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Year-End Tax Planning with Mark Doran Podcast


Mark Doran, Senior Tax Director, joins Doug Fabian (a Mercer Advisors financial advisor) for this episode of the Science of Economic Freedom financial planning podcast to discuss tax strategies for year-end tax planning. If you wait until after December 31, you will miss out on significant opportunities to improve your tax preparation situation when April 15 arrives.

The end of the year is the time to take a look at your personal finances to identify any future events that could affect your taxable income, and come up with steps to lower your overall taxes.

The year is almost over, and that means now is the time to think about something very serious. That something is taxes, and right now, before the year is over, you still have time to manage your situation and to minimize the impact of on your economic freedom.

In the latest episode of the Science of Economic Freedom, “Year-end Tax Planning 2018,” I speak with Mark Doran, Senior Tax Director for Mercer Advisors. Mark has over three decades as a CPA helping families, plan, manage and file their income taxes, and that makes him the perfect expert to turn to for guidance on year-end tax planning.

According to Mark, this is the time of year to identify any future financial events that will significantly increase or decrease future years’ taxable income. It’s also the time to come up with tax strategies to minimize your overall tax costs.

In this timely podcast, Mark and I discuss diverse tax issues such as:

  • Deferring income and accelerating deductions
  • The many significant changes in the tax laws and how to approach them
  • Minimizing or eliminating the 3.8% Net Investment Income Tax
  • How to harvest capital losses and implement capital loss carryovers
  • The new deduction limits and how to maximize charitable deductions
  • Using retirement planning to defer taxable income
  • The new rules of Qualified Business Income (QBI) and how to plan properly
  • Plus, much more…

With a little more than one month to go before the year is over, now is the time to act. If you wait until after December 31, you will miss out on significant opportunities to better manage your overall tax situation come April 15. And after listening to this episode, you’ll be much better prepared to ask your financial advisor the right questions and implement the right actions for your tax situation

Doug Fabian: What can you do prior to year-end to reduce your 2018 taxes? How has the tax law changes affected your tax deduction? And what should you be reviewing within your investment portfolio regarding your 2018 taxes? Joining me today is Mark Doran, Senior Tax Director for Mercer Advisors, on this episode of The Science of Economic Freedom.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.



Doug: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones.

Today, we want to help you identify your next step on that journey.

This is Episode 38 — Year End Tax Planning for 2018. Joining me today on the podcast is Mark Doran, Senior Tax Director for Mercer Advisors. We’re going to talk today about year-end tax planning for 2018 and this is an area that gets overlooked by taxpayers each and every year. Many times, people get focused on their tax situation in February or March of the following year when they’re getting ready to meet with their CPA or tax preparer and that is absolutely the wrong time to be thinking about tax planning. So, we have a great coach here today with Mark Doran. Mark has been a CPA for over three decades and he is one of the real tax specialists here at Mercer Advisors. So, Mark, welcome to the podcast.

Mark Doran: Oh, thank you, Doug, for having me.


What to do about changes in the tax law

Doug Fabian: Well, thank you for joining us today, Mark, and 2018 is winding down. We are having conversations, of course, with clients. The Science of Economic Freedom podcast audience is broad, we have some clients and non-clients listening to the program today. In general, let’s begin the discussion about tax law changes in 2018, we have a new rule book. What kind of coaching do you have for us, Mark, just relative to the changes in the tax law that happened this past December?


Mark Doran: Yeah, Doug. Well, overall, just the tax law that was passed, it was passed right after Christmas last year. And the overall gist of it is there’s an overall reduction in tax rates but with that, to individual taxpayers, there was a significant reduction in deductions. So, the deductions went away, but at the same time, Congress decided to up the standard deduction and make it much more generous. So, that’s sort of the overall gist of what happened. Coupled with that, the alternative minimum tax was always a problem for a lot of taxpayers, especially where I’m sitting here in California, that was watered down significantly so a lot of people will not be subject to that anymore. And then on top of that, business deductions have been significantly changed in that the purchase of capital assets can be written off in the first year that they’re acquired as opposed to being depreciated over a period of time.


Which tax group do you fall in?

Doug Fabian: Mark, let me follow up with a couple of questions here. Let’s talk about this standard deduction and itemized deduction because that’s the real crossroad for many people. Can you just give some examples or explain this in a little bit more detail so our listeners can understand which group they fall into because that has to do with their tax planning. Mark?

Mark Doran: Yeah. The standard deduction, and we’ll talk about married people, has now gone to $24,000. In the past, it was significantly less than that, almost $12,000. And so when you look at that $24,000, that’s a pretty high number in that a lot of people, when they add up their itemized deductions now under the law, they’re not going to reach that $24,000. The new law limits taxes to $10,000. There’s a possibility of limitations on your mortgage interest if you have new mortgages. And also on deductions that used to be categorized as miscellaneous itemized deductions, you just don’t get anymore. So, a lot of people are going to find themselves, when they sit down and do their tax return, when they add everything up, the standard deduction is going to be their best answer.

