025 - Wealthy Accountant

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1 - 11 Jonathan Mendonsa Alright we're back in the studio you know guys I always say it's hard to win if you don't know the rules and today we have a wealthy account in the studio. And Brad I am super excited to get a chance to really go through some of his content.
11 - 49 Brad Barrett Yeah you and me both Jonathan. This is an episode I've been looking forward to for quite some time. We met Keith down at Camp mustache in Florida and as many of you know I'm a CPA but I'm a CPA in name only essentially at this point. Keith is the most knowledgeable and exuberant accountant I've ever met and that's not a word you normally hear tied tied with accounting. But he just loves this stuff. You can just you can feel it when you speak with him when you're in the room with him. He just he absolutely loves this stuff. And yeah we cannot wait to really present this to you. So yeah this should be a phenomenal episode.
49 - 65 Jonathan Mendonsa You know I like using adjectives and threes so knowledgeable enthusiastic and I would say prolific. The man writes three articles a week it's unbelievable and I love reading all of his all of his blogs all of his articles. I learn something new from every single one of them. So Keith welcome to the studio today how you doing buddy.
65 - 70 Keith - the Wealthy Accountant Doing pretty good but you've got to wait a second I'm still dancing to that intro music that you had.
70 - 83 Jonathan Mendonsa Yes. Pretty awesome isn't it. You're actually in Wisconsin and you're the accountant for Mr. Money Mustache who is in Colorado. So we got East Coast Central and West Coast are all bases are covered here.
83 - 100 Keith - the Wealthy Accountant All the bases covered. And I have to say that it's kind of strange that I am from Wisconsin though because coming from Wisconsin being the eighth highest tax state in the country and I'm going to read a blog on how to cut your taxes. I haven't understood this you know geographic arbitrage thing very well yet.
geoarbitrage, tax
100 - 102 Jonathan Mendonsa Yeah you would think that you just move right.
102 - 112 Keith - the Wealthy Accountant I should if it wasn't home if I didn't have family here would be much easier. But boy I tell you the climate and when the governor sends me that thing every year around April it really gets me thinking.
112 - 113 Jonathan Mendonsa There's the rub.
113 - 114 Keith - the Wealthy Accountant There's the rub.
114 - 118 Jonathan Mendonsa So Keith you came on the scene. Did you start writing at the beginning of 2016.
118 - 195 Keith - the Wealthy Accountant I started writing the wealthy accountant blog a little over a year ago and how that started was is. I had done writing in the past and I had written some books I've written some other blogs. None really had a whole lot of success but it accomplished what I wanted to do. Then about three years ago I met Pete over at Mr. Money Mustache and I went to see him because I wanted I had one of these business propositions. And so I had this idea I go over to camp mustache in Seattle which was the second one. And I said to my wife that I would schmooze him for a couple days not the last day spring this great business opportunity that I wanted to partner with. So the first day we got there and I said Well as long as I'm there I'll do. I'll do a presentation on you know LLC's and S-Corps things like that and Pete shows up in my presentation which I thought was pretty cool sat straight across from me in about 10 minutes into my presentation. He goes You're my accountant and I stop for a second. That was a tell. And when he did that I was like OK. And I kept on going. And after the presentation was over he came up to me and said When I say something I'm going to do it. I told him I said I had this great idea to present to you this isn't the interaction that I wanted to go and the rest is history as they say.
195 - 232 Jonathan Mendonsa And this is really remarkable just because I know that he has been you know there are accounts from all over the country that have tried to get access to Pete and it's pretty cool that you know you are able to tell a story essentially you were able to present an idea that essentially crystallize something for him that he had not considered and he decided to bail on Turbo Tax. You know in the community we are just by our intrinsic nature we are DIYers. You know we're going to do it ourself and we're going to we're going to do and we may screw it up but we're going to learn something along the way. And I'm sure Pete is probably the worst of us at that. And in this particular case you presented that idea that so transformed the way he looked at a problem that he just said you know what I'm going to give this one to you.
232 - 314 Keith - the Wealthy Accountant Well I think what stuck out in this whole presentation is that he was and I got to make sure I say this in the correct way. I don't want to be giving away his personal information but he was he was structured in a way that maximizes taxes versus minimizing it. And Pete does a lot of things himself but he's also a very intelligent man and you can see that by reading Mr. Money Mustache. He's an incredible individual and shares a ton of great information. Now when he heard me speak about d doing an LLC as an S-Corp he knew right away he's going to be saving money and he knew I understood something other economists weren't telling him. So he took to that very quickly and we had some good conversations. The funny thing about it is people sometimes get the impression that Pete and I are charming together all the time and we're not. They also sometimes get this impression that every time Pete gets a piece of taxes vice from me he follows it. And that's not necessarily true. For example when he wrote an article a few months back on donating money to charity he was going to donate a hundred thousand dollars. And when he said he was going to do that he called me first so I was going to happen. And I gave him all these great ideas to save the maximum amount in taxes. And he looked at it he said that's too much work and disregarded everything I said. So he still thinks for himself and that the do it yourselfer is kind of hard to get rid of.
savings, tax
314 - 332 Jonathan Mendonsa That's awesome and that's a great story. So is there any way could you give us an idea of you know just by making that one change how what percentage or what dollar amount I mean how much is making a simple change like filing as one over another what is that worth on but not necessarily people I should say a business that's making 400 $500000 a year.
332 - 432 Keith - the Wealthy Accountant Well it depends on the facts and circumstances so let's look at it this way. Somebody comes into me and let's start with a smaller business which I get accused sometimes of always focusing on business and to big businesses. But let's look at somebody smaller safe side gig or maybe has a business that's doing let's say $100000. This strategy is going to work really really good for those people because they're going to take half of their income or approximately paid as a wage to themselves. The remainder is going to come through as a distribution or dividend through their S-Corp and they're not going to pay any fica tax so they're going to save you know maybe seven eiht thousand dollars in tax. Pretty simple. Now somebody comes along and they say I'm making a half million per year. The problem that you run into there is they now have an issue with the social security cap so you get to 120000 or so and then you don't pay Social Security you just keep on paying Medicare so that low hanging fruit starts to go away. There are still advantages but they do tend to be mitigated. The strategies change depending on again facts and circumstances. So when I talked to Pete about becoming an S-Corp I saved him a lot of money. But part of the reason I save the money is because Pete and his wife both own the business they're both doing things as both things are going on. Now that doesn't mean that each had an equal role in it. So what I did is I modified the payroll so that it reflected the reality of their business. And I was able to save them more money than than originally anticipated. But for someone coming in if they're a single owner of a business and they made a large amount of money then my advice is going to change. So every time it's facts and circumstances.
socialsecurity, tax
432 - 476 Jonathan Mendonsa This is awesome you know our audience is wildly varying and income brackets I mean everybody from you know 20 to $30000 a year to people that are making upwards of a half million dollars a year. I'm convinced that every single tax bracket is represented in our audience. And to me the cool thing about what you do in living inside the margins of the IRS tax code essentially is that you have had you've been forced to the nature of your job you've been forced to figure out how to optimize each one of those situations. And then if we can just turn that into a conversation. How many people can benefit from that information just by them knowing the rules and how much peace you have knowing that you have optimized it as best you can for your specific situation as opposed to not knowing and just hemorrhaging unnecessary dollars.
476 - 592 Keith - the Wealthy Accountant Well let's look at this even a little bit different. Let's take a look at this from a current standpoint so I know this is a podcast I know that we're we are recording today but it will present in a few weeks. I also know the people down the road will be listening to this but I think currently in 2017 a big issue is tax law change and as we're recording this. Yesterday the president said I'm going to change the tax code I'm going to have this big tax cut and a lot of people have questions on that. Now people that are asking the questions are are making valid questions but the questions are there because they don't understand what's being presented and that's because it's big it's still in its early phases and almost certainly will not make it through Congress. But I think that what we need to consider and every business owner especially whether it's a side gig big business small business. The idea is that we're going to get taxes down to 15 percent versus 35 percent. Now why is that important to the small guy. So if you're a big corporation and your top tax brackets 35 percent and makes a whole lot of sense. But if you're an S-Corp you say wait a minute I don't pay any tax. I pay income tax on my personal return but I don't pay tax on a business level. What's being proposed is taking those distributions from S-Corp and capping those at 15 percent. That would be massive for almost every business owner. But if you have a partnership it's probably not going to work as I currently understand this proposal. So I think everybody needs to keep their eyes and ears open. I think that there will be some tax law changes I think businesses have some opportunities. And you always have to be fluid with taxes because the rules change the tax court changed the rules interpretation and in 2017 I'd be surprised if we don't get some kind of tax reform though it may not be as draconian as is anticipated.
hustle, tax
592 - 607 Jonathan Mendonsa This is awesome you know. I bet you there's a large percentage of our audience that has no idea what you just said. But at the same time was incredibly excited by what you just said because the idea there is if you know the rules or at least you know who to go to who knows the rules you can win. And that's what we're trying to do.
