The End of the Backdoor Roth IRA?

Is the backdoor closing? If a recently released proposal from the House Ways & Means Committee is enacted, then yes it is.

My analysis and commentary below is just my initial take on the proposed new laws: it is subject to revision.

UPDATE December 18, 2021

The update as of December 18, 2021 can be read here. Turns out that as of now (December 18th) my predictive analysis offered in November appears rather spot on. But remember, things can change.

Here’s what I wrote in November: On November 19, 2021, the House of Representatives passed the proposals discussed below. To my mind, the passage of this legislation is a 26.2 mile marathon: Passage in the House is the first mile, and passage in the Senate is the next 25.2 miles. There are absolutely no guarantees as to whether the proposals ultimately become law. My view is that passage in the Senate is going to be much more difficult than passage in the House.

Backdoor Roths

The Backdoor Roth IRA has been a popular transaction for over a decade. It allows those unable to make a direct Roth IRA contribution to get an annual contribution into a Roth IRA through a two-step process. There is a 401(k) version popularly referred to as the Mega Backdoor Roth IRA, which allows taxpayers to move significant amounts into Roth accounts using after-tax 401(k) contributions.

House Ways & Means Proposal

On September 13, 2021, the House Ways and Means committee released legislative text and an explanation of proposed new rules that would change the Roth landscape.

Elimination of Backdoor Roth IRAs and Mega Backdoor Roth IRAs

Effective in 2022, after-tax amounts in IRAs could not be converted to Roth IRAs. This rule would apply to all taxpayers regardless of their level of adjusted gross income. This rule would eliminate the Backdoor Roth IRA, as amounts contributed to a nondeductible traditional IRA (the first step of a Backdoor Roth IRA) could not be converted to a Roth IRA.

The bill would also eliminate after-tax contributions to qualified plans. As a result, workplace plans such as 401(k)s could no longer offer the Mega Backdoor Roth.

Effect on 2021 Backdoor Roth IRAs

In a twist, the new rule would effectively impose a deadline on all 2021 Backdoor Roth IRA planning: December 31, 2021. If the new law is passed, both the nondeductible traditional IRA contribution step and the Roth conversion step for a Backdoor Roth IRA would need to be completed by 2021 in order to do a 2021 Backdoor Roth IRA.

Usually, the deadline to worry about from a Backdoor Roth IRA perspective is the deadline to make the nondeductible traditional IRA contribution, usually April 15th of the following year. There is no particular deadline to complete the Roth conversion step. By prohibiting Roth conversions of after-tax money in traditional IRAs beginning January 1, 2022, Congress effectively makes December 31, 2021 the deadline to execute the Roth conversion step of a 2021 Backdoor Roth IRA.

I wrote about how the legislative proposal impacts the approach to 2021 Backdoor Roth IRA planning and deadlines here.

I have previously written about late or “split-year” Backdoor Roth IRAs under current law here.

Update on Legislative Proposals (As of November 4, 2021)

On October 28th, a new tax proposal came out which did not have the Backdoor elimination proposals. However, a second new tax proposal issued on November 3rd did contain the Backdoor Roth elimination proposals. Based on the current political landscape, there is significant doubt as to whether any tax proposal is enacted during this Congress. However, there is at least some chance the Backdoor Roth proposals are enacted.

Elimination of Roth Conversions for High Income Taxpayers Beginning in 2032

The legislative proposal also eliminates Roth conversions in any year a taxpayer’s adjusted taxable income is $400K (single filers) or $450K (married filing joint) starting in the year 2032.

A couple of observations about this rule. First, this rule would have no practical effect on the FI community. Usually, those in the FI community avoid taxable Roth conversions during high income years. Taxable Roth conversions (such as the so-called Roth Conversion Ladder strategy) are usually executed during early retirement before collecting Social Security. Those years often have artificially low taxable income, so a high income cap on the ability to do a Roth conversion is a rule without consequence for the FI community.

Second, you might be wondering: why the heck are they changing the tax law 10 years in the future? Why not now? The answer lies in how Congress “scores” tax bills. Taxable Roth conversions, particularly in the near term, increase tax revenue. An immediate repeal of Roth conversions would “cost” the government money in the new few years. But by delaying implementation for 10 years, Congress is able to predict that taxpayers, facing a future with no Roth conversions, will increase Roth conversions in 2030 and 2031, increasing tax revenues in those years.

Outlook

Congress is closely divided. There is absolutely no guarantee this bill will pass both houses of Congress and be signed by the President. That said, these proposed rules are now “out there” and being “out there” is the first step towards a tax rule becoming law.

I will Tweet and blog about any future developments in this regard.

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Tax Deductions for Individuals

Tax deductions can be a confusing topic considering the many types of tax deductions and the terminology for them. Below I explain the different types of tax deductions you can claim on your tax return. You may be taking several of these types without even knowing it.

Types of Individual Tax Deductions

Exclusions

Many things we think of tax deductions are not treated as tax deductions on a tax return. Instead, they are excluded from taxable income. An exclusion from taxable income has the exact same effect as a tax deduction.

The most common exclusion is the exclusion for employer provided benefits, including health insurance, retirement plan contributions, and health savings accounts contributions. Here is an example:

Example: Mark has a salary of $100,000. He contributes ten percent ($10,000) of his salary to his employer’s 401(k) plan. His W-2 for the year will report wages of $90,000, not $100,000, and he will enter $90,000 as wages on his Form 1040. The $10,000 Mark contributed to his 401(k) is excluded from his gross income. This exclusion has the same income tax effect as a deduction.

Exclusions are a great form of deduction in that they are generally unlimited on your tax return, though they may have their own limitations. For example, in 2021 the most an employee under age 50 can exclude for contributions to a 401(k), 403(b), or a 457 is $19,500.

For those at least 70 1/2 years old, the qualified charitable distribution (“QCD”), which I wrote about here, can be a great tax planning technique.

Exclusions also reduce adjusted gross income (“AGI”). Items that reduce AGI are great because AGI (or modified AGI, “MAGI”) is usually the measuring stick for whether a taxpayer qualifies for many tax benefits (such as eligibility for making a deductible contribution to an IRA or making a contribution to a Roth IRA). Lowering AGI is an important tax planning objective, since lower AGI opens the door to several tax benefits.

