Season 2, Episode 12: Women on the Verge of Doing Their Taxes

Tax planning to make sure you’re taking advantage of all the financial strategies that lower your taxes and increase your investments (so adult-y!)

Taxes. Ugh. Whoops. I mean: What a great opportunity to save money and pay your fair share!

Many of us never learned how to take advantage of different strategies to avoid paying overly high taxes because we started out not making enough to have any money to protect. But, we have to learn all this stuff to build our wealth and be smart with our income. No matter how painful it is.

Oh, and what the hell is a capital gain?

In this episode, Sara and Caitlin grill Austin-based CPA Erica Fink who works for Mangold Anker Phillips, a professional accounting firm, about all the ways we can take advantage of tax saving programs and strategies. We promise there are only a few references to the tax code.

Erica tells us the one thing a woman on the verge of a financial breakthrough can do to level up her tax planning game through taking advantage of employer-supported retirement account matches, HSAs, FSAs and TSAs.

Just kidding about the last one. It’s hard to make taxes fun. We promise you’ll learn something and it’s the least boring version of tax learning that it could possibly be.

Oh! And do you have a passive income story? A success? A failure? Tell us about it in a voice memo and e-mail it to: womenonthevergepodcast@gmail.com

Ask us your dumb investing and finance questions for Season 2 on our Ask Us page!

This episode was edited by our co-producer Kelly West. Music by Bad Bad Hats and Devmo.

Transcript for Season 2, Episode 12: Women on the Verge of Doing Their Taxes

Caitlin Welcome to Women on the Verge of a Financial Breakthrough, a podcast where we're figuring out finance. One dumb question at a time. I'm the dummy. Caitlin Meredith, a coach and mediator based in the Bay Area.

Sara And I'm Sara Glakas. I'm an investor advisor and founder of Black Barn Financial and the Austin Women's Investing Group, which can be found on Meetup and Facebook.

Caitlin Before we start, do you know a woman who might be on the verge of a financial breakthrough? Will you text her a link to our show and maybe to other friends while you're at it? Also, please, if you can leave us a review. This helps other women on the verge find us and we read them and they make us happy cry.

Caitlin Today we have a tax expert. What I say, income tax expert or all around tax expert?

Erica Probably say income tax. They like to shy away from payroll or other kind of taxes.

Caitlin Okay.

Caitlin So today we have an income tax expert, Erica, who Sara can introduce.

Sara Oh, my gosh. Okay. So this is Erica. Thank. And we have known each other, I know, for several years now.

Erica I said, Yeah, I think so.

Sara Yeah. We were originally introduced because she works for the firm that I've been having my taxes prepared by ever since I started my firm, Black Barn Financial. And so when Caitlin was looking for a tax expert, I mean, I don't really love talking about taxes. There are some financial advisors who will talk about taxes and like do like legitimate tax planning. But I'm like, you know what? I know someone who knows what they're talking about and is an expert in this field. So why don't we just have her come on and kind of talk us through the basics of income taxes specifically? Because I think, like we're recording this in early February, right? So we're just kind of hitting the stage where people start freaking out a little bit about whether they are preparing their taxes correctly or whether they need help with it, whether they're missing something, whether the IRS is about to seize all of their assets or like kick in their door and take them to jail for something that they've done in the past. So I'm really hoping that when Erica walking us through this, that we'll all just be a little bit more chill about preparing tax returns, of thinking about taxes, of planning around taxes so that we all don't have to be like have such high anxiety during this part of the calendar year.

Caitlin Yeah. Erica, do you love talking about tax? I mean, it's too late. You're on the podcast, so like, Love it or not, you're going to be talking about them. But do you like talking about taxes?

Erica I do like talking about taxes. So much so that if you run into me at a bar, we'll start to discuss your tax returns.

Sara Oh, my gosh, you guys are soulmates. Caitlin used to want to take, like, a one page summary of how to, like, open a Roth IRA and drop it off with bouncers at bars that she went to so.

Caitlin We could have crossed paths in red lit, set up a card table and honest sex and just. Really, like, worked our way through the crowd.

Erica I bet they let you in for free every time.

Caitlin Oh, my God. I never thought of that. How did you get into tax planning? An income tax world.

Erica In college I just. I wanted to be in business, theoretically. But then I realized it's going to be really hard for me to just get a job in business generally. So I thought accounting was more practical and the day to day accounting grind was a little bit much. And I really like taxes because it changes every year. So there's always updates with legislation and you're constantly learning and trying to stay on top of things, which can be frustrating for some people because things are always changing, but it really keeps it interesting for me.

Caitlin Okay.

Caitlin Well, we're from different universes, Erica. So but I have come to appreciate not just taxes, but like this other universe of tax planning, which I never like. When you don't make any money, you don't hear about tax planning. And I feel like over time, like I went from, like waitressing where you're, like, barely scraping together enough to you're not worried about taxes. Like, I'd always get a refund. I don't even remember how they got filed. Like, it was such a simple process. No assets, very low income. It's you don't have to think about it. But then you find yourself with like a career and more money, and there's tax planning that you're supposed to be doing. But like nothing that came before helps you plan for it. Just making the extra money doesn't come with a bunch of tax instructions, right?

