Tax Reduction Strategies

By Jason Watson, CPA

One of our primary focuses at WCG, a Colorado Springs tax and accounting firm located in Flying Horse, is ensuring you are paying the least amount of taxes allowed by law. Shocker, I know. Some of our other primary focuses are helping you build wealth and leverage the most of your financial worlds for you and your family. However, these objectives are not isolated; they are very much related to each other and intertwined. Before we run through several tax reduction and tax avoidance ideas, let’s talk about some basic concepts-

Secret Club

There is not a secret tax deduction club that only a few people know about. If there were, it would be like fight club, right? #1 rule of flight club? Don’t talk about fight club. But trust us when we say no one not is talking about a tax deduction club intentionally.

Saving Cash

Most people are interested in saving cash when they say they want to reduce or avoid taxes, but saving cash and reducing taxes are not necessarily the same. You save $20,000 today by writing a check to your church for $60,000. Doesn’t really have the pow you were looking for, right?

Neighbors

Two households, making the

exact same income, might have wildly different tax liabilities based on the myriad of variables such as children, mortgage interest, charitable donations, available tax credits, and, Yes, the proficiency of the tax professionals involved. Let’s not forget good looks and charm too! As household incomes travel through the ranges, a lot of things happen. The first $100,000 in income for most households is well-sheltered with itemized deductions and low tax brackets. The next $100,000 in income sees certain tax credits go away, higher tax brackets and fewer available tax deductions such as IRAs and other things (what we call income phase-outs). In other words, if you go from $100,000 to $200,000 in household income, you will pay way more than double in taxes (you could easily see 2.5 to 3.0 times more). 54 North by Colorado Media Group

Yuck! The next $100,000 and beyond is completely naked, and is generally purely taxable (unless some tax reduction tactics are deployed). Super yuck!

Tax Deferrals

Tax deductions and tax deferrals are not the same. Tax deferrals are tax bombs later in life; little IOU’s to the IRS and they will eventually call in the chit. But if you use the immediate tax savings to build wealth, then a tax deferral is worth it. Deferring taxes to pay for a cruise vacation might not always be the best approach (then again, live a little!).

Patience

You want to match the highest tax deduction to the high

income. Let’s say it’s December and you are considering buying a piece of equipment. If next year’s income is going to be significantly higher, wouldn’t it make sense to wait until January to complete the purchase? Probably. Ok, here we go on those tax reduction and tax avoidance tactics –

Sell Stock Losers to Offset Gains

This is a bit of snoozer, but it might make sense. You sell securities whose price is stable yet is lower than what you paid. Next, you use these losses to reduce the capital gains on securities you sold previously (profit harvesting). Finally, you wait the necessary 30 days to prevent wash sale triggers and re-purchase the securities that were sold at a loss (only if you believe it will eventually rebound in a time frame that makes sense given inflation and other economic conditions).

Borrow Against Your Unrealized Stock Gains

Do you remember the chatter about taxing unrealized gains on stocks and other securities? It was part of the zillion dollar how the heck are we going to pay for all this legislation discussion. Why was this something certain legislators wanted to go after? First, what are unrealized gains? These are “paper” gains where you buy a stock for $10 and it is now worth $100, but you haven’t sold it yet. What is the big deal you say? Well, buckle on this one. Let’s say you bought a bunch of Tesla stock in 2017 for $47 and now it is worth $1,000 a share. You have about $950 in unrealized gains per share. Let’s also say you invested $50,000 into Tesla stock back in 2017 and you now have around $1 million. If you sold this stock to grab the cash, you would pay capital gains taxes on $950,000 or about $170,000ish in taxes. There’s probably a Sammy Hagar song in there. But can you grab some cash without paying taxes? Yes! You could easily borrow up to 50% (or higher depending on your situation) of the stock’s value or about $500,000 in this example. In speaking with a Morgan Stanley financial advisor recently, they would lend up to 60% on Tesla stock and charge interest only payments at LIBOR (right around 2.5% for the past few years). Therefore, you grab $600,000 in this example, pay 2.5% interest rate, and buy a rental or buy another investment (there are some rules here). You still own the Tesla stock, so that’s cool, and without trying too hard you can probably find a rate of return on the borrowed funds which exceeds LIBOR. Win win! There is some risk should the stock decline since you will need to reduce your loan with cash. Ah, but worry about next time, next time, right?

Summary

This is just the beginning of tax reduction strategies. In the next issue, if the editors allow me, I will discuss discounted Roth IRA conversions, defined benefits pensions for our business owners, cost segregation for that real estate investment, among some other tax bullets.