Business Deductions

Business deductions include trade or business deductions generated from self-employment and investments in partnerships and rental property. On a Form 1040, these deductions are reported on Schedule C or Schedule E. Business deductions include salaries, rent, depreciation (deducting the cost of a business asset over a useful life), and other ordinary and necessary expenses.

Business deductions are generally great tax deductions because they are subject to relatively few limitations on your tax return. That said, limitations such as the passive activity loss rules and the at-risk limitations can limit a taxpayer’s ability to claim some business losses. Further, business deductions reduce not only income tax but also self-employment income, and thus, self-employment tax.

Business deductions are also valuable because they reduce AGI.

“For AGI” or “Above the Line” Deductions

On your Form 1040 you deduct certain expenses from your gross income to determine your AGI. Prior to tax returns filed for 2018 and later, these deductions were at the bottom of page 1 of the Form 1040. Starting with tax returns for 2018, these deductions are presented on Schedule 1 which accompanies Form 1040.

Examples of these deductions include one-half of self-employment tax paid by self-employed individuals, deductible contributions to IRAs, and contributions to certain self-employed retirement plans.

Capital losses, generally up to $3,000 on any one tax return, can be deducted for computing AGI. Capital losses in excess of $3,000 are carried over to future tax years to be deducted against capital gains and against up to $3,000 per year of ordinary income.

Health Savings Accounts (“HSAs”) are their own special breed. If contributions to an HSA are made through workplace payroll withholding, they are excluded from taxable income. If contributions to an HSA are made through another means (such as a check or wire transfer to the HSA), the contributions are for AGI deductions reported on Schedule 1. Which is better? From an income tax perspective, there is no difference. But from a payroll tax perspective, using payroll withholding is the clear winner. Amounts contributed to an HSA through payroll withholding are not subject to the FICA tax, creating another HSA tax win!

Standard Deduction or Itemized Deductions

Tax reform changed the landscape of itemized deductions. As a result of the tax reform bill enacted in December 2017, far fewer taxpayers will claim itemized deductions, and will instead claim the standard deduction.

The most common itemized deductions are state and local taxes (income, property, and in some cases, sales taxes), charitable contributions, and mortgage interest.

Taxpayers generally itemize if the sum total of itemized deductions (reported on Schedule A) exceed the standard deduction. Tax reform did two things to increase the chance that the standard deduction will exceed a taxpayer’s itemized deductions. First, the amount of the standard deduction increased. It went from $6,350 for single taxpayers in 2017 to $12,000 for single taxpayers in 2018. For married filing joint taxpayers, the standard deduction went from $12,700 in 2017 to $24,000 in 2018.

The standard deduction for 2021 is $12,550 (single) and $25,100 (MFJ) for most taxpayers.

In addition, several itemized deductions were significantly reduced. For example, starting in 2018 there is a deduction cap of $10,000 per tax return ($5,000 for married filing separate tax returns) for state and local taxes. This hits married taxpayers particularly hard and increases the chance that if you are married filing joint you will claim the standard deduction, since you will need over $15,100 in other itemized deductions to itemize (using the 2021 numbers).

In addition, miscellaneous deductions, such as unreimbursed employee expenses and tax return preparation fees, were eliminated as part of tax reform.

Thus, many taxpayers will find that they will often claim the standard deduction. As discussed below, there will be planning opportunities for taxpayers to essentially push many itemized deductions (such as charitable contributions) into one particular tax year, itemize for that year, and then claim the standard deduction for the next several years.

Neither the standard deduction nor itemized deductions reduce AGI.

Special Deductions

In a relatively new development in tax law, there are now deductions that apply only after AGI has been determined and separate and apart from the standard deduction or itemized deductions.

QBI Deduction

Tax reform created an entirely new tax deduction: the qualified business income deduction (also known as the QBI deduction or the Section 199A deduction). I have written about the QBI deduction here and here. Subject to certain limitations, taxpayers can claim, as a deduction, 20 percent of qualified business income, which is generally income from domestic business activities (not wage income), income from publicly-traded partnerships, and qualified REIT (real estate investment trust) dividends.

The QBI deduction does not reduce AGI.

Taxpayers can claim the QBI deduction regardless of whether they elect itemized deductions or the standard deduction.

Special Deduction for Charitable Contributions

For the 2021 tax year, taxpayers who do not claim itemized deductions are eligible for a special deduction for charitable contributions. The deduction is limited to $300 for single filers and $600 for MFJ filers.

As discussed by Jeffrey Levine, this deduction, like the QBI deduction, neither reduces AGI nor is an itemized deduction.

The statutory language for this new deduction is found at Section 170(p). I believe that there is a very good chance that this deduction is extended to years beyond 2021, though as of now, it is only applicable to the 2021 tax year.

Planning

Tax deductions provide a great opportunity for impactful tax planning. Here are some examples.

Timing

If your marginal income tax rate is the same every year, then you generally want to accelerate deductions. Thus, if you have a sole proprietorship and are a cash basis taxpayer, you are generally better off paying rent due on January 1, 2022 on December 31, 2021 instead of January 1, 2022 since the deduction saves the same amount of tax regardless of which tax year you pay it, but you’ll get the cash tax benefit sooner – on your 2021 income tax return instead of on your 2022 income tax return.

But there can be situations where you anticipate that your marginal tax rate will be greater next year than this year. In those cases, it makes sense to delay deductions. For example, perhaps you would make a large charitable contribution next year instead of before the end of the current year. Or, in the above example, you would pay the rent on January 1, 2022 to ensure the deduction is in 2022 instead of 2021.

Bunching

For some taxpayers, it may make sense to bunch deductions to maximize the total benefit of itemizing deductions versus claiming the standard deduction over several years. My favorite example of this is the donor advised fund. I’m not alone in my fondness of the donor advised fund. It allows you to contribute to a fund in one year, claim a charitable deduction for the entire amount of the contribution, and then donate from that fund to charities in subsequent years. The big advantage is that you get an enhanced upfront deduction in the first year and then claim the standard deduction in several subsequent years. This strategy only works if the amount of the deduction for the contribution to the donor advised fund is sufficient such that your itemized deductions in the year of the contribution exceed the standard deduction by a healthy amount.

