Ep. 185 – Steven Jarvis, CPA – 2022 End-of-Year Tax Strategies

What should you be thinking about or doing with your tax planning as we approach the end of the year? Planning your taxes ahead of April is a great way to make the process more efficient.

When it comes to tax planning, the earlier you can do it outside of April, the more things you can get done. Some of the things you should be looking into include RMDs and QCDs, which depend on the situation or age.

In this episode of the Secure Your Retirement podcast, we have Steven Jarvis, a CPA, owner of Retirement Tax Services, the host of Retirement Tax Podcast, and is very knowledgeable in tax planning. We discuss QCDs, standard deductions, Roth conversions, and much more.

In this episode, find out: 

  • Why these last months of the year are a great time to check on your taxes before April.
  • Things to check on before the year ends to avoid tax interests and penalties.
  • How QCDs allow you to give to charity without taxation and should be done by the end year.
  • The advantages of doing QCDs if you’re charity inclined and over the age of seventy and a half.
  • Understanding the standard deductions and how to save on taxes when donating to charity.
  • The difference between a Roth conversion and contribution and how to do them correctly.
  • The advantages of a Roth account in giving tax savings and flexibility.
  • How taxes are paid on Roth conversions, depending on age and situation.
  • Why the inflation reduction act doesn’t directly impact your taxes.  

Tweetable Quotes:

  • “Tax planning should be a conversation we have thirteen months of the year.”– Steven Jarvis
  • “Taxes should go into our considerations; they should not be the primary reason we do something.”– Steven Jarvis

Get in Touch with Steven:


