The second habit of Stephen Covey’s The 7 Habits of Highly Effective People is to begin with the end in mind. The new year is a clean slate, a fresh start, a time to take advantage of new opportunities and plan for your success. It is a beginning. When you plan for your new start to the year, you should plan with the end in mind.

As we begin the new year, are you correctly positioned to make the most not just of 2022, but for years to come?

Laura Ruleman leads this live discussion between Tom Gibson and Brian Shey during which they will discuss the importance of examining your 2022 financial plan now including:

  • Ensuring you are positioned to maximize your 2022 tax deductions
  • When is the optimum time to use the Roth Conversion strategy
  • Identifying any life changes
  • The importance of reviewing your beneficiaries
  • The best time to review the members of your family office team

Transcript (edited for clarity)

Laura Ruleman: Hello. It’s good to have everyone here today. Thank you for joining the webinar. Today’s webinar is Begin Your Year with the End in Mind. My name is Laura Ruleman. I am a Client Relationship Manager with TSP Family Office. I’m joined today by Senior Tax Strategist Tom Gibson and Family Office Strategist Brian Shey.

Tom Gibson: Hello, Laura and Brian, and hello to all the folks listening to the webinar.

Brian Shey: Likewise. Hello, everyone. Tom, Laura, pleasure to be with you guys.

Ruleman: Thank you. So, let’s get started.

Our goal today is to help you prepare and position yourself for a successful kick off to the new year. There is a popular book in our office that advises us to begin with the end in mind. Today we’re going to cover some topics that will help you plan for this year, and even the years to come. They’re going to help you maximize your 2022 tax deductions and make any updates – maybe some changes that occurred last year or ones that are coming ahead for you.

Tom, why don’t we get started? Let’s talk about the scorecard – our term for traditional tax deductions. I’m sure this is something that many of our clients are familiar with, but it’s always good to review at the beginning of a new year.

Gibson: Absolutely. There are a lot of the scorecard strategies that are updated on an annual basis, and we’re going to cover the most common two for our clients.

First, the mileage rate. A lot of you – if you have employees running errands, driving on behalf of your business – are reimbursing your employees using the standard mileage method. For 2022 the standard mileage rate is $0.585 per mile. The good news is that’s up 4.4% over the 2021 numbers. The bad news is, in the same time frame, the price of gas has gone up 58.7%. So it’s not quite keeping pace with inflation, but it’s an increase, nonetheless.

Second, a lot of you have your children working in the business. As you know, many times we are tying that child’s compensation to the standard deduction for a single individual. If the child’s over 14 years of age, maybe they’re doing corporate modeling, some administrative work, things like that. Last year we recommended paying them $12,550. This year, the standard deduction has increased to $12,950, so a $400 increase.

For those of you who have children under the age of 14 and were predominantly using them as just corporate models – many times we recommended paying them just half the standard deduction, assuming that’s reasonable. If you’re in Orange County or New York City, your rates are probably going to be a little bit higher. If we take that $12,950, divide it by two, that would be $6,475, about $200 higher than the amount we were recommending last year of $6,275.

There are a couple of ways you can handle this in terms of your payroll system. You could, if you wanted, take that $12,950, divide it by however many pay periods you have in a year, and just adjust your payroll up. That’s one way to do it. A little bit easier way, I think, to do it would simply be to give the child a bonus – just leave the payroll where it is, their periodic checks that they are receiving, but either give them a $400 bonus at the top of the standard deduction or a $200 bonus on the next paycheck, and you’ll end up in exactly the right place at the end of the year.

One other deduction, just as a reminder. Since the Reagan administration, business meals, typically, have been capped at 50% deductibility. With the Biden COVID relief legislation that passed at the beginning of last year, business meals are 100% deductible. Now, business meals need to be purchased from a restaurant, but they can be dine-in, takeout, delivery – all of those work. Between now and the end of the year, your business meals are 100% deductible.

Ruleman: That’s great. I’ve had a couple clients ask about the kids’ salaries and their employment agreements. Is there any need to update those or change the employment agreements that they may have received in the last couple of years?

Gibson: Because the standard deductions don’t change every year, we will typically update the employment agreement when they go from being strictly a corporate model, and we start adding on additional duties around the age of 14. So I don’t think it requires a restatement of their job description. They were a corporate model last year; they’re a corporate model this year; we’re going to give them a bonus. Or, if we go through actually adjusting the payroll itself, we’re just giving them a raise. While you may want to make some note about it as part of one of your tax-free meetings, it doesn’t require that we completely redo their job description.

