Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast that challenges your old school business practices and the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host Dave Cain. We’re hot and heavy into the 2019 tax season which means we’re all getting to see how the tax cuts and jobs act actually plays out on our personal tax returns and business tax returns as well. Naturally because we’re up close and personal with our finances this time of year questions about financial wellness and planning strategies are at the forefront. So, we’re happy to welcome Cindy Kula, one of the region’s leading tax planning specialists and a famous consultant on Rea’s tax team. Welcome back to unsuitable to lead us through the tax stuff and the tax maze. Welcome to unsuitable Cindy.
Cindy Kula: Thanks Dave.
Dave: Before we get started we need to pick your brain a little bit.
Cindy: Okay.
Dave: You’re a bit of a social butterfly would you say?
Cindy: Probably not.
Dave: But we need some advice on some upcoming happy hour, social hours, cocktail hours if you will. Can you give us some advice? You know what? I’ve been struggling here with what do you talk about at these cocktail hours, what’s appropriate conversation? The rules have changed.
Cindy: Yes, deductibility of those expenses have changed so.
Dave: Well, we’ll get to that. That’s a good, that’s good but sports, I assume sports is still okay to talk about at happy hour?
Cindy: Sure, it’s okay to talk about I don’t know. Yeah, you can talk about anything you want really.
Dave: Gun control, is that okay?
Cindy: Sure.
Dave: How about the wall, is that appropriate conversation?
Cindy: Yes as long as people are aware that that might be a political stance or?
Dave: Another brick in the wall is okay, you can do that?
Cindy: Sure.
Dave: And of course any CPA that goes to happy hour and they find out you’re a CPA they want to know about the new tax law.
Cindy: Of course.
Dave: So, that’s always good and then.
Cindy: It’s business promotion yes.
Dave: So, what’s going on? How are the tax forms? The tax forms out yet? Can we file a return? Can we get a refund?
Cindy: Not yet. I think the opening is January 28th of the filing season this year. So, with the government shut down that might be more complicated. I am not positive, they are still saying that it’ll be open and running so.
Dave: Well, hopefully by the time our podcast airs we’ll be back and running.
Cindy: Right, and they’re simplified this year, very simple forms.
Dave: You know, isn’t it amazing that the general public really didn’t care a whole lot when the government shut down but what would happen if Amazon would of shut down?
Cindy: Good point.
Dave: Yeah. So, we’ll get to talking about the new tax code here pretty shortly. I wanted to commend you on your professionalism. I heard you speak about a month ago at the mega tax conference for the state of Ohio attended by probably a 150 people that were in attendance at your seminar. You had them eating out of your hands.
Cindy: It’s all about lifestyles anyways Dave so it was good, people were pretty receptive.
Dave: So, you’ve been a guest on the podcast a number of times so we’re going to jump around, maybe pick up some of the tax tidbits that we haven’t talked about in the past. One of the things that you pointed out in some of your presentation is multi year tax planning is critical five years prior to retirement. That’s picking up social security and medicare, and the planning is important. Can you comment on that aspect of planning?
Cindy: Yes, usually with the wave of the baby boomers that are going to be retiring shortly it’s really going to be critical that they look at their tax and financial picture probably from the age of 60 to 65 there’s going to be a lot of planning that they could be doing. Do they delay taking social security? Do they, perhaps they start taking it early, or there are other kinds of opportunities available. The biggest thing right now is I wasn’t ever a proponent of Roth IRA’s but as a person does retire it may make sense to take out IRA contributions to even out your tax brackets and that’s tax bracket management. So, it’s important to make sure that we have that in our time frame. So, if you retire at 66 and you’re not receiving a lot of income perhaps taking an IRA contribution and converting it to a Roth and setting that aside for your heirs.
Dave: So, as you look ahead into the 2019 crystal ball is that maybe something that our listeners should take a look at?
Cindy: I think so and I think that sitting down and budgeting and looking at the whole time horizon is going to make sense. I know I started doing that for myself so it makes it more personal too.
Dave: Oh yeah, you live it and you walk it.
Cindy: Yeah you do.
