Today, we are talking to Alexis Gallati of Cerebral Tax Advisors all about controversial, aggressive, and often little-known tax deductions. Alexis is an enrolled agent and a CFP, and she has an MBA and an MS in tax. She is the author of Advanced Tax Planning for Medical Professionals and the creator of The Doctor's 4-Week Guide to Smart Tax Planning: Actionable Strategies for Side Gigs and Locum Tenens to Boost Savings. She has also been a WCICON speaker, and she will be joining us again this year. Today we ask her about all kinds of topics and how to execute on them in a way that will not get us into trouble with the IRS. We talk about when they are risky, when they aren't risky, and if you should use them or not. Some topics we cover are land conservation easements, captive insurance companies, self-rentals, employing your spouse or children, cost-segregation studies, and much more.


 

Land Conservation Easements 

Land conservation easements are a technique for preserving and protecting land from development. They were established in the 1970s as a way for individuals to conserve their land by restricting its use. When you enter into a land conservation easement, the IRS assesses the land's value both as if it were to be developed and as if it were to remain undeveloped. The difference between these two values becomes a charitable deduction for the landowner. This deduction can be quite substantial, often ranging from a 1x-5x of the investment. In other words, for every dollar invested, you could receive back as much as $5 in charitable deductions. You can claim charitable deductions up to 50% of your adjusted gross income—which can result in significant tax savings, typically around 40%-45%.

There have been significant issues with the abuse of this strategy, particularly involving inflated appraisals and syndications. In response to these problems, new regulations were put in place at the end of 2022, capping land easement syndications at a two-and-a-half multiple, making it less advantageous as an investment strategy. Alexis shared that she used this tax strategy for a few years, but since it is not as advantageous as it once was, she no longer does and no longer recommends her clients do, either.

It's important to understand that investing in land conservation easements can be complex, and it carries a higher risk of IRS audit. The audits typically target the partnership managing the easements, but any changes or issues can affect individual investors. Proper vetting and due diligence are crucial if you decide to pursue this strategy. While land conservation easements can offer substantial tax benefits, recent regulations have made them less attractive, and there are risks involved. Alexis said to always check with knowledgeable experts and carefully consider your situation before even considering pursuing this strategy.

More information here:

Investing in Conservation Easements

 

Hiring Your Children or Your Spouse 

Another potential tax strategy is employing family members in your business. Both Alexis and Dr. Jim Dahle have employed their children over the years. They encouraged using the court-tested age of 7 as the minimum age for this purpose. The most important part of using this strategy is actually providing legitimate work, fair compensation, and meticulous documentation—such as creating job responsibility cards and tracking working hours for the children. The primary objective here is to justify reasonable salaries for children, enabling contributions to a Roth IRA, and consequently shifting income to lower tax brackets. They also caution against common pitfalls when employing children, such as paying them excessive salaries without proper documentation, and they emphasize the necessity of having children on the payroll, rather than treating them as 1099 contractors, to avoid self-employment tax issues.

Another common strategy is to employ our spouses in our business. The primary goal here for many people is to enable their spouses to participate in retirement plans like a 401(k). Similar to employing children, spouses must have legitimate roles within the business, and they must be treated as regular employees. There may be benefits such as deducting travel expenses if the spouse has a legitimate reason to travel for business purposes.

They also highlight the potential for abusive practices where family members are added to the payroll without performing genuine work, resulting in higher Social Security taxes and minimal tax savings. Another area that can be considered is employing your parents, particularly if you help support them. This strategy is not always a good idea, and it requires careful consideration due to potential implications for the parents' eligibility for state benefits as their income increases.

Employing family members in your business should be done with a focus on legitimate work, fair compensation, meticulous documentation, and adherence to tax regulations to optimize tax benefits while avoiding potential pitfalls and abuses of the strategy.

More information here:

How to Hire Your Kids for Taxes the Right Way

Can I Hire My Spouse as an Employee?