607 - 638 Keith - the Wealthy Accountant The rules for business are of course a lot wider so I have a lot more opportunity if you have a business. I want to make sure that in this conversation in this podcast that we touch on the business end but we also talk about things that are business related that people don't always think of as being business related. And talking about some personal things you can do to maximize your tax efficiency and just hasten the ability to retire which I define as being able to do what you want not necessarily quitting a gainful employment business wise or as an employee.
638 - 682 Brad Barrett So Keith let let's set up a scenario here and we didn't actually clue you into this before about it but I'm curious if we could talk through this so hypothetically or not so hypothetically Jonathan I are starting a business right. We're starting choose FI. Talk us through it as as an accountant because there are plenty of people out there listening to this who are thinking about starting a business who have just started a year or whatever it may be where would you start to your business entity structure things to think about. Jonathan has talked before him you know like how do you get your kids involved. So potentially they can earn some income and you can dump it in a Roth IRA or how do you get your spouse involved. You know etc etc and I love to hear just some some real high level thoughts on that. You know if you think that's a valid thing to talk about.
2ndgenfi, accountant, ira, roth
682 - 763 Keith - the Wealthy Accountant Those are powerful tools. Here's what I would look at if it's if it's day one of a business. I'm going to ask some questions that are going to help me start the process. My first thing is I'm probably going to ask you to be an LLC but I'm not going to ask you to be an S-Corp until after the fact when it makes sense. So it's your first day on the job you're starting ChooseFI. Things are starting out to be quite honest you probably have a default in your LLC to a partnership. And if you say you want your wife involved a spouse involved that's fairly easy to do as long as they are really actively involved and get a paycheck. They can use all of the retirement accounts that you would ever run through the business. There's an economic reason which it's easy to get. In most cases for your wife to come along on business trips I think that that's a very doable thing as well. The kids are a little different story. Now if you're a sole proprietor or if you're a farmer or any any of these basically single owner businesses no entity structure if your kids are minors you can pay them and there's no worry about lica tax. But if you have an entity that rule changes because you're not the one paying then the entity is you can still pay them. But there can still be issues with Fika taxes and that kind of thing involved in it. So it gets. So yes you can do it where they can put money into a Roth though it may not be as completely tax free as you would like it to be.
2ndgenfi, roth, tax
763 - 773 Jonathan Mendonsa Dude I'd like chills in my spine. The idea that I'm going to learn these rules as part of a conversation. I can go back and I can reference this any time. You know as you build a business and as you start to flush this story out very very cool stuff.
773 - 923 Keith - the Wealthy Accountant Yeah. Now once you get a little bit bigger OK now you got a couple of pod cast so it is growing it's getting bigger. My next question to you is going to be what is your profit. I'm not so interested in your revenue I want to know the bottom line. When I started asking you about your income the reason why I'm asking about income is because I want to know when I want to treat your LLC as an S-Corp. The nice thing about an LLC is it allows me to change my mind periodically and I'm like that I'm not I don't I don't stick with things. I'm one of these guys I'm all over the place. And the reason why that cool with an LLC though is because I can save you money with different entity structures and the LLC allows me to do this. If you're telling me that yeah I make $10000 doing this I'm going to say that's wonderful. Keep your structure as it is. Now see it is being treated as a partnership and I really can't save you a lot of tax at that particular point. Maybe we can do some retirement accounts. If you start making thirty thousand or so a year I would think 30000 is kind of a floor. Then if it's going to be consistent then I want you to get this LLC being treated as an S-Corp because now we can take some of that income treated as a wage a reasonable wage and the remainder is going to flow through to you outside of the Fica Tax. Once your income goes about 50000 I personally think it's pretty much all net at that particular time. As long as it's a business I'm not talking rental real estate that's a different type of business. You would not be an S-Corp ever with that. But for a business like you have or like an accounting office or maybe you're doing some roofing or a business of that type you want to then be an LLC treated as S-Corp. Now I'm going to put a caveat in there just so people understand this. You can wait until you reach a specific marker before you make that selection. So for example I don't have to go out there and specifically today fill out all the forms to be treated as an S-Corp. I can wait until later in the year and you say guess what Keith. I'm doing really good. I'm making some money it came true. It wasn't just a dream anymore. And I say wonderful let's fill out these forms to be treated as a S-Corp. We have a rough prok ruling that you can put in the tax return we attach this to your tax return even though we may file it during the year we make sure that you act like we want to make sure that you act like an S-Corp so we can do it later in the year and say wait a minute IRS I'm acting like an S-Corp. I just didn't get to the point of actually filing for it. So I can look back in time and have 20 20 hindsight where I'm going to get the best tax advantage.
923 - 988 Jonathan Mendonsa This is really cool man. One of the things I want to do is just kind of as we're going in I'm benefiting from having your article here in front of me so I just want to put a couple of numbers to it. But let's just let's take your advice for the two different cases that we've talked about so far without getting into the weeds because people can just go to your blog and they can read through this. But on a $30000 profit based business business makes $30000 a profit a year. The advice that you're just now giving to us is worth about $1800 which is pretty darn decent. And on the same line the advice you're giving us if you have a business that's making $50000 a year profit that's worth about three grand. Just just by making that one change you want to keep an extra three grand in profit than follow your advice and I kind of like the idea that for these different brackets where people have these side hustle so they have these businesses that they've developed that are now earning profits so they have a business just by following the advice that we're talking about at an extremely high level. We know this but the idea is like you could take what we're doing and take this information to your accountant and this advice is just save the $30000 profit business and just save you 1800 bucks and saved the person that was making $50000 just saved you $3000 just because for the first time you are exposed to what the rules look like inside the margins of the IRS tax code.
988 - 1094 Keith - the Wealthy Accountant Right. You know when you're in business and I'm going to say this kind of tongue in cheek because it's not 100 percent true and people will sometimes argue with this a little bit. But you know pick your tax bracket. And what I mean by that is there's so many things you can do in a business so let's take an example you come to me and you say hey I got Choose F-I we're doing pretty good. I think I'm ready to be an S-Corp. But there's a cost of being an S-Corp. You got to pay for an S-Corp tax return. Now you have to pay for some payroll even if you're just paying yourself. But then you say to me as I start questioning you you say hey we bought a bunch of equipment and we bought a new computer system. We bought some new computers we bought new software and new microphones. And we spend let's say $20000. And the company that sold it to us said we'll lease it to you as a lease agreement and you'll pay zero percent interest you'll pay it over three years or five years. And at the end it's a $1 buy out. So whether you pay cash now or spread it out over three to five years cost exactly the same thing. The IRS says if it's a $1 buy out lease you own it. That means you can deduct that right now. Because under tangible property rules every item under twenty five hundred dollars is under tangible property rules just written off. If you make an election and if you have something over twenty five hundred under Section 179 you can just expense that in most cases in which case I'm going to say hey you made $30000. No you didn't you only made 10 this year. Next year we'll worry about it so we saved you not just money on taxes but money on some of the daily needs to be a corporation so we can save you some money in accounting fees payroll fees as long as possible. So here's the thing. Always keep it as simple as possible until you have no choice but to go forward. To get that tax benefit.
1094 - 1124 Brad Barrett Hey Keith real quick. Since you talk about obviously the facts and circumstances being different let's just say hypothetically because you know a lot of the people I'm I'm really trying to put myself in the shoes of someone who is out there listening to this podcast and is thinking about starting a business. Right. So let's just say hypothetically they make a good salary at their job they're even over the the Fika cap. Right. So they're making over 120 K is their value is their value in the S-Corp election. Then where does it go away. Once that individual has already reached the cap.