Erica And people start throwing out terms like depreciation and amortization and you don't know where.

Caitlin You're going with that, right?

Caitlin It's another like investing another field just rife with like really hard vocabulary words that turn off everybody or you think, like, I should know what that means already. So it's too embarrassing to ask and I'll never remember the answer. So, like, it doesn't even matter what it means.

Erica Yeah, there's a lot of things you can do just to keep it simple and to reduce your taxable income, to try to plan. And then there's also the preparation piece. What do I need to know now this year to do your taxes? But what what is one of the main questions that you see a lot of? With your clients asking about tax work.

Caitlin Yeah. Sara, what did they ask you?

Sara I think a lot of people are under the impression that there is a whole bunch of, like, sophisticated techniques that they should be using in order to reduce their taxes. So what you said, I mean, just now about kind of simple ways that you can think about reducing your taxable income. I would love for you to start there that if you're talking to I mean, because Caitlin and I are talking to just normal people, right? We are not talking to the ultra high net worth families who have, you know, billions and billions of dollars to manage and.

Caitlin Like a whole team of staff who are doing this.

Sara Right. So assuming that someone has a regular income and kind of a regular life, what do you see as like a pretty simple way to think about taxes and ways to reduce taxable income?

Erica The biggest bang for your buck, I would say, is to contribute to your retirement. So using a pretax plan to contribute to your retirement. But even if you're using Aftertax contributions, which we also refer to as Roth type accounts, that can save you money in the future because your distributions are going to be tax free. So there are two types of plans the Roth, which is the Aftertax contributions, and then a traditional type which is going to reduce your taxable income. So a lot of employers will offer a41k plan and you can contribute to that for 2023. The limit is 22,500. So if you could max that out, you're reducing your income tax by a significant amount. Now, not everybody can do that. So I always say the key thing, which I tell all my friends, all my family, all my relatives contribute enough to get the employer match because that is basically free money that you're getting. You're reducing your income tax liability. And there's really no benefit because typically, you know, it's 2 to 3% that your employer is contributing to a match or sometimes more if you're lucky. But that's just easy money that you can make. And it seems like a lot of people don't even know to do that.

Caitlin Yeah, I need to break something down to even like more granular level, and I hope this doesn't make it sound like I failed seventh grade civics class or whatever where we learn this. But obviously in America we have an income tax. Several states have it too. Texas doesn't happen to have it, but California does and many other states. So we earn a certain amount of money every year. Our income, whether it be freelance or salaried for the government, wherever the government takes a percentage of that money every year, our taxes to pay for, you know, roads, schools, infrastructure, whatever. And we're not everybody is taxed the same percentage. They decide in brackets. And the more money you make, the higher the percentage of your total income you pay as income taxes. It'll be so embarrassing if this is wrong.

Caitlin But saying and I might delete it.

Erica So the way I. Yes, that is correct. The way I typically like to explain the graduated tax structure is different buckets. So there are different levels. So everybody is going to for that. Yes. That first $20,000, that rate is, you know, 10%. Once you had over that, the next bucket, that bucket's full. The next bucket of your money is taxed at 12%. Then once that's full, it goes up to 22%. So you're not being charged. If you make a certain amount of money, a flat 22%, and you're still getting into really the 12% rate, then the 22% rate got.

Caitlin So no idea. Okay. So it's that's what it means to be graduated. God, I'm so glad I asked you this. This is so funny. Did you know that, Sara? You know that, of course. Okay. I shouldn't even have asked. Sorry. Take that out.

Caitlin Really?

Sara Most people do not know that. I would say most people. What? Know? Those people talk about their tax brackets. They're like, I'm getting taxed on, you know, 37% of my money. Like, if you're in the highest tax bracket when really it's a blended.

Caitlin Yeah. So only a proportion of their money is getting taxed at that higher rate at each of. A success of higher rates. Oh, my God. Okay, well, the episode's done. I have learned. I can learn Erica's work. It's good. I got it. Okay.

Caitlin So the idea here is and this is all that I've gathered from, like, the emails I get from my CPA being like, Hey, could you contribute 3000 more to your 401k? Is that by putting our money in something that gives us credit like a retirement account and an HSA, you're going to go into what those things are. The government says, okay, we won't even look at that x. How do we explain how this works?

Sara I think of it. Caitlin Like like you just take it out of the the pot that gets taxed today. Right. So if you earn $100,000 and you're able to set aside today $20,000 in a pretax for a1k or a Sep IRA or something like that, it just removes that from your tax return this year and your taxable income is then $80,000 instead of 100.

Caitlin The government says, okay, we have deemed that these certain accounts give you credit that that money is invisible from us, that we won't we won't charge you tax on it. We won't include that in your month, in your yearly income. And therefore, while you really earned $100,000, we're going to just look at the $80,000 because that other 20, you put a net as you're calling a pretax account, which the government decides what's a pretax account? I can't just be like, Oh no, that's my pretax account. Like there's certain things the government has decided are accounts where we can put our money that then will prevent it from going into the calculation of what we get taxed on for our income.