Doug Fabian: And let’s go to the business owners for a second. Let’s put a little bit more color on this for business owners because we have a lot of small business owners in the audience, large business owners in the audience. But I know that there are some different rules for property and equipment, maybe even a car purchase. Put a little bit more color on the kind of things that a business owner can do under these new tax laws that make it advantageous for them, Mark.

Mark Doran: Yeah. The new laws, in essence, allow what’s known as first year, a write-off. And actually, there’s two flights, if you will, two different ways you did it, but in essence, you’re able to buy machinery that in the past, you may have had to depreciate over five years, seven years. Now, you can pretty much write it off all in year one and there’s a couple of different ways you can do that. And without getting into the nitty-gritty details, you’re able to write it off in year one as opposed to just depreciating it out over that period of time.


Planning aspects of year-end tax strategies

Doug Fabian: So, let’s move into the planning aspects of this discussion, Mark. And one of the things that you and I talked about in our pre-interview was investment planning and this has to do with interest, dividend income, and capital gains. So, explain how someone can look at their investment statements and do some investment planning prior to year-end that could be advantageous to them.

Mark Doran: Yeah, what we generally do is we take a snapshot of where you’re at in 2018, based upon all the assumptions we gather, and then we have a discussion with the client of what’s going to happen in the future. Are there any big items that would significantly increase your income and/or decrease your income? And then based upon that, we try to smooth these items out so that looking at the marginal tax rates, that if you’re in a year or if you’re in the highest marginal tax rate this year and/or possibly in the future, let’s try to smooth those out so that overall, you’re paying a lower amount of tax. The capital gains tax rates start at 0% and go to 20% depending upon your income level. So, that’s what we try to do is try to get you into the 0% if possible, a lot of times that’s hard, but definitely keep you in the 15% tax bracket as opposed to moving up into the 20% tax bracket.

Coupled with that, too, is there’s a tax that came about because of the Affordable Care Act that was passed, oh, six, seven years ago. There’s just a 3.8% tax that’s on all of your net investment income as well, that kicks in at about $200,000 for an individual and about 250 for if you’re filing jointly. Again, if you’re really close to the threshold, we try to plan around that to avoid that 3.8% tax.

Doug Fabian: And then another area that people get confused in or may not be aware of, Mark, let’s just kind of talk it through. In my investment coaching with people on strategy, dividend income from qualified dividend stocks is treated well from a tax perspective, explain that. And also talk a little bit about municipal bond income and owning munis, when it makes sense and when it doesn’t make sense.

Mark Doran: Yeah. Dividends also have their own separate tax rate if they’re qualified. Qualified basically means if you’re a publicly traded company and the company pays tax itself, when it pays a dividend out to its shareholders they’re considered qualified. And then it really just falls into the same tax brackets that long-term capital gains do — the 0% tax bracket, the 15% tax bracket, and the 20% tax bracket.

With regards to muni bonds, the interest that you receive from muni bonds is generally tax-free but they also usually have a lower yield that’s paid out. So, when we’re doing year-end tax planning, we try to assess whether or not it makes sense to invest in these bonds or not. And usually, it doesn’t make sense for taxpayers generally speaking unless you’re in a higher tax bracket. The higher tax brackets now run from — educated guess — between 32% to 37%, that if you’re in those brackets, that possibly investing in muni bonds is helpful to your overall economic yield that you receive from these bonds. In essence, what you want to do is take your taxable bonds, tax effect those, what’s your after-tax yield on those, compare that to what muni bonds are paying, and obviously, the highest one is the one you want to be invested in.


Do you take into account your state income tax?

Mark Doran: Oh, yes. I try to keep this discussion simple but clearly, if you’re in a high tax state, I’m in the state of California, the tax rates here are very high so investing in California muni bonds definitely plays into the calculation and your analysis.

Doug Fabian: Mark, let’s move the discussion over to deduction planning. And, of course, this brings us back to that discussion of the standard deduction and the itemized deduction. I wanted you to first talk about how a taxpayer could itemize one year and use the standard the next year. Talk about that, compare and contrast, and again, kind of go over that big issue that somebody needs to understand is do I use a standard deduction or do I itemize.