1124 - 1277 Keith - the Wealthy Accountant Well it doesn't go away because they're still going to be that Medicare portion which is 2.9 percent. Remember if you work a job for somebody else you pay 1.45 and your employer pays 1.45 when you own your own business your employee and employer you pay 2.9 so you save that. The second thing is is it's much more clear. Once you become an entity and elect to be an S-Corp. You can now have an office space so you might be doing this let's say out of your home. You say I have this business I want to keep expenses low. So I want to have an office in the home. Now you can rent your home from yourself. Now I want to be clear with this if you say I got an office in the home as a sole proprietorship it needs to be regular and exclusive. Those are the words the IRS uses. That means that if you have a separate bedroom used only for business you can take that pro-rata share of all your expenses in the house and deduct them you will avoid fika taxes on those. Everybody's happy. But I hate the rule because you can't use a corner of the living room you can't use a corner of the basement that has to be exclusive has to be regular. And I'm limited to only the actual expenses. Now if I'm an S-Corp an LLC treated as an S-Corp what I'm going to tell you is you need to rent your office space in your home to your corporation to your entity. So you charge a fair rent. So let's say your deduction as a home office is 2000 per year but you might be able to say a fair rent is 500 per month $6000 per year. Now you've rented your home or your office for the benefit of the employer doesn't have to be regular or exclusive It has to be for the benefit of the employer. Much easier hurdle to jump over. Number one and number two instead of avoiding Fika taxes on $2000 I now redo. I don't have $6000 the deduction but you'll say wait a minute. That's that's crazy. I'm an S-Corp I'm already avoiding Fika taxes on that. But remember what I said you have to pay a reasonable wage. Safe Harbor for a reasonable wage is 60 percent. Now you might be able to get away with less because of facts and circumstances but as a one man army 60 percent is a pretty nice place or at least minimum 50 50 50 and payroll 50 is a distribution. Now why is that important. If I have a bigger expense for my rent to my house I have a smaller profit and my safe harbor just went down too which means if I'm making 100 grand a year I just allowed myself to reduce my paycheck by $4000 and avoid. Another level of self-employment tax.
1277 - 1298 Jonathan Mendonsa Wow dude that's a game changer. And you know I have been looking at the home office deduction trying to figure out what I would need to do it and it's regular and exclusive it's kicking my tail just absolutely. You know when I dig down into the weeds on what that actually means it's like I don't even know what that would look like what you're describing is a completely different and much less stringent application of tax law if you do it the way that you just described.
1298 - 1376 Keith - the Wealthy Accountant Absolutely and I. Any time I can do something in tax school where I can simplify the process lower the bar. I want to do it now. Keep in mind there are also other rules too. So let's say if you have an office in the home regler an exclusive there used to be only one way to do that you plug in all your expenses your mortgage interest property taxes utilities you get a pro rata portion. There is now a safe harbor where you can get five dollars per square foot up to 300 square feet or 15 hundred dollars. There are some advantages to doing that. However I like the idea of self renting because I like my landlord and my tenants when I'm on both sides you know what I mean and everybody and everybody in this FI community knows that you need a couple rental properties right. That's where the money is at. Well there's the biggest problem with that whole concept is that you got to deal with tenants and you know I can't think of a better tenant than me. I always pay myself I don't get it. And keep in mind that these these these are powerful tools. The office in the home is also an audit trigger. But if you're renting it's not an audit trigger. So because it goes on a different line the IRS computer doesn't say Oh you're renting them yourself on your tax return I'm going to check a box saying self rental. It will affect passive activity rules. And I would expect people to this.
1376 - 1384 Jonathan Mendonsa I guarantee you that there's like probably close to 600 accountants they're going to get a phone call next week asking him what the implications are for the just because of the seed that you just planted.
1384 - 1410 Keith - the Wealthy Accountant Actually what happens is the accountants call me and I get a lot of accountants and a lot of e-mailing and calling and I'm good with doing that because I'm one guy and I have no intentions of expanding my business size. I'm kind of on one location. I don't want to be this big massive company but I love tax theory I love the training. And if I can teach an accountant they can then help their thousand clients. And I think that's good for their community this country. It's good for everybody.
accountant, tax
1410 - 1432 Brad Barrett Yeah that's really cool. If I'm just mechanically since you know people are out there listening to this and want to know how to do this so you're renting this portion of your house back to yourself. I mean do you recommend to your clients that you know they write up contracts that they physically write checks every month that they somehow get an appraisal for like what is a standard rent for X number of square feet like you know how official do you do people have to make this.
1432 - 1551 Keith - the Wealthy Accountant Well this is how I do it. And I talk to the IRS and more than one of them on one occasion and got pretty much the same answer every time. And here's the way it goes it needs to have a formal contract. However since I'm probably not going to sue myself the contract can be written by me. So basically my contract reads I Keith Shrader hereby rent my office for this amount of money per month for the next five years. It's a commercial lease so it's a five year contract and I'm going to pay myself on the first of the month and that's just the way it is. It's a triple net lease. Sometimes it's not. It depends on again facts and circumstances. And my office building here it's not my home so it is a triple net lease. And then I pay myself now should I write checks every month. Yes you have to make it look like it's a real transaction it can't be something that you're just playing games just trying to reduce your taxes do it by the book I'm renting as an entity. OK. An entity is a person in the eyes of the law. You would not stiff Joe Smith down the street that you're renting from. So don't stuff the entity that's renting to you or vice versa. So write it up. You sign his landlord and tenant you date it you write a check every month you put you're counting books and you clearly specify still for me I have an office building but what you would do if you had an office in the home that you would specify what was needed. You need to provide a room or a place for doing podcasts where it would be quiet and we could do these recordings and a place to store certain equipment so you can you want to include something but you're going to put this on one page you don't have to go through a whole bunch of things saying hey if you sue me you got to use California tax law or California courts. What you have to say is what you need to cover. And I think as long as you have that you've covered the bases it may not stand up in court but it doesn't have to it has to stand up in tax law and tax law says what are you what are you agreeing to and what I agree to is pay me x amount of dollars per month and you provide a certain environment for doing this work whether it's out of your home or as a separate office building.
1551 - 1566 Jonathan Mendonsa Two ideas come to mind. Think of two other scenarios that might be fun to talk about. One is let's say you're making 200 plus thousand dollars a year and you're as an employee would be the implications if you restructure that as a consultant and have you had you have you seen anybody do that.
1566 - 1634 Keith - the Wealthy Accountant I've seen a few people do it generally because they came to me through the money mustache blog. I like the idea. Now a lot of people won't do it because the employers won't do it because they're afraid of the fact that somebody is an employee and they have employee taxes there can be issues. But if somebody says I'm going to quit my job and I'm going to work as a contractor and I want to have other clients I think it makes a lot of sense for a couple of reasons. One I'm going to have you as an S-Corp pretty quick. I'm going to have you renting part of your home to this entity pretty quick. I'm going to have you doing the things that maximize retirement accounts. But the nice thing about it is is you know as well as I do that if you work a 9 to 5 job you don't need nine to five to get the work done. Almost always there's a lot of dead time. The employer pays you to be there those hours and you're going to be there. But you know you can get the work done faster especially if you own your own business you can do things to increase the efficiency so it took 40 hours a week. Now maybe it takes 25. Now you can bring out a new client. I think it makes a lot of sense and people that do it I think of generally like that because you can work from home in most cases. And I think and you will and I'll get you to pay a little less tax.
1634 - 1657 Brad Barrett Alright Keith one thing that's that's really important obviously to many people in the FI community is 401K savings retirement savings tax deferred savings. What do you recommend. So someone comes in to you whether they're a regular W-2 employee or you know what we're talking about here probably more specifically of a small business owner or someone looking to start a small business. We're going you get them started with with retirement options.