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To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:Welcome everyone to our Secure Your Retirement podcast. Today, Murs and I are super excited. We have a returning guest, I would say one of our most favorite CPAs in the whole wide world, Steven Jarvis. Steven, thank you for coming back on and talking with us today.  
Steven Jarvis:Yeah, of course. I’m happy to be here. Least boring CPA is another moniker that I get at times, really setting the bar high here.  
Radon Stancil:Great. So to set the theme up of what we’re talking about is, really, as we’re recording this and actually people are going to hear it, we have about one month left in 2022. So we’ll start this off and then Murs and I just have a few questions. But you got one month left in 2022, somebody might think I’ve got all the way till April to worry about 2022. Are there any reasons why a person might start thinking, “Wait a minute, let me take care of a couple of end of year things before I get to January 1st, 2023?”  
Steven Jarvis:Yeah, so one of the things I’ve started telling people, advisors and taxpayers both, is that, really, tax planning should be a conversation we have 13 months of the year, that a lot of people kind of fall in this trap of only thinking about taxes in March or April. And yes, April, this year’s going to be 17th is the tax filing deadline, but the calendar year actually is a cutoff for a lot of planning opportunities. There are certain things that have to get done within the calendar year, even though the filing deadline isn’t until April. And so absolutely, we want to be having a conversation about taxes outside of April and this last month of the year is a great time to just check back in and say, “Are there any things I need to take care of before the calendar turns over?”  
Murs Tariq:Yeah, I think for most CPAs, they’re busy season, especially if they’re filing on the individual side, their busy season is the first quarter leading into the second quarter of the year and then they have to handle extensions. But I think the uniqueness about what Steven brings to the table for us and retirement tax services is that his busy season is the entire year. Because as soon as they get through the filing year, then they’re starting to work on tax strategies that can be done throughout the year before we get into 12/31 and into the next year. So that’s one thing we really appreciate about, it’s not just about filing your tax return, it’s also about, let’s thinking about, proactively, what can we be doing today to make tomorrow a little bit better from a tax perspective.  
 So what are some of those things, as we approach, we’ve got about a month left in the year, what are some of those things that you’re advising your clients on right now as, Hey, maybe you should look at this or make sure this has been done. What are some of those things, Steven?  
Steven Jarvis:Yeah, a couple things that immediately come to mind, and these, of course, are going to be situational, some of them won’t apply to your listeners, some of them will. Some of it’s dependent on age, but as we get close to the end of the calendar year, we always want to be thinking about required minimum distributions or RMDs, want to make sure that those are getting taken care. Of course, those kick in when we turned 72. So whether you are over the age of 72 or getting close to it, this is a good conversation to be thinking about and having, make sure we don’t miss any important deadlines. Because, for whatever reason, the IRS saved their largest penalties for our retired friends out there and missing RMDs can result in up to 50% penalties. So that’s a big one we want to be paying attention to.  
 Similar age range, when we get to 70 and a half, we can start doing qualified charitable distributions or QCDs. Another great tool that we need to make sure we’re thinking about the calendar year, not the filing deadline. This is a really great way to be giving to charity, to organizations we care about and getting a tax benefit from it. So those are definitely ones we want to be taking a look at. For listeners who are still working or accumulating, have income that they need to take a look at, I like to just check in at this time of year to make sure that we are avoiding surprises at tax time as far as how much we might have to pay to the IRS. We have one last chance to make an estimated payment in January if we need to. Because although the filing deadline is in April, the IRS is a little bit anxious about when they want their money. And so if we have large amounts of tax due, we need to get those paid in January actually to avoid interest and penalties.  
 And that also sets us up that as we go into the next year, as we go into 2023, we know if we need to be adjusting withholdings, if we should be adding a tax withholding to our social security benefits, that’s one that gets missed by a lot of people. So there’s a couple things that just immediately come to mind that we should definitely be checking in on and thinking about right now.  
Murs Tariq:Yeah, I’ve got a follow-up question on the QCD is because that is a hot topic right now. And so let’s take the scenario of someone that has, they’re 72 so they’re in RMD age. For anyone listening, that’s required minimum distributions on your pretax assets like your IRAs, 401(k)s 403(b)s. At age 72, the government requires you to start taking a distribution out of those accounts. There’s a special formula to it, but ultimately results in money that you have to take out regardless if you want it or not, and pay taxes on it. That’s the big thing.  
 So Steven, we have a scenario, say if someone that has reached 72, they have a, let’s just make up a number, a $30,000 required minimum distribution that they need and they don’t really need any of that money. Can you explain how the QCD works and how that could be very advantageous to them? They are very charitably inclined.  
Steven Jarvis:Yeah, I’m glad you mentioned that last point of they’re very charitably inclined. We have to remember that taxes should go into our consideration. They should not be the primary reason we do something because if we weren’t going to give the dollars to charity, we’re essentially paying a dollar to save 30 cents and that math just doesn’t work out. But for taxpayers, for listeners out there who are charitably inclined, QCD is a way to get those dollars directly to a charity. And so the logistics here are important because if we distribute that money from an IRA, we cash the check, put it in our bank account and then give it to the organization we care about, at that point we have to give a big chunk to the IRS and less of our hard earned money goes to the charity that we want to support. What a QCD does is it allows us to give directly to that charity.  