Jason Watson CPA

a Senior Partner for WCG, Inc. a progressive boutique tax and accounting firm located in Colorado Springs. You may contact him at 719-428-3261 or jason@wcginc.com. North by Colorado Media Group 55

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NEXT GENERATION LEADERS Caitlin McIntosh

Astute, Intuitive Observations from One Student Determined to Use Her Academic and Social Strengths to Succeed

By Dirk R. Hobbs, ACHE, MS, IABC

How does your story begin?

Mom and dad both grew up in California. Both worked in Silicon Valley, and my dad is a pilot for Jet Blue. At one time, they had their own marketing communications company. My parents serve as inspirations to me because they have given me so much by working hard. Their accomplishments are a testament to how focus and hard work can get you to the places you want to go. at home. It was really hard. Personally, I learn so much better in person where I can talk and ask questions. Online learning was challenging. Also, it created a disconnect from the real world because there was a time when we didn't go out a lot.

Siblings?

I have a little sister that I'm really close to. She's three years younger than and her name is Maddie. She's like my best friend - she's like a mini-me.

What brings you guys together?

She's my only sibling. I think quarantine and shared experiences at home have brought us really close together. She makes me laugh so hard – she is a breath of fresh air in my life.

How have you personally fared having spent so much time at home due to COVID?

I spent my sophomore year and half a freshman year

Were you strictly quarantined or just didn't go to school?

Initially, I was quarantined, so we didn't go into a lot of places. As mandates were loosened, I finally started being able to see my friends again on the weekends. It was frustrating and difficult in many ways because we didn’t know a lot about the virus and how it worked. So, we were cautious. I believe in masks and vaccines. But I think that being locked up for so long was bad for everyone: for people losing their jobs, businesses losing revenue, and for us kids. It was depressing to not have people around you and I think as we progress through the pandemic, hopefully we will have learned something valuable.

Yes – I mean, you saw each other on the screen so there was little social interaction, but we were unable to be in the same room together, play sports—my Pine Creek tennis season was cut short, or go to the movies.

What is your synopsis of that period of time?

It was lonely, upsetting, and frustrating for sure. It created this sense of missing everything that you had before the pandemic. It was a steep change and I think in some ways, it matured everybody, because we ended up realizing that the community is more important than our individual wants. Getting back in school creates a lot of gratitude for the things that we had, and now have again. There was a little fear factor from a personal health standpoint – maybe not so much for me, but definitely for our parents and older loved ones. Another part of that maturing came from having the time to get to know yourself more which is neat because you are at an age where you are trying to figure out where you want to go in life and what you want to do.

After online school, what did you do?

I spent a lot of time playing tennis and with family. My dad played in high school too, so that's something that we would do outside. We also hiked. I love to be outdoors. trying to figure out who I am and what I want. People will say stuff like, “If you like skiing you should go to a school where they have Fridays off for skiing.” Or, “Pick something about yourself and choose a certain school to pursue that interest.” I have several interests: business law, international relations, and maybe medicine. I want to study where I see myself having a good career, and maybe being able to someday raise a family. I would go to NYU in New York, because I love that city: you know, Wall Street, big corporations, and NYU’s business school is strong. I don't think that I'll play tennis in college because I want to focus on academics. I want to pick somewhere where strong internships and interesting programs that get me out there trying new things are available. I also want to go into the international relations part of business. Traveling, learning different cultures, and then incorporating that experience back into a company is exciting. I grew up with a grandmother from France, so I speak fluent French. Having her close was a big part of my life. I loved learning about her experiences and her language. My love of travel and my ability to adapt my social skills internationally could be a good combination for international relations.

The colleges you list are very different?

And you remained an honor student:

Yes, I am still deciding. I do want to have Greek life and a classic American college experience where

Yeah, this year I'm taking 5 AP classes and advanced math. At present, I’m at a 3.9 unweighted. Advanced math is probably my hardest subject. The subjects I'm best at are government, writing, and social studies.

Do you want to go to College?

Yes. NYU, Duke, and Yale have some of the best business and law schools. Georgetown has a focus on international business as well as diplomacy. And the Universities of North Carolina, Chapel Hill and Texas at Austin are also on my list.

What criteria are you using to pick a school?

I’m at an age where I’m still

there's a lot of people, football, etc. Most importantly, though, I want to focus on my academic skills.

What do you think are today's big issues?