Erica Yes. Anyway so yes.

Caitlin So sort have it.

Sara Welcome to the podcast, Erica.

Erica Yeah. So they and your employer, let's say you do it through your employer, then they are not going to calculate withholding your income tax from your paycheck. They are going to reduce the amount by the amount you contribute to retirement. So then, you know, they're already withholding less income tax from you in that calculation in the pretax accounts and then in a Roth account, then you would just take that after tax money, but you would still be taxed on the full amount of your wages.

Caitlin Okay. Right. And I guess the underlying question there is, it is the U.S. government that decides which places you can put your money that qualify for it not to be counted as your income for that year. Is that correct?

Erica I say that's correct. I mean, it's yeah, it's written in the tax code, which plans qualify. So typical ones are going to be for a1ka simple IRA, a Sep IRA, you know 403b if you work for a non profit. So they have different characteristics, but that's all written in the tax code and then it should be laid out in your employer's handbook, what plans they offer, what characteristics it has and what you can contribute. So all of that should be provided to you when you start a new job, with the exception. If you're self-employed, then a or a simple IRA is something that you just need to ask your tax advisor about to see what your options are for contributing to retirement or you know your broker.

Caitlin Okay, so the idea is the more money we put in those accounts, the lower our income taxes will be because we can get into a lower bracket with a smaller percentage of our income being taxed. Is that the idea behind us.

Erica If it's a traditional type account? Yes.

Caitlin Okay. We can proceed.

Erica Okay. Not everybody has an employer. So there an option for that is to contribute just to a regular IRA. And you can contribute 6500 for that in 2023 because not all employers offer retirement plans. And so you can get a deduction for that or you can do a Roth type, which you wouldn't get a deduction in the current year. When you go to pull out the earnings when you're retired, it will be tax free for the difference of whether you should contribute to a traditional type plan or a Roth type plan, which is after tax money, is to analyze what is my income tax going to be going to be now versus what is it going to be later on. So if you think that you're going to have a lower income tax rate now versus when you're maybe pulling money out of retirement later, it would make more sense to use after tax money now because your rate is lower. And then when you pull it out in your rates higher, it will be tax free versus a traditional, you're saying, oh, I think my tax rate is really high right now. I want to try to reduce that. So I'm going to put my money in that now. But when I pull it out, my tax rate will be lower. So I'm ultimately going to pay less tax on that retirement.

Caitlin It's whether or not we pay the income taxes now on our money or later. There's something that I'm confused about, like why we would ever want to not pay lower taxes. Now I can only think about today.

Erica You can only think about today. Okay, so let's see, an example would be a medical student or, you know, doctor in residency. So right now they are not going to be making that much money. They're going to be working a lot of hours. So it would probably make more sense for them to contribute to a Roth type account because later on they're going to be in a much higher income tax bracket and would be pulling more money out. So it would make more sense for them to do a Roth type earlier. Most careers are that way. A lot of times it makes more sense to contribute to Roth when you're younger because your income tax rate is only going to go up.

Caitlin I see. So when you're already in a low tax income tax bracket, meaning your percentage is relatively low of the percentage of your income that you're paying in taxes, then you're not doing that much to save yourself on taxes now because the rate's already lower. Whereas if you're predicting your income will be going up over time, even when you retire, that then you will want that sort of tax planning. So to lower your annual percentage of your income that you're paying in taxes.

Sara I think I just see people kind of get tied up in knots about that question, right. Like I have the choice between a Roth four, okay. And a traditional four. I think like what is the best thing to contribute to. Right. And kind of like you mentioned it. It requires you to know what your tax rate is today, but also to project into the future what it might be in the future, which can be really difficult. Right? Like, it's.

Caitlin Also completely unknowable.

Sara Right. I mean, and things can change, right? Tax rates can change any year. So getting tied up in knots about it is can be a little bit counterproductive if that's the decision that's kind of keeping you awake at night. Right. Like it's just pick something for me. A lot of times it's if it's not obvious, just pick something, move on with life. And, you know.

Caitlin That's Sara's approach to dinner. To tax savings.

Sara To podcasts.

Erica No, I would say I would agree with that and with retirement, you know, just puts them in there. Make sure you get the employee match. Don't get too worried about what you should do. But I mean, either way, it's probably going to be fine. So it depends on, you know, if you really want to lower your tax now or you don't really mind that much, or maybe you want to do a little bit of both. Yeah. Yeah.

