there, what are some of the key things that they should be looking for? What are some of the ways that they can mitigate their taxes without going out there and buying unnecessary machinery or trying to find those loopy deductions with the help of some creative CPAs?

Bill: Gotcha. For our W-2 friends and maybe our 1099 earned income friends, the obvious thing is to take a look at, have you maxed out to your ability with your retirement plans, for starters? That’s the easy one, and then things start to get a little bit more interesting with some of the deductions that people are just not aware that are out there. In particular, at this time of the year, there are several fee-simple mineral donation programs that have been worked on all year by attorneys and prepared so that now these offerings, which usually come out as “Reg D Private Placements” are available for folks that are looking for potential ways of reducing their tax liability. We’re working with some right now where for every dollar of purchase into some of these mineral donation programs, they will create five times that in terms of a deduction. These are legal, they are part of the tax code. They are in the tax code for a reason, and I always tell my clients, consider why these things exist to begin with.
In the mineral donation program, these are programs where you’re essentially acquiring land where there may be silver, gold, plutonium, uranium, whatever it is that the US government has deemed to be a special mineral. There are programs set up, without getting too deep, where purchasers can partake of buying that land and then collectively donating it to a Conservancy or, more importantly, to the government in exchange for a multiplier on their dollar. It usually comes out somewhere in the 4.5 to 5, 500% as a multiplier. Another thing that we’ve discovered recently, which is a fabulous program, is medically driven. Wherein you’re participating by helping a pharmaceutical company purchase the raw materials necessary for them to produce a state-of-the-art compound used in the treatment for burn victims. It’s very similar, and it’s not a listed transaction, it’s not a transaction of interest. It’s a heck of a program where you’re going to do well by doing good by helping purchase these things so they can turn around and donate their product to burn centers, hospitals, military hospitals where our wounded are taken care of. It’s a fabulous program, and once again, it’s creating about a five times your investment return in the form of a deduction. So, if somebody was in a combined 40% tax bracket, for simple thinking, if you put in $1 into the program, it’s going to save you $2 in hard money on your tax return. It’s applicable to all forms of income: W-2, 1099, K1, you name it, it can be used.

Enpo: That’s really good. Oftentimes, just thinking about W-2 income, unfortunately, there’s not really a lot of things that are available. In fact, many people are now just using standard deductions because it’s gone so high to reduce down taxes. It is good to know that there is an option for those with W-2 income. Now, traditionally, 1099 income, everything from Social Security being deducted to printers, to multiple office-related equipment, before I guess you could even take out your clients to dinner and write some of it off. So, other than what is, I would say, creative from an accounting perspective, is there anything else that our 1099 friends out there in the audience might be able to really benefit from looking into?

Bill: Absolutely. And of course we don’t want to recommend a solution that is not right for the client. But depending on how much their income is, at the end of the year, there are a number of things. And the Secure Act 2.0 is opening up new door wherein we are able to retroactively establish a 401k plan. Obviously, you can’t do the deferral but you can do the profit sharing retroactively for 2023. You can establish a defined benefit plan that can be an even bigger deduction again depending on your income. And if we have large income where we think that it’s likely that it’s going to stay there and perhaps even grow going forward. In some cases, we can establish something called an 831b, the section of the code
“Microcaptive Insurance Company”. And essentially what you’re doing is you’re creating your own insurance company that will ensure real risk as underwritten by actuaries and Insurance Underwriters on your business. And as a 1099 consultant and independent contractor, you definitely have risks that could put you out of business, such as if you’re a primary contractor and suddenly went out of business, and that was a large source of your income. We can ensure against that risk as interference of Revenue. And the state of Delaware has created a list of 70 different insurable causes, which has kind of turned into the master list in every state. So at any rate, it’s another thing that’s a little further down the maybe the esoteric chart, but it’s a wonderful tool, and it really does ensure risk. And I’ve had clients make claims on their policies, and the outcomes are fantastic because you’re sharing risk with thousands of other people who are like-minded, and your claim is covered, which is fantastic. And at the same time, you’re able to reduce your taxes by the amount that you’re paying as an ordinary necessary business expense into your captive as a deduction. And your captive does not have to recognize the premium as income. So it’s a wonderful tool for 1099s and other people as well in the right circumstances.

Enpo: That’s actually very fascinating that you bring that up. A lot of our listeners are actually Physicians, and they’re no stranger to having to carry a lot of insurance. So this might be a good way for them to essentially be their own insurance company. And some of the things that maybe they’re not able to cover, they’re now able to, it sounds like. So it could solve for two issues, one on the tax side but also just looking at insurability.