Deadlines, Deadlines, Deadlines!!!

Different deductions have different deadlines. Many deductions have December 31st deadlines, so it is important to make the contribution by year-end. For charitable contributions, it is best to make the contribution online with a credit or debit card before January 1st if you are running really late, though if you place the contribution in a U.S. Postal Service mailbox prior to January 1st that counts as prior to the near year (though it makes it harder to prove you beat the deadline if you drop it in the mailbox on December 31st).

For employee contributions to a 401(k), the deadline is December 31st. Thus, if you are reading this on December 5th and you want to significantly increase your 401(k) contribution for 2021, you ought to get in touch with your payroll administrator and increase your contribution rate for your last paycheck ASAP.

By contrast, the deadline for a 2021 contribution to a deductible IRA or a non-payroll 2021 contribution to a HSA is April 15, 2022 (the date tax returns are due).

Self-employed retirement plans have their own sets of deadlines that should be considered.

Conclusion

Tax deductions present several important tax planning considerations. These considerations should include the taxpayer’s current marginal tax rate and future marginal tax rate. They should also include consideration of maximizing the combination of itemized deductions and the standard deduction over multiple taxable years.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Roth IRAs and the VAT Boogeyman

The Roth IRA: tax free retirement income. What’s not to love?

But wait a minute. What Congress gives Congress can take away, right? Might Congress, looking for tax revenues to pay off the debt, simply make Roth distributions in retirement taxable? Not very likely.

While I have no evidence to support this proposition, my guess is that Roth account owners vote at very high rates. Voting to tax Roth withdrawals in retirement seems to be a good way to create a motivated constituency to deny members of Congress re-election. I’m hardly the first person to argue that it is very unlikely that Congress will ever subject Roth withdrawals to income taxation.

The Value Added Tax

There are indirect ways for Congress to attack Roths and tax some of that otherwise tax free account value. One way some worry about is the value-added tax, otherwise known as the VAT. The VAT is a consumption tax on goods and services. The EU has a website here describing the VAT in the European Union. A VAT functions like a sales tax and can be added at any or all levels of production. Many developed countries have a VAT, but the United States does not.

Roths and the VAT

A VAT has the potential to increase the price of goods and/or services, and thus, to potentially eat away at value inside Roth accounts.

Here is a simplified example of how that would work.

Maria is retired. Her annual consumption is approximately $95,000, $5,000 of which is property taxes. She lives off $25,000 a year in Social Security income and $70,000 a year in withdrawals from her Roth IRA. She pays no income taxes on those withdrawals. If a 10 percent VAT were enacted on retail sales, she would need to withdraw approximately $9,000 (10 percent of her current $90,000 non-property tax annual consumption) more from her Roth IRA to pay for her current level of consumption. Instead of using an income tax, the government collects $9,000 from her Roth IRA annually by imposing a VAT.

The VAT functions as a tax on a Roth IRA. As Maria has to withdraw more from her Roth to maintain the same level of consumption, the VAT also reduces the value of amounts inside a Roth IRA. Does this mean a Roth IRA is less desirable?

For the reasons argued below, I believe that the answer is No. First, it should be remembered that were a VAT to be implemented, is almost certain to be implemented in addition to the current federal income tax. Sure, if the United States were to switch from an income tax to a VAT traditional IRA owners would win big (having previously received an income tax deduction without a later income tax charge) and Roth IRA owners would lose big. But a switch from an income tax to a VAT is almost certainly not happening.

Second, when assessing the value of Roth accounts in a United States with a VAT, one must compare them to the alternatives: traditional retirement accounts and taxable accounts.

Traditional Versus Roth with a VAT

Let’s start out by examining the difference between a Roth IRA and a traditional IRA if there is a federal VAT. Here is an example.

Joe is 65 years old and retired. He is a lifelong New York Jets fan, and decides he wants to go Super Bowl LVI, to see his Jets, presumably the AFC representatives in the game. One ticket costs $10,000 and Joe’s only source of funds for the purchase is his retirement account. Joe’s marginal federal income tax rate is 22 percent. Here are the results if Joe has a traditional IRA and a Roth IRA both without a federal VAT on the ticket and with a 5 percent federal VAT on the ticket:

	No VAT	No VAT	5% VAT	5% VAT
IRA Type	Amount Needed	Income Tax Due	Amount Needed	Income Tax Due
Traditional	$12,821	$2,821	$13,462	$2,962
Roth	$10,000	$0	$10,500	$0

Hopefully you can see what is going on in the table. With a traditional IRA, one cannot simply withdraw $10,000 to pay for a $10,000 expense. There will be income tax due on the withdrawal. In order to net out $10,000 to pay for the ticket, Joe must withdraw $12,821, which covers the cost of the ticket and the 22 percent federal income tax (assume Joe lives in Florida so there’s no state income tax). This is computed as the amount needed ($10,000) divided by 1 minus the tax rate (1 minus .22), which equals $12,821.

With a 5 percent VAT, Joe must pay $10,500 for the Super Bowl ticket. From his traditional IRA, he must withdraw $13,462, computed as the amount needed ($10,500) divided by 1 minus the tax rate (1 minus .22).

As we are about to learn, paying a VAT with a traditional IRA creates a new tax: income tax on the VAT. Paying a VAT with a Roth IRA avoids this new tax.

If Joe pays for his Super Bowl ticket with a traditional IRA, he needs $641 more from his traditional IRA in a VAT environment to pay for the Super Bowl ticket. He must pay $141 in additional income tax to cover this additional withdrawal. The income tax on the VAT is $110 (22 percent of $500), the income tax on the income tax on the VAT is $24 (22 percent of $110), and there is approximately $7 of income tax on the remainder of the income tax required.

See this spreadsheet for the income tax calculation. Incredibly, it is possible to pay income tax on the income tax on the income tax on the income tax on the VAT if you pay the VAT from a traditional IRA. It will get much worse as expenses increase beyond the $10,000 tackled in this example.