Caitlin 5050. Yeah. Okay. So I'm curious for like, as I was telling you in my own life, I went from, like, not making any I should have been so lucky to worry about my tax rate to then at a certain point being like, Oh God, this is too complicated. Like, I can't go. TurboTax won't take me anymore because I have rental income, self-employed, like I have too many little variances. So I had to hire a CPA and then I didn't have to think about it at all until they do it. And they're like, Hey, can you put this much more money in your. So like, it went from a thing that I didn't have to think about because I didn't have any money to a thing that I didn't think about because somebody else was just telling me what to do, which I think is great, but also not super empowering because I wasn't really sure what the general idea was like. Am I avoiding paying taxes here? Which of course we're not advocating only legal processes of, you know, figuring out what's legal and smart for building your financial future. But in this podcast, we talk about building wealth and building a financial future. And I'm always by the seat of my pants when it comes to tax time. And so I just I'm curious about how to evolve that thinking and you're talking about a little bit like predicting if you'd want a Roth, predicting what your income might be and that you'd want a lower tax or you'd have more money than, oh, I can't even remember it now.

Erica I don't I have trouble with it even now.

Caitlin That's reassuring. Yeah, well, it's just.

Erica You know, you have to think about it, which goes back and forth and what are the rates going to be? So it does get very confusing. And when you're starting with that, the best thing that you can do is just to have good records for your CPA, whether you have them, because you have the preparation standpoint and only that's kind of square one. We're getting your taxes done, we're getting them filed. And then once that's done, you can kind of move on forward, like, what should I be doing? So I think that's where you kind of take it from there. But the number one thing, right, is maintaining good records that keeps your tax bill down and your tax preparation fees down as well.

Sara Hey, Erica, can you talk about some of the some of the things that are taxable versus what are not taxable? I think I know that's a very broad question. I think in my mind I'm remembering the time that someone just walked me through page one of my 1040 with the boxes. Right. Like box one, Box two, and forced me to read what that box was and how that line item was taxable versus other things, because I think there was some confusion about what types of things get taxed. I mean, and sometimes it's like, okay, if I take money out of my savings account, is it going to be taxed versus if I take money out of my retirement account? Is it going to be taxed? If I take money out of my brokerage account, is it going to be taxed If I have a side gig, is it going to be taxed? Do you know what I mean? So I wonder if you could just like like a really like paint with really broad brush, brush strokes, that types of things that are taxable and then maybe some ways that people end up with money that are not taxable. Does that make sense?

Erica Okay. So we'll start at the beginning. You know, if you have a have wages and you work for an employer, that's going to be taxable. That's going to be subject to what we call ordinary income rates. So those are those tax rates that we talked about earlier that are graduated. And the more income you make, the more tax that you have. So pulling money out of your savings account isn't something that is going to be taxable, but not doing anything with your savings account and leaving the money in there. The interest on that money is going to be taxable because that is something that you are earning on your money. So even though you're not, you know, the bank is depositing, you know, couple cents dollars here or there, depending on how much money you have in there that's going to be taxable.

Sara It could be tens of dollars in a year.

Caitlin Like even 12.

Erica So and they'll send you a little form in the year in the mail from your bank that says here, this is your 1089 interest form and this is what you owe for your you know, you have to calculate that that goes on schedule B, So another item that goes on there is let's say, you know, you invest in some stock this year and you buy that. So stock has dividends that are often issued and those are also taxable on schedule B as well as the interest. Moving on down, I guess the 1040 would be schedule C, which is going to be, you know, your business income, your side hustle, your hobbies even would go on there. So you keep track of the income that you get through PayPal, Venmo or whatever, and you keep track of your expense items that you have and you subtract those from the income that you produce from that activity. So things like advertising your travel expenses, you know, your laptop computer that you bought to run your business, maybe your cell phone or the portion of your cell phone you use for business, a home office expense, those kind of things you can take to offset your income on schedule. C moving down would be Schedule D, which is capital gains. So anything from selling the stocks that you purchased, selling an investment property, a piece of land or even selling your house if you're over the exclusion limit. So you have a big gain on the sale of your home that would all go on schedule D and Schedule D is special because you hear a lot about capital gains, so those are taxed at preferable rates, which are typically going to be 15% unless you're in a really low tax bracket. And then at zero or high one where it would be 20.

Sara Can we stop a minute on capital gains and can you explain how a capital gain is calculated.

Caitlin And what it is and all those words you just said before? Preferable? I mean, I know preferable.

Sara But the preferable rates, how you even calculate it in the first place.

Caitlin Yeah.

Sara And all of the other words. Yeah.

Erica A capital gain is you're going to have something which is going to be your sales price, which a lot of time will be reporting to you on some type of form. Say, you know, this is what you saw, this there's the money you receive for selling a stock or really an item, whatever it be. And then you have what's called your cost basis. So that is what you paid to purchase that item. So you get to offset your sales price with what you paid, you invested into that stock that you're selling, and then you pay tax on the net of that, which can either be a gain or loss.

Caitlin Can we do that in terms of a house just so I can So I bought a house for $200,000, sold it for $400,000. How does that play out with this? The capital gains is taxed on the $200,000 profit that I made in the sale of the house.

Erica That's right. That's correct. And so one small rule, because there are so many nuances in the tax code, if this is a house that you've lived in for two out of the past five years, that was your primary residence, you can exclude up to $250,000 of that gain or 500,000 if you're married. So then it becomes non reportable in that instance.