 Many IRAs will allow us to actually get a checkbook so we can literally write checks out of the IRA to that charity and we’ve got to make sure that’s done before the end of the calendar year. That’s not something that we can wait and do by the filing deadline. But it does a couple of things for us, it allows us to give to that charity and get a tax deduction for it whether we itemize or not, which is huge because 90% of taxpayers at this point take the standard deduction. So for the vast majority of taxpayers, there is no tax benefit to charitable giving unless we are very proactive and intentional about it.  
 An added benefit of a QCD as opposed to just giving directly to charity is that it comes out a little bit higher up on our tax return and we won’t get into all the line numbers and technical terms there, but what that does for us, is that it gives us a little bit more room on some of the credits we might be eligible or some other things on our tax return that there’s just kind of that added bonus of doing a QCD. So it’s certainly worth looking at if you are charitably inclined and if you’re over the age of 70 and a half.  
Radon Stancil:Great. So we’re going to segue, we’re going to keep on this topic a little bit about charity and I just think because these are again things that people could do right now at the end of the year if they chose to do so that could potentially help them for 2022. So let’s talk about that. So you talked about a couple of things. The standard deduction. Before we go much more, could you explain real brief because we use that term and I don’t know that everybody understands it because they just get it and they just go, “Oh this is my taxable income.” Real quick, what is the standard deduction from a definition and then an amount of money?  
Steven Jarvis:So for our folks out there that are married filing jointly, for 2022, the standard deduction is $25,900. And to your point, Radon, and what that means is that the IRS is essentially saying, “Okay, we’re going to start with your income that could potentially be taxable. And then just right off the top, we’re going to let you deduct $25,900 that we’re going to take almost $26,000 and we’re just going to say nope, that piece is not taxable.” And that amount went up significantly a few years ago with the Tax Cuts and Jobs Act. It used to be a little bit more complicated as far as who could itemize versus take the standard deduction. And a lot of us were kind of raised on this idea that somehow itemizing is a win. And honestly, I look at it as if we’re taking the standard deduction, that means we get to deduct expenses that we didn’t have to spend. So I look at it as a win. But yes, that standard deduction is money that we just get to take out of our taxable income regardless of what else we have going on.  
Radon Stancil:Okay. So now that’s going to segue into this next part of the conversation because we were talking about this prior to our doing this particular podcast episode and we were talking about there are ways that people can take it advantage of things that they’re already going to do when it comes to charity. But maybe we can get them into a scenario where we get above that standard deduction and I just want you to explain maybe why a person might do that. So let’s just take an example real quick.  
 You just said that the standard deduction is nearly $26,000. So let’s say that a person, and I’m just going to use some numbers to make the math simple, normally donates to their church and they are charitably inclined or whoever they donate to, it doesn’t matter who they donate to, but they donate $15,000 a year. So that’s below that 26,000. So they don’t really get a lot of benefit from that up and above the fact that they are kind of getting it counted within the 26,000. Am I doing the everything right so far?  
Steven Jarvis:Until we have deductions that get us over that 26,000, great, we supported a charity but we didn’t get any tax benefit. You’re exactly right.  
Radon Stancil:So there are tools, one is called a donor advised fund, that I’m able to now say, hey, for the next 3, 4, 5 years, I know I’m going to give my charity $15,000 a year. So let’s just make the math easy and work off of a three year deal. So if I took a donor advised fund, I could take $45,000, which is three years of my donations and put it into that donor advised fund and get my deduction this year for the 45,000. Now I’m going to ask you a question. If I do that, is there benefit and why would there be benefit?  
Steven Jarvis:Yeah, so let’s work out the math here real quick. So if we now instead donated $45,000 this year, and one of the cool things about the donor advised fund is it still leaves us control of when and how we donate those funds. We have to say that these are going to go to charity, but we can still contribute those to whatever charity over the next couple of years. But so great, now we’ve given $45,000 to a charity, which is above and beyond the standard deduction by about $19,000. And so that means in this year when we created the donor advised fund, we now can itemize and get that deduction for $45,000. And in the next two years when we presumably won’t have a charitable contribution because we just front loaded it all, we still get the standard deduction of that $26,000 and it goes up a little bit every year.  
 So we got an additional benefit this year, which, depending on our tax bracket, that could easily be four or $5,000 in tax savings this year. So this is real money and my experience working with hundreds and hundreds of taxpayers is that there’s a very emotional connection to saving on taxes. And that’s a huge win. At times, even if we can just save several hundred or a thousand dollars, let alone four or $5,000 in your example here. Those are real tax savings right now in this year and we don’t hurt ourselves in future years because we still get that standard deduction.  