The first lesson: a VAT hurts those with traditional IRAs, since they will have to increase their taxable withdrawals to pay for goods and services subject to the VAT. When paid with a traditional retirement account, VAT creates several new taxes: the VAT itself, the income tax on the VAT, the income tax on the income tax on the VAT, etc.

The second lesson: if a VAT is enacted, the Roth protects retirees from the income tax payable on the VAT. The 5 percent VAT increases the total tax cost of the $10,000 ticket by $641 if one uses a traditional IRA but only by $500 if one uses a Roth IRA. Having a Roth protects against income tax on the VAT itself. This makes a Roth an even more desirable planning alternative if there is a VAT than if there is no VAT.

The income tax on the VAT is another tax villain the Roth can successfully defeat.

Roth Versus Taxable with a VAT

I believe the logic applied in the Roth versus Traditional VAT environment applies in assessing Roths versus taxable accounts in a VAT environment. To fund consumption, retirees will have to sell more of their taxable brokerage accounts to pay for the now increased price of goods and services, resulting in higher capital gains (and thus, more capital gains taxes) in many cases. Using a Roth withdrawal to pay a VAT protects against those additional capital gains taxes.

Planning

If one believes that a VAT is coming, there is not much, to my mind, to be done from a financial planning perspective, other than increasing amounts in Roth accounts. One might purchase durable goods in advance of the enactment of a VAT, but that sort of planning is of limited value. How many refrigerators can you stockpile for your future use? For those worried about a VAT, the tactics that appear effective are to increase Roth contributions and/or conversions.

While a VAT would not be good news, it makes the Roth planning decision more likely to be the advantageous planning decision.

Paying a VAT out of a Roth avoids the income tax on the VAT (and the resulting additional income taxes) retirees incur when paying the VAT out of a traditional IRA. A Roth also avoids increased capital gains taxes resulting from using taxable brokerage accounts to pay a VAT.

Conclusion

A VAT is not good news for Roth IRA owners, but it is worse news for traditional IRA owners. Roths limit the tax damage of a VAT to the VAT itself in a way neither traditional retirement accounts nor taxable accounts are capable of. In the age-old traditional versus Roth debate, the possibility of a future VAT moves the needle (if ever so slightly) in the direction of the Roth.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Qualified Business Income Deduction Update

For those interested in tax planning for the FI community, some interesting news came from the Senate this week. Senator Ron Wyden, a Democrat and the Chairman of the Senate Finance Committee, released a proposal to modify the Section 199A qualified business income (“QBI”) deduction.

My view is that this is very good news, for reasons I will discuss below.

QBI Deduction

The Section 199A QBI deduction provides small business owners a deduction of up to 20 percent of their “qualified business income.” Usually, this is income from self-employment (reported on Schedule C) or income from a partnership or S corporation (reported on Form K-1). The deduction is subject to a host of limitations which tend to kick in hard for upper income taxpayers.

I’ve written plenty on the Section 199A QBI deduction. My introductory post is here, and a more advanced post is here.

The QBI deduction is good for the financial independence community. It lowers the federal income tax burden on those with small businesses and side hustles.

Expiration

But there is one lurking issue with the QBI deduction: will it last? There are two reasons to worry that it will not. First, it was enacted by Republicans in late 2017 in a polarized political environment. While that means Washington Republicans generally support the deduction, it also means Washington Democrats may have no particular political reason to support it. Second, the deduction has an expiration date: December 31, 2025: The deduction is not available in tax years beginning after that date.

While there are few things more permanent than a temporary tax deduction, obviously it is worrisome that if nothing else happens, we only have four and a half more years of the tax deduction.

Wyden Proposal

Senator Wyden introduced a proposal to modify the Section 199A QBI deduction. The legislative language is available here and a summary of the legislation from Senator Wyden’s staff is available here.

I am still reviewing the language, so at this point (July 21, 2021) I only have a basic understanding of it. Please take the below as a preliminary analysis subject to change.

The bill keeps the QBI deduction, but appears to eliminate it entirely (as related to qualified business income itself) if taxable income reported on the tax return is $500,000 or more. Between $400K and $500K of taxable income, the QBI deduction is phased out. It appears single taxpayers do very well with this provision, as the limits apply per tax return, and are not doubled for married filing joint taxpayers.

The Wyden proposal eliminates the ability for married filing separately taxpayers and estates and trusts to claim the QBI deduction.

The bill also eliminates the concept of a “specified service trade or business.” This simplifies the QBI deduction and will help many self-employed professionals qualify for the deduction where under current law they would not.

See the example of Jackie I posted here. Without a deduction for Solo 401(k) contributions Jackie did not qualify for any QBI deduction at all because he was a single lawyer with a taxable income over $215K. If the Wyden proposal is enacted as written, Jackie could have up to $400K in taxable income and claim a full QBI deduction. Single moderate to high income professionals appear, at first glance, to be the big winners if the Wyden proposal is enacted. Some married professionals will also benefit from this provision.

Section 199A Dividends

The proposed bill appears to keep the 20 percent deduction for “Section 199A dividends” which are dividends paid by real estate investment trusts (“REITs”) and mutual funds and ETFs which own REITs. It appears, however, that a taxpayer’s ability to deduct Section 199A dividends would phase out between $400K and $500K of taxable income. Under current law there is no taxable income limit on the ability to deduct 20 percent of Section 199A dividends.

Expiration

The Wyden proposal does not eliminate the expiration date, December 31, 2025. To my mind, that is not too surprising. Eliminating the expiration date would increase the “cost” of the Wyden proposal and thus, under Congressional budgeting procedures, likely require cutting spending or raising other taxes.

The Good News

To my mind, the Wyden proposal is good news for those fond of the QBI deduction. Instead of eliminating the QBI deduction, we now have a powerful Washington Democrat embracing large parts of the deduction, and expanding its availability for some taxpayers. If this were to pass (and that is very speculative), then both Republicans and Democrats would have passed a version of the QBI deduction. At that point, it is unlikely that either party would want to be responsible for the deduction dying in full in 2026.

This legislative proposal is simply a first step: stay tuned for further developments. But for the FI community, I see a powerful Washington Democrat embracing a large portion of the QBI deduction to be a positive development.