One is the environment. I think in some ways, we’re trying to get on the right track. We have to work smarter to reduce our carbon-footprint as much as we can. As I get older, I see how things have progressed from years ago in nature. Now, we have a lot of electric vehicles, for example. This is a great step to reduce emissions and slow damage to our climate.

How do you look on previous generations and their choices?

I think in many ways, they didn’t know to consider what we consider today, like emissions. I perceive them to be wiser and a little bit more black and white. I’m that way. Maybe a little bit more stubborn too, but that’s not a bad thing. Lots of what earlier generations passed down are good and important.

And how about your generation?

In general, there are lots of good things. We’re more in tune with the environment, but we have so much

How do you view social media?

For me, it has had a large impact in my day-to-day life. I use Instagram, TikTok, Snapchat. I don't use them because I want to. I think that my life would be better off without them, honestly. But they are a major source of communication for kids my age. I've deleted all of them at one point or another and then I found that it's hard to kind of keep up with the times without it. Before this came along, I was always a paper and pen kind of person. I also use social media in my DECA projects. DECA is a high school class and student marketing and leadership organization where we develop business and marketing skills. We also compete with other students in our region and throughout the state. Since social media is key to promoting products and services, for our competition, I developed a product that relies on social media in its marketing campaign. It won at the regional competition and now qualifies me to compete at the DECA State Competitions at the end of February.

What about addiction to social media and the psychological and sociological issues?

It doesn't seem to be as big a disruption for guys, as for girls. There are always stereotypes that girls have to be pretty and have her act together. Social media really pushes this. Influencers are photoshopping their pictures and look completely different from their photos and in real life. It creates a completely unrealistic standard for girls. Girls can experience more insecurities because you see these people who portray themselves as perfect on social media even though that's not how things are in real life.

Has social media robbed you of aspects of childhood?

Yes. All the pressure to keep current, look a certain way, always be responding or posting? Caring about appearances is a big part of my generation’s experience. I feel I’d be happier if I didn't have to deal with it. I’d rather focus my energy into better things like time with my friends.

What would you and your friends do if you didn't have to manage that?

I think we’d have more fun. We would do things my parents did. Some of what they did sounds fun and we'd have more bonding experiences. My friends and I will sometimes put our phones away while at a sleepover. Those were the best nights - the ones

where you feel closer to people. We're reading an essay about the same thing in my class now. They say teenagers grow towards a world of conformity - and that conformity is social media, seeing what peers around us are doing, and constantly seeking attention. This is causing depression when one feels like you don’t get the attention you seek. Sometimes, we can be too sensitive about things that wouldn't have been as big a deal in the past. There are advantages to being sensitive toward things that are hurtful and offensive, but not as much as we focus on.

How do you recharge your batteries?

For me it's free time that I can spend with my friends or with my family. I like hiking – that’s my favorite way to decompress. I jump on the courts at Black Forests to hit some balls with my sister, my friends. I'll probably continue doing some modeling, too. I mentioned DECA, and I’m currently the president of my chapter at National Charity League (NCL). I like to do community service. Some friends and I have gone to Cheyenne Canyon on a weekend morning. We fill buckets of water from the waterfall and bring it up to the newly planted trees. NCL has taught me leadership, because as president you come up with ideas, run meetings, and organize things that you want your group to do. It provides a great way to get that experience. As my Senior year comes up, I’m a little nervous. I love where I live, I love my friends, and I think that going to college is going to be a hard transition. But, I look forward to my future. I've always thought about the neat experiences I will have.

What are some takeaways from your high school life?

Treasure your young life at home! Work hard, be yourself, serve people, be authentic, and treat everyone with respect.

Call Outs

ACADEMIC ACHIEVEMENT

„ National Honor Society „ French National Honor Society „ DECA regional awards

SCHOOL ACTIVITIES

„ TAG student „ DECA Officer „ Varsity Tennis

UPCOMING ACADEMIC ACTIVITIES

„ Universal Youth Education Series Leadership

Program at Disney and Universal „ Colorado Association of Talented and Gifted

Legislative Day, National Student Leadership

Summer Conference

COMMUNITY INVOLVEMENT

„ National Charity League of Colorado Springs,

President for the Class of 2023 „ Volunteer at Colorado Springs Fine Arts Center, Care and Share Food Banks, and Friends of

Cheyenne Canyon

PERSONAL GOAL

„ Walked the runway at all three nights: Denver

Fashion Week, Fall 2021

Finding Solutions to Protect Your Investments & Your Family’s Future.

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