Caitlin In that instance. But if I had made $500,000 on the sale of my house and I had lived there two out of the past five years, it the first $250,000, they wouldn't count. Out so I would be taxed. My capital gains would be considered $250,000 if I had made a $500,000 profit.

Erica Yes. If you had made a $500,000 profit. Yeah, you could exclude 250,000. So then you would pay tax on the remaining 250,000. So that's a nice benefit in the tax code. When you go to sell your homes. But if you know, if it's a rental property or something like that or just an investment property, that home sale exclusion doesn't qualify.

Caitlin Unless you've lived there two out of the past five.

Erica That's right.

Erica Mm hmm.

Caitlin And what is the rate? What's what does that mean? Preferable rate.

Erica So those are typically just a flat rate. So it's a lower rate for the most part. If you're being taxed it the 15% capital gains rate. Ordinarily, your income tax rate is higher, so it's less of a rate.

Sara Well, just going back to Caitlin like this, this comes up like it comes up in presidential elections. Like, you remember like when Mitt Romney ran for president. And then it turns out that most of his money comes from capital gains, which are taxed at 20%, which, I mean, it was like millions and millions of dollars, whereas if he had income of millions and millions of dollars, he would have paid taxes at a much higher rate, like 35 or 37% versus 20%.

Caitlin So people that are so rich that they don't have to earn a salary anymore, but just keep earning money off of selling their assets and buying other things pay a much lower tax rate than people who are working and making maybe that same amount of money. But it says their income not after the profit of a sale of some big house or yacht.

Erica This is the plight of the middle class versus generational wealth for the most part, because, you know, you have these long term assets that are sold at the lower capital gains rates versus somebody earning ordinary income. Let's just say, you know, you're a single taxpayer and you're making $250,000 or something. You could be paying up to a 35% rate. So.

Caitlin Oh, my God, no. That's this is an example of how not understanding all this financial terminology means. I don't even understand what they're talking about in a political race. Like, I wouldn't even have picked up on that. I would get like, he's rich and that's not fair.

Caitlin And.

Caitlin He's not paying enough or whatever. And I know Warren Buffett's famous thing that he his secretary pays a higher tax rate than he does, and he doesn't think that's fair. But I would have never put that together that the money that very wealthy people are paying taxes on is taxed at a lower rate than the rest of us who are just getting money from income.

Erica Right. So this is, you know, one of the advantages of investing your money, holding on to your investments for longer than one year is that you do get preferable rates when you sell. But, you know, it does take a more sophisticated investor and person, but it's not that hard to get into. So, I mean, I'm courage of people to get into that, you know, and there could be a lot of benefits there.

Caitlin So you're saying it's better to be rich? Yeah.

Erica It depends on what brings you happiness.

Caitlin It's such a good answer and is a good answer.

Sara You didn't even lose any clients saying it that way.

Caitlin That's really good. Yeah.

Sara But that also, I mean, in in investing like a purely investing sense to what you said about a short term capital gain if you buy something and sell it within a year versus if you own it for more than a year. For people who are investing and maybe think that it's either fun or profitable to trade stocks, that's something that comes up quite a bit. If you have a Robinhood account and you're just buying and selling things daily or weekly or, you know, every few months at the end of the year, you get the tax bill for all of those transactions. And if you didn't hold something for more than a year, it's taxed as ordinary income, right. And a short term capital gain. And if you did hold it for more than a year, then you get those preferable rates that you were just talking about.

Erica And another time that we see this a lot, too, is with employee stock purchase plans. You know, how long should I hold on to my employer stock before I sell it for it to be qualified or restricted stock? So, you know, and that's offered a lot of times here in Austin because, you know, there are a lot of startup companies or just whatnot. So we see a lot of decision making trees of how long. Should I hold on to my stock? Should I sell it? Do I want to hedge from being so heavily invested in my company or to sell it and diversify my portfolio and invest in other stocks? And what kind of rate am I going to pay on that? Because you purchase stuff. It is called a strike price. And you know, the value of the stock may also go up or down. So there's a decision making tree there. So it all gets really complicated. But with capital gains, it comes down to long term versus short term. And longer term always gets the preferable 15 or. 20% rates depending on your tax bracket.

Caitlin Okay. I'm having another breakthrough here. We did an episode about how I'm still mad at Sara for not allowing me to make millions of dollars on the Airbnb stock because I was what was my classification like? I got to buy a certain amount of stock before they went public.

Sara She got to participate in the IPO for everybody because she's a super host.

Caitlin I'm a super host, and she told me that I wasn't allowed to borrow any money to max out what I was allowed to buy. You know, and it tripled overnight or something. And then since has gone way down. But so my fantasy was that three months after it went public, when it was at the height, I would have sold and made, you know, 5000 thousand dollars. But now what you're telling me is, if I had done that, the surprise would have come in April when it had been like, Oh, hand us over $20,000 of that in taxes.

Erica Yeah. So you want to plan for that? You know, when you exercise your taxes, it depends on what you bought it for. But yeah, you would have to definitely pay tax on that. So whereas have the other day but it would still be work out to your benefit.

Caitlin Right. But okay so now I'm keep I've kept it because I have an emotional attachment to this.