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Sean on The Struggle is Real Podcast

I chatted with Justin Peters on The Struggle is Real Podcast regarding tax issues for those in their 20s to consider. You can access the episode here: https://justinleepeters.podbean.com/e/what-you-need-to-know-about-taxes-in-your-20s-e39-sean-mullaney/

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

S Corporations for Beginning Solopreneurs

Last month the blog discussed the beginning of the self-employment journey. Specifically, it discussed how one pays taxes when they become self-employed. This post goes further. It explores a potentially powerful tax planning for self-employed solopreneurs, the S corporation.

None of the below is tax advice for any particular taxpayer. Note that if you are considering an S corporation, you are generally well advised to work with a tax professional before and during the process of implementing an S corporation.

The S Corporation Concept

Generally speaking, a corporation is subject to federal income tax at a 21 percent rate. For example, if Acme Incorporated has $100,000 of taxable income for the year, it owes the IRS $21,000 of federal income tax. Further, the shareholders are subject to taxes on the receipt of dividends from the corporation. If Acme Incorporated pays its after tax profit of $79,000 to its shareholders, generally its shareholders must include the receipt of the dividend in taxable income (though the dividend may qualify for the favorable qualified dividend income rates).

Based on both the corporation and the shareholders having to pay tax on the same income, it is said that many corporations (so-called “C corporations”) are subject to double tax.

For smaller businesses, this can be very problematic. The tax rules recognize this, and thus, for certain small business entities, allow an “S corporation” election (meaning that the corporation is taxed under the rules of Subchapter S of the Internal Revenue Code).

S corporations are generally subject to only one level of tax, as all of the tax items of the S corporation (taxable income, gain, loss, credits, etc.) are reported and taxed on the shareholder(s) individual tax returns. The S corporation itself usually does not pay federal income tax.

Most states replicate this treatment to a large extent. For example, in my home state of California, S corporation income is reported on the shareholders’ tax returns, but the S corporation itself is subject to a 1.5% income tax (with a minimum annual tax due of $800 regardless of income).

The Self-Employment Tax Savings and Reasonable Compensation

There is another wrinkle to S corporations which can make them advantageous to solopreneurs. The S corporation must pay owner-employees reasonable compensation as W-2 salary. However, the rules generally allow the owner-employee to take some of the earnings of the S corporation as a dividend. This has the rather interesting effect of, in many cases, reducing the overall payroll tax liability of the solopreneur.

Here’s a quick example of how that could work:

Aurora works as a private detective. After business expenses, she has a net income of $110,000. The payroll taxes she pays will depend on whether the business is organized as a sole proprietorship or an S corporation.

If she is operating as a sole proprietorship, she will pay $15,543 in self-employment taxes, as computed on Schedule SE (roughly, 14.13% of her profits are due in self-employment taxes).

Things are different if the business is organized as an S corporation. Assume, just for the sake of this example, that the S corporation pays Aurora $55,000 in W-2 compensation and this is reasonable. The FICA tax she and the S corporation together pay is 15.3% of that amount, $8,415.

In this example, Aurora saves over $7,000 in payroll taxes by electing to operate out of an S corporation.

Of course, compensation must be reasonable. S corporation owner-employees who pay themselves very small W-2 salaries can have dividend payments recharacterized as W-2 salary, prompting disputes with the IRS and state taxing agencies and the collection of back payroll taxes.

Solopreneur Requirements for an S Corporation

Below I discuss, very broadly, the general requirements to establish and maintain an S corporation for a solopreneur who does not employ other people. Those items with a single asterisk can (but does not have to) apply to a Schedule C sole proprietorship (for example, for solopreneurs a limited liability company can be either a Schedule C sole proprietorship or an S corporation). The item with a double asterisk also applies to a sole proprietorship, but perhaps to a somewhat lesser extent.

Entity Formation*

To have an S corporation, one must operate out of a legal entity. Generally, the legal entity can be a corporation or a limited liability company (an “LLC”). Corporations and LLCs are creatures of state law. Each state has its own formation and regulation procedures, requirements, and fees. Often it is wise to consult with legal counsel when forming a legal entity.

Under the federal income tax rules, an S corporation generally must have 100 or fewer shareholders and only a single class of stock outstanding.

Tax Election

Electing S corporation status requires the filing of a Form 2553 with the IRS with the signatures of all the shareholders. In community property states, usually one’s spouse is considered a shareholder. Taxpayers omitting a spouse’s signature where the S corporation stock is community property can fix the omission under the procedure available under Revenue Procedure 2004-35.

Entity Maintenance*

Legal entities have requirements for maintenance. These vary by state, and can include annual fees, annual shareholders’ meetings, and meetings of a Board of Directors. Consultations with legal counsel can be helpful in this regard.

Separate Books, Records, and Bank Accounts**

A legal entity should have its own bank account to collect revenue and pay expenses. Most solopreneurs operating out of either a sole proprietorship or an S corporation are well advised to hire a (very likely virtual) bookkeeper to track revenues and expenses.

Separate Federal Income Tax Return

S corporations must file an annual income tax return with the federal government, the Form 1120-S. Included in this Form is a Form K-1. Form K-1 reports to both the shareholders and the IRS the ordinary income and other tax results of the S corporation for the year that must be reported on the income tax returns of the shareholders.

Generally speaking, the Form 1120-S is due March 15th, but can be extended to September 15th.

Separate State Income Tax Return

In most states, S corporations have to file income tax returns. There can be entity level taxes on S corporations (such as California’s 1.5% income tax, $800 minimum tax) and in most states the shareholders will need to report the S corporation’s income on their own state income tax return.

Running W-2 Payroll/Reasonable Compensation

S corporations must pay their employees, including solopreneur owners, reasonable compensation. This requires running W-2 payroll, including federal and state payroll tax withholding and remittance. There are payroll processors that specialize in providing payroll services for small S corporations.

As discussed above, W-2 compensation must be reasonable.

Forms W-2, W-3, 940, and 941

There are both quarterly and annual payroll tax returns that must be filed to report salaries paid and payroll taxes withheld and remitted. The Form 941 is filed for each quarter and is generally due one month after the end of the quarter.