Bill: A great point, Enpo. And we have some clients that do that. We don’t urge them to get rid of their malpractice- however, what we often recommend is that they raise their deductible on their malpractice, and they can ensure the deductible. They can also ensure a lot of the legal expenses that are not covered by their malpractice insurance through their own captive.

Enpo: Well, I can tell you that that is definitely a very unique strategy and also solves for many different needs. Just looking though at the end of the year, we are getting to some deadlines, and I don’t know exactly when this episode will air, but I can assure you that every one of our listeners, they’re perking their ears up and going, “Okay, well, what are some of my deadlines?” Let’s say they start today. It’s October – the middle of October that we’re recording this, but could you give our listeners, “Hey, if you want to get some of these strategies rolling, here’s your latest possible dates.”

Bill: Great question. Wow- Let’s go back to the first ones I mentioned. When it comes to participating in a Reg D offering, it’s not the time… these things, thanks to Docusign these days, we can execute paperwork pretty quick, and we can wire money pretty quick, but the issue is that you want to make sure that the opportunity still exists because some of these offerings sell out. They are Reg D Private Placements, and there’s X amount that they’re going to be able to sell. If it’s land and mineral rights situation, if it’s the medical solution, I would think in that case that’s also set up as a Reg D. So the earlier that you can get into some of these ideas, the better. With the captive insurance company, it’s simply a matter of building the captive. But one thing there’s an interesting way to get your deduction for 2023 and actually finish the construction of the captive in 2024. And as we probably have all experienced in the past where some of us have had to put out money along with a binder, so we’re bound for the insurance before it’s formally underwritten. The same thing can be held true with the captive. So the captive manager receives the check in 2023, enabling you to take the deduction, but the actual final underwriting and issuance of the policies might occur in 2024. But that’s certainly another strategy for those that are starting to look down the road at retirement. There may be an opportunity if you’re starting to transition assets from the appreciation phase to the distribution phase. Our company, “The Charitable Pay RaiseTM”, uses a tool that we’ll call a philanthropic LLC. Think of it as a cousin to a charitable remainder trust or a gift annuity. They’re kind of all in the same family. And this is a great time for those tools to be used and involves the giving away of an asset in return for a tax deduction and income in the future. The one that we use, we feel is the most efficient for those that are looking to maximize tax-free cash flow in their retirement years while getting a very handsome deduction today in the year that you do it. Generally speaking, most of our clients are between two to maybe five or six years from when they actually see themselves retiring, but they see the opportunity to start positioning themselves for that event down the road. So it’s a great tool, as are cruts and crats and gift annuities and things of that nature. For some folks that are so inclined, you have the ability to give away a chunk. I believe, Enpo, you can probably verify for me, I think it was $100,000 that you’re allowed to give directly out of your retirement plan, which is also a great deduction for those that don’t need the income. And in some cases, we have folks that aren’t even looking to use their 401K money down the road. Business owners, maybe Physicians with a very large practice, and that’s really where their value is in their estate. So these are a few more of the concepts that we see available to folks that we can definitely get done before the end of the year. Another one is we could squeeze in for those that are receiving passive income out of their investment properties. We can do a cost segregation study, which is a way of accelerating the depreciation into the first six or seven years, maybe 80% of the depreciation on a property into the first six or seven years rather than waiting to take it evenly over 39 and a half years. And there’s definitely time to get it done, and it can be done retroactively into 2023. So for folks that are blessed to have that kind of income coming in and they haven’t spoken to anybody about looking at the plausibility of a cost segregation study, you and your financial planners definitely can talk about that tool. It’s a wonderful way of time value of money, of getting those deductions now so they have use of the dollars today rather than waiting for years and years to get them. Just another thought.

Enpo: Well, Bill, it sounds as if there is some flexibility in the time frame here, but I think our viewers who are listening at home, the bottom line is, reach out sooner as opposed to later because the window of opportunity closes the closer we move to April 15 and beyond. So I want to thank you, Bill, for joining us as a guest. I think you’ve shared a lot of really good ideas, and if there is anything on this podcast that is of interest to you, please reach out to us here at My Financial Coach, bring it up with your financial coach as well if you’re working with one, and we’d be happy to bring some of these ideas that Bill has to the table. Thank you very much, Bill, for joining us.

Bill: Thank you for having me and look forward to many years of working together, lots of good stuff.

Enpo: Thank you.