Taxes are a team sport (most of the time)
Welcome to the second Above Our Pay Grade, feat. tax guru Jeffrey Levine
This week, Douglas takes the wheel for the second installment of Above Our Pay Grade, a new series where we speak with subject matter experts on topics that are essential to our money and our lives.
Ready to talk taxes? Buckle up!
I recently sat down with my friend Jeffrey Levine, someone I’ve known for more than a decade and one of the sharpest minds in financial planning. Jeff and I came up in the industry around the same time, and we were both fortunate enough to be named to InvestmentNews’ 40 Under 40 early in our careers. Even back then, it was obvious Jeff was wired a little differently when it came to taxes and retirement. If there’s a person in our field who can read a 500-page piece of tax legislation and immediately understand what it means for real people, it’s Jeff. I’m not sure anyone does it better.
Jeff is widely recognized as one of the leading technical experts in financial planning. He’s a CFP®, CPA, PFS, ChFC, RICP, AIF, CWS, BFA, and TPCP. I can only imagine how many CE credits this man needs each year. He’s also the lead financial planning nerd at Kitces.com and a nationally recognized educator who spends much of his time helping advisors understand the constantly evolving world of tax and retirement planning.
Which is exactly why we wanted him for Above Our Pay Grade.
I ended up speaking with Jeff for more than an hour about taxes, retirement strategies, policy changes, and what couples should be paying attention to right now. Our conversation was so nutrient dense that there was simply no way to share it all here. What follows are some of the highlights from our discussion, edited for clarity and length.
Douglas Boneparth: You once said, “Good tax planning is not the lowest tax plan in one year. It’s the lowest lifetime tax bill.”
Why is it so important that both partners in a relationship understand their tax situation, even if they’re not the one filing the taxes?
Jeffrey Levine: You are both responsible for what’s on your return, right? I mean, that’s the simplest thing. From a tax planning perspective, when we look at a tax return, especially a joint return, it’s a combination of each spouse’s income and each spouse’s deductions, each spouse’s credits put together. Maybe you’re entitled to some sort of benefit at your work that can help lower your income. But is that the right thing to do? Does your spouse have a better vehicle at their work? If you’re looking at making contributions, maybe both of you have access to an HSA, but you both can’t contribute up to the family maximum. This is why coordinating between spouses is important: so that you can make the best decision as a couple and ultimately put yourself in the best position long term.
To do that, it’s not just looking at this year, but it’s looking at what your tax bill looks like this year, next year, and for the balance of our expected lifetimes. Because if you end up paying very little this year, but it costs you two or three times down the road, that’s not a good trade-off.
D: I rarely see this come up in practice, but can you walk us through the scenarios where a couple should seriously consider filing separately?
J: You don’t see it a whole lot, because it’s usually not the right move. When you file “married separately,” you lose a lot of tax benefits. There are lower brackets, lower standard deductions, but there’s also a whole lot of other deductions and credits that you’re just not entitled to. So, it is rarely the optimal move when you’re trying to just minimize taxes.
The biggest reason why someone would do that is you don’t trust your spouse. When you sign a joint tax return, you’re responsible for what’s on there, together. If you don’t feel like that’s a good decision anymore, then that would be a really good time to think about filing a separate return.
Now, from a financial perspective, when might it actually save you money? Those situations are few and far between. Maybe there’s a scenario where you’re a modest earner or you have your own business, and you’re married to someone whose income is relatively high, and their high income stops you from taking a qualified business income tax deduction. Even though you might normally pay more taxes filing separate, it’s possible that your spouse’s income would phase you out on a joint return.
Another common reason that’s not tax related: student loans. Looking at income-driven repayment plans, if you file separate, you may save more on your student loan payments than it costs you in higher taxes. It’s about balancing those against one another and seeing what makes the most sense overall.
D: A spousal IRA lets a working spouse contribute to an IRA for a non-working spouse or low-earning partner. To me, this seems like one of the rare places where you’re getting rewarded from a tax perspective for partnership. Is this a love letter from the tax code?
J: A lot of people are not aware of this; candidly, because it doesn’t come up that much. We’re usually taking about high earners, and relative to the amount that someone can put into an employer plan, you know, it’s still a sort of somewhat smaller amount. This year you can put well over $20,000 into a 401(k). That, along with your own IRA contribution might max you out. You might not have the ability to put even more money away for retirement. So, we’re usually talking about higher earners.