Murs Tariq:And I think for anyone listening, the donor advised fund, it is a really good strategy and we do have intentions on diving deeper into that on a future podcast, so stay tuned for that. But I want to move over to another topic. You mentioned there’s some end of year deadlines and a big one that we know of is Roth conversions. I think some people when they get to April of next year when they’re filing their taxes and they’re like, “Oh, I’ve got a window here in my tax bracket. Let me do a Roth conversion.” And they confuse that with the ability to do a Roth contribution. And so I want to talk about that real quick. The person that’s not at RMD age right now, they’re like, “Oh, I’m not 72 yet. I don’t have to worry about RMDs.” But a huge strategy that a lot of our clients are implementing right now is, what if I could get my IRA balances, IE, my future RMDs down by the time I reach age 72? And the way that we do that is Roth conversion.  
 Let’s talk about the difference between a conversion and a contribution. And then also how do you talk to people about how do they make the decision on should I do a Roth conversion or not?  
Steven Jarvis:Yeah, great questions in there, Murs. So yeah, the IRS doesn’t really do us a lot of favors in how deadlines are structured because you would like to think that everything related to Roth could all be due on the same day to make it simple for us, it’s not. To your point, we can make contributions up through when we file our taxes even into the next calendar year. We got to be really careful with how we assign those to which year it applies to. But distributions from an IRA have to happen by the end of the calendar year. And to do a Roth conversion, that’s the first step. We’ve got to distribute the money out of the IRA and then move it over into a Roth. And so we got to get that first step done before the end of the calendar year. So we want to make sure the logistics are dialed in. That’s why it’s great that clients can work with advisors like you guys to make sure that those things get lined up and done correctly. It’s really important we get the dates right.  
 But then to your second question of, okay, well why would someone do this? How would we step back and say, Yep, this applies to me and I should go ahead and move forward or consider, start looking at how much to do. And in general, the way I frame that conversation, we want to look at at two things. The first is, Roth gives us not just potentially tax savings, but also tax flexibility. So one way to think about this is, Mr. And Mrs. Client, all of my fictitious clients are Bob and Sue, so we can say, “Bob and Sue, someday you’re going to need a large chunk of money. Hopefully that’s for something fun like an RV or a fun trip with your family. It could be for something less fun like a new roof on your house or medical expenses. Would it be all right if we work together to create a tax-free bucket that would give us flexibility to pull those funds out when we get to that situation?”  
 And so there’s that flexibility piece to say, let’s look at our different potential sources of income and are we going to run into this issue where when we need funds, one of our biggest considerations is, well, how much is the IRS going to take? And so part of it’s just that flexibility. The other piece is, are you concerned at all that tax rates might go up in the future? Because if tax rates go up in the future, whether because the Tax Cuts and Jobs Act expires in 2025 and we already know they’re going to go up in 2026, whether that’s because we think that personally we’re going to make more money in the future when our RMDs kick in or we start taking social security or that we think Congress might change their minds and increase tax rates from what currently are historic lows.  
 If for any of those reasons we think tax rates might go up in the future, if we convert to Roth now we essentially are paying the taxes at a discount because we get to pay the taxes at today’s rates and then our Roth bucket is going to grow tax free. So anytime there’s concerns or the potential that a client’s tax rates might be higher in the future, then we absolutely want to look at getting dollars into Roth now while the tax rates are relatively low. The other thing I would throw out as far as things to consider for listeners thinking about their own situation is a really great time to be thinking about this is between retiring and then taking Social Security or RMDs kicking in.  
 A lot of people end up with a few years where their income is lower than it’s been when they were working and it’s lower than it’s going to be when Social Security and RMDs fully kick in. And so again, we have this chance to essentially decide, proactively pay taxes at what ultimately turns into a discount because in the future our tax rate’s going to be higher.  
Radon Stancil:All right, thank you. I’ve got a couple of questions on this. Let me have two questions on this, Murs.  
Murs Tariq:Yep, go ahead.  
Radon Stancil:All right. So we get this a lot from folks and they’ll say, they’ll ask a question. I just want you to explain this real brief if you could. They’ll say, “Hey, what is the tax on a Roth conversion? What’s that rate on the Roth?” It’s almost like they think is there’s a specific amount of money, percentage wise, that is on that Roth conversion. Could you explain, obviously, this goes a little bit into our whole tax code, but just the big idea here, how does it get taxed?  
Steven Jarvis:Yeah, so a little bit, it depends on your age, actually, because there are some potential penalties and restrictions on doing those conversions if you’re under the age of 59 and a half. But we’ll move past that, a lot of the people that we work with on this are over that age and we’re strictly talking about what’s the income tax going to be. So we’re going to focus on that piece. And so this is really impacted by what we call our marginal tax rate. There’s not going to be a quiz. Nobody needs to commit that to memory. The important part is, is how much tax do I pay on my next dollar of income? And so we do have to look at what your other income sources are and then how much we are going to convert to Roth because that does intentionally increases our taxable income in the current year so we can pay those taxes and be done with it.  
 And so it’s going to depend on your filing status, it’s going to depend on what other income you have, but there isn’t a set rate, which is why we can be strategic and we can take advantage of relatively low tax rates for people who are strictly funding their retirement through cash for a period of time. We might be able to convert at 0%. That’s my favorite percent to convert at. But there’s a lot of situations we come across where we’re converting at 10 or 12 or 22%. And again, depending on the situation is going to affect what percentage it makes sense to convert at.  