401k, savings
1657 - 1822 Keith - the Wealthy Accountant Well because we're talking a lot about business I'm going to take a little segue into people that work for somebody else and then come right back to the business. And this has come up in the last couple days as I've written my blog and I've had people questioning if it's even possible and the answer is for tax law it is. And here's what it is. People come in and say well I don't make $100000 per year. So I use the example we have a couple they make a hundred thousand year 50000 each very typical in many parts of the country. People will always make a half million but a lot of people make 50 to 100 thousand per year. And I say what you need to do is save half your money. And if you save half your money you're going to get a lot of tax breaks for it in fact you might even qualify for things like saver's credits or earned income credit which are harder to get. But you can get. You can get a lot of credits available to you because your income technically is being reduced by this. Now what you're allowed to do is you can take like a simple IRA but if your employer just as larger has a 401k if their plan administrator allows it you can take the first $18000. And if you're going to add 6000 to that if you're 50 and older so you can take the first $18000. Put it into your IRA get your matching It's totally deductible. Most people think it's like 15 or 20 percent. That's not true. The other thing people get confused on is this 25 percent will say well I can only deduct 25 percent. The rule for a 401k is your employer can only make matching two employees. That equals or is less than 25 percent of of the money of the money that's being put in. Twenty five percent of wage max. So what that means is this if you're a sole proprietor you get $100000 and you're an S-Corp of a small business you come into my office. You got a $50000 W-2 a $50000 dividend you say to me how much can I put my 401k. And the answer is you can put 18000 as being withheld from your paycheck and then 50000 times 25 percent is twelve thousand five hundred. So you can have matching from your employer yourself. Twelve thousand five hundred plus to 18000. So you can put thirty thousand five hundred dollars in yourself if your wife or spouse works for you. They can do the same thing. So on $100000 income if you don't if you don't even if you use an S-Corp we may not even want to use that S-Corp advantages because we want to use these retirement advantages because I can probably get as much as sixty one thousand dollars between two people the max that you can do per person though is 54 per year and in 2017 if you're an old codger like me then you can do another six you can get up to $60000. So each individual is going to do thirty thousand five hundred or below the 54 and they get matched that's the company that they own will put money into this and they will save Fika tax as well as income tax on that.
401k, ira, tax
1822 - 1834 Jonathan Mendonsa So it sounds like you're saying when you combine all that that's all going to go in pretax if you take advantage the way that these business entities are structured you're going to get to get all of that profit into those retirement vehicles pretax using that the the framework that you just created.
1834 - 1873 Keith - the Wealthy Accountant You know very quickly if you're willing to pay the price by cutting your spending and you want me to get money into this you have 100000 income you get to W-2s your S-Corp was paying out 100 percent of the profit to you and your wife or your spouse you max out the retirement account you've got 61000 between the two of you and that your income for the savers credit caps at around 60000. But because you take your contribution to your retirement account your income is only down to like 40000. You now actually get a savers credit which further reduces your taxes which means you put in 61000 but you really didn't lose 61000 the government handed you a check and say on us.
1873 - 1902 Jonathan Mendonsa This is where I inject hashtag boom. Welcome to Earth. That is freaking awesome man. That is so cool. That's like the thing about it is this is the F-I community. We've already made the decision that we are totally willing to sacrifice our income to buy our freedom sooner. And you just laid out a plan that I don't see anybody talking about on a blog except for you. I understood it. And it's. And you know a lot of us probably didn't understand it the first time. You know what. This is recorded man. Go back and hit replay listen to it again. Dream about it tonight. Then tomorrow go take action. That's freaking cool. Thanks for sharing.
1902 - 1928 Keith - the Wealthy Accountant And let me add one more thing. Your employer is frequently going to have forms that say hey you can put a certain percentage and talk to your age our department your H.R. department will tell you if you can just go dollar for dollar and ask simple IRA up to 18 grand then in 2017. What that means is that they may have a little secret in their plan documents that nobody even asks about. And you can max this thing out and just absolutely smoke it out.
1928 - 1935 Jonathan Mendonsa So cool. All right let's talk about two other fun scenarios. Let's talk about let's talk about kids man. Let's talk about having a small business and kids. What does that look like.
2ndgenfi, hustle
1935 - 2004 Keith - the Wealthy Accountant Well like I said originally if you have kids and you have an entity the issue that you have is that the entity is paying them and the entity has to withhold taxes as if it was anybody else as an employee. However let's say you have a really small little side gig so farmers as it makes a lot of sense farmers you know they generally don't have any entity structure. They're running a small family farmer let's say you have a business that does that say in the summer you have a lawn mowing business you have you know $30000 a year that you make and you want to pay the kids well. In this case I'd just say why not go ahead and then do it as a sole prop. I would have to check the rules to make sure that an LLC that is disregarded as a sole prop can do this I think they can but I'd have to double check that. And what I would say in those cases though is that your kids then can get paid for doing work. And I have a little farm there's a reason why I grew up on a farm and I still have one because I can put my kids to work number one which teaches them a valuable lesson I can pay them and tell them by the way dads keeping it dropped into your 401. Or excuse me into your Roth IRA. And so I'm giving them a good start in life as well. But it does not work quite as clean if you have a S-Corp.
families, ira, roth
2004 - 2017 Jonathan Mendonsa And let's talk about let's talk about real estate just for a second maybe some real high level stuff. Real estates fun a lot of our community overlaps with the real estate community and rental properties are big. What are a couple of FI hacks that we can we could talk about for that space.
2017 - 2197 Keith - the Wealthy Accountant There's going to be two to five hacks that I think some accountants are catching on to one and the other is definitely being dropped by almost every continent and it drives me insane. And the first one is the tangible property rules the tangible property rules are probably the best thing that's ever happened in my 30 plus years in and in practice the IRS actually did something that really makes sense to my clients. And you have to step back and understand why. If you're a business you can take a large dollar amount and expense it under Section 179. There's a profit you can say $100000 Out she goes but a rental property cannot use Section 179. So that $800 refrigerator is now going to have to be depreciated over five years. Now that's really kind of a pain because your cash flows all over the place you have cash coming and you're spending the money but you're paying tax and money you no longer have tangible property rules say this first part of tangible property rules say anything under $2500 you just make an election it's on all the tax software you just check a little box saying hey under the minimus rules I want to follow those. Anything. Twenty five hundred hours or less. Don't worry about it. Write it off it's not a problem. So you want to do that. Two reasons. One you get a deduction up front and two you clean that depreciation schedule which is irritating the next part of his tangible property rule is people don't understand what is deppreciable and what is deductible. So here's what the rules are. Some things are really a repair expense so you can get to your real estate property your rental property and carpet's a 15 year property doesn't last that long so I tend to depreciate at last. But most of the time if you're a rental property and you have carpeting you rip out old carpet put new carpet in. Not improve that property. You brought it back to the level of which it was originally purchased. Therefore it is a repair and is currently deductible if you do the same thing at windows a window out window in deductible you pull out the sashes IRS tax court says it's an improvement. Roof shingles off roof shingles on deductible repair expense. If you take some roof boards out tax courts say well that's kind of an improvement. Here's where it doesn't work. You can't go out there buy a property in tough shape today go in there and do a remodel on that thing and say it's all repairs doesn't work. You have to have a couple of years in there. I ideally at least five. Now there's one last repair expense hack that you can have even if you're doing an improvement on a property commercial property rental real estate. If it's under $10000 you plug the thing in just like you normally would in your tax return check a little boxing on making the election to take this to appreciable an improvement. And I want to treat this as a repair expense. And then you just run it right through on a repair expense take the deduction. And none of this crazy other stuff that you have to wait 27 and a half or thirty nine for commercial to depreciate. So that's the first part tangible property rules. Most accountants get most of that. The one that drives me the craziest because most people don't get it is cost segregation. I wrote about it in my blog and virtually no one commented. Nobody looked at it. It did. There you see the whites of their eyes and then they go backwards.
accountant, tax
2197 - 2219 Jonathan Mendonsa And you know what I've been excited about this one because when it finally clicked for me how powerful it was. My jaw dropped. And for whatever reason when you wrote it. I don't. I agree. People just didn't get it. And I hope guys this is a part. You know I know you're probably almost in shock from the amount of information that Keith has dropped on you right now but you need to now focus on this cost segregation. Tell us how it works.