But for higher earners where one spouse makes either very little, or they are a stay-at-home parent, you can use this to fund that spouse’s account. And then the question becomes, what’s the better move? Is it a traditional IRA? Is it a Roth IRA? Do you have the possibility of doing a backdoor Roth type of move here for that spouse? So, all the regular questions come in on top of it. Not just should I do it and can I do it, but then what type of account, how do I invest, how do we coordinate with our overall plan, etc.
D: Let’s say a couple just got married this year. What are the first things that they should do from a tax perspective?
J: I have seen a couple of times in my career where a couple was planning a late December wedding, and they said, you know, “What if we don’t get married until January?” Or the other way, like “Hey, we’re planning a January wedding, but if we just go to like the courthouse and officially get married on December 30th, we could pay for our wedding through tax savings by getting married in December!” Not a bad deal there.
So, you should understand what marriage is going to do to your tax bill. How are you going to manage these things as a couple? Again, we go back to retirement contributions, HSA contributions, understanding all those things when you get married. For some individuals where there’s more saved—especially if you’re getting married later in life—it may change your estate planning or gifting strategies. Once you’re married, you can gift double and do things called “gift splitting.” There’s just so many things to think about.
And then we also have to layer in all the non-tax stuff. For older couples, how does this impact Social Security planning for your own benefits, for survivor benefits, for spousal benefits? You need to make sure that your beneficiary forms are up-to-date. If I had a dollar for every time I’ve seen a somewhat young (but not super young!) person who recently got married come into the office and say that their mom and dad are still their beneficiaries because they haven’t changed it yet…you probably want to make sure your spouse is your beneficiary. It happens automatically in some cases, and there are other considerations, too, but it’s just a bigger conversation than tax liability. You also need to update your estate plan. Maybe you want to change who your executor or trustee is. All those sorts of things typically happen around getting married.
D: Next question is for all the entrepreneurs out there, because there’s a lot of couples with one W-2 employee and one spouse running a business, which can create an interesting and sometimes messy tax picture.
What are the biggest opportunities and biggest mistakes that you see when you have couples in this situation?
J: In some cases where there is a valuable business and you’re getting married, it’s important to think about a prenuptial agreement. That way if something goes wrong, your business is still yours. Every state has slightly different divorce rules, but what grows during the marriage—and a business can certainly grow during the marriage—that’s often considered part of the marital property and may be available for distribution if you later get divorced. So, protecting yourself from that point of view can be very valuable.
On the other hand, there’s tons of opportunities. Maybe you pay your spouse to work in your business. You hire them part time. This way, you can get them on your business’ health insurance, or you can get them contributing to the business’ retirement plan or put away money into a pension plan for them. Any number of these things. They can now have certain employee benefits. The benefits are different depending upon how your company is structured (whether you’re a partnership or an S-Corp or a C-Corp), some of which you don’t get if you are a family member and some of which you do, but there are some very basic ones that are awesome.
Just know, you can’t arbitrarily decide to pay your spouse a wage. They actually have to do some work. “Reasonable compensation” can be very broad, but you do have to have some basis for what you’re paying them. So, keep track of the hours, etc., or the duties they’re performing.
D: We already talked about weddings, but lots of major life events can impact our taxes. When are some other moments that couples are missing tax planning opportunities?
J: I think it’s all of them, right? It’s births, deaths, marriages, divorces, graduations, going back to school, caring for an aging parent. Every one of them may have opportunities that come with their own little nuances.
We tend to get so tied up in these life events that we don’t really think about much else. We’re excited about babies, we’re excited about marriage, we’re sad about divorce, we’re sad about death. And in any case, the last thing on our minds is how this impacts our finances or taxes.
But that’s where a good financial advisor offers that objective advice and says, “I know this situation is really tough,” or “I know you’re really excited about this situation, but here are some things we need to think about to put you in the best possible position going forward.”
Thank you so much, Jeff, for sharing your wisdom with our readers! Want to watch or listen to the entire conversation? Stay tuned. We hope to release the full video to paid subscribers soon.
Sad Girl Lunch™
I have a love/hate relationship with tuna fish. On one hand, it’s a healthy, versatile, shelf-stable protein. On the other hand…it’s tuna fish.
When I’m working from home and between meetings, I find myself reaching for a can far more often than I’d like. So, I have to get creative. Some of my favorite SGLs™ using tuna fish include: tuna melts; tuna and cucumber in seaweed wraps; tuna in pasta with some chopped olives; tuna with spicy mayo over rice; and tuna mixed into a mediterranean salad with ingredients like tomato, cuke, onion, hearts of palm, and feta.
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