Radon Stancil:Good. Okay. I’m going to do a follow up now. And just so everybody knows who’s listening, some of these things we throw at Steven, this is not rehearsed, so I’m going to throw him a scenario and we’ll see if we can follow the math. Okay. All right. So we have a couple of clients that right now have done what I’m about to describe, meaning they’ve set themselves up for this and a couple that are planning to retire say next year. And they’re kind of setting themselves up for this, but here’s the scenario. I got a person who is under 72, so no required minimum distributions. They have some money in the bank, cash that’s already been taxed. And so when they retire, they on purpose have set themselves up so that they are not going to have any taxable income that year.  
 And they kind of talk about that and they go, “It feels good. I’m going to have a year where I don’t pay any taxes because I’m going to live on this other money. And then eventually I’m going to get my Social Security and I know that that’ll come in. But for right now, I’m going to do this.” Now we talked just briefly earlier about this thing called the standard deduction. So we’re talking about a couple, they got $26,000 deduction. So I want to ask you first, this person has zero income. How much could they convert at a 0% tax rate?  
Steven Jarvis:Yeah, for a couple that’s married, finally jointly we could convert up to $26,000. We would create $26,000 of income that would then immediately be offset by that $26,000 standard deduction and we would pay 0% tax to get $26,000 into a tax free bucket.  
Radon Stancil:Yeah, I think that’s a big eye opener to people. They don’t think about it that way. Now, if they wanted to convert a little bit more, then how does that work? And we don’t have to go through the whole thing, but just say they decided I’m going to convert $40,000. You don’t have to give us the exact numbers. I’m not trying to throw exact math at you.  
Steven Jarvis:I do have a cheat sheet on my desk I like to keep handy. So again, for a couple that’s married finally jointly, if we got up to $40,000, most likely we would definitely get the $26,000 at 0%, the next portion would most likely be at 10%. And so we’re just going to work our way through those tax brackets. But yeah, we have a huge opportunity there. And then Radon, this would have to be a conversation for a whole other podcast, but the thing to think about even further than that is that we can also look at intentionally recognizing capital gains because our 0% bracket for long term capital gains is actually much bigger than just the $26,000 standard deduction. And so when we have those years, when I come across people who have years with little or no income, my eyes light up and I say, “Okay, let’s really dive deep on this and see how much we can take advantage of at little to no tax.”  
Murs Tariq:Yeah, I think that’s great. So this episode has really been about, hey, we’re approaching the end of the year, some things that we need to be thinking on. Quick summary, everyone, is think about your withholdings, think about things you haven’t done yet like your RMDs. Those are due by 12/31. QCD is due by 12/31. Roth conversions due by 12/31. And then work with your CPA or someone just to be thinking about other things you could be doing to make your tax scenario a little bit more efficient. I think, Radon, you have one more question as we close out just to get this idea, this take from Steven on an act that was passed that made a lot of people nervous about the IRS is coming after us now.  
Radon Stancil:Just real brief as we close out here, Steven. We had this Inflation Reduction Act and the media loves to kind of pump it up and make us fear that there’s a big problem happening when sometimes it might not affect us. But this Inflation Reduction Act, for the average person that’s out there working, how does it affect them?  
Steven Jarvis:Yeah, so overall, there’s a lot of things floated related to taxes as part of the Inflation Reduction Act. But for probably the vast majority of your listeners, for a lot of Americans, there’s not going to be a direct impact. The one that felt the scariest was this headline of the IRS got funding to hire 87,000 agents. And I’m sure for most people, what immediately comes to mind is these are all going to be gun-toting enforcement officers who are going to come to their house and take all their money and their cat along with them. And that that’s just not the case. Part of it was that the IRS was already grossly understaffed just from a service standpoint. We won’t get into the philosophical, political side of what the IRS funding should be. We just now know that they’ve got more funding. Hopefully that means that their customer service will improve. It certainly will mean that they have more enforcement officers, but the chances of your average taxpayer getting audited are still very, very unlikely.  
 And one of the questions that I get as a tax professional is, “Okay, are you going to do anything different now that there’s going to be more IRS agents?” And my answer is a very confident and quick, “No, I’m still going to approach my job the same way.” I’ve always approached this from the philosophy of we should pay every dollar we owe. We just shouldn’t leave a tip. And so anytime I’m making a recommendation to a client, I’m doing that with, in the back of my mind, if I had to sit in front of an IRS agent and explain this, could I do that with a straight face? So is there a slightly bigger chance that questions could come up? Sure. Does it in any way change how I’m going to make recommendations to clients? Absolutely not.  
Radon Stancil:Well, thank you very much, Steven. We appreciate you coming on. I do want to do a quick reminder, if you’ve listened to this and you’re on a walk or you’re in your car and you’re thinking, “Oh my goodness, there’s a lot that was said”, we do have a blog that’s written on this as well. You can go to our website, which is pomwealth.net. Go to the blog page. You’ll see an entire article written on this particular topic. And if you have a question for Murs or myself, we’re glad to hop on a call. You can go to the website, top right hand corner, click on schedule call, and we’re glad to hop on a 15-minute complimentary, no obligation phone call to kind of walk you through some of these concepts. But again, thank you very much, Steven, and we hope to have you back here in a few months.  
Steven Jarvis:Absolutely. I love coming on, guys. Keep it up.