Podcast Summary: "Don't Fall For These 5 Tax Traps!" – Money Guy Show

Podcast Information:

• Title: Money Guy Show
• Hosts: Brian Preston and Bo Hanson
• Episode: Don't Fall For These 5 Tax Traps!
• Release Date: February 21, 2025
• Description: Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life.

Introduction to Tax Traps Timestamp: [00:00 – 01:27]

Brian Preston (A) and Bo Hanson (B) kick off the episode by addressing the complexity of the U.S. tax code and the common pitfalls taxpayers encounter. They emphasize the importance of distinguishing between tax avoidance, which is legal and encouraged, and tax evasion, which is illegal and can lead to severe penalties. Brian uses a compelling metaphor to illustrate this:

"There is a cliff or a line and you need to know where that is. If you go to the left of that line, that's legal...if you go over the line and you actually fall off that cliff, that is totally hitting the tax evasion standpoint and that is Al Capone illegal." ([00:26])

1. Blowing Your Income Tax Refund Timestamp: [01:27 – 05:45]

The first tax trap discussed is mismanaging your tax refund. Bo highlights a common misconception:

"Some people think that getting a tax refund is like making money...all you're really doing is you're getting a return of money that you did not have to pay them." ([02:23])

Brian adds frustration over industries, like car dealerships, enticing consumers with tax services to funnel excess refunds into depreciating assets:

"It's like letting the fox into the hen house...they are offering to do your tax return at the car dealership." ([02:22])

Strategies to Avoid the Trap:

• Adjusting Withholdings: Instead of overpaying taxes to receive a large refund, adjust your W4 to increase your monthly cash flow.
• Investing Refunds: By investing the refunded amount, typically around $3,000 annually, you could potentially grow it to nearly $400,000 over 30 years with an 8% return.

Bo reinforces the long-term benefits of this approach:

"If you were to just take that $3,000 and you were to put that to work over the course of 30 years...you could get you to a retirement portfolio of almost one and a half million dollars." ([05:45])

2. Underpaying Taxes and Facing Penalties Timestamp: [05:45 – 10:18]

Brian and Bo address the risks of underpaying taxes, especially relevant for self-employed individuals and gig economy workers. Underpaying can trigger not only the owed taxes but also significant underpayment penalties and interest.

Brian shares his extensive experience as a tax preparer to underscore the prevalence of this trap:

"I had more phone calls with people trying to explain this...if you don't understand estimated tax payments." ([06:03])

Key Points:

• Estimated Tax Payments: Necessary for those with income not subject to withholding (e.g., freelancers, gig workers).
• Safe Harbor Rules: To avoid penalties, taxpayers can either:
  • Pay 100% of last year's taxes (110% if income exceeds $150,000).
  • Ensure payments cover 90% of the current year's tax liability.

Bo cautions against the misconception of saving for tax payments at year-end, emphasizing the need for quarterly payments:

"They actually do require you to pay it as you earn it...they're annoying because they make no sense." ([08:09])

3. Navigating Income Cliffs Timestamp: [10:18 – 17:41]

Income cliffs occur when crossing certain income thresholds disallows access to specific tax benefits. The hosts explain that these cliffs affect taxpayers across all income levels.

Examples of Tax Cliffs:

• Roth IRA Contributions: Phased out at higher incomes (e.g., around $200,000 for married couples).
• Child Tax Credit: Eligibility decreases beyond certain income levels.
• Capital Gains Rates: Long-term capital gains can fall entirely into a 0% tax bracket if income is below specific thresholds (e.g., $48,350 for single filers).

Bo illustrates how strategic tax planning can optimize benefits:

"You might be thinking, okay, well that's those incomes that...you could sell up to $10,000 of gains in your taxable brokerage account and pay 0% capital gains rates on those gains." ([15:03])

Brian emphasizes the necessity of understanding these cliffs to make informed financial decisions:

"You had to take an active role in this because if you'd have just made one different decision...you would no longer qualify for the 0% capital gains." ([15:03])

Strategies to Mitigate Cliffs:

• Gain Acceleration: Shift income to lower-earning years to take advantage of lower tax rates on capital gains.
• Transaction Splitting: Spread large transactions across multiple tax years to remain under income cliffs.

4. Not Filling the Bucket Timestamp: [17:41 – 23:01]

The fourth tax trap is underutilizing tax-advantaged accounts. Brian and Bo discuss how failing to maximize contributions to accounts like Health Savings Accounts (HSA) and Roth IRAs results in missed tax benefits and growth opportunities.

Brian shares a personal anecdote:

"When I wrote Millionaire Mission...just because I didn't fill up the buckets of my Roth IRA." ([19:06])

Key Points:

• Health Savings Accounts (HSA): Leave potential contributions on the table, losing out on tax-free growth.
• Roth IRA: Not fully funding can lead to substantial long-term regrets and missed investment growth.

Bo advises regular reviews of contribution limits to ensure full utilization:

"Take full advantage of them...go back in time and still fund for last year." ([20:11])

Brian encourages incremental saving:

"Just 1% more when you're in your 20s and when you're in your 30s can have huge impacts." ([21:14])

5. Living in the Gray Zone: Tax Evasion Risks Timestamp: [23:01 – 27:22]

The final tax trap is engaging in tax evasion or operating in the gray areas of the tax code. Brian and Bo warn against following misleading advice from unreliable sources, such as social media influencers promoting dubious tax strategies.

Brian recounts a concerning incident:

"There was a YouTuber who was crying because $500,000 had been just yanked by the IRS out of their account." ([23:51])

Bo highlights the dangers of misinformation:

"Be careful when you start listening to someone else tell you all of the tax moves...they're not giving you sound information." ([24:43])

Key Points:

• Tax Evasion Consequences: Severe penalties, interest, and potential legal action.
• Misinformation Dangers: Following unreliable sources can lead to financial loss and legal issues.
• Focus on Education: Stick to proven, legal tax avoidance strategies and seek professional advice when necessary.

Brian concludes with a strong admonition against crossing the legal line:

"Stay away from the gray zone...understand where those lines are and make sure you stay on the right side of that line." ([26:53])

Conclusion Timestamp: [27:22 – End]

Brian wraps up the episode by reinforcing the importance of legal tax minimization as a component of overall wealth building. Both hosts encourage listeners to be proactive in their financial planning, emphasizing education and strategic decision-making to navigate the complexities of the tax system effectively.

"Focus on how do you minimize your taxes legally...there's more to wealth than just money." ([27:22])

Key Takeaways:

1. Manage Tax Refunds Wisely: Optimize withholdings to increase monthly cash flow and invest refunds for long-term growth.
2. Ensure Accurate Tax Payments: Especially for self-employed individuals, make timely estimated tax payments to avoid penalties.
3. Be Aware of Income Cliffs: Understand income thresholds that affect your eligibility for tax benefits and plan accordingly.
4. Maximize Tax-Advantaged Accounts: Fully utilize accounts like HSAs and Roth IRAs to benefit from tax-free growth and deductions.
5. Avoid Tax Evasion: Steer clear of dubious tax strategies and misinformation; adhere to legal tax avoidance practices to protect your financial future.

By following these strategies, listeners can effectively navigate the tax landscape, minimize liabilities, and enhance their overall financial well-being.