Afford Anything Podcast: Tax Strategies You Might Be Missing with Natalie Cilotti

April 11, 2025 | Host: Paula Pant

Introduction

In this insightful episode of the Afford Anything podcast, host Paula Pant engages in a comprehensive discussion with tax strategist Natalie Cilotti. As tax day approaches, Paula emphasizes the importance of understanding and optimizing tax strategies to avoid leaving significant money on the table, especially for W2 employees who often get overlooked in tax planning conversations.

Common Tax Deductions for W2 Employees

Natalie begins by addressing frequently missed tax deductions that everyday W2 employees can leverage to reduce their tax liabilities. She emphasizes the complexity of the tax code, which spans approximately 70,000 pages, and recommends focusing on a few key areas:

1. Standard vs. Itemized Deductions

   • Standard Deduction: Every taxpayer filing a Form 1040 is entitled to a standard deduction ($15,000 for single filers, $30,000 for married couples). This serves as a baseline benefit irrespective of other expenses.
     • Natalie Cilotti [03:33]: "Everyone gets [the standard deduction] just a freebie."
   • Itemized Deductions: If eligible, taxpayers can itemize deductions, which may include mortgage interest, property taxes, medical expenses, and charitable donations. Natalie advises comparing itemized deductions to the standard deduction to determine which is more beneficial.

2. Personal Property Taxes

   • Often overlooked, personal property taxes include fees for vehicles, boats, RVs, and other personal assets.
     • Natalie Cilotti [05:00]: "There’s a good chance part of that fee is a personal property tax. And a lot of people just completely forget that."

3. Sales Tax Deductions

   • Applicable for residents in states without an income tax (e.g., Florida, Washington). Taxpayers can claim sales tax on significant purchases such as cars, boats, or home renovations.
     • Natalie Cilotti [06:00]: "If you don’t have state income tax, keep track of your sales tax on any large things."

4. Medical Expenses

   • Deductible only for expenses exceeding 7.5% of the adjusted gross income (AGI). Strategic timing of medical procedures can help exceed this threshold, maximizing deductions.
     • Natalie Cilotti [08:17]: "If you have an upcoming surgery or multiple procedures... considering what year these events happen in."

5. Charitable Contributions

   • Includes not just cash donations but also charitable mileage, in-kind donations, and contributions through donor-advised funds.
     • Natalie Cilotti [12:24]: "You can receive 14 cents a mile for those miles you drove for charity work."

Tax Misconceptions and Myths

Natalie tackles several pervasive myths that can lead to costly tax errors:

1. Section 121 Exclusion Misunderstandings

   • Primary Misconception: Believing that merely living in a home for two out of five years guarantees a full tax-free exclusion on the sale.
   • Reality: Any period of non-qualified use (e.g., rental) before the two-year occupancy can prorate the exclusion, potentially resulting in taxable gains.
     • Natalie Cilotti [24:20]: "If you rent a house for decades and then try to move into it for two years, erase all the gains—that won't work."

2. Withholding Misconceptions

   • Myth: Receiving a bonus leads to higher taxes.
   • Fact: While employers may withhold more tax from bonuses, the overall tax liability remains based on annual income. Over-withholding results in refunds, not higher taxes.
     • Natalie Cilotti [45:26]: "You're just holding a little more of it for taxes. You will get it back later."

3. Promising Tax Strategies on Social Media

   • Warning: Be cautious of overly simplified or exaggerated tax strategies promoted online. Many sound too good to be true and may result in adverse outcomes if not applied correctly.
     • Natalie Cilotti [38:29]: "Anything that sounds too good to be true, anything that just sounds perfect... be cautious."

4. Employing Your Children Incorrectly

   • Pitfall: Issuing 1099 forms instead of W2s can lead to unintended tax liabilities and complications.
     • Natalie Cilotti [40:30]: "If you give them a 1099 for $10,000, they have to file a tax return and can have self-employment income."

Tax Strategies for Small Business Owners and Real Estate Investors

Natalie distinguishes between W2 employees and those with business or rental income, highlighting the expansive tax-saving opportunities available to the latter:

1. Deductible Business Expenses

   • Business owners can deduct a wide range of expenses, from office supplies to educational materials, that are ordinary and necessary for their operations.
     • Natalie Cilotti [62:54]: "Everything you pay for that relates to your business is a write-off."

2. Retirement Contributions

   • There is greater flexibility in how business owners can structure and maximize retirement contributions compared to W2 employees.

3. Home Office and Vehicle Expenses

   • Deductions are available for portions of home and vehicle use dedicated to business activities, provided meticulous record-keeping is maintained.
     • Natalie Cilotti [68:44]: "You have to track how much you're using something for personally and how much for business."

4. Record Keeping Strategies

   • Natalie advocates for organized bookkeeping systems, recommending dedicated business accounts and digital storage solutions to streamline expense tracking and ensure readiness for potential audits.
     • Natalie Cilotti [70:59]: "Just something easy for you that works for you."

Choosing and Working with Tax Professionals

Selecting the right tax preparer is crucial, especially for individuals with complex financial situations:

1. Assessing Expertise

   • Ensure the tax professional has relevant experience and qualifications. Look beyond surface claims and verify through platforms like LinkedIn.
     • Natalie Cilotti [53:18]: "Look at someone's background and looked at their LinkedIn. See if they actually have a degree in this."

2. Collaborative Approach

   • A good tax professional should be willing to collaborate and provide explanations rooted in tax code sections.
     • Natalie Cilotti [53:04]: "Find someone who’s really open and willing to help teach you."

3. Red Flags to Avoid

   • Be wary of tax preparers who lack relevant experience or who dismiss strategies discussed on social media without consideration.
     • Natalie Cilotti [57:14]: "Anyone who is 100% this is the correct answer... you need that flexibility."

4. Consultants and Second Opinions

   • For high-income individuals or those with multifaceted financial situations, bringing in specialized consultants can provide additional insights and ensure comprehensive tax planning.
     • Natalie Cilotti [76:02]: "If you have multiple moving pieces and you want the best person for each, there’s a good chance that’s not all going to be in a singular person."

Navigating Tax Code Changes and Maintaining Flexibility

The tax landscape is ever-evolving, necessitating adaptable strategies:

1. Anticipating Legislative Changes

   • Be prepared for potential alterations in tax laws by maintaining flexible plans and diversifying tax-saving instruments.
     • Natalie Cilotti [83:06]: "Keep in mind that the tax code is very fluid. It gets changed constantly."

2. Diversifying Tax Accounts

   • Building a tax triangle of taxable, tax-deferred, and tax-exempt accounts can provide resilience against future tax code shifts.
     • Paula Pant [85:24]: "Taxes even one year into the future could be very different than they are today."

Key Takeaways

1. Maximize Itemized Deductions: W2 employees should explore deductions beyond the standard, such as personal property taxes and charitable miles, to enhance their tax savings.

2. Strategic Timing of Deductions: Bunching deductions like charitable contributions and medical expenses into specific years can help surpass deduction thresholds, optimizing tax benefits.

3. Understand Withholding and Bonuses: Misconceptions about bonus taxation can deter individuals from accepting raises or bonuses. Recognize that perceived higher withholding does not equate to increased tax liability; any over-withholding is refundable.

Conclusion

Natalie Cilotti provides a wealth of knowledge tailored to both W2 employees and those with business or rental income, debunking common tax myths and highlighting overlooked deductions. Her emphasis on strategic planning, meticulous record-keeping, and informed collaboration with tax professionals equips listeners with actionable strategies to optimize their tax situations. As tax laws continue to evolve, maintaining flexibility and staying informed remains paramount for financial health and sustainability.

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