#22 | Income Taxes in 2023

Jon “Jag” Gay: Welcome to episode number 22 of Protecting and Preserving Wealth. I’m Jon Jag Gay, joined as always by Bruce Hosler of Hosler Wealth Management, who has taken some time out of his busy schedule to join us today.

Bruce Hosler: Thank you, Jon. It’s tax season.

Jon: Yeah. And recording this full disclosure on March 28th.

And Bruce, you’re a tax accountant and your team’s busy helping prepare taxes for your clients right now. And we’re smack dab in the middle of that tax filing season today. I wanna ask you, what are you finding is on your clients’ minds?

Bruce: Jon, everyone always wants to know how much they’re going to owe. Or if they’re hopeful, how much of a tax refund they can expect to receive.

Jon: I think we’re always hopeful on that. That really is the big question. I’m curious, Bruce, is there any better way for people to have a better idea of where they stand on their taxes before they have the taxes prepared?

Bruce: Jon, we work very hard with our team of tax professionals, CPAs, and enrolled agents to prepare an annual tax plan for our clients.

We’re trying to help our clients move to “tax-free” and primarily, that is repositioning or converting their assets from taxable and tax-deferred investments like traditional IRAs to tax-free vehicles like Roth IRAs, life insurance retirement plans, sometimes called LIRPS, and of course the new Roth 401k that we talked about in our last podcast.

Jon: Right, and I encourage our listeners to go back and listen to that episode if they haven’t yet. So, as I understand it, if I convert my IRA to a Roth IRA, that is a taxable event and I have to pay the taxes on the amount that I convert, correct?

Bruce: That’s right. You have to recognize the amount that you convert from your IRA to a Roth IRA as taxable income.

Whether you pay taxes on that or not fully depends on the other tax deductions, income and other tax adjustments. And it can affect how much of that conversion is actually taxable and at what rate, depending on your tax bracket with that additional income.

Jon: All right, so if I’m understanding this right, Bruce, preparing a tax plan to know what tax bracket you’re gonna be in with your Roth IRA conversion, for example, is a really important process our listeners are gonna want to know about.

Bruce: Absolutely. Our regular listeners know that we’re trying to help them move to tax-free investments. This process will usually have some cost associated with it, and that cost many times will show up in the form of taxes that we’ll have to pay in the year — we are repositioning those assets in order to minimize those taxes over the long run.

We want to control how much we’re converting or moving in any given tax year and what the tax implications will be. So, the goal is to keep the client in a tax bracket that is not too high.

Jon: All right, Bruce, what tax bracket are you thinking is ideal right now with our current tax rates that are of course helped by the Tax Cuts and Jobs Act, which is still in effect.

Bruce: That is really the question right now, Jon. The Tax Cuts and Jobs Act of 2017 sunsets in the end of 2025, December 31st. And until then, we have some very favorable tax rates that our listeners can use to reposition assets to tax-free vehicles. The tax bracket that I think is best to be shooting for right now is to fill up and use the 24% tax bracket.

Jon: All right, so why the 24% tax bracket as best to fill up?

Bruce: It’s only 2% more than the 22% tax bracket. But the next tax bracket up is another 8% higher to the 32% tax bracket. So I think 24% is a sweet spot.

Jon: That is quite a jump. I love this idea of knowing how much my taxes are expected to be for the year before I even submit all the tax papers to my accountant.

I’m curious, to really be able to project a client’s tax rates, you must be using some sort of sophisticated tax planning software, Bruce?

Bruce: We have some special tax planning software that will consider all of the variables that we can project as accurately as we can, based on the best guesses that our clients give us of their expected income and what tax bracket they’ll be in.

Jon: Okay, so what happens in a big situation where a client sells some stock or a rental house or something like that?

Bruce: That is the beauty of planning, Jon. It’s in advance. You can adjust the plan. Or even better yet, if we know that’s coming up, we can plan with those expectations in mind.

Jon: So, I’d imagine then sometimes you have to update a plan when these things happen.

Bruce: All the time. Think about it, last year in 2022, a lot of people wanted to sell positions they had held in the stock market. For many years, they had big, huge, large capital gains – so they could move out of a stock market and protect themselves and invest in things that were not as volatile as the equities. But in selling those positions, sometimes they created capital gains.

Other times the client was able to harvest a capital loss. All of those unexpected changes, both gains and losses, need to be added to your tax plan for that tax year.

Jon: That makes me think of something I’ve been thinking about personally. Does it make a difference where the markets are when you make a Roth conversion?

Bruce: Yes, sir, it does. Think about it. Say you’re invested in Microsoft and the market for Microsoft is down, and you convert your Microsoft stock in kind from your traditional IRA to your Roth IRA. All of the recovery of that stock later on is maintained inside of your tax-free Roth IRA. So, we try and help clients make Roth conversions while the markets have pulled back, allowing clients to earn all the tax-free gains and their recovery inside of their Roth IRA account.

Jon: Okay, So, that makes sense because you are transferring the same amount of stock at a lower price and that’s why you’d be paying less taxes. And then if it comes back, those gains are tax-free. Got it. Okay.

Bruce: That’s right. That’s how it works. It’s the amount of the value. And even though it’s the same number of shares, the value as far as the amount of dollars is less because the price per share is lower.

Jon: The analogy I’ve always heard is that at that time, stocks are on sale.

Bruce: That’s exactly right, baby.

Jon: I think you used that in previous podcasts actually.

Bruce: Yeah. Stocks are on sale.

Jon: Are there any tax rules, Bruce, that our listeners have to be aware of regarding these Roth conversions that can get ’em into trouble?

Bruce: Jon, you and I both know that the tax code is full of gotchas. And the one that can affect some of our listeners. If they’re old enough that they have to take required minimum distributions, those RMDs, then they have to make sure that they withdraw their RMD before they attempt to make a Roth conversion for that tax year.

Let me say it another way. The first distribution of the tax year has to be your RMD. If you try to convert your IRA first on the first distribution to a Roth IRA, and you’ve not yet taken your RMD, You have created a huge tax mess and will likely be subject to some tax penalties.

Jon: Oof. That does sound scary. Do the Roth conversion rules let me make a Roth conversion for the last tax year right up to the filing deadline, usually April 15th, like they allow for an IRA contribution?

Bruce: Jon, no such luck. The Roth IRA conversions must be completed in the tax year. That means January 1st to December 31st. If you begin a Roth conversion after the start of the new year, it will be effective for the new tax year that you made the conversion in.

Jon: So, if I made that change, now that goes in for 2023, not 2022. Got it.

Bruce: That’s correct.

Jon: As always, Bruce, it’s been really good information for our listeners, if they have questions, wanna get in touch with you or your team, what are the best ways to find you at Hosler Wealth Management?

Bruce: So, the best place is certainly on the website, Jon: www.hoslerwm.com. , or on the phone in Prescott, (928) 778-7666, or in Scottsdale, (480) 994-7342.

Jon: Bruce, we were talking offline before we got started today. I know you’re a little jealous of me cause I’m just back from a cruise and a vacation. I hope that you can get through the end of tax season and enjoy a well-deserved vacation of your own.

Bruce: I’m looking forward to it. Jon, thank you very much for a good conversation today.

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