Forms W-2, W-3, and 940 are filed on an annual basis and generally due January 31st.

Tracking Distributions and S Corporation Stock Basis

Shareholders must track their “basis” in their S corporation stock. Generally speaking, dividends from an S corporation are not taxable to the shareholder. However, they reduce the shareholder’s basis in their S corporation stock. If the shareholder receives a distribution at a time he or she does not have basis in their S corporation stock, it triggers a taxable gain to the shareholder.

Basis should generally be tracked as part of the tax return preparation process. However, basis should also be tracked during the year prior to the shareholder taking significant dividends from the S corporation.

Increased Professional Fees

Operating out of an S corporation generally increases the professional fees a solopreneur pays. This absolutely can be worth it, but in many cases there needs to be professional assistance regarding reasonable compensation, tax filings, legal maintenance, and payroll processing.

Tax Planning

In a world without two of my favorite tax topics, the qualified business income deduction and the Solo 401(k), the analysis was usually somewhat straightforward. Estimate business income and run it through the filters of income and self-employment tax if reported on a Schedule C versus income and payroll tax if reported through an S corporation. This yielded an estimate of the overall tax savings obtained using an S corporation structure.

To make the “S corporation or Schedule C” decision, the taxpayer would then, for the most part, compare the estimated annual tax savings versus the additional administrative burden and costs associated with the S corporation.

Today, we live in a world with the qualified business income deduction and the Solo 401(k). These planning opportunities make the “S corporation or Schedule C” question more nuanced. At a minimum, solopreneurs should work with their tax advisors to model out what the income tax, self-employment tax, qualified business income deduction, and retirement plan results look like at their anticipated business income level and desired retirement plan contribution level to determine whether the S corporation or the Schedule C route is better.

Operating through an LLC

One option available to solopreneurs is operating out of an LLC as the sole owner. LLCs provide a legal entity out of which to conduct business. Properly operated, an LLC can provide a solopreneur with liability protection and reputational advantages. One great feature of LLCs is their tax flexibility. They default to disregarded status, meaning that for a solopreneur, the default option is that the taxable income of the LLC is simply reported on their Schedule C. However, using the Form 2553, a solopreneur can elect to have the LLC treated as an S corporation.

Those looking to work through an LLC should consider hiring legal counsel regarding the establishment and maintenance of their legal entity.

Conclusion

Operating out of an S corporation is a significant additional operational commitment. There are instances where it can make a great deal of sense for a solopreneur. Those considering using an S corporation should understand the administrative commitment involved and should work with advisors as appropriate to ensure they make an informed decision.

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Sean Discusses Tax Planning on the ChooseFI Podcast

I was honored to discuss using tax returns as a springboard to tax planning on a recent episode of the ChooseFI podcast. Click here for the episode website.

During the conversation we referenced this blog post.

As always, the discussion is general and educational in nature and does not constitute tax, investment, legal, or financial advice with respect to any particular individual or taxpayer. Please consult your own advisors regarding your own unique situation. Sean Mullaney and ChooseFI Publishing are currently under contract to publish a book authored by Sean Mullaney.

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

Paying Taxes When You’re Self-Employed

Thinking of shifting to self-employment? If you’re thinking about starting a business and being your own boss, one of the things you need to do is figure out how to pay taxes. The transition from W-2 work to self-employment significantly alters the tax landscape.

Below I discuss the taxes self-employed solopreneurs are subject to and how to pay them. As always, the below is for educational purposes only and is not tax advice for any particular taxpayer.

Taxes Paid by the Self-Employed

Federal Income Tax

The first tax is the exact same tax you paid as a W-2 worker: federal income tax. The determination of how much of your income is subject to this tax is a bit different. As a W-2 employee, you received a Form W-2, and, generally speaking, Box 1 of Form W-2 told you how much of your income was subject to federal income taxes.

As a self-employed individual, you now need to track the income and expenses of your business. Solopreneurs should strongly consider practices such as having a separate bank account for the business and hiring a bookkeeper, possibly a virtual one.

Income and expenses of the solopreneur’s business are reported annually on a Schedule C filed with Form 1040 every year. The amount of income computed on Schedule C is taxable on Form 1040.

Federal Self-Employment Tax

Congratulations on the transition to self-employment! You just signed up for a new tax: the federal self-employment tax. It’s actually (roughly speaking) the same FICA tax you paid as a W-2 employee, but now you pay it yourself (instead of through employer W-2 withholding), and you pay both halves of it.

Here is an example of federal self-employment tax:

Leslie reports self-employment income of $80,000 on her Schedule C. Leslie has no W-2 income. Her self-employment tax is $11,304, computed as 14.13 percent of $80,000.

One’s self-employment tax will not always be approximately 14.13 percent of self-employment income. That said, in many cases 14.13 percent will be the approximate percentage. Self-employment tax is computed and reported annually on Schedule SE. Schedule SE is filed with the annual Form 1040.

To account for the fact that the self-employed pay both halves of the payroll tax (the employee side and the employer side), they receive an income tax deduction (from adjusted gross income) on Schedule 1, line 14 for the “employer” half of the payroll tax.

State Income Tax

Most states have an income tax, and the self-employed must pay it too, no different than when one is a W-2 employee.

Local Taxes

Localities have various taxes solopreneurs may be subject to. First, there may be a general business tax which is often either a flat annual fee or a small percentage of revenue. Especially with the latter, there may be an exemption amount (usually, a revenue threshold) below which the solopreneur does not owe the tax. It is usually important to register with your locality to be able to claim any exemption from these taxes.

Second, localities sometimes impose a separate sales tax on particular industries or goods.

It is best to look into these taxes upfront. Localities know that sometimes small businesses miss these taxes and are usually willing to work with those who apply for relief for any missed filings or payments.

Paying Taxes

Now that we’ve discussed the broad categories of taxes the self-employed are subject to, the next step is to determine how and when to pay those taxes.

