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Many of you wanted to know: What deductions can I look into to lower my tax burden if I’m not a business owner? We’re bringing back Tim Steffen, a CFA, CFP, and CPWA at Baird Wealth, for another Rich Girl Roundtable.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Mentioned in the Episode

• Who qualifies as dependents

• Standard deductions for 2024

• Itemized medical deductions

• HSA-paid expenses cannot leverage medical deduction

• Child Tax Credit

• Tax Cuts & Jobs Act (TCJA)

• Understanding Married Filing Jointly (MFJ); understanding your filing status (MFJ vs. MFS, Head of Household, etc.)

• Update your federal withholding on your W-4

• Charitable donations

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Katie:

Welcome back Rich Girls and Boys to the Rich Girl Roundtable weekly discussion of the Money with Katie Show. I'm your host Katie Gatti Tassin and every Monday morning we discuss a relevant money topic a little more casually than we do in our Wednesday deep dives, although I'm not sure how casual you can make tax talk and that's where we're going today. So here is a quick message from our sponsors before we get into it.

This week's upcoming main episode is about why lower interest rates may not always be the answer. We've all been eagerly awaiting the Fed to lower rates, particularly for housing purposes, but a 3.5% interest, that's probably not something we're ever going to see again and paradoxically might not even be the panacea that we think it's so that is going to be a really fun episode. But in the meantime, onto the round table. Henah, how are we today?

Henah:

We're good. I love when you use the word panacea casually in conversation. This week's question is, it came from many, many folks actually. What deductions can I look into to lower my tax burden if I am not a business owner who can get write-offs, including myself? So we're bringing back Tim Steffen, he was our CPA, CFP, Certified Private Wealth advisor, all the things for another edition of Rich Girl Roundtable. Tim, welcome back to the show.

Tim:

Thanks for having me again. Great to be with you both.

Henah:

Absolutely. So is there a place you'd love to start this conversation, Tim? We got a lot of places we can go.

Tim:

Yeah, so I'll start with this one. The question I get from folks always is tell me what I'm missing on my tax return. What are the things that all the rich people do to not pay tax that I'm missing out on? And it's often my job to break the news that you're probably overstating what's really happening there and there isn't that silver bullet out there that just going to wipe out your tax liability. So we have to just kind of level set people first and say, all right, there are things you can do to reduce your tax liability. Most of those involve spending your money or giving your money away or some sort of an expense like that. So there's no magic wand. I can wave over your tax return to make your tax bill go away, but you still keep all the money. That's a little bit tricky to do. There's a couple things, but for the most part, if you want to reduce your tax liability, you got to give up some of the money to go with it. So we'll start with that and that's kind of just level setting and then we can get into some of the specifics that people like to think about or maybe aren't as familiar with.

Henah:

I learned that the hard way when I had that AKA that $8k tax bill and my CPA was like, well you could give $5k to a IRA or something and I said, so I got to put more money so that I can gain maybe $1,200 back. This feels like a sham. I'm

Katie:

Like, I want to talk to this man.

Henah:

I just want to talk to Uncle Sam myself. So Tim, let's start maybe with parents. That was a big question that we got.

Tim:

Are there tax benefits you can get associated with your parents? Yes, it's not easy but it can be done. The big thing for parents is that they have to qualify as what's called a dependent. So if your parents are living on their own, working, living on some social security, IRA withdrawals supporting themselves and you may throw a little money their way once in a while to help 'em with some expenses here and there. Probably not going to count as a dependent. And then all you're doing is making a gift to them and gifts to individuals are non-tax deductible. There's no immediate benefit you get by making a gift to your parents or to your kids or wherever that might be.

Henah:

Katie, I'm rescinding your birthday gift right now. I'm so sorry.

Katie:
Oh man.

Tim:

Yeah, the cost of that gift just went up a little bit, huh?

For your parents, if they do qualify as a dependent, then you maybe got some options. And typically in those scenarios the big expense you're paying on their behalf would be medical expenses. So you're paying for their healthcare, maybe in a nursing home, something like that. In those cases, then those expenses are medical expenses for independent and they are deductible. Now, just because something is deductible doesn't mean it actually saves you taxes. So that's where we get into the whole, well what are the rules and how do I deduct it and when do I deduct it and what are the limitations and what's the maximums minimums? And there's a whole set of rules that apply to every one of these different expenses. Medical is no different. So again, just because you pay to deductible expense doesn't mean you get a tax benefit.

Katie:

Can you say a little bit more about that? Are you referring to the fact that maybe these are things where you would have to itemize in order to get the deduction? Like you would have to forego your standard deduction, which given how high it is, is probably not going to be the right move for many?