2219 - 2357 Keith - the Wealthy Accountant And this is a podcast. You can listen to this a couple times take it to your accountant. Here's cost segregation. And the reason why you want to do it even if you're selling your property tomorrow hey. Cost segregation says that you got a building and if it's a residential real estate property it's depreciated over 27 and a half years. It's a commercial property it's over thirty nine. Now that's a long time. Cost segregation study says this would bring in one of our engineers. They're in there for a couple of hours. They pull that building apart into components. This is the road. These are the windows This is the flooring This is your ace HVAC system. And we break out those components and there's a reason for this. Some of it's going to be five your property some of it 15 your property and then the remainder is going to be back to that 27 and a half or thirty 39. We're going to accelerate depreciation. Now this is where it gets really fun when you get a property and you do this this is also improvements. When you do something with a building let's say pay a million dollars for exclusive of land you paid 1.3 for it and 3000 300000 for land. A million dollar building on a commercial it's going to be 27 and a half years so we're about $30000 per year in depreciation. Now we're going to get about half a third half of that and a five year to 15 year property in many cases which means we're going to take a couple hundred thousand three four 500000 and deduct this over five years. Now the reason why you want to do this is because you're going to be doing this against ordinary income. When you sell the property down the road several years later it's probably going to be all capital again. That's your recapture. There are some instances where there can be recapture at the 25 percent rate and I'm going to throw out this really technical thing here so your eyes might gloss. You only pay that on the excess over straight lines of five year property five your property after five years or straightline is still zero. There is only ordinary recapture at capital gains rates so what this really means is today we're going to take a deduction. We're going to accelerate that. And then what we're going to do is we will hold onto this money because it's ours and the IRS wants it some day. And 10 years down the road 20 years down the road when you sell the IRS Says Give us our money back. But you got to pay half because the capital gains rate is about half depending on facts and circumstances again of what the ordinary rate is. So you get to keep your money now. And when you do pay later half price.
2357 - 2365 Jonathan Mendonsa Let's let's say let's attach let's attach like a number to this. This starts to really work once you're talking about a building that's over 300000 right. Is that a fair estimate.
2365 - 2397 Keith - the Wealthy Accountant Yeah we can get down to about a quarter million now and that's exclusive of the last $300000 building 250000 for the building. Let me add a few more things to this because there's a more important point even if you never sell the property and do a cost save study let's say the roof is valued at $40000 and it's depreciated down to 20 and now you put a new roof on. Well I already told you if you just shingles off shingles I can take a deduction for the whole roof. That's good. But remember the 20000 haven't depreciated. You got to take that right now even though you didn't sell the building.
2397 - 2399 Jonathan Mendonsa It's a $20000 tax break.
2399 - 2399 Keith - the Wealthy Accountant Right up front.
2399 - 2400 Jonathan Mendonsa That's amazing.
2400 - 2428 Keith - the Wealthy Accountant So let let's say let's go to a million dollar building after land so it's an easy number if 30 percent of that becomes five year property that means $300000 is going to be deducted now in five years versus over twenty seven and a half or thirty nine. If your tax bracket is let's say 33 and a third percent. I know I know that's not a tax bracket but let's say for easy figuring that's $100000 in tax savings the first five years and we haven't talked about the 15 year property yet as well. So we're talking serious money.
savings, tax
2428 - 2432 Jonathan Mendonsa And so this is like you know what's described as the person that has the 10 unit apartment complex.
2432 - 2497 Keith - the Wealthy Accountant Ten unit on a 10 unit apartment complex. This works for business owners to understand this. This is where accountants get sometimes confused. And I just and this tax season I've had to educate a few of them and they were good with that they did the research but they wanted to bounce it off me and here's what they did. You have a business like you guys got you know choose FI. Let's say you've got a big national headquarters doing this you got this million dollar building maybe it's in manufacturing whatever it is. But everybody knows you never put real estate inside of an S-Corp so small business you got an S-Corp and you have this little partnership LLC over here and your accountant is going to tell you. Yes but the but the but the passive activity rules say you can't deduct it because you make too much money. So you can't take the loss and I say no no no that's crazy. You do what's called grouping. You attach a little note to your tax return not an S-Corp needs to actually make a disclosure but the individual attaches a note to their tax return saying hey I want to group that rental property with that business and then you check a little box on your tax return that says I am an active participant. It is deductable 100 percent regardless of income. Against other income.
accountant, hustle, tax
2497 - 2514 Jonathan Mendonsa This is incredible. Most people a lot of people are never going to understand this but if they can get the essence of it if they can get the idea then this is something that they can still benefit from and it means real dollars. But at the end of the day there's only one Keith Shroeder. How do our listeners find an accountant like you what where would you point somebody.
2514 - 2571 Keith - the Wealthy Accountant I tell you the accounting profession and a tax professional other that the tax professional profession has really shrunk in the last couple of decades. And there are fewer of them. There is. It is true there is one of me there are good ones out there. Unfortunately the really good ones get really expensive or they get really busy and probably bowl. I think that you have to Q&A the accountants you have to talk to them if you're going to do a cost segs study. Your accountant doesn't necessarily have to look at you and the front brain with this they're not going to do that many of them generally but if they're willing to look it up or if they're saying hey listen to this podcast I looked at this blog that you told me to look at hey can I just talk to this column for a while and recharge you a couple of hundred bucks for my time. I'm willing to teach these accountants to do that because we need them to learn it. Now that doesn't mean when they listen to this podcast I need 600 phone calls this week. I'm going to be very cautious with that. What's the phone number for you know getting the time. 5 5 1 2 1 2 or something.
accountant, tax
2571 - 2573 Jonathan Mendonsa 1 800 HELP.
2573 - 2633 Keith - the Wealthy Accountant So anyway I don't mind helping accountants with this. I'm not trying to steal their clients I've got plenty enough but I can help them with some of this stuff. The 31 15 before him. So let's say you have this scenario again we're going to cost sites study and you say hey I bought this building five years ago I can't do it and I said don't worry about it. We'll do the cost study and we're going to fill out a form called 31 15 change of accounting method. We're going to tell the IRS remember five years ago when I should have been doing this. Whoops I didn't do it. I'd like to take it right now. So we're going to take all the depreciation you should've taken in the last five years. Number five your property at 300 grand like a $300000 tax deduction usually is required to be amortized over four years so it's not a one year thing. And that's there so you can't play games with this because there are people like me that would so you would have this $300000 deduction brought forward that you didn't take you would have to amortize it over a few years but you're not going to lose anything. You're going to get that full value and it's kind of nice to get that too.
accountant, tax
2633 - 2634 Jonathan Mendonsa Very cool.
2634 - 2652 Brad Barrett Hey Keith I just want to switch gears for a quick second so healthcare is a big one for small business owners so let's say someone out there doesn't have a regular 9:00 to 5:00. They don't have health care through their employer. What do you recommend. As far as the best way to optimize taxes while still being covered for health care.
healthcare, hustle, tax
2652 - 2713 Keith - the Wealthy Accountant The first thing I asked them if they're religious and then if they are I tell them that they need to pray a lot because the current in the United States it's a sad thing that we have such a Morfordite health care system. It is difficult for small businesses. Arguably what you have to do is you go to the ACA Web site you get your health care if you're a small business running on your own maybe out of your house it's really small. You can take a deduction. I know what the tax code says that you're not supposed to do it but the IRS has acquiesced and allowed small business and small business owners to get their health care through the ACA for themselves and take that tax deduction for that so that's either going to be on the business entity level itself or more than likely on front page of a 10 40 as an adjustment to income. So you can take that deduction it's not going to be lost if you have a group it gets a little bit easier if you have more employees where you can get a group insurance plan. But I got to tell you I don't have a good answer to health care and I wish I did. I have to stutter step through it because there is no real good answer.
health, hustle, insurance
2713 - 2721 Brad Barrett Yeah that's kind of what I feared and that's what I've noticed in my own life. So yeah I was just just kind of hoping you had a little hack for me actually but yeah that's that's I appreciate the honesty.
2721 - 2725 Keith - the Wealthy Accountant If you find it you pass it along to me just for personal use.
2725 - 2739 Jonathan Mendonsa I do know there's a few people that I've kind of slipped in between the subsidy gaps right. I mean that's kind of the only play that some people have found is just basically getting their income low enough that they are able to collect subsidies. But that doesn't work for small business owners to the same degree.