Dave: Remind me again, a lot of the tax changes that we’re up against, there are some sunset provisions and then some of them are going to go on forever. So, give us a quick overview of the stuff that we have in front of us for 2019. Are we going to live with that for the rest of our lives or changes ahead?
Cindy: There may be changes ahead only because there’s still technical corrections out there that have to be made and those have not been finalized yet. I also feel that with another change of government administration. Trump only has a four year term so what’s going to happen after that four year term?
Dave: We don’t talk politics on this podcast by the way.
Cindy: So, it could change prior to even the sunset provisions. The only reason there are sunset provisions is to quantify the tax law change so.
Dave: You know I’m a little confused. I thought this tax law change occurred in December, late December of 2017 and you’re saying that technical corrections and patches haven’t been made?
Cindy: Not all of ’em. They’ve done a pretty good job of laying out examples and clarifying proposed regulations but I think overall there are still some little loose ends like depreciation of property and so there’s some things that still need to be clarified.
Dave: There’s this thing floating around the qualified business income deduction has … First of all, what is that? That sounds kind of cool. What is that? Can I get one of those?
Cindy: Yes it is. Yeah. It’s called too …
Dave: Other things yup.
Cindy: It’s going to be a benefit for a lot of the small …, the small businesses. It’s a 20% deduction on the income and there are thresholds and there are limitations but there is going to be a unique opportunity to take advantage of that this year.
Dave: 20% deduction of income?
Cindy: The pass through and income but there’s also limitations if you’re AGI is lower because you have other losses or offsets so.
Dave: So, when you refer to pass through what are we talking about? Is that S corporations?
Cindy: S corporations, partnerships, LLC’s …
Dave: How about my sole proprietor?
Cindy: You’re a schedule C so proprietorship yes.
Dave: Rental?
Cindy: Rental properties.
Dave: My director’s fees?
Cindy: Your director’s fees.
Dave: Lottery winnings?
Cindy: No.
Dave: Come on.
Cindy: No lottery winnings.
Dave: No lottery winnings.
Cindy: No.
Dave: That’s not trade or business income.
Cindy: No, unless you are a professional trader in that area. I guess you could look at …
Dave: Well, no I’m not but I thought I’d throw that out there. What about, again staying with this is it QBI, is that the buzz word?
Cindy: It is the …
Dave: There’s this little provision, small print about if you’re a consultant you may not be able to take that hair cut?
Cindy: Yeah, once again if your threshold is the key. So, you want to make sure you understand and have knowledge of what the thresholds are and in a joint return that’s 315. So, if your income is under 315 you’re pretty much going to get the 20% deduction. Now, that’s cut in half for everybody that’s single so it’s 157 5 for those people. So, that’s why you can do planning, you can look at your depreciation, you can look at a retirement plan contribution if you’re really bordering on the 315 or the 157 5.
Dave: So, planning, planning, and more planning on this. So, this is a good thing, the 20% haircut on pass through entities. And again, I want to be clear that’s pass through entities does not apply to the traditional C corporations?
Cindy: C corporations already got the benefit of a 21% flat tax rate. So, this was supposed to be a counter to giving the individuals that are not a C corp or a regular corporation a tax benefit too.
Dave: So, it kind of puts them on the same leveled playing field?
Cindy: Yeah. I mean the problem with the C corps is that they were corporations that were in the 15% bracket, the smaller corps, and now they’re going to have a 6% tax increase.
Dave: Yeah. See now we have something else to talk about at cocktail hour. “Hey you guys taking advantage of the QBI?”
Cindy: Exactly.
Dave: And they’re going to look at you like, “You’re a crazy fool”. So, what’s happening in the estate area? Estate tax, we got anything to worry about there?
Cindy: No, actually it’s been quite a windfall there with the exemption going up to 11 million 180 per person and that’s actually something that I didn’t think I’d ever see. I remember when it was back to 600 thousand dollars so this is something that the only thing is if people saying, “Okay I don’t have any estate tax”. But if a married couple has to experience a death of one of the spouses portability might play in so you may want to file an estate tax return to preserve that exception.
Dave: Right. In your presentation in front of the … society group you had mentioned the estate planning and the importance of even though there’s no estate … limited estate tax, some of the planning is still in play like the documents. And maybe this time, a year when you file your return, a good opportunity to take advantage and look at these other documents.