Sara She wants to keep rehashing this.

Caitlin But that's also to my I mean the fact that it has gone down sort of refutes this argument, but from another point of view, holding on to it through all this time will mean that when I finally do sell it, I'll have to pay a lower tax rate on whatever $12 of profit that I end up on. I guess my idea of like having this amazing I was going to say insider tip. I don't know anybody that could even give me one, but like having this great idea or the great opportunity buying this stock and making a bunch of money in a quick amount of time. There are tax consequences to that quick turn around. And what you're saying, Sara, is like this idea that like, ooh, Robin Hood, like if you made all this money on GameStop and at the end of the year, the government adds up what your profits were from all that day trading. So it no longer becomes like this quick free money thing. It's actually considered like a job. And you're going to pay taxes on that income.

Sara Right? I mean, I think that that I mean, either way, like, if you have a capital gain, you're going to pay taxes on it unless it's on your residence for, you know, some for some amount. But if you have a capital gain when you realize that capital.

Caitlin Gains I mean thing you made money capital money gain made it. Yeah.

Sara Okay. Turn to your money into more money by investing. Okay. When you sell that and turn it back into cash, you will owe taxes on the difference. Right. But if it's a short term capital gain. I mean, it gets it gets added to like your.

Caitlin Wages, your wages, income. It's part of that ordinary income pool versus there's a capital income pool which are taxed at the lower rate. So that's going to be your long term holdings and sales.

Caitlin Is there a strategy behind that, like in the tax code? Is it to discourage short term? Investing, is it? Is it consumer protection? Is it what? Why would that be that if I sold my Airbnb stock within a year of owning it, I'd pay it at a higher tax rate than I would if I sold it in three years.

Sara I've heard that it's to incentivize long term providers of capital. Right. Like, if you think about you want all the people with savings to be investing their money in new businesses, for example. Right. Like either through the publicly traded stock market or other things that are happening in the economy. Right. So it's to encourage people to put their money in and not yank it back out right away. That's what I always like.

Caitlin Stability and capitalism.

Sara Something like that. Like, you just want to incentivize people to not hoard their money or be moving it in and out of instruments all the time. You'd rather have people invest in something and then let that thing bear fruit over long periods of time. I would say for stability, I mean, that kind of makes sense, right?

Caitlin I'll accep it. I'm not going to Google it. We always talk about like what wealthy people do. And we've said before, like people have this idea that, like, wealthy people don't pay taxes. And that's part of how the rich get richer. Is that your idea, too? Like, is building wealth is a key part of that tax planning, figuring out all these schemes and strategies? Or is it like, you know, it's an irresponsible thing to do to protect your wealth building?

Erica You can do tax planning and there is, you know, a certain amount that you can do given your current situation. So if you are a W-2 employee and you just work for a company, I mean, typically there are some small things you can do, but there is not a whole lot of avenues. So if you're you have your own business in Europe or self-employed, you know, you're kind of a little bit more in control of your revenue stream. You can decide whether you want to purchase more equipment and this year or to reduce your income or, you know, various other things. So it's tax planning shouldn't be your only consideration when you're thinking about your financial future. You know, it's just one aspect of it. So you can be mindful of certain things that are going to help you maximize your income regarding taxes. But for the most part, you know, you're going to have to pay them. It's just how much now or how much later.

Sara I like that, though, because I think a lot of people think that the tax strategy comes first and then the wealth comes after. I tend to think it's the opposite. You make the money first and then you hire the people to help you grow it or preserve it. Right. That at some point tax planning becomes more and more valuable, the more money you have, and it doesn't necessarily get you from point A to point B to having all of the money. I think a lot of relatively regular or low income people or low net worth people as of right now start with the taxes first instead of the investing or the increasing your income or, you know, kind of whatever, that the ways to actually grow the money first people, we just we just need more money first. Right. Like we want like with women, we want more money in the hands of more women. Right.

Caitlin Like that. Yeah. And I do that for conflicted. I've lived in a lot of countries that don't have tax. Base for their infrastructure and education and health care system. And it is awful. So I'm also a little bit confused here. Like I don't want to pay more than my fair share, but I also really believe in paying taxes because I benefit so much from all of it. So I think there's an ambivalence I have towards like figuring it out in a like super strategic way because I'm like, well, it's not it's not like it's going to like some terrible corporation. I mean, obviously the government does a bunch of stuff I don't agree with also. But like in general, I am so grateful to live in this country that has streetlights and all this stuff that I've lived in, places like Somalia, Nigeria, that do not have those things. And I think, You know what? It's a pretty good tradeoff. I'll give my money. I see it. Every day the benefits of all this. So I don't I mean, that's it's not a tangent. It is something that I think about in terms of taxes. But I do think it's a separate thing from how especially gender like women. I think in traditional marriages, I think there is a gendered structure and a lot of marriages for who dealt with the taxes, who needed to know and who was making the bigger income, too. And so through the generations, women are just behind and figuring out what it all means and how to do any sort of planning around it. To think of it like what you were saying, Sara, like growing and protecting our assets to compete with other people that are doing that. And so I do I think that it's pretty like important to understand it. And then how you decide to do it yourself is another thing. But like what the main things are that we should be thinking about in our planning.