Tim:

That's exactly right Katie. So there, when you look at your tax return, there's really two areas where you might have expenses that reduce your ultimate tax liability. One of those is a set of what they call adjustments. They're relatively uncommon things that most people don't have. There's two or three that might be a little bit more common, especially if you're self-employed, but that's one set. Then you've got what they call itemized deductions. They're sometimes referred to as below the line deductions because they come after your adjusted gross income and there are two different types of deductions. You have the standard, which you mentioned before, it's a flat amount that every individual or married couple gets that reduces their tax liability and that for a married couple, now that number is approaching $30,000 for 2024, it's a pretty big number. And then if you're over 65, if you are blind, you get an additional amount on top of that.

So a retired couple could be looking at a standard deduction in the low thirties, a pretty meaningful number. The other side of that is your itemized deductions, and these are expenses that we all incur that if they meet certain rules can be deductible. And if your total itemized deductions after going through all the limitations that apply are greater than your standard, you become an itemize. Otherwise, you are a standard deduction person with the rules the way they are right now, the we've seen over the last few years that about 90% of all taxpayers use the standard deduction, about 10% itemize. So that means those expenses that we all incur and most of us incur, some of these 90% of us don't get any tax benefit for those expenses. We're talking about things like medical expenses, mortgage interest, investment interest, charitable contributions, state income taxes, property taxes, casualty losses, all of those kind of things are expenses that can be fall in that itemized category. And again, only about 10% of individuals actually get a benefit from those items.

Katie:

Are we correctly understanding that the medical example falls into that category? So it's medical. What about the student loan interest deduction? Is that something you have to itemize or can you add that to the standard?

Tim:

Great question. So medical expenses are part of that itemized deduction category. They're the below the line expenses and medical in particular has a unique rule that says you can only deduct medical expenses if they exceed 7.5% of your income. So let's say you're somebody who's adjusted gross income is a hundred thousand dollars seven half percent of that is $7,500. Your first $7,500 of medical expenses provide you no value, but that next dollar becomes deductible after that and gets added to all your other itemized deductions. And if those in total exceed the standard deduction, then you get a benefit for those.

Henah:

Can I ask a clarifying question there? So when you say $7,500, let's say that you're paying for, I dunno, IVF and you have your HSA or FSA funds, can you use that money towards those and then if you surpass it, is that deducted from that or do you have to pay an additional $7,500 for that account since that is pre-tax money?

Tim:

So anything you pay from a health savings account is considered non-deductible. You already got a tax benefit because you're paying it with dollars that you never paid tax on to begin with.

Henah:

That's what I figured. I wanted to be clear. Okay.

Tim:

Yeah, so if you pay it out of pocket, that's deductible. If you pay from a health savings account, that's not

Katie:

So no double dipping?

Tim:

No double dipping man.

Katie:

This healthcare system, boy, it's the gift that keeps on giving. It really is

Tim:

Another example that would be like insurance premiums. Your insurance premiums, if you're employed, those are paid with pre-tax dollars out out of your W-2 through your employer. You can't take a deduction for those. If you have private insurance, you might be able to deduct those.

Katie:

Interesting. Thank you for making that distinction.

Henah:

So I think we've covered taking care of your parents. You've talked a little bit about student loan interest, mortgage interest, medical bills. Was there anything for childcare that we should consider?

Tim:

There's a couple of tax credits that are out there for your kids. So yes, your kids do provide some value from a tax standpoint. The two credits that are out there that we like to talk about, there's one that just called the child Independent Credit. And what that says is you can get a tax credit of up to $2,000 for any child you have under age 17. Now there's income limitations on that for a married couple. If your income exceeds $400,000, you begin to lose the benefit of that credit. It starts to phase out. Single person would be $200,000, but you can get a $2,000 credit for any child who's a dependent of yours under the age of 17 if they're 17 or older or you have other dependents like going back to our parents again, you can get a $500 credit for those individuals and again, subject to the same phase out. So if you're a married couple with a couple of kids, those kids are worth $2000 bucks a piece to you from a tax standpoint.

Henah:

Time to start having some kids.

Katie:

Should we take a step back and more broadly define the difference between deductions and credits?

Tim:

Great point. So a deduction is an expense that reduces income. The amount that's subject to tax a credit is something that reduces the actual tax cost. So a $1,000 deduction might save you depending on your tax rate, anywhere from either $100 to $370 on $1,000 deduction, whereas $1,000 credit, that's $1,000 in your pocket. So there is a big difference between a credit and a deduction.

Katie:

I want to get me some of those credits.