Ruleman: Great. Thank you. So, Tom, another question that comes up often at the new year is withholdings. We have some new clients, and they probably have some questions. What should they be doing for this coming year?

Gibson: Bust as a refresher, there are two ways to pay your federal income tax payments for any given year. There are the withholdings from your W-2 wages, and then many of our clients who are business owners will actually make estimated tax payments in addition to their W-2 withholding. In either case, the required amount to keep you out of a penalty situation for any given year – the most common one that CPAs take advantage of – is called the safe harbor rule, pay 100% of the previous year’s tax liability.

Now, if you have been a client for a while, meaning any time prior to 2021, your estimated tax payments – it’s all kind of baked into the cake really because, come April, when the CPA tells you what your estimates are going to be for the upcoming year, that’s going to take into account, in all likelihood, all the scorecard strategies that we put into place, as well as the real estate investment. They’re going to try to keep you out of a penalty situation. If you’re predominantly a W-2 employee, again, and you’ve been with us for more than a year, chances are there have been adjustments made to your withholdings from your W-2 wages. Again, our goal is to have you pay in the appropriate amount of tax. We’re not trying to get a big refund at the end of the year. We’re just trying to make sure that you’ve covered what we expect that you’re going to owe.

If you came on board in 2021, in all likelihood, if you’re making estimated payments, we probably made some adjustments to those, because it’s just easier to do. A lot of you may not have made your third and fourth quarter estimates in light of the planning that we were able to put into place from the last year. Also, others of you, if you’re predominantly W-2 employees, we may have made some recommendations regarding your withholdings. So you’re probably in pretty decent shape if you didn’t come on board in November and December. At that point it’s too late, really, to do a whole lot, and it’s not going to make a lot of difference. You should get a pretty sizable refund come April, but we will probably talk to you a little bit about what we think you need to do for withholdings for this year.

One thing, though, that I would recommend that everyone do on your W-2 withholdings – your federal income tax that’s being withheld – look at that first pay stub, the first couple of pay stubs, that you received this year. Some companies will set everyone back to zero withholding allowances at the beginning of the year – not all, but some. Check to see if you saw a big drop-off from what your last check in December was to what your first check in January was, in terms of your net pay. And again, if you need some help getting that adjusted, we can certainly help you with that.

Ruleman: Thanks, Tom. Brian, I’d like to talk about Roth conversions. These are a hot topic these days. We’ve discussed them with many of our clients, and we like to remind people that you don’t have to wait until the end of the year. Some people think there might be an advantage to waiting. Is there a reason why they couldn’t just do it now?

Shey: First of all, you certainly do not need to wait till the end of the year, and you can certainly look at doing a Roth conversion between now and December 31st of this year. The short answer, which is odd for me to give, according to Tom, would be yes; you can do it anytime. But it does need to be done by the end of the year.

The backdrop on the Roth conversion – the pleasant thing is that the Build Back Better tax plan is dead in the water, and I think Tom’s going to talk a little bit about that later. We’re no longer trying to figure out where they’re going to move the goalposts; the goalposts aren’t moving anymore. You have until 2025 to do Roth conversions, according to current law, so that’s a positive thing.

You’ve heard Tom and I talk about tax rates in the future being higher. We believe that the marginal income tax rates will continue to rise, therefore we are not huge proponents of using qualified retirement accounts401(k) plans, 403(b)s, those kinds of things. If you happen to have an employer that matches, we’re going to give you the recommendation of, “Take all the free money someone wants to give you,” but anything over that match, we recommend that you scale back, get a little bit of a raise in the paycheck, bring more money home, and then invest it into the Roth. Then you don’t have to worry about the Roth conversion.

Depending on whose numbers are out there, there’s $30+ million dollars wrapped up in 401(k) plans in the country, and you can continue to convert those over to the Roth. We recommend you do that, but you do have to pay the taxes. However, for our clients, and with Tom’s wisdom, we use multiple tax strategies. A lot of times, if those strategies are put together, you’re getting down into the capital gain area of 20%, 21%. So, therefore, if we recommend that you convert $100,000 and you have to pay $20,000 in taxes, when are you ever going to be in that type of tax rate environment? So, we highly encourage you to do the Roth conversion; and don’t wait.

And lastly, I would throw the bullet out there, if you happen to do a Roth conversion, please contact us. Let us know. Tom can put that into what we call “the tax workbook.” That way, when you’re meeting with us in Q3 and getting ready to do some tax strategies, we already know what you’ve done.