Mark Doran: This is really coming in to play this year, to follow up on our earlier discussion that the standard deduction is much higher. And as we’re going through and doing planning for a lot of our clients, we’re seeing a lot of clients that their itemized deductions, they’re either really close but they can’t use the itemized deductions because the standard deduction’s higher, or they’re just a little bit over the standard deduction. And so they’re just into it. But a better play idea might be, to the extent you’re able to, is to bunch your deductions so that in year one, you take all your deductions and try to jam them into that year, and then the subsequent year, you just take the standard deduction so that your plan is on an ongoing basis to alternate between taking itemized deductions and the standard deduction.

One of the deductions that you have a lot of variability on is charitable contributions. If, say, you give to your church, it might make sense to make that two-years donation in year one, tell the church that you will not be making a donation year two but then you’ll see them again in year three, when you’ll make a double donation as well. So, something along those lines might maximize your tax benefit of your deductions.


Potential additions to itemized deductions

Doug Fabian: So, what are the things that stick out to you, Mark, that are potential additions to itemized deductions that people may miss out on or that are sometimes overlooked?

Mark Doran: One of the strange ones that just occurs here in 2008 but I’ll mention, it’s probably a small audience that this applies to, but medical expenses each year are subject to an overall limitation. You figure out what your adjusted gross income, that’s in essence the bottom line number on page one of your tax return, all your income and expenses that are allowed on that page. And then medical expenses are limited to 7.5% in 2018. In 2019, that goes to 10% under the new law. So, it might make sense, again, if you are in that situation and if you have some flexibility, to pay as many medical expenses in 2018 as opposed to 2019.


Year-end tax planning for medical expenses

Doug Fabian: I’m thinking in terms of a family. Again, let’s also talk about things that are not allowed. But in a family, a joint task return, husband and wife, kids, is that for the entire family? How are those defined and what if you were taking care of an elderly grandparent? What is actual, the rules, for allowable medical expenses?

Mark Doran: To the extent that you’re allowed to take medical expenses for yourself, your spouse, your children, and anybody who’s your dependent, you are then allowed to deduct anything that you’re out of pocket on those costs. So, if you have insurance reimbursements or you pay for your medical expenses through a flexible spending account, those would be reductions of the allowable amount. Also the expenses could not be optional expenses, it cannot be for cosmetic surgery and things along those lines.

Doug Fabian: Okay, thank you. That helps out. Great. So, let’s continue our discussions about bunching or grouping the deductions in any one year or before the end of the year. We talked a little bit about charities but I wanted to get into a little more detail about required minimum distributions. Because there’s some nuances relative to RMDs and charities that people may not know about and there’s a proper way, we do this for clients all the time, but I want the audience to understand that there’s a right way and a wrong way or a better way, I should say, to do this and if you could talk about that a little bit.

Mark Doran: Yeah. This rule’s been around for a little while now but it really comes into play nicely in 2018, again, when the standard deduction is so much higher and a lot of people will probably be using the standard deduction. If you’re in a situation where you’re 70-1/2 and you have required minimum distributions to take out of your IRA, and you want to still make charitable donations, you are able to elect to have your RMD paid directly to a charity. And that way, in effect, you still are able to deduct the charitable donation in the fact that by making this election, the RMD that you transfer to the charity is not included in your taxable income. So, effectively, it makes it a nontaxable, nondeductible situation. But that, in essence, allows you to get a benefit for that payment.


Year-end tax areas for charitable deduction

Mark Doran: Well, charities, with the new law, you have limitations on the amount that you are allowed to deduct for charities. Before, it used to be 50% of your adjusted gross income was your annual limitation. That’s now gone to 60%. So, if you’re really giving a lot of money to charity, that allows you to deduct more.

Also one of the things that we use a lot for charity, when people are charitably inclined and want to make donations, is we go into their investments and try to find appreciated stock, for instance, or any appreciated investment, if it’s a long-term capital gain asset to you. In other words, you’ve held it for over a year and you have a gain on the investment, you can donate that to charity. You’re allowed the fair market value of that donation, but you don’t have to pick up the income either on that. So, it’s sort of a win-win situation. So, if you’re charitably inclined, those are the type of donations that we try to identify and have clients use those assets to fund their charitable donations. There’s limitations on those that you have to go through and figure out but it’s a great idea. A lot of clients really like that idea in that they’re able to avoid long-term capital gain taxes on those assets and still fully fund their contributions.


Business and retirement tax planning

Doug Fabian: Mark, let’s move on to business planning. And certainly in the audience, we have small businesses, large businesses, we have people who are listening to us who are receiving 1099 income and may be able to file a Schedule C of their business expenses. But just talk about the big opportunities for year-end planning with businesses and go through that with us.

Mark Doran: Sure, Doug. One of the things that we see a lot of when people are in the example you sort of alluded to, where people have small businesses, executives have left their companies and are now consultants, or they’re out there just operating in some sort of small business, is they do not take advantage of the ability to make retirement plan contributions.