Henah:

Tim, as a remote employee myself, this was very valuable to know, which I don't think will work in my favor, but a lot of people wanted to know they're a remote employee who works from their home. Sometimes their employer pays for the internet, some of them don't. Are there any sort of tax deductions that they can claim if they work remotely full-time?

Katie:

For a W-2 employer, not as a self-employed person.

Tim:

That's an important distinction. So if you're a W-2 employee, you're an employee of someplace your expenses that are not reimbursed by your employer. Under today's laws non-deductible, they used to be deductible prior to something called the Tax Cuts and Jobs Act. So since 2018, those unreimbursed business expenses of an employee no longer deductible, that may change come 2026 when that particular provision expires. And we can talk more about that some other time, but there is a lot of things might be changing them, but that particular deduction right now doesn't exist. Self-employed, different answer to that. But as an employee, no unreimbursed expenses like that can't be deducted. So your best bet is go back to your employer and say, Hey, will you cover some of my expenses as an employee if they would do that?

Katie:

The answer is no.

Henah:

Katie,

Tim:

Sorry to a can of worms there.

Katie:

Tim, you just put me so on the spot my man. No, I'm just kidding. That makes sense. I'm also nervous for 2026 because I'm afraid they're going to cut down that standard deduction, which I guess is good news for people who have been paying a bunch of mortgage interests and are like, I'm not even able to itemize this because the standard deduction is so high. But as a proud renter, I'm like, no, please don't take this away from me.

Okay, so one big category of questions that we got was all about married filing jointly versus filing separately. Can married people even file single isn't the option only you have to do married filing separately. It's not a legitimate tax status with the IRS to file single if you're married. Help me understand that distinction first.

Tim:

Yeah, that is correct. So filing status first off is based on your marital status as of the end of the year. So all those people who like the romantic idea of getting married on New Year's Eve and having a big wedding that day, just understand you are now a married taxpayer for the entire calendar year, whereas if you'd waited one more day, you'd be married the next year. And when you switch from being single to married or being from married to single, there's a lot of tax planning that goes into that. So understanding your marital status, and I hate to say this time your wedding to make the most tax advantageous date.

Katie:

Now you're talking, I put married filing jointly tax breaks in my vows that I read in front of our family. I said, I am so happy to be standing here because I have calculated the benefit. And it is great.

Tim:

Once you're married, your only options really are married, filing joint, married filing separate. In almost all cases it makes sense to file jointly. You can choose to file separately about the only time it really makes sense is if there's some sort of a student loan forgiveness angle there. Sometimes if one spouse has some very unique deductions or credits they might be eligible for, you can file separately there. I often see couples who are on a second marriage, they're each married for the second time, they'll file separately acknowledging that it may cost them a little bit more, but they just really want to keep their finances separate.

Katie:

Oh my gosh, Tim. I thought you meant people that were maintaining a secret second marriage on the side.

Henah:

I was looking at your face and I was like, why does she look so surprised by this? This makes sense.

Katie:

I was like, you have clients that are like, you know what, my other wife in Omaha, she really, oh my gosh, okay, onto your second marriage in a linear fashion, not simultaneous. I'm up to speed. Thank you.

Tim:

Got it. I will be more careful next time on that one. So again, married filing separate generally going to cost you more tax overall. Some people like to do it just to keep the finances separate. Generally married filing joint is going to be your better answer. And then if you're really worried about keeping finances separate, you can do an allocation. Your accountant can help you figure out whose income caused what portion of the tax liability. A little bit more complicated, but if you're paying less tax, you can still allocate it between the two if you really want to keep finances separate.

Katie:

I wanted to ask too, with the student loan forgiveness piece specifically, is it true or fair to say that the analysis, the cost benefit analysis that someone should be running is, okay, I'm in this couple, we are married, our joint income is X, my income is Y, which is less than X. And so if we file separately, then they'll only look at my income for the purposes of determining my monthly payment so I can calculate that number and figure out how my monthly payment would change. But then I have to compare that with how much more I'm going to be paying in taxes potentially as a filing separately household than as a married filing jointly household and determine if that tax differential is more or less than the savings in your monthly payments.

Tim:

I think you nailed it. That's exactly what the analysis would be is how much loan forgiveness will I be eligible for by filing separate compared to what is the net increase in my tax liability. And that's not to say there's always going to be an increase. There will likely be an increase in tax by filing separately versus joint, but there could be scenarios where there's not. So you might get a win on both sides there, but in general, yeah, you're going to pay more by filing separate. So then is that extra tax cost you're going to pay offset enough by the loan forgiveness and that's a unique situation for every individual.

Henah:

To wrap up this section, before I move to tracking your deductions, I did want to flag a very funny question we got where someone said they keep not withholding enough, should I just add some children in there or add extra expenses so that they keep holding more? And I said, ma’am, I think that's tax fraud. So leading into this, how do we track these deductions accurately and on paper so that we know that we're doing the right thing when tax season comes along?