Cindy: Right, and key documents are your will. I mean everybody should have a will. The goal is not to have it go to your will though. So, you want to make sure, they don’t have to read the will for your assets but it’s always good and important to have a will. Medical directives, in case something happens you want to make sure that there is proper, your wishes are being honored. So, those medical directives are out there too. I also feel and I know that it’s probably me but I really think if we start young enough with exposing younger generations to a net worth statement and if they would do that every time they do their tax return and see their growth and their net worth they might be more cognizant of saving and increasing that net worth number. And you could do so much with technology now that it’s such an easy process that it just makes a financial journal a legacy you can leave behind.
Dave: So, I think to kind of paraphrase what we’ve been talking about there is that regardless of your age we ought to have these, the documents, the will, the healthcare stuff, and your net worth statement, and what better time to do that when you file your tax return?
Cindy: Perfect timing.
Dave: So, what do you think of the new tax laws so far? I ask you that every time you’re on the show.
Cindy: I know you do.
Dave: I want to see if you change your position.
Cindy: No, I don’t know if I’ve changed my position but I think that we’re going to see that there’s going to be a area of the upper middle class that will be saving especially if they have little children. I think the tax brackets are quite favorable now. Everybody in the upper brackets will be saving money, so even on the top bracket they’re going to be saving and I think we’ll see that. I think that people are going to try to plan for the qualified business income deduction too. Maybe consider increasing their retirement contribution which technically isn’t due until the filing of the return including extensions for the most part. So, it’s going to be interesting to see the planning that we can do.
Dave: One of the things that you shared with us is the financial life stages and financial wellness for all generations. Comment further on your opinion on what you mean by that when you talk about all generations.
Cindy: Financial stages are all set by different aspects of our life. It’s how much income we earned? How much we spent? What’s our family situation? What are we saving for? Are we saving for that boat or the second residence? So I think that all our different stages of life are going to be determined by our lifestyle and I also believe that children learn what they live in all aspects of life including financial. And if you’re going to teach good saving habits and you’re going to teach good financial habits to your family the best thing to do is start to involve them in your financial situation. Teach children what it means to save. So, and I just feel that sometimes we overlook that and I can see it sometimes in families the lifestyle perpetuates.
Dave: Is this something you refer to as a financial journal?
Cindy: My financial journal that I, I really encourage everybody to start doing this and one of the documents in there is a personal document locator and it’s really important ’cause some things happen when we don’t expect it and in our society with passwords and everything else. I mean I had a client who passed away and the wife had no idea how to get into various documents, or bank accounts, or anything because the husband just did not write it down. Obviously there are software professionals, or hardware professionals that can go in there and probably hack into it and pull down the documents that are needed but it was a real difficult process for her and she’s already dealing with the death. So, leaving this personal document locator in a secure place and helping the next generation. You’re leaving a legacy so why not leave a legacy that shows something that makes it easier on them?
Dave: You know it’s kind of interesting when the time changes we change our clock, we change the battery in the smoke alarms, but we never update the journal.
Cindy: No we don’t and that’s why it doesn’t make sense. We have thumb drives, we have software. All you have to do is do another sheet in Excel for 2018, 2019, and it’s easy to update when you’re doing your tax return.
Dave: So, like you say your tax return, get up close and personal with your tax return. That’s really what you’re referring to as hey this is an opportunity during the year where you just take inventory and update all of your records.
Cindy: Right.
Dave: Good.
Cindy: And I think it’s important that husbands and wives are on the same page so that they understand and there is communication between both of them.
Dave: Communication, communication, communication, huh?
Cindy: Right, and it is possible to leave your estate and not have to even read your will if you title everything properly.
Dave: Right.
Cindy: There are so many famous people who have died and their estates were so hard to settle and you’re going back to Abraham Lincoln, and you’re going Aretha Franklin, and Prince.
Dave: Purple Rain.
Cindy: Yeah, I mean these are people that have died very wealthy and everything that they owned now became public knowledge.