2739 - 2750 Keith - the Wealthy Accountant So for example let's give you an example of something that I did so if the IRS is listening take notes and you decide yourself if you watn to audit me I shouldn't say that because they'll be out at my door.
2750 - 2750 Jonathan Mendonsa Yeah they Will challenge you man.
2750 - 2820 Keith - the Wealthy Accountant But by the way I have an S-Corp here in my area the person that does the S-Corp audits used to be my employee so I got a little bit of pool I hope. But anyway what you can do is for example I updated my computer system here and the system with everything together came to about $51000. It was that same lease situation I talked about earlier where they said I don't care if you pay cash or paid over three years you're still going to pay the same exact dollar amount. Well time value of money says I'll take the least $1 buyout at the end. And the reason why that was important is because I looked it up it was very important to me because I wanted my $51000 deduction. I also then used every string I could pull to accelerate and deduct things so Section 179. For a lot of businesses might mean it makes sense to buy that extra piece of equipment. Let's say you're in an earthmoving business it might be worth buying a backhoe or something and getting that full deduction upfront. Under Section 179 because it will bring your income down enough that it may actually not just give you a tax deduction but also give you the ability for one year to get some kickback from that ACA tax. You know the premium tax credit.
2820 - 2841 Jonathan Mendonsa OK. All right fair enough. Keith why don't we go ahead and pivot for just a second here and kind of just talk about maybe wealthy account a little bit I mean you're a prolific writer and I would say probably about 15 percent of the stuff on your Web site is absolutely hardcore tax related like what we just spent you know most of the time going over but that is not the limitations of your blog and you kind of cover a lot of different topics. What are some other things that you're passionate about getting out to this community.
2841 - 2980 Keith - the Wealthy Accountant Well the the accountant is not was never meant to be a tax blog. It was meant to get people to start thinking like an accountant. And that's how you get wealthy if you want to have wealth and keep wealth. You've got to think like an accountant. So it wasn't just about the tax issues and the hardcore I think other people do it better and many of them did it before me. But it's about living your life right. It's about making decisions financially. I get the advice you get. at my blog is the same advice I give clients and I get a lot of exasperated grunts and groans. People don't like to hear my simple formula to save half your income invest in broad based index funds and the rest is all the rest is my opinion on how to live life well. So people want to hear that though and my argument every time is that somebody comes in making a half million dollars I can't save half I say wait a minute I've got a client making a quarter million. Well you know he's doing it why can't you. And then the quarter million guy comes and says I can't do it and I said I got this 100 $25000 a year guy guys said well you know what about him $125 an hour your guy comes in and he says I can't do and I said I got to $75000 your guy doing just fine. Next the $75000 guy comes in and keeps on cycling down. I have one client that makes $10000 a year houses paid for been retired for a long time and he's my age same year. So he's always within a year of my age 52 and he's making 10 grand a year and never made much more of that in his life has a house paid off enjoys life to the max. They still spend nothing. So it's not that it's not doable it's that you choose not to do it all the rest is how to live life in a meaningful way if the world according to Keith. That's what it really comes out to be. And I try to tell stories that mostly are true. I try to end the. Well I absolutely want to entertain if I entertain you. I've got you laughing. I might get you to do the one thing I need you to do which is save half your income and invest in broad based index funds if I can tell stories and you like me as a person you like my writing you and you subscribe to this. It's not about having a business it's not about an S-Corp It's not about all these things because if I give you more money in tax savings and all you do is squander it I haven't done you any good. I just gave you a bigger pile of debt. I mean if it's going to be a great big Hummer in your driveway instead of paying the IRS I've just shifted one task master to another. That's all.
accountant, debt, indexfunds, savings, tax
2980 - 2981 Jonathan Mendonsa Alright buddy you ready for the hotseat.
2981 - 2984 Keith - the Wealthy Accountant I am my seat it's getting pretty warm over here.
2984 - 2989 Jonathan Mendonsa Yeah Let it burn.
2989 - 3016 Announcer In a world drowning in debt and rampant consumption. Trapped by the chains of lifestyle inflation. These questions highlight the secrets of those who are broken free. Welcome to the Choose FI hot seat.
3016 - 3017 Jonathan Mendonsa Were you ready for that.
3017 - 3028 Keith - the Wealthy Accountant I'm always ready. Remember at the beginning I said if you hear any crackling and that's my that's my career burning hot seat is this. This is the match that started the whole thing.
3028 - 3031 Jonathan Mendonsa That's right the fire is spreading that's what we always say.
3031 - 3033 Keith - the Wealthy Accountant Remember you were there when that happened.
3033 - 3039 Jonathan Mendonsa That was a good man that was deep. That was gravel. You could patent that. All right let's go right into this. We've got question number one Brad. Go for it.
3039 - 3042 Brad Barrett Yeah. Keith your favorite blog. That's not your own.
3042 - 3179 Keith - the Wealthy Accountant Is there any good was by besides my own. Actually what I you know I think that's a good question. I think people need to get a paper and pencil because I don't think any one blog including the wealthy accountant is the best in all areas. So I'm going to have a couple that I think do well in each area. And you know of course Mr. Money Mustache. I'm going to have to give a high regard I mean he's changed my life radically in business just by having confidence in me and saying hey you're my accountant if you want to talk about early retirement I think Pete over money mustache is the best. If you want to talk about investing I think the stock series at Jl Collins is the best. If you want the godfather of this industry of this genre I think that you have to look to J.D. Roth and he used to run get rich slowly which is where a lot of us got our beginning a lot of us have our roots in that. He now runs Money boss. I think a tax blog that is really good is the mad fientist. And in fact I give a shout out. He likes to keep his name private so I'm not going to say his name. I've been on stage with him a few times on I'll probably meet him again at the end of May. In a few weeks here an incredibly intelligent man when it comes to taxes. I actually printed his article out for the Roth ladder and I used it because he just he said it better than I ever could and made me understand that and I'm the tax guy for crying out loud. I'm going to give that one. I think another one that's important for younger people for Millennials. I think Gwen over at fiery millennials is great to watch as she moves forward in her life toward financial independence. Military people should probably military guy Doug Norman started that and his name is. Everybody calls NORD's. So I think that he's good and I'll give you two last ones. Natalie Bake and I tend to watch once in awhile read her stuff. She is. I don't want to say she's from the feminine standpoint but I think definitely a different viewpoint. She's a she's a recovering attorney. She's alwasy calls herself and she's she's she's very entertaining and good. And then outside the genre I love reading Zen Habits because I'm not wired ever. But I do need to relax relax every so often so leo. I think it's pronounced Buddha right Zen Habits and I've enjoyed that for many years as well.
accountant, military, roth, rothladder, tax
3179 - 3200 Brad Barrett Hey Keith you mentioned the Roth IRA conversion ladder over at the Mad Fientist. We've we've talked about that in depth and I'm curious and you know the answer just simply might be no. But do you see anything evolving in any kind of you know you mentioned how the president just came out with a new tax plan. Do you ever see anything evolving that could cause that to not work.
ira, roth, rothladder, tax
3200 - 3265 Keith - the Wealthy Accountant Yes I'm glad you brought that up I didn't I didn't think of that that I should. I want to write a blog post on this. I actually have it in my queue but I don't want to pull the trigger yet because it's not official. I think the Roth ladder goes away almost. It's almost a certainty it's going to go away in the next few years. They can take away the Roth ladder because it raises taxes without saying they raise taxes and the roth the back door roth has always been something that works in theory in the tax code because there's a loophole. But it was never the intentions of Congress to do this it wanted people very wealthy not to put money into Roth. And now you can be making a gazillion dollars a year and still in certain instances you can do a backdoor Roth or a laddered Roth it and it works very well. I think it probably goes away. I'm actually surprised that got to this point. I still like the idea. Use it while it's there. But I would guess with then unless things really fall apart in Washington I think this is low hanging fruit that both parties would be happy to make go away to have any kind of tax reform at all. So if tax reform happens I think the Roth Ladder is going to die pretty fast.
roth, rothladder, tax
3265 - 3273 Brad Barrett Yeah that's interesting. So you think that that rises to the level. I mean do you have any idea what kind of revenue that would raise for the government like is it something that will even be on the radar screen.