Erica Yeah, yeah. And I could go, you know, a couple other items that, you know, specifically may or may not help. You know, women or people with families to decide is a big one. We get asked is, should I, you know, contribute to an HSA account? Oh, yeah. Yeah. Health savings account. So what is that? So it's it's typically offered by your employer. It comes with a high deductible health care plan. So you can basically contribute pretax dollars. You don't pay any tax on the earnings and you withdraw the money tax free to pay for qualified medical expenses. So there's really a triple benefit to an HSA account.

Caitlin And it rolls over.

Erica And the funds roll over. So you can use that as a saving tool to save, you know, for any even if you don't have high medical costs now, maybe you'll have more in your retirement. So some people use it as an investing tool and it reduces your income in the current year. So it's really a great tool that you can use to kind of reduce your income. And, you know, you just get a little debit card or you go down to the pharmacy and you can still buy things like sunscreen or Band-Aids and whatnot and use your HSA for that.

Caitlin And it the way that I've understood it. So I have a as a freelancer, I have a health insurance plan that qual is an HSA qualifying. And when I was looking through my health insurance options like the bronze, the silver and mine is the lowest tier and therefore qualifies when I pay a lot more when I go to the doctor so my premiums are lower, I pay more for services. However it qualifies for an HSA. So in theory, if I filled up, what's the maximum you can contribute to an HSA every year?

Sara Yeah, this year for individuals it's $3,850. For individuals and for families it's $7,750.

Caitlin So one of my understandings about the HSA is that if you whatever money that's in there, when you're 59, you can withdraw it or convert it to another kind of retirement account. You don't have to spend it on health care.

Sara Yeah, but you don't even have to convert it. You can just take withdrawals.

Erica Out of it because you put the money in pretax for the HSA. Right? And then when you pull it out, there's not going to be a penalty, but it's still going to be subject to ordinary income tax if you're not using it. For qualifying medical expenses. Okay, you can pull it out. There's just you.

Erica Know, there's no penalty at after age 59. So the one I have is through my credit union and it's not associated with a brokerage account, but there are ones that you can then use the money that's in your HSA, invest in index funds, and then if you need the money. For a medical expense, you can then cancel your stocks, whatever, and use that money, withdraw it through the HSA, and use it for a qualified medical expense.

Erica Right.

Sara Yeah. Okay.

Erica So the HSA plan, I mean, like you said, you pay higher out-of-pocket medical costs, so it might not be right for every family. But, you know, like you said, the investing component that you can have or to earn it tax free, you know, is a big advantage. So you kind of just have to see what's right for you, because if you're somebody that has a letter doctor visits with small children or a lot of prescription costs or whatnot, then that might not be the plan for you. So that's an example of where the tax savings aren't always the biggest driving factor in your decision making, because you might not be able to afford that out-of-pocket expense for those people. A lot of people also offer flex spending account. So there's a medical type that you can defer pretax dollars up to 3050 for the year for medical costs for you and your family, which typically these don't roll over. So you kind of want to estimate your medical costs for the year or they have a small rollover. I think it's somewhere about $600 or something like that. So if you're not somebody that wants to use the HSA in the high deductible health care plan, you can always consider a flex spending account if that's offered.

Caitlin Hmm. I would like to say that I was I had one for two years and I hated it because predicting was impossible. And then I was left over with $300 and I was like getting Band-Aids and ace Bandages and, like, it was ridiculous, like, mad dash to the CVS to, like, what qualifies. And I know, like, Amazon, you can Google on Amazon, like what qualifies. There are specific stores online where you can get these things and there's even period underwear you can buy with them like I think there is a lot of, but it just seems like a total scam quite frankly like that you have to predict it and then you give that money away like it just seems like it should be illegal. Like if you get a gift certificate from a restaurant, they are legally bound to honor it for their entire existence 15 years from now. But an FSA is allowed to expire. Who gets that money? Is it the government? Is it your employer? Is it the accountant.

Sara Who does get it?

Erica I mean, I would think it would be your employer.

Caitlin They're stealing.

Erica I don't actually know that That's. Yeah, I have wondered that.

Sara Caitlin do some investigative journalism to find out who gets so much free time. Okay.

Caitlin I'm putting it on the list.

Erica And after the investigative journalist segment.

Sara I mean, not right this very second. That's a separate podcast for sure.

Caitlin Please hold.

Erica Moving on from that, the medical FSA, which may or may not be a scam, that there's a dependent care FSA for people who have kids that you can defer up to $5,000 of your salary to pay for a child cost. So, you know, if you pay for preschool or after school care, summer camps or whatnot, you can defer up to $5,000 of that pretax, which is nice. If that's something that is offered or there's typically a child and dependent care credit on your tax return that you can put expenses in as well to get a benefit for that for I think it's children under 13. So that's a good way. You know, if you're paying for preschool or summer camps or after school care that you can get a small tax benefit by submitting those to your employer and you get that deferred on your W-2.