Tim:

Well, just to go back to that specific question, if somebody's worried about not having enough withheld, the last thing you want to do is add more exemptions that will just continue to lower your withhold even more. What you want to do is say, alright, do the math and figure out whatever your flat withholding is going to be based on my income and then take an extra a $100 a check, $200 a check. Many people do that,

Henah:

Right, which you can do in your W-4 at any time in the year.

Tim:

Absolutely. And that's especially the case for people who have non withheld upon income. You have a rental property, you've got a lot of investment income, a side business of some kind that you don't pay a tax on. You can have that paid through the withholding. So that's fairly common.

Katie:

Yes. My boy, Terry gave me that tip. I said, should I be making quarterly payments on this side hustle? He's like, no, dude, just increase your withholding on your paychecks and your golden. And then I didn't do that either and then I owed a bunch of money in April, but it's okay. He was on it. I just was like,

Henah:

And that's why we have Tim on the show and not advice from Katie on taxes.

Katie:

And that's why Tim is here. You know what though? I do think we could have an entire separate podcast just titled, is this tax fraud? Absolutely. For all of the tax related questions that we got, because that was the TLDR of most of them is like, is the IRS going to come for me if I do this? Usually, yes. Okay, Tim, please continue.

Tim:

So what I would say on that is kind of use some common sense. If you hear somebody say, Hey, you could take a deduction for this. You're like, huh, that doesn't quite sound right. I should probably dig into that. And anything else, if it sounds too good to be true, it probably is. There's a lot of misinformation out there these days on what's deductible and what's not. So just kind of have your radar on, use some common sense. Rely on a professional if you're not sure of things. For most individuals, deductions are pretty straightforward. It's going to be your state income taxes if you own a home, your property taxes and the interest on your mortgage, medical expenses if you have enough to get over the threshold that we talked about. And then charitable gifts. And it's really pretty simple these days because of the changes in that TCJA several years ago, they eliminated some of these other things like moving expenses and casualty losses and unreimbursed business expenses and advisor fees and all those other kinds of things that were a little harder to track.

Charitable gifts is probably the one that most people struggle with in trying to figure out, all right, how do I value these things? How do I keep track of all that? Personal finance tools do a great job of that. I'm a big Quicken person. Not to throw a plug there, but I've been using it for a long time. It works very well for me. Other people use other tools. There's a lot of online tools you can use nowadays. The old Excel spreadsheet works pretty well too, as long as you're diligent and keeping up with it. So a lot of ways to keep track of those things.

Henah:

What I personally do with charitable contributions is every time I get the donation receipt in my email, I just put it in a folder that says donations for 2023, whatever the year is. And that's been really helpful. So that is great. Anything else you wanted to add, Tim, before we wrap up today?

Tim:

Keep those letters. There's been some famous cases of the IRS disallowing deductions and people didn't have those letters, so yeah, absolutely keep them in there. But on the flip side, if you know you're not going to get over the standard deduction, don't worry about it. Give the gift. Feel good about giving it to the charity. Don't worry about the tax implications. Not going to matter.

Henah:

He said just don't give. Just be stingy.

Katie:

Just don't give.

Henah:

Totally kidding.

Katie:

That's what I do. No, I'm just kidding. And on that point though, on the charitable deductions point, I feel like we've kind of danced around this, but to really double down, you cannot deduct charitable contributions I think above what, $300? Unless you're itemizing.

Henah:

It used to be $600…

Tim:

If you're not an itemized. Yes, correct. That's changed recently. So I don't want to give you an answer that I'm not certain of on that one. It was $600, it was $300, then it went to $600. I believe it's back to zero to be honest with you. I'd have to double check that though.

Katie:

Yeah, I was going to say I know it's gone. $300 is the number that sticks in my mind, which tells me that that was something that I had done one year, but I don't remember for the purposes of this conversation, it's not important probably, but it's not like if you give $5,000 and that's your only itemized deduction, you can't deduct the $5,000 if you're taking the standard. So I think that's also important to say, still give your five grand, but you're not going to get a tax break for it be altruistic people.

Tim:

Exactly. Quick scan of the 1040 and I don't see the line on there for the charitable gift anymore, so I think that might be gone now.

Katie:

We need to get Tim on literally every tax episode. This is amazing. We have ChatGPTim for taxes. Alright, well that is all for this week's Rich Girl Roundtable. We will see you on Wednesday to talk about our frozen housing market and what the ideal interest rate might actually be because you're probably not going to deduct that interest anyway. Alright, see you.