 

Setting a Low Salary 

It can be tempting to set as low a salary as possible if you have an S Corp in order to reduce Medicare and Social Security taxes. Alexis said this is one area that the IRS monitors closely. It is incredibly important to pay yourself a reasonable salary or you will get penalized by the IRS. To determine a reasonable salary, Alexis suggests using the “many hats method,” which involves assessing the different roles you perform within your business and allocating your time and pay accordingly. For instance, if you work 80 hours a week as a physician but only spend 60% of your time on physician-related tasks, your salary should reflect that 60% of your time. Taking a blended rate, calculated based on the average rates for different job roles, can help lower your salary while remaining within the bounds of reason.

Alexis said the idea of following specific rules of thumb, such as not setting your salary below the Social Security wage limit or paying yourself at least 50% of the business's income, is not actually useful as the IRS does not provide clear guidelines for determining reasonable compensation. Instead, she emphasizes the need to conduct a thorough analysis of your roles and responsibilities to establish a fair and defensible salary. This analysis should be revisited periodically or after significant changes in your business.

More information here: 

S Corporations: What You Need to Know 

 

If you want to learn more about Alexis and Cerebral Tax Advisors, check out this special page she created just for white coat investors.

To learn more about these unique tax strategies, see the WCI podcast transcript below:

  • Captive insurance companies
  • Tax-loss harvesting
  • Cost-segregation studies
  • Qualified personal residence trust
  • 179 deduction for cars greater than 6,000 pounds
  • Home office deduction
  • Restricted property trust

 

Milestones to Millionaire

#156 — Family Doc Pays for a Dream Wedding with Cash

Today we are celebrating this family practice doc cash-flowing his dream wedding! This supersaver had to get comfortable spending a pretty big chunk of change to bring his and his wife's dream to life. He learned that while saving for your future is crucial, it is also important to learn how to spend well and enjoy your money. He worked hard and saved both for the wedding and for retirement at the same time. His next financial goals include paying off his student loans in the next few months and then saving enough to be retire-optional by 50.

 

Finance 101: How to Wire Money 

Sending money electronically is something we all need to get comfortable doing. There are several different ways to transfer funds. The most common method is writing a check, which is not always great because it can take some time for the transaction to clear. Another option is an ACH transfer, which is similar to an electronic check but still requires time for the funds to be confirmed. When immediacy and certainty are essential, wiring money is the preferred option. Wiring money is often required for significant purchases, like buying a house or making substantial investments in private funds.

Traditionally, you would visit a bank to initiate a wire transfer, although brokerage accounts like Vanguard can also wire funds. Some banks may charge fees for sending wires, while others, like Vanguard, may offer them for free after reaching a certain asset threshold. Wiring instructions should never be solely verified through email because email can be vulnerable to hacking. Scammers can intercept emails and trick people into wiring money to the wrong accounts with no recourse for recovery. It is important to confirm wiring instructions over the phone or in person to ensure accuracy and security.

To wire money, you typically need to know the recipient's routing number and account number, as well as the account holder's name and the bank's address. While the process can feel intimidating at first, it becomes more routine with practice. Wiring money is becoming more and more common for various financial transactions. Understanding the basics of wire transfers and following secure verification procedures are important in today's financial landscape.

 

To read more about how to wire money, read the Milestones to Millionaire transcript below.


 

WCI Podcast Transcript

Transcription – WCI – 353

INTRODUCTION

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011.

Dr. Jim Dahle:
This is White Coat Investor podcast number 353 – Lesser Known Tax Strategies

If you're finding our podcast informative and helpful, check out our website. Since 2011, we've been working hard to provide valuable personal finance and investing information through thousands of blog posts written by an array of authors.

You can find information on how to manage your student loans, fix and avoid common financial mistakes, understand your retirement accounts, optimize your investments, find professional help at a fair price, get started investing in real estate and so much more all at no cost to you.

You can find out more about the courses we offer, the conferences we put on, the newsletters we provide and interact with other WCI readers and listeners through our online forum. Head over to whitecoatinvestor.com to start learning today. You can do this and the White Coat Investor can help.

 

QUOTE OF THE DAY

All right, we got a great quote today for our quote of the day. It is from Morgan Housel who said “There are over 2,000 books picking apart how Warren Buffet built his fortune, but none are called ‘This guy's been investing consistently for three quarters of a century’, but we know that's the key to the majority of his success.” I love that one because it points out what really matters in investing, which is pick a reasonable plan and stick with it.