Federal Income Tax and Self-Employment Tax

This is one stop shopping. The federal tax rules require the self-employed to pay estimated taxes in quarterly payments (referred to as estimated tax payments). The dates they are due for each quarter of the year are as follows (assume the estimated tax payments account for Year 1):

Quarter	Date Estimated Tax Payment is Due
First Quarter	April 15, Year 1
Second Quarter	June 15, Year 1
Third Quarter	September 15, Year 1
Fourth Quarter	January 15, Year 2

Note that if a payment due date occurs on a weekend or federal holiday, generally the due date is moved to the next day that is not a weekend and/or a federal holiday.

Generally speaking, the estimated tax payment must include both the estimated income tax due and the estimated self-employment tax due. Further, it must account for all taxable income (interest, dividends, capital gains, etc.), not just self-employment income.

Failure to pay in sufficient amounts on time can lead to an underpayment penalty computed on Form 2210. Usually, the amount required to avoid an underpayment penalty is the lesser of (i) 90 percent of the current year tax due (paid in timely, equal payments) or (ii) 110 percent of the previous year tax due (paid in timely, equal payments). These two standards are often referred to as safe harbors.

Note that if previous year adjusted gross income was less than $150,000, the 110 percent safe harbor drops to 100 percent.

For those with growing incomes, the 110 percent safe harbor often works best. Those who have filed your Year 1 tax return by April 15, Year 2 (or at least have it just about ready to go) can take the total tax due number from the Form 1040, multiply it by 1.1, and divide it by 4 to get the amount of the required quarterly estimated tax payment to be good to go. Here is an example:

Josh is self-employed and filed his Year 1 tax return on April 1, Year 2. His business is growing. His total federal tax for Year 1 (including income tax and self-employment tax) was $45,000. Josh believes that his self-employment income could significantly increase in Year 2, so he has decided to rely upon the 110 percent safe harbor to pay his estimated tax. He multiplies $45,000 by 1.1 and then divides that product ($49,500) by 4 to get his quarterly estimated tax payment of $12,375). He makes four $12,375 payments to the IRS no later than April 15, Year 2, June 15, Year 2, September 15, Year 2, and January 15, Year 3.

The nice thing about this strategy is that Josh is now protected against the underpayment penalty even if he wins the lottery during Year 2. He simply makes those estimated payments and then, with his Year 2 Form 1040, he pays the IRS the balance due, which could be quite large. But regardless of the balance due, Josh’s underpayment penalty is $0.

Taxpayers who might be subject to the underpayment penalty can request relief from it on the Form 2210 and/or “annualize” their income on Form 2210 to prove that the majority of their income came from later in the year (and thus estimated taxes paid later in year are sufficient for the current year’s estimated tax). Using the 110 percent safe harbor generally eliminates the need to look to mitigation tactics.

Paying the IRS

Solopreneurs can mail estimated taxes to the IRS with a Form 1040-ES. Alternatively, solopreneurs can use the IRS DirectPay system and pay electronically at this IRS website.

State Income Taxes

States with income taxes also generally require periodic or quarterly estimated tax payments. Many follow some or all of the IRS rules. My home state of California has its own timing rules for estimated tax payments. It generally requires taxpayers to pay 30 percent of their estimated income tax liability during the first quarter (April 15th due date), the next 40 percent of their estimated income tax liability during the second quarter (June 15th) and the remaining 30 percent after the end of the fourth quarter (the following January 15th).

States, like the IRS, generally have website portals where solopreneurs can make estimated tax payments.

The Transition Year

Transitions from W-2 work to solopreneurship presents many challenges and opportunities. One potential opportunity is the need to pay less or possibly no estimated taxes for the year of the transition. This can be true for several reasons.

It may be that based on the W-2 withholding collected prior to leaving full time employment, the new solopreneur had enough withheld to cover the tax on their annual income. W-2 withholding generally assumes a full year of employment, but if one leaves full time employment and experiences start-up expenses and lower self-employment income as they build a business, it may be the case that they need to make little or no estimated tax payments in that first year.

Another source of tax payments is spousal W-2 withholding. If filing jointly with a spouse, the spouse’s W-2 withholding combined with the new solopreneur’s partial year W-2 withholding might be enough to cover the estimated taxes for the transition year.

EINs and Forms 1099

In most cases, it makes sense for sole proprietors to obtain an employer identification number (“EIN”) from the IRS for their sole proprietorship. This EIN is used on the business’s Schedule C. Further, this number is used (instead of a Social Security number) to file any required Forms 1099s paid with respect to the business. Forms 1099 (such as the Form 1099-NEC) are required for cash payments of $600 or more during the year to individuals in the course of business.

The IRS has an internet portal here for taxpayers to apply online for EINs.

Tax Planning

The transition from W-2 employment to self-employment can provide several tax planning challenges and opportunities. Here is a brief overview of several challenges and opportunities.

Qualified Business Income Deduction

The Section 199A qualified business income deduction is a relatively new deduction for small businesses, including solopreneurs. I have previously blogged about this deduction here and here.

Roth Conversions for the Self-Employed

The transition to self-employment may present Roth conversion opportunities, for two reasons. First, as a business starts up, the soloprenuer’s taxable income might be very low, and thus a start up year might be a great time to execute a Roth conversion (i.e., moving amounts from traditional IRAs/401(k)s etc. to Roth accounts) and enjoy a low marginal federal income tax rate on the converted amount.

Second, there are instances where Roth conversions by the self-employed can benefit from the Section 199A qualified business income deduction. I blogged about that opportunity here.

S Corporations

Many solopreneurs will have the opportunity to operate out of what is referred to as an “S corporation” for U.S. federal tax purposes. There are several advantages to operating out of an S corporation, but there are also some disadvantages.

Next month’s blog post discusses S corporations and some of the planning considerations involved.

Solo 401(k)s

Solopreneurs are responsible for their own workplace retirement account. The Solo 401(k) is a great opportunity for many solopreneurs to stash significant amounts into tax-advantaged retirement accounts.

As I announced in March, I’m currently working on a book about Solo 401(k)s, which is tentatively set to be published in early 2022.

Hiring Professionals

To my mind, the shift from W-2 employment to self-employment often signals the need to hire a tax return preparer, and possibly a (virtual) bookkeeper as well. Self-employment significantly increases the complexity of one’s tax return and thus it is often wise for the self-employed to hire a tax return preparer and a bookkeeper.