Ruleman: Great, Brian. Good advice. Tom, let’s talk cost segregation. I know we’ve had quite a few of our clients that have already taken advantage of this. Can you just give a high-level review of who should be thinking about this for this upcoming year?

Gibson: Yes. Cost segregation has been around forever, and cost segregation is a method to accelerate depreciation – typically it’s on a commercial building – into the first 10 to 12 years of the life of the building.

There are two different scenarios where cost segregation would be a good fit, but the baseline begins with this idea. The life of a commercial building is 39 years, per the Internal Revenue Service. So, I go out and buy a $390,000 building, not including whatever I paid for the land, and over the next 39 years, I’m going to take a $10,000 deduction every year, as I’m depreciating the building. At the end of 39 years, the building is going to be fully depreciated. That’s one way to do it, and that’s the way that we see it often happen with clients who are coming into service.

Even though the life, technically, of a building is 39 years, there are a lot of components that make up that building that no one would think would have a 39-year life if we were just going out and buying them separately. That could be things like the parking lot outside the building or your HVAC units. A lot of our medical clients and dental clients, in particular, have built-in cabinetry in their offices – the hardwood or the tile that you have down– all of those things. If you went out and bought them, they would be 7-year property, a 10-year property for the parking lot.

With cost segregation, we bring in a team of engineers, and they basically rebuild the building from the ground up. They split it out into those component parts, and then they assign the appropriate depreciable life to those different classes of assets. There are two different ways that cost seg can work. If you’ve owned your building, say, for 5 or 6 years, you’ve taken a certain amount of depreciation between when you purchased it up to the point at which the cost seg study is done. Once the cost segregation study is done, we will be able to compute what your depreciation would have been had you been using this new updated method since day one, and there’ll be a gap. The size of the gap – let’s say it was $100,00 – you’re $100,000 short in terms of your accumulated depreciation, where you should have been. Now you would be able to take a $100,000 catch-up deduction this year, and basically take the entire deduction.

Now, what if you’re going out and buying the building that your practice is operating in? You’re getting ready to do about $700,000 of build-out on the building. For you, it’s going to be a two-pronged approach. Those improvements that you’re making, the lion’s share of those is going to fall in that 7- to 10-year life. With the Tax Cut and Jobs Act, they’re going to be able to be written off under Section 179 or under bonus depreciation. So, you’re going to get a big shot in the arm on the improvements that you’re making to the building.

For the new building, you’re not going to get that big pop in the year that you do the cost segregation, but you are going to get started off on the right foot with the depreciation of the building. Same thing applies; we’re still going to get a very large part of the cost of the building written off in the first 10 to 12 years.

So, two different ways to use it. It’s a great strategy, and it’s one that doesn’t cost our clients anything to find out how it is going to work. The engineering firm will do a preliminary study. They’ll give us what I’ve found to be a pretty close estimate of what the impact is going to be. They’ll also tell us what their fees would be to do the study. If the numbers make sense, we can pull the trigger and go. It’s a great strategy. Between October of last year and now, we have about 10 clients who I know were buying buildings, renovating buildings, so we’re going to be hopping with cost seg studies the first part of the year here.

Ruleman: Thanks, Tom. Identifying life changes is always an important part of the planning process. I’m sure everyone had varying degrees of life changes in 2021. Maybe they welcomed new children, got married, sadly maybe lost some family members. It’s very complex world right now. But those big changes – they tend to spiral and domino into things that need to be reviewed. Brian what should our clients be thinking about or looking for in terms of life changes?

Shey: I think all of us look at the end of the year and the beginning of the year, and we start re-evaluating or evaluating where we are in life, where we’re going – things like that. As Laura mentioned, there are all kinds of life changes. You could have a baby; you could have a grandbaby; you could get married; you could get divorced; you could be looking to buy a practice – or sell a practice; get into different opportunities and look to grow your wealth and – welcome, Tom.

Tom's grandson

Gibson: This was my life change for last year. That’s my grandson, Jude. He is wearing his Irish National rugby shirt that his Pappy was kind enough to have sent over from County Cork, which is where my family got on the boat to come to Virginia back in the 1730s.

Shey: All kinds of life changes. It’s a good opportunity and it’s a good time to just re-evaluate everything. A lot of the areas that we talk about deal with either insurance protection or investment accounts, and all of those things have beneficiaries. This is a really good time to look at – and update – your beneficiaries. You can certainly look at the estate documents – your will, living will, durable power of attorney, healthcare directives can be updated and tweaked or changed; get a second set of eyes on them.