We bring this up all the time. There’s various ways you can go about doing it. Some are very simple and easy to fund. Others take a little bit more administrative work to do, but if that administrative work allows you to have a bigger deduction, those work as well. What I’m referring to is SEP plans and 401(k) profit sharing type plans. And we’ve also seen in that example I was sort of alluding to that executives have left their business, they tend to be in their 50s, 60s, they’re getting a lot of self-employment income. For those clients, in a couple of situations, we’ve been able to sit down with them, meet with a pension administrator to try to determine if a defined benefit plan works for them or not. And if it does, because it’s a defined benefit plan, so in other words, you’re funding towards an amount that’s needed at retirement and if you’re in your 50s or 60s, you’re a lot closer to that retirement, so the number’s a lot bigger. So, in essence, you’re able to superfund towards those amounts and it’s a very nice deduction that you’re allowed to offset the self-employment income.


Qualified business income deduction

Doug Fabian: So, we’ve talked about business owners, retirement plans. Talk about this qualified business income deduction, the ramifications of that, Mark. Just kind of give a general overview of QBI and what it is and what are the advantages and what are the general rules for people there.

Mark Doran: Yeah. Not a problem, Doug. And I’ll try to keep this as simple as possible because this can become very complex real quickly. In the new law, sort of background to start with, C corporations, their tax rates were significantly reduced. The top tax rate used to be 35%, it’s now down to 21%. Congress wanted to give other types of businesses — S corporations, partnerships, sole proprietorships — the ability to take a deduction that would try to parallel that reduction in tax that C corporations got. So, they came up with this plan called Qualified Business Income. In essence, what that is, is a 20% deduction that you’re allowed if you run a business that you just take right off the net income. So, you figure out what your net income is, take 20% of that, and you’re allowed this deduction.

However, there’s qualifications for that and they’re sort of two flights. One is that if your taxable income is below a certain threshold, and for married filing jointly individuals, that’s $315,000. So, if your taxable income is below that and you have business income that you are reporting on your return, then you should be able to take this 20% deduction without any limitations. Once you go over that threshold, however, there’s a whole slew of different types of limitations that would come into play. Certain businesses, service businesses, accountants, attorneys, doctors, aren’t allowed to take that if they go up over a certain threshold. In addition, other operating businesses, that 20% deduction is limited to a very complex calculation that’s basically sort of tied to how much wages you pay out. So that in general is what you’re able to get. So, it’s a nice thing to have but it’s going to take a lot of work to sort of figure out qualifying for it and making sure that you got it right on your tax return.


Different year- end tax planning strategies

Doug Fabian: So, any other planning ideas that you want to give the audience, Mark, before we wrap up?

Mark Doran: You know, one of the things that I tell everybody every year and it comes up is if you have to take required minimum distributions from your IRAs, make sure you do it because the penalty is so onerous. It’s a 50% penalty. So, that is just something you really do not want to get into, so you really want to pay attention to that. The other part of this tax law that came up too, Doug, that was very significant was the lifetime exclusion that came up from an estate planning standpoint, increased it to over $11 million dollars for each individual. So, again, I think people really need to, if they’re in a situation that their estate is growing, that number is very significant, so a lot of people probably won’t be subject to estate tax. But they probably should still look at their estate planning documents and make sure that the estate planning documents are updated and are operating the way that they want to, assuming that this exemption is around when it comes to play. So, I would say that that is something that people just really need to keep an eye on as well.

Doug Fabian: Well, Mark, this has been great and I appreciate you taking the time out of your busy schedule to help enlighten our audience today on tax planning for 2018. Ladies and gentlemen, I want to reiterate our goal today was to educate, inform, and motivate you to take a closer look at your taxes. Everyone’s tax situation is different. We’re not trying to give personal tax advice on this podcast, we wanted to give you an overview of what the rules are but we would encourage you to speak with your tax preparer, your CPA, your advisor. Certainly, if you’re a client of Mercer Advisors, call us and let us talk about your individual situation and we want to do our best to help you minimize taxes prior to year-end.

Now, certainly, as you go through the tax preparation process, you can still make a qualified IRA contribution or a SEP IRA contribution prior to filing your taxes for 2018 at the deadline of April 15th of 2019. So, that’s something to be aware of. But we are big believers that managing your taxes are an important part of achieving and maintaining economic freedom. So, I want to remind everybody who’s listening today to also send me an email, ask your questions.. My email address for the show is, And again, Mark, I want to thank you for joining us today and we certainly appreciate having you on The Science of Economic Freedom.



Mark Doran: Thank you, Doug. It was a pleasure to join you today.

Doug Fabian: Ladies and gentlemen, thanks for tuning in. This is Doug Fabian. Until next time, thanks for listening to The Science of Economic Freedom.

Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.

This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.

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