Caitlin Okay. So that would be the kind of thing that they check off when they're like signing all the forms for their paychecks. Like, I would like to get this deferred $5,000.

Erica Typically, when you, you know, set your health care plan, you decide if you want to HSA or not or an FSA. You know, I think it's usually around sometime in December of each year, you kind of can review your benefits options with your employer, which is always a good thing to do. You can see if they offer this kind of plan and take advantage of that $5,000 there.

Caitlin So the more you talk, Erica, the more I think, thank God I hired somebody to do all of this thinking and it occurred to me, like I told you, I had to hire somebody when my taxes got too complicated because of self-employed income, like just a few. It wasn't my actual how much I was making it was that it was too complicated to get it done for free at the, like, you know, library. And TurboTax was like, Yeah, no, you need that kind of form. Nope, we don't do it. So I sort of fell into it because the only alternative was me sitting alone at home with all the tax forms. And so I'm curious in general, when do you see the threshold between like, you can do it and like, you know what? Like that. Now it makes sense to hire somebody to think through all the stuff like educate you, include you, all that. But like we all have other jobs too. So when should this be our part time job versus when we hire somebody else to do it?

Erica TurboTax does ask you a lot of questions that are very confusing a lot of the time. So it can be hard to know, you know, what your deductions are, what's allowable, what you should do. So I would say typically, if you're going to have any kind of complicated transaction, you're going to have to start your own business. You are going to have a rental property. Maybe you've retired from your job. These are all times that it would probably be a good idea to contact a tax advisor and they don't necessarily have to do your taxes in and out every year, especially for something. Maybe you get a rental property and you just kind of get that going and have them do your taxes a couple of years and you feel a little bit more comfortable. Maybe you can go back to preparing them yourselves.

Caitlin And you just see what they did in the previous years and copy that.

Erica Yeah. So it's not always you have to spend thousands of dollars doing your taxes. Once you start getting a tax adviser, you can never stop or anything like that, but it just helps to get some advice, kind of figure out what you're doing for your situation. And then if you're self-employed or have a business, then it's usually a good idea to have a tax advisor, as you can see, is very easy to get into the weeds with things.

Caitlin So Sara and I both have young daughters and because there are children and there are daughters, we they are going to be indoctrinated about savings, investing from a very young age. And one of the things that we have been trying to figure out is with Roth, like I understand it, that a kid, when you start earning money legally, that you can then you're qualified to open your own Roth account. Is that correct, regardless of your age?

Erica So I think they can open it at any time as long as you have earned income. I mean, that has to be reported on the tax return. So that's what a lot of people will do, is they'll hire their kids, they will be filing, answering phones, whatnot. And so they have the earned income and they'll file the W-2 for their children and then open to a retirement account and kind of put the money in there.

Sara Because I think Caitlin, didn't we talk about the example that someone opened a Roth IRA for their baby and then had their baby in an advertisement and paid them paid the babies $6,000 to be in.

Caitlin Advertised on the Instagram.

Sara Started. Yeah. And then started a Roth IRA for their baby. So is that defendable, Erica?

Erica I mean. Well, I don't know in that instance. I mean, if they're in an advertisement I saw all you got is that advertising is like shown places like I don't know. I mean, it has to be something that they would say would be reasonable. So that's why, you know, like if you have a four year old, you can't really say, you know, I'm paying six or $7,000 to work for my business because they're not going to be doing much.

Erica But that is your limit. I have not seen.

Erica So I would just I mean, they could.

Caitlin So for those the normal ones of us have to wait until our kids have some job that's, you know, where they're earning money because they're actually completing a task that gets, you know, paid. And then we can open a Roth for them. And that would make sense at that point, because they have no taxes at that point. And so they're not lowering a tax rate, assuming that they're making like normal kid wages.

Sara Okay, Erica, thank you so much for being on our podcast. This was so much more exciting than I think anyone had had hoped is awesome. But at the end of every show, we'd like to ask our guest, what is one thing that a woman on the verge of a financial breakthrough can do today to help them along on their financial journey?

Erica Maybe just take a night, sit down and see, you know, what are all my income streams to see? Maybe some. Small ways that you can reduce it. So you know, be it retirement, make sure you're getting that match being an HSA or maybe even finding someone to prepare your taxes that might have a little bit of extra advice that you don't know or can't do.

Caitlin Go I love it. Or don't want to or don't want to.

Caitlin Thank you so much, Erika. This was so helpful.

Sara Thank you, Erica.

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Caitlin Hey, before we go, thank you so much to Kelly West, who co-produced and edited this episode.

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Sara If your partner is making you ask for money, giving you an allowance are not letting you know about family income. This could be economic abuse.

Sara Learn more at thehotline.org, or call one 800 799 safe.

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Devmo I know the first thing you notice is that I'm covered in gold, the flick of the wrist it could turn a hot bitch cold, to get what you want in life girl you gotta be bold. Now Imma die rich, and I know...

Sara This podcast contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this podcast will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.