This is probably a good segue to introduce a new addition here at TSP Family Office, John Kloss. He has a JD background in trust and estate planning techniques.

But, again, with the Family Office and the collaboration of professionals here, this is a good time to reach out to your relationship manager and have all of these things reviewed. And you, again, want to continue to update these documents and make sure that the appropriate people are listed.

Gibson: Nothing will ruin Thanksgiving like finding out that the first spouse is the one who’s still on your documents and finding that out in the presence of the second spouse.

Ruleman: Thank you. I’m going to segue to your professional team – your financial team. Here at the TSP Family Office, we know the value of having an entire team work for your end goal – what is important to you. Brian, can you share why it’s important to review your team, or what might cause someone to want to make a change?

Shey: If you didn’t get logged in or look at the recording of the December webinar of the Odd Couple, which was Tom and I again, we discussed in detail the Family Office concept and how we put it together, and how really the 1% of the population has had access to a family office – the mega-wealthy, the Rockefeller family, the Kennedy family – where you have a team of professionals that are collaborating on behalf of the family and all working and rowing in the same direction. The investment person isn’t worried about some withdrawal of $100,000 to be able to have the client put $100,000 through the door of permanent life insurance that they’re using for a tax strategy. The CPA is always in tune. Everyone understands the tax implications on just about any financial situation that the family is going to go into.

Most people have to go out and find an insurance professional, an investment professional, a CPA, and an attorney, and maybe a private banker. That takes you time, and all of us know that time is money. With the Family Office, it’s one call to your relationship manager. This is what’s going on in your life, and then the team of professionals are collaborating on your behalf in one room. They all understand the implications of what you may be doing – whether it be investing, whether it be buying a policy, whether it be building a building – and we all understand what’s going on. That’s the high-level view of the Family Office. we have a lot of doctors that are clients of ours, and, just to be very direct, we look at it as exactly what a doctor does. We examine, we diagnose, we prescribe, and we treat; we just do it in the financial sector. That’s just a high-level of who we are here at TSP Family Office.

Ruleman: That’s great. Thank you, Brian. I’d like you to expand a little bit on some final questions regarding how clients can really begin with the year in mind.

Shey: At the end of the year/beginning of the year, you start talking about where you’ve been, where you’re at, and maybe where you’re going. One of the ways to do that is, if you’re working with a conventional retirement planner or someone like that, they may say, “Hey. What are your goals?” When someone asks that question, it doesn’t really provoke the mind in the right area.

One of the tools that we use is to talk about what your vision and what your expectations are, maybe, over the next year, over the next two years, or three years. Think about it a little bit differently – and here’s a question that you may want to try out on yourself. What’s interesting about the question is it’s a future-based question, so it triggers the mind to think a little bit differently. And the question goes like this: if Laura is a client, I would say, “Well, Laura, if you and I are meeting here three years from today, and you’re looking back over those three years back to today, what has to have happened during that time for you to feel good about your progress with us?” That’s going to get Laura’s mind working in a little bit different way. And she’s going to think about, “Well I’d like to have my estate documents done. I’d like to put more life insurance in place. I’d like to gift to my grandkids…” a lot of different things – buy a practice, sell a practice, expand a practice. And then I’ll take her a level deeper, and I’ll ask, “Tell me three of your biggest dangers that you’d like to eliminate in your life.”

What we’re talking about here are things that you worry about – things that when you have windshield time that you might think about, things that don’t allow your head to lay softly enough on the pillow: untimely death, health, financial issues, whatever it may be. Think about things that you worry about.

Then we’ll talk about, “Are there opportunities that are in your life that you want to focus on and capture, whether it be a real estate project, whether it be doing cost seg on a building, whether it be investing in a restaurant or some other business outside of your profession?” Most of our clients want to try to create some type of passive income, but there are passive incomes that are taxable, and then there are other incomes out there that are non-taxable.

The third part is we’ll talk about – and this is the part that a lot of people struggle with, except for Tom. Tom’s always telling us what he’s really, really good at –what are the three biggest strengths to be reinforced and maximized? And, again, this part people struggle with, because you don’t want to ever talk about yourself. But what we have found is when you look at that screen, if we can take a client and get them to focus on their strengths, they will actually capture their opportunities. And by adding those opportunities into the financial wellbeing of the family, it ends up eliminating the dangers or the things that they’re worried about. So, just a completely different way of thinking about your vision, your expectations, where you’re at, and where you want to go. I highly encourage you to look at doing that exercise, see if it works, write it down, and then share it with your team.