3273 - 3286 Keith - the Wealthy Accountant Oh it's on the radar screen. This is this is easy low hanging fruit. It may not raise a trillion dollars but we're probably talking y'all know orders of 10 10 or 20 you know maybe 10 billion a year. Five billion or something.
3286 - 3309 Brad Barrett So are there any other issues for the fi community tax wise since since we're on this topic and we're kind of hijacked the hotseat here. But you know we talk a lot about tax optimization and and certainly deferring taxes with you know traditional 401K and the like. Are there any other major issues that you see you know that could potentially change that would change the calculus of how we go about FI.
401k, tax, traditional
3309 - 3377 Keith - the Wealthy Accountant I think the big change that I think was a positive was those tangible property rules which are tax people with rental real estate and there's a lot of people that when people hit this early retirement they want to hit FI they can get there quicker if they have some kind of revenue stream. So real estate tends to fit the bill it gives you a nice passive stream of income. Get yourself a nice property manager and you're ready to go. So I think that that's a good thing. I think the backdoor Roth is probably the biggest negative and these latter Grosse. But it hasn't happened yet so you can't look at that until it does. You just have to be aware that at some point this may go away. Now the other thing that you need to look at though is there are changes coming. And I think that some of those may be positive. Nobody right now is looking at appreciably raising taxes. The issue for the FI community is the same issue for everybody. It's not the tax code the tax code is really just something you work within this framework. The manager goal of this. You're independance financially. The trick is and always has done for me to convince my clients that I'm not full of b.s. when I tell them you can actually save half your income.
passiveincome, tax
3377 - 3397 Jonathan Mendonsa It really is just changing your mindset and realizing that that's possible and maybe even having just a few other people like we did that quote you're the average of the five people that you spend the most time with. If there are people that are doing it that are modeling it for you and that's the norm instead of just spending every dollar that comes in the door suddenly it goes from something that seem impossible to now something that you just questioned why didn't I start sooner.
3397 - 3459 Keith - the Wealthy Accountant Well the other issue is two people say I maxed out my Roth I've maxed out my 401k I filled my retirement account. I'm done. No you're not ok. If you make $100000 and you're able to put 30000 into deferred vehicles you've got another 20000 to put in the nonqualified accounts. It could put it into a broad based index fund. Again their tax efficient so taxes are going to be better. But that's not the issue. The issue is I need to get you to say $50000 if you want to retire before you're 97. People don't believe that quick enough. If you save half your income what does it take like 15 17 years to get there. But if you're saving 10 it takes like 48 eight or something. You know Mr. Money Mustache has a calculator on his blog for this. And I don't think you need to wait that long. I always tell people if you save half of your income you probably there in 10 years. And the reason why is because your income doesn't go to zero if you hit 10 years and you're saving and you're not quite there under the 4 percent withdrawal rate that 4 percent rule you know when you don't have 25 times your spending saved. But if you have a couple rentals if you have a side gig you don't need as much to retire because you've got some revenue coming in.
401k, roth, savings, tax
3459 - 3459 Jonathan Mendonsa I love it.
3459 - 3464 Keith - the Wealthy Accountant But you just you've got to get these people to save something not and 10 percents. Not enough.
3464 - 3471 Jonathan Mendonsa Yeah. All right. How about this. You're number one your favorite article of all time. Now this can be either one that you wrote yourself or on another person's blog.
3471 - 3566 Keith - the Wealthy Accountant I'm going to take my blog because I like a lot of posts by a lot of different people. The ones I'm going to take the wealthy accountant ones that they stick up for different reasons. The first one is called Silent Night and that was published on 12:23 this last year. This is these are all true stories of little mini stories packed together. Either it was so depressing nobody commented or they didn't care. I thought it was my best blog post ever because it was very close to my heart. These are real things that happen and I think that was important if not for you guys it was important for me. I think the other the next most important one for me that I think was a serious blog post is Library millionaire and it's because I decided that I know that libraries are a great tool to live very economically if you will. But when I started researching this I ran across an article that the L.A. library had a whole bunch of this free stuff like free tutoring and all kinds of stuff they were giving away for free. So I started asking my local libraries if they had anything like it. Well I spent two weeks I couldn't get out of the library they wouldn't leave me alone. They had so much great stuff and so I wrote this blog post and I and I don't know if enough people catch this but you can get so much free stuff from the library you can lend out and it's not just books magazines and movies and things like that. I mean I have libraries that have fishing equipment and sewing machines there's my local library has a wife a hotspot you don't want to pay for Wi-Fi wonderful take it on avocation you'll have Wi-Fi 10 10 megabits per second or faster much anywhere in the country free. And so I think that's a powerful post.
accountant, library
3566 - 3575 Jonathan Mendonsa No. That's huge and you know we've actually had people ask us for more information or what sort of features you can get at your local library. So we'll put a link to that to that article for sure in the show notes people can check it out.
3575 - 3582 Keith - the Wealthy Accountant If you want some humor I throw that in. Those are my blog posts that I think were that they were meaningful to me in some way that I wrote.
3582 - 3587 Jonathan Mendonsa Right. Definitely definitely we'll link to all of us. What is your Keith What's your favorite life hack.
3587 - 3646 Keith - the Wealthy Accountant Well the library is going to I think that's pretty good. I know that Jim Collins who was on mentioned that as well. I think the fire community is very aware of this life hack but I think there's ways to get free tax free income and it's fun to do it just to do it. And that's the credit card bonus hacks you guys have a little something to do with that too. It's not maybe the best life hack. After the library there's just so many things but you know people come in and there are flat broke. And they're kinda like the Dave Ramsey guys are coming in there. They're there in the water they're drownding they'd come up to times if they go down one more it's all over. And I tell them if we don't get rid of the credit cards let's just do something intelligent. You'll get some free money and you'll pay it off faster and you know and I think it's a great life hack that some people that have had problems need to just say I don't need to freeze my credit card or cut them up I just need to be a responsible adult. And let's use this to my advantage. I think it's a great life hack.
library, ramsey
3646 - 3650 Brad Barrett That's very cool. Keith Have you started maximizing rewards points.
3650 - 3671 Keith - the Wealthy Accountant I'm kind of a funny duck with that I don't. I take the rewards point sometimes but I keep on turning them into cash because I don't travel as much as a lot of people like to. I do travel some. But I have more points than I have traveling ambitions so to speak. When I head down to fin con I know at least one airline tickets paid for and I'll get my wife's paid for it too. And all the rest I'll take in cash.
fincon, travel, travelrewards
3671 - 3677 Brad Barrett Yeah I love that alright let's say number four. What was your biggest financial mistake.
3677 - 3823 Keith - the Wealthy Accountant Well you guys read my blog and I don't know if people catch this but I'll tell you what to tell your story. My biggest life hack people you know you'll hear people like Pete he'll talk more. He had a business partner and it was a problem. I made a mistake. I mean a lot of mistakes in life that the one that really rose to the top was I didn't want to be an accountant at first. I wanted to be a stockbroker and I felt being a tax guy would be my ticket into being a stockbroker so what I did is I got my business going and back in the 90s. HD Investment financial services came around and basically convinced every accountant every tax guy in the country you need to be a stockbroker. So I became a stockbroker and I learned very quickly. I'm glad I decided to be an accountant because I went there that 7000 people that were brokers back then in six months I was in their top 100 you start learning very quickly that this is a dirty industry. Back then what they asked me to do and what everybody was doing is illegal today. Put you in prison if you did it today. Here's what they did. They would have these mutual funds that would pay bonuses. So for example Putnam's X Y Z fund this month would have a 2 percent bonus on it if you sold it in commission so you get a little extra. Everybody sold X Y Z fund. That's what they did. And all the other funds they wouldn't sell and I kept on saying that that's not what's right for my client. Back then I didn't have a full comprehensive understanding of index funds but I always told people back then get yourself a growth and income fund because these are big companies that are growing and probably throw increasing dividends. That's where you need to be. It was my backdoor way of having an index fund that was actively managed. When I was stupid. But I disagree vehemently with the way the industry runs. And the worst part about it is if you're a stockbroker all my investments had to go through them I couldn't I couldn't do intelligent investing anything I own. They had to know all of it had to be run through them. As a result what I thought I was going to love that's what I thought to be a stockbroker. Two years later maybe three max I was done and out and I was getting six figures off of that easy and six months I already had six figures. So I'm talking that I turned away since then if I would if I could if I could have taken my morals and pissed them away down the drain. I could be I could have had another five six seven million since then in cash I just had to. I just had to sacrifice. I had to throw in people like Pete and you guys under the bus. That's all I had to do and I couldn't do it.
accountant, hotseat-mistake, indexfunds, tax
3823 - 3831 Jonathan Mendonsa Well welcome to the team and we're glad you're here. I guess there's us the last question in that kind of wraps this thing up what would be the advice you would give your younger self.