Dave: Yeah. Yeah. Let’s switch gears a little bit, go on the business platform but employment of children within the family business. What’s your opinion on that? Still an opportunity?
Cindy: Still an opportunity and I think that overall you could actually use children because they’re so talented now with website development and even office cleaning but they can do things more than the parents can. So, it’s important to do that and employing a business in a sole proprietorship is a little bit different than employing them in business but they can still earn a certain amount of money and you can have them contribute to an IRA and their tax ramifications will be minimal.
Dave: And these would be, I guess you’re referring to some minor.
Cindy: Yeah minor children.
Dave: Minor, and as they get to be adults it’s a whole different scheme as far as employment within the family business.
Cindy: Correct, but you still want to be able to make them realize that you pay yourself first. You have to encourage them to save on their very first jobs that they have.
Dave: You made a statement, “Need to educate all generations on the importance of paying yourself first”. Can you expand on that statement?
Cindy: Sure, paying yourself first just means exactly that. I’m going to put away money I’m earning for myself and it can be in a 401k, it can be just in a savings account, and that’s why nowadays the direct deposit makes so much sense where you can actually allocate a certain amount to your savings account. Some people retirement accounts are not an issue for them and they really don’t want to worry about that but they should still be putting it in a savings account. Emergency funds are necessary and people have to realize they should have three to six months of living expenses set aside in a savings account in case they need it.
Dave: Three to six months?
Cindy: Three to six months of living expenses.
Dave: At a minimum?
Cindy: At a minimum yeah. It just relieves stress that you know you have had. So, once again it’s about paying yourself first, making sure all of your ducks are in a row, and you have the security there.
Dave: Sure. Again just kind of picking your brain jumping around on some of the new tax laws in front of us and again maybe this is just a personal opinion on your behalf. With the change in some of the itemized deduction rules, do you see or sense a decline in charitable contributions?
Cindy: I don’t think so. I’m probably one of those people that probably won’t itemize this year. I’ll just take the standard deduction.
Dave: Alright first time huh?
Cindy: But yeah, first time, but you can do things to bunch deductions. So, even though the limits are at ten thousand dollars there are things like donor advised funds that you can contribute to. So, if I know I want to over the next three, four years I want to contribute maybe 20 thousand dollars I can put it into a donor advised funds, not specify my charity yet, and actually get a deduction on my tax return for 20 thousand. Okay so I think that people are going to realize that there are opportunities out there that …
Dave: That take care of?
Cindy: While they’re especially in their working years. Especially if you’re approaching retirement and you know that you have money now and you’re going to have taxable income now doing a donor advised fund might make sense and it will lower your current year taxable income and you don’t have … I mean a lot of people think “Oh I’m not going to make the decision yet. I don’t know who I’m going to give it to.” But there is an opportunity there. And I’m also going to encourage people who are receiving required minimum distributions that I know are making charitable contributions to their church to use those required minimums directly to the charity.
Dave: So, let’s back that up because I think that’s one area that’s often overlooked.
Cindy: It is.
Dave: The required minimum distributions are, what you’re referring there is out of a retirement plan or 401K where you get to a certain age and you have to take a certain amount of draw, you’re saying I can direct some of that to a charitable organization and bypass some taxation?
Cindy: Right. I mean it doesn’t even go onto your adjusted gross income. So, I mean that’s an opportunity and I truly believe that many boomers have saved and they do have this opportunity in their retirement account. And if they don’t itemize they can still take kind of a pre tax deduction so it makes sense.
Dave: Right. Going back to charitable contributions and required minimum distributions, how difficult is that to accomplish?
Cindy: It’s very easy.
Dave: Very easy?
Cindy: I have quite a few clients that are doing it and all they do is tell their broker or whoever their IRA is at to do the contribution directly. The key though is you have to be 70 and a half. It can’t be the year you turned 70 and a half, it has to be after the age of 70 and a half.
Dave: After 70 and a half?
Cindy: Correct.
Dave: Okay. Okay. Do you think there’s still a misunderstanding with our clients and our listeners about the deduction of real estate tax and the limitations on that?