Ruleman: Great. Thanks, Brian. We have one question regarding estate planning, and it sounds like this person has some outdated documents. You mentioned John Kloss could review those in-house. We’re not attorneys so what would that entail?

Gibson: Let me just give a quick piece of advice. Don’t die. Don’t die until we get your documents looked at. That’s number one.

John, while he has a JD, typically, we would refer the work to an estate planning attorney in the state where the client is located. Of course, in this person’s case, we want to get copies of the documents. John would get his eyes on them; I’m sure he’ll have some recommendations. And then, if you don’t have an estate attorney that you’re working with, John can help you find a competent estate planning attorney in your area who can help you.

Shey: Hey, Laura. I have one comment. If you have not had a conversation with either one of the strategists inside the Family Office or your relationship manager regarding the financial platform called eMoney that is part of all of our clients’ service, there is a vault inside of that platform that allows you to provide your documents, your estate documents, your will, living will, durable power of attorney, healthcare directive. You can put that into the vault that gives our team access, and then, obviously, we can have John review those documents and circle back to you.

Ruleman: Great. Good reminder, Brian. Well, as we close, I’ll give Tom one more chance to talk about Build Back Better. I know he loves it. Any quick updates for people who haven’t had a chance to follow it closely? I know that you are.

Gibson: Since August of 2020, I believe, it is a legal requirement for me to talk about the Build Back Better Act or some aspect of what we think the tax policy may or may not be, so let me fulfill that obligation on this call. I’ll use the words of a gentleman from Texas who’s had a good amount of experience with the Internal Revenue Service, Willie Nelson. Turn out the lights; the party’s over. The Build Back Better Act is, for the moment, dead in the water. Senators Manchin and Sinema sided with the Republicans. Manchin had an alternative proposal, which was less money, that he’s even taken off the table at this point. So according to Steny Hoyer and Nancy Pelosi, they’re going to try to pass it piecemeal which, I think, actually, would be an even less successful route to take because things will be voted on in much smaller chunks, as opposed to being hidden in a bill with hundreds of pages and hoping that nobody reads it. So, we’ll have to see where that goes.

Last year we were saying, “Next year is the congressional election.” Well, we’re at next year now. We’re going to have congressional elections in November. Right now, on the congressional ballot, depending on whose polls you’re looking at, Republicans are ahead anywhere from 13.5% to numbers as high as a 20% lead, and so things don’t look promising for the Democrats come November.

There are already 28 Democratic members of the House who have chosen not to stand for re-election. In the Senate there are 6; 5 of them are Republicans. But with the exception of Senator Toomey from Pennsylvania, they’re all in very solidly red states, so it’s probably not going to make a lot of difference anyway. And Pat Leahy is going to hang it up this year on the Democrat side of things.

If you’ve been following the news, you know that the president’s approval ratings are less than stellar. I’m afraid if we give it a couple of months, the inflation rate may actually be higher than the president’s approval rating. And so, long story short, I think worst case scenario, we’re going to come out of the November elections with gridlock. I think there’s, maybe, a better than average chance that Republicans may actually retake both of the houses of Congress. So I think, to a great extent, major tax reform policy is probably not in the cards for at least the next three years.

Now, what we will get two years, if Republicans do retake the House and Senate, is them passing bills that they know that Biden is going to sign, to show you how hard they’re fighting for you. And those kabuki theater performances will – if your email is like mine –be accompanied by a request to, “Send us more money so we can fight hard for you.” If Republicans had shown half the self-discipline in the first two years of the Trump administration that they purport to have when they’re out of power, they could’ve passed anything they wanted the first two years of the Trump administration. And we got one major piece of legislation: the Tax Cut and Jobs Act. You may get the impression that I’m not a huge fan of politicians, and you would be exactly right. They’re a hindrance in almost every aspect, which is why I love gridlock. If neither side can do anything, I feel a lot safer. And that’s where I think we’re going to be, probably, for the next two or three years, until the presidential election two years from now.

Ruleman: Thanks, Tom. Anything, as we close up for you, Brian or Tom?

Shey: No. I just want to thank everyone, and happy 2022. And hopefully the world will try to straighten itself out a little bit better this year than last.

Gibson: Absolutely. We hope everybody is staying safe. We hope everybody at your house is healthy, and hope that trend continues going forward.

Ruleman: Thank you. If anyone has any further questions, reach out to us at (772) 257-7888. Have a great afternoon. Thanks.