3831 - 3890 Keith - the Wealthy Accountant You know I grew up on a farm and I turned 18 in 1982. It was the worst year of the recession back then since the Great Depression. In Wisconsin we're still part of the Rust Belt. It was a really difficult economic environment. The 2008 recession was bad but it didn't hit this area the way it did in 1982. Here I am 18 years old in the county I live in every single employer. One hundred percent wouldn't even give you an application they wouldn't waste the paper. The answer was No. Unemployment in Calumet County back then was probably pushing close to 25 percent which is very equivalent to 1932. That's where I grew up and I grew up extremely poor. And as a result I worried about money and I saved incessantly and that it helped me get to retirement much sooner it allowed me to take like a quasi retirement when I was 22 until I drove myself crazy found Mrs accountant and that I had to get real again.
3890 - 3892 Jonathan Mendonsa She definitely rounds you out for sure.
3892 - 3934 Keith - the Wealthy Accountant Shedefinitely rounds me out and I worried too much about money and if I had to go back in time and talk to myself stop worrying so much about it just just invest the money that way and start living life. And you know what I can. It's not just even talking to my younger self I have to tell myself today because I really I've been the biggest thing I get from guys like Doug Norne which is an awesome man in your head the military guy he keeps on telling me stop the one year you know one more year thing your done Keith you hit it. And I used to make excuses and I just tell him I just like what I do and that's why I do it. And I had to tell myself something is stop worrying so much. Live a little better and take a vacation. I take vacations. Understand. But I think I've learned to not like vacationing for that reason.
3934 - 3936 Jonathan Mendonsa Well maybe you hopefully will still see you Camp mustache again.
3936 - 3954 Keith - the Wealthy Accountant Oh I'm going to be. I got something to do that's not business trips are good. Telling me to sit down on the beach and have a cold one just sit there for a week reading a book. And I tell people open a gun because I might miss you know the gun might miss I need the rope I can't do it I have to I'm too antsy but that's my advice for myself.
3954 - 3959 Jonathan Mendonsa Very cool. Alright Keith well next how can our audience connect with you and with the work that you've been doing over at Wealthy account.
3959 - 3996 Keith - the Wealthy Accountant There is a contact page on the wealthy account and it also gets you over to my Web site for the business. If you for example go if you contact me. And said Keith I heard about this Koscheck study. You know do you have information if you e-mail me on that through my blog and contact. I'll shoot you back some contact information for the person to get in touch with you if you're a small accounting firm like mine and you want to do this work that I'm doing the outsource things where you you do your taxes internally but you just don't want to deal with payroll and that stuff which can be kind of a pain if you contact me I'll get you in touch with people that I have actually trained that will they'll actually be pretty good to do this for you. Do a turnkey.
3996 - 4017 Jonathan Mendonsa All right I got an idea Keith I want to pitch it to you live and see how you feel about it. Two things. One this was a lot of fun. This is great. And I know this only scratched the surface of the ideas that you have and so you know if we were going to do like you know just over the next few years or so we were going to do another kind of three either short or full on segments. What would be three topics that you think would be a lot of fun to just I guess unpack on the show.
4017 - 4024 Keith - the Wealthy Accountant Well I think the first thing we have to determine is what I'm going to get paid so I figure a good bottle of Jack first would be a good start.
4024 - 4025 Jonathan Mendonsa We'll send it your way.
4025 - 4044 Keith - the Wealthy Accountant So I think if we can focus on a couple of things we could always go back to business maybe talk about hobby versus what a business is. For example people do Uber and the average person that does Uber does it less than a year quit and I argue that they're not in business they are in hobby. And so they're overpaying their tax. I think that would be an interesting topic.
4044 - 4045 Jonathan Mendonsa Very cool.
4045 - 4123 Keith - the Wealthy Accountant I think another topic we could talk about is when. When do you know all you have enough. When do you so for example you get the 4 percent rule with the 4 percent rule was kind of a flighty thing you know 4 percent is not really what you're going to do you're going to have some income. So when do you decide to get in and out of this when you decide to retire. And I had a I had a consult. this morning with a person through my blog this morning another business owner and he had a great topic to call me up he just wanted to talk to me for an hour he paid me for this and he wanted to talk about things like can you look over my businesses and things like that and tell me if it's a good deal or not. But what he really wanted to know can I retire without really retiring and so we talked about what I call practicing retirement min retirement. So guys like J.D. Roth All right that hey I took a vacation for a year I travel around the country with my girlfriend. We had a great time and we did this and I walked out on life. And my argument is this that's a great concept. I love it. It actually draws me. I like that idea actually. But wouldn't it be greater if we could just find a way to take six or eight week vacation and then come back and then do it again later and then come back. You can still run your business you can still have your job. The mad Fientist his wife did that she said hey I'm going to be gone for a while I'll see you later. He Said Good good. I think I think that's a great topic to get into.
4123 - 4145 Jonathan Mendonsa Very cool. You know we have we've set up a voice mail feature and it's being used. We're getting close to 10 voicemails a week. And some of those are tax related. I was just wondering if we were to get a really good tax related question and we were to send that to your way maybe to send you like one every one to two months something like that. Would you be willing to you know do a response to that and just send it our way and we can play that on as a segment of the show.
4145 - 4199 Keith - the Wealthy Accountant I think we're going to do a little mini shows on that so we can have a full fledged let's say two or three times a year. I like using real life examples because it allows me to do something I can't do on my blog sometimes. And what I mean by that is this I go through all this idea it's a concept it's not an actual real life thing and people will then keep on e-mailing me and commenting. Well what about this what about this what about that. And they're right. There are so many different factors that can affect this. So if we had a specific situation where we say it's anonymous said I have this situation I can take the facts and circumstances as it applies to Anonymous and say this is the things that I would do here's what I would consider here are the options. And I think flushing something like that. Oh let's say over let's say a 30 or 45 minute quick podcast might be a fun way to use examples and then people can apply them to your own life if they have something similar.
4199 - 4200 Jonathan Mendonsa Thank you that was awesome.
4200 - 4200 Keith - the Wealthy Accountant Thanks for having me.
4200 - 4250 Jonathan Mendonsa Yeah no problem guys. That brings us to the end of this episode. That is amazing. So first of all guys what you just heard choose FI has become the podcast home of the wealthy account and we are really honored that he would be willing to just come on in a somewhat recurring basis and really share the knowledge that he's accrued over the last couple of decades. I mean the guy is a wealth of information and nobody is going to give you more accurate more in-depth knowledge than the wealthy accountant especially when it comes to tax optimization strategies for the fi community. I hope that your mind was blown by this episode. I hope that you realize how much you don't know just like me and you're going to go back and you're going to listen to this not once or twice but maybe three or four times just to figure out what it is that you don't know and how you can use the piece of that that will make a difference in your life. And you can start to move in the right direction and so Brad know actionable steps is what we're all about. What did you come away with today.
accountant, tax
4250 - 4293 Brad Barrett You know this was a great episode. I can listen to Keith all day honestly. He is at a totally different level from any account I've ever met. And you know that was my profession for 15 years so that's that's as high praise I can come up with. He is. He's operating on a different level to me. I'm going to go back I knew I was taking notes. I'm going to go back and listen to this three times just about the cost segregation all the expensing of depreciation. That's that's an aspect of tax that I know nothing about. And frankly you know I don't know anything about real estate investing now but that's something that I know one of you out there are going to take a huge amount of value from. So you know for me that's one of the biggest takeaways and I just want to sincerely thank Keith for for taking the time. This was a really wonderful episode.
4293 - 4301 Jonathan Mendonsa All right guys very cool well as we always say the fire is spreading my friends and join us next night as we continue to go down the road less traveled.

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