Cindy: I think there is still some unclarity on that because I think right now people feel that it’s real estate taxes or they feel it’s state and local income taxes, they don’t realize it’s all taxes. So, the limitation is there, it’s in place, and that’s why if you look at yourself or and you have taxes at 10 thousand. And then if you can itemize and you’re subject to 24 thousand if you don’t have a mortgage interest ’cause you’re already in your 60’s or you have 14 thousand in charitable, sometimes that’s hard to get.
Dave: Yeah. So for example, if I’m a high net worth individual and have a vacation home in Charlotte, North Carolina all I can deduct on my real estate tax is 10K or total tax?
Cindy: Total tax and that’s combined with all of your other taxes so.
Dave: What do you think of that rule? It’ll stick around, is that rule going to stick around?
Cindy: I have no idea, I can’t even predict that. I mean it’s interesting because one of my high net worth clients I did try to evaluate the fact that he was limited to 10 thousand. He lost probably 500 thousand dollars of taxes this year as a deduction plus he also lost all of his investment fees. So, but they got rid of the appease limitation which reduced his itemized deductions so.
Dave: Wow, you run with a pretty distinguished crowd.
Cindy: Yeah.
Dave: I’m going to start hanging with you.
Cindy: No, but it’s going to be significant for some people.
Dave: Yeah. Alright as we close down the last few minutes what are maybe some tax tips for the 2018 tax return to be on the lookout for?
Cindy: Well, the form is definitely simplified like I said, it’s a half page. There are about six or seven schedules that might be needed in addition to the pages, half pages that you have. I think overall though it is a little bit more, if you’re not going to itemize and I think that overall it will be a little bit simpler. I have a problem with the forms though because there are people who have been doing these by hand for 40 years and all of the sudden they have this half page, they’re not going to know what to do.
Dave: Right.
Cindy: So, I think that going into tax season we’re going to have, we send out our organizers and people are not going to realize that …
Dave: It’s going to be a little confusing.
Cindy: There’s going to be confusing.
Dave: Yeah. I think as a general rule we’ve talked about is individual probably is simplification in that area but on the business side it has maybe become a little more difficult.
Cindy: Plus more planning, there’s going to be a lot more planning for a lot of the business clients so we need to focus on that.
Dave: And my entertainment costs, not deductible?
Cindy: Back to that entertainment stuff.
Dave: Oh yeah, gotta have that.
Cindy: Yeah.
Dave: Gotta have, non deductible?
Cindy: Non deductible.
Dave: Okay. So, let’s kind of wrap up …
Cindy: Not all.
Dave: Not all?
Cindy: Not all.
Dave: Okay there’s still room?
Cindy: There’s still room.
Dave: Okay, there’s still room for that. Okay. Let’s kind of wrap up what we talked about, certainly financial life stages and wellness for all generations no matter what your age go for it, a lot of planning opportunities. We also talked about get up close and personal with your tax return. It’s a good time to not only change the batteries in your smoke alarm but all of your documents. Take a look each and every year and use a financial journal. Set up a financial journal and share it.
Cindy: Exactly.
Dave: Is that kind of it?
Cindy: That’s it.
Dave: You got any closing comments for a podcast community?
Cindy: No. We’re looking forward to an exciting tax season.
Dave: We are?
Cindy: We are.
Dave: Yeah. You mean the compressed tax season as it has become?
Cindy: It will be compressed.
Dave: So, our guest today has been Cindy Kula, a tax specialist and very famous person within Rea and Associates for tax planning strategies. If you need to talk to Cindy get ahold of Rea and Associates and we can direct you to her. She’s wonderful to talk to about just about anything. So, thanks for joining us today.
Cindy: Thanks Dave.
Dave: And as always you’ve been a wealth of knowledge. You bring so much insight to the tax topic in financial planning. Listeners, as a CPA firm, Rea and Associates has many great resources available on our website. Just type www.ReaCPA.com into your browser and hover that mouse, that crazy mouse if you can find it, on the growth tab to find blog posts, financial calculators, white papers, and more. Did you like this episode? Let us know, leave us a comment, give us a thumbs up, and most importantly share it with your colleagues. You can also subscribe to our podcast on a variety of platforms including iTunes, I Heart Radio, Google Play music, and others. Until next time I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
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