Conclusion

The shift to self-employment is both exciting and challenging. Yes, the self-employed have a more complicated tax picture. But with some intentional planning, managing and ultimately optimizing the tax picture is very much possible.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

QCDs and the FI Community

Qualified charitable distributions (“QCDs”) are an exciting tax planning opportunity, particularly for the FI community. Below I describe what a qualified charitable distribution is and how members of the FI community should think about them when tax planning.

Of course, this post is educational in nature. Nothing in this blog post is tax advice for any particular taxpayer. Please consult your own tax advisor regarding your unique circumstances.

Qualified Charitable Distributions

QCDs are transfers from a traditional IRA directly to a charity. Up to $100K annually, they are (a) not included in the taxpayer’s taxable income, (b) not deductible as charitable contributions, and (c) qualify as “required minimum distributions” (“RMDs”) (to the lesser of the taxpayer’s required minimum distribution or the actual distribution to the charity). Here is an example:

Example 1: Jack and Jill are 75 years old and file their tax return married filing joint. Jack has a RMD from his traditional IRA of $40,000 in 2021. Jack directs his traditional IRA institution to transfer $40,000 during 2021 to a section 501(c)(3) charity. Jack and Jill recognize no taxable income on the transfer, and Jack does not have to take his 2021 RMD (the $40K QCD having covered it). Further, Jack and Jill receive no charitable contribution deduction for the transfer.

Considering that Jack & Jill (both age 75) enjoy a standard deduction of $27,800 in 2021, they get both the standard deduction and a $40K deduction for the charitable contribution from the traditional IRA (since they do not have to include the $40K in their taxable income). This is the best of both worlds. Further, excluding the $40K from “adjusted gross income” (“AGI”) is actually better than taking the $40K as an itemized deduction, since many tests for tax benefits are keyed off of AGI instead of taxable income.

Important QCD Considerations

Take QCDs Early

Generally speaking, it is best that QCDs come out of the traditional IRA early in the year. Why? Because under the tax rules, RMDs come out of a traditional IRA first. So it is usually optimal to take the QCD early in the year so it can fulfill all or part of the required minimum distribution for the year. Then you can do Roth conversion planning (if desired), so long as the full RMD has already been withdrawn (either or both through a QCD and a regular distribution) from the traditional IRA first.

No Trinkets

I don’t care how much you love your PBS tote bag: do not accept any gift or token of appreciation from the charity. The receipt of anything (other than satisfaction) from the charity blows the QCD treatment. So be sure not to accept anything from the charity in exchange for your QCD.

QCDs Available Only from Traditional IRAs

In order to take advantage of QCD treatment, the account must be a traditional IRA. 401(k)s and other workplace plans do not qualify for QCDs. Further, SIMPLE IRAs and SEP IRAs do not qualify for QCD treatment.

As a practical matter, this is not much of an issue. If you want to do a QCD out of a 401(k) or other tax advantaged account, generally all you need to do is rollover the account to a traditional IRA.

QCD Age Requirement

In order to take advantage of the QCD opportunity, the traditional IRA owner must be aged 70 ½ or older.

Inherited IRAs

QCDs are available to the beneficiary of an inherited IRA so long as the beneficiary is age 70 ½ or older.

QCDs For Those Age 70 ½ and Older

If you are aged 70 ½ or older and charitably inclined, the QCD often is the go-to technique for charitable giving. In most cases, it makes sense to make your charitable contributions directly from your traditional IRA, up to $100,000 per year. QCDs help shield RMDs from taxation and help keep AGI low.

QCDs and the Pro-Rata Rule

If you have made previous non-deductible contributions to your traditional IRA, distributions are generally subject to the pro-rata rule (i.e., the old contributions are recovered ratably as distributions come out of the traditional IRA).

However, QCDs are not subject to the pro-rata rule! This has a positive effect on future taxable distributions from the traditional IRA. Here is an example of how this works:

Example 2: Mike is age 75. On January 1, 2021, he had a traditional IRA worth $500,000 to which he previously made $50,000 of nondeductible contributions. If Mike makes a $10,000 QCD to his favorite charity, his traditional IRA goes down in value to $490,000. However, his QCD does not take out any of his $50,000 of basis from nondeductible contributions. This has the nice effect of reducing the tax on future taxable distributions to Mike from the traditional IRA, since the QCD reduces denominator (by $10K) for determining how much basis is recovered, while the numerator ($50K) is unaffected.

QCDs for Those Under Age 70 ½

Those in the FI community considering early retirement need to strongly consider Roth conversions. The general idea is that if you can retire early with sufficient wealth to support your lifestyle, you can have several years before age 70 during which your taxable income is artificially low. During those years, you can convert old traditional retirement accounts Roth accounts while you are taxed at very low federal income tax brackets.

For the charitably inclined, the planning should account for the QCD opportunity. There is no reason to convert almost every dime to Roth accounts if you plan on giving significant sums to charity during your retirement. Why pay any federal or state income tax on amounts that you ultimately will give to charity?

If you are under the age of 70 ½ and are charitably inclined, QCDs should be part of your long term financial independence gameplan. You should leave enough in your traditional retirement accounts to support your charitable giving at age 70 ½ and beyond (up to $100K annually). These amounts can come out as tax-free QCDs at that point, so why pay any tax on these amounts in your 50s or 60s? Generally speaking, a Roth conversion strategy should account for QCDs for the charitably inclined.

Conclusion

For the charitably inclined, QCDs can be a great way to manage taxable income and qualify for tax benefits in retirement. QCDs also reduce the pressure on Roth conversion planning prior to age 72, since it provides a way to keep money in traditional accounts without having to pay tax on that money.

FI Tax Guy can be your financial advisor! Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Sean on the How to Money Podcast

I recently discussed tax planning, financial independence, and entrepreneurship on the How to Money podcast. Please click the below link to listen. https://www.howtomoney.com/smart-tax-planning-moves-with-sean-mullaney/

FI Tax Guy can be your financial planner Find out more by visiting mullaneyfinancial.com

Follow me on Twitter: @SeanMoneyandTax