All right, thanks for all of you out there for what you do. You get something special today for listening to the podcast. In fact, if you're listening to this in the morning it dropped, you are finding out about a pretty cool thing that those who are actually at WCICON today do not yet know about, which is the presale for WCICON25. They're not going to find out about this until this afternoon, so don't text somebody if you know they're at the conference. They're probably not listening to the podcast today, so they are not listening to this.

But from now through the 12th of February, you can get WCICON25 at the best price we'll ever offer it. That conference is fairly similar to the conference we have this year. However, it's going to be in a different city. And I'm going to reveal that to you right now, even though those people at the conference aren't going to find out until this afternoon. We're going to San Antonio. We've been in the west, we've been in the east. Now we're going to try one in the middle.

But it's a great property. It's going to be an awesome wellness conference, but also financial literacy. That's why it's called The Physician Wellness and Financial Literacy Conference. We mix both of them in there. It's going to be good for CME dollars, and of course, it's going to be really good for you to network and to rejuvenate and to learn more about putting your own financial plan in place.

Okay, here is what it is. Here's the deal. The price, if you buy it before the 12th, is $1,499 for an in-person general admission. You can't buy virtual in the pre-sale, but you can cancel through July 31st. There is a $99 cancellation fee, but this is serious savings compared to what this course will sell for later this year.

So, if you've been missing out on these, or if you just want to come again, this is your chance to get it. This is as cheap as it gets and it's really a deal at this price. I know what it takes to put on these conferences and this is quite a good deal. I suggest you sign up, do it before the 12th and you get this great price.

Okay. We've got a guest on today who's been with us for quite some time. I'll introduce her in just a minute. But we're going to talk about some fun stuff. We're going to talk about saving money on taxes. You've heard about these techniques. You've heard they're bad. You've heard they're risky. Well, we're going to talk about them and when they're risky, when they're not risky, when they're good, when they're bad, and help you decide if you want to use any of them, and if so, which ones you would qualify for and that you would want to use. We're talking about these aggressive, controversial, little known maybe tax deductions that are out there. And I'll bet there's one of them you probably want to use. So, let's get into the interview.

 

INTERVIEW WITH ALEXIS GALLATI

Our guest today on the White Coat Investor Podcast is Alexis Galati. She's an enrolled agent. She has an MBA as well as an MS in tax and is a CTP. She's the author of Advanced Tax Planning for Medical Professionals. She's the creator of The Doctor's 4-Week Guide to Smart Tax Planning: Actionable Strategies for Side Gigs and Locum Tenens to Boost Savings. And she's also been a WCICON speaker. Alexis, welcome to the podcast.

Alexis Galati:
Thank you, Jim. I'm excited to be here.

Dr. Jim Dahle:
Okay. As you know, our goal for this podcast is to talk about a few, and it's a pretty good number actually, tax techniques, tax reduction techniques. I am a fairly aggressive person when it comes to deductions, when it comes to lowering tax. I view paying taxes as something I'm more than willing to do. I'll pay everything I owe, but I don't like leaving a tip to the IRS. And when an area is gray, I like to call it in my favor. But with many of these techniques, pigs get rich and hogs get slaughtered.

So, today I wanted to clarify for the audience, number one, what the techniques are, just the basics on them. Number two, when you've gone too far. We'll discuss those because there's not always a hard and fixed line on these. But I wanted to go over the considerations of what people ought to be thinking about if they're using any of these techniques.

For those of you out there, if you're not familiar with some of these techniques, you can check out Alexis's book. Many of these have also been discussed on either the White Coat Investor blog or in the WCF forum before. There's more information available about all of them. If it feels like we went through one just too quickly, know that there's plenty more information out there about it.

All right. The first technique I wanted to talk about is land conservation easements. Do you want to start by describing what that is?

Alexis Galati:
Yeah, sure. Land conservation easements were actually started in the 1970s and they were really more seen as if you owned your own personal piece of land you wanted to conserve, which basically means you're not allowed to really do anything with it. You can't develop it, you can't put houses on it, etc. There's just a few minor things you can do, like farming, for example.

And so, what it basically does is the IRS takes a look at your land and says, “Okay, if you were to appraise the land, if it were to be developed, then what would that value be? And if you looked at the land, if it weren't to be developed, what would that amount be?” And that tax difference is a charitable deduction.

You're basically giving up the right to use the land for anything meaningful. And this obviously will provide a tax deduction, and it can usually range from the ones that I've invested in. And so, that's kind of a thing to know is that I've invested in these myself, is that for every dollar you put in, you're getting back a certain amount in charitable deduction. If you put a dollar in, you're getting $5 back in charitable deduction. And you can go up to 50% of your adjusted gross income and that saves you about 40, 45% in tax. It's a really, really nice deduction.

The problem has been when these have started to be built up with syndications, there has been a big area of abuse. And mainly with crazy appraisals, where instead of getting like a one to five multiple, maybe you're getting a one to 20 multiple or a 10 multiple. And that's where you start to get into hot water. What's great about these is that yes, you get a big bang for your buck, but there has been a lot of litigation around them. At one point they were actually listed transactions. We can talk more about that sort of legality as well and legislation that happened.

But at the end of 2022, land easements for lease syndication purposes have been limited to two and a half multiple. And so, it's really a dollar for dollar kind of reduction. You're putting $100,000 into the investment, and you're getting $100,000 off your taxes. So you're basically paying this place instead of just paying the taxes essentially.

It's not as beneficial anymore. And for disclosure purposes, I did invest in them from 2018 until 2020, but I understood the risks involved. It's basically that it's pretty much guaranteed that you're going to be audited. And it's not you that's audited, it's the partnership that is audited. But if there's any change at the partnership level, it trickles down to you as the investor.

You have to understand that risk, but know that if you are working with a proper program offer that they do have audit funds and so they usually have about $500,000 of audit funds. They've set things up properly. I went through a lot of vetting to feel comfortable with it myself and through a lot of years before I even felt comfortable doing it.

And so, you just have to make sure that if you are going to do it, which like I said, I don't recommend it going forward just because the cost benefit isn't there anymore, that you properly vet whoever you're going to work with, or if they're offering anything similar. This is going a touch off topic, we need to talk about it after, but there's now instead of doing land conservation easements, they'll have medical products that they're donating to hospitals at the fair market value, but they're buying it at a wholesale rate and then you're getting up to 50% AGI again and etc. I've seen started happening in the past few years. I'm not comfortable with it yet.

Dr. Jim Dahle:
Yeah. Maybe we ought to explain for those who don't know what a listed transaction is. What does that mean?

Alexis Galati:
Yeah. That basically is the more media appropriate name is the Dirty Dozen list. And so, these are just transactions that the IRS is looking at closely and more for abusive transactions. And so, that's a very important language. These transactions are not considered illegal, it's just they've been abused in a lot of areas. And so, another one I think we're going to be talking about in a little bit, like captive insurance companies were on that list for a while. Both with the captive insurance and the land easement, both of those were actually taken off the list retrospectively because the IRS did not go through the proper motions to put them on the list properly. And so, technically looking back, they weren't ever on the list, but yes, they're basically just strategies that the IRS takes a closer look at and scrutinizes further.

Dr. Jim Dahle:
Yeah. I've talked to some other people about this and looked some other stuff up about it. Ike Devji, who does a lot of asset protection kind of stuff, he calls them the “tax scam that doctors sell each other.” I think it's something that is fairly prevalent out there in the medical community. And there's somebody else, a law professor around here that said that, “Yeah, it's possible to have one that's okay, but I haven't seen it yet.” And so, this one's definitely on the aggressive side like it's in Star Wars when they talk about aggressive negotiations, they're talking about a lightsaber duel.

It's interesting. As I talk to tax people, I find some are very, very conservative and never want to do anything that could even possibly look bad in an audit and so forth. And then other people are fairly on the other side of the spectrum. Where would you place yourself on that spectrum?

Alexis Galati:
I am of the spectrum all these strategies are court tested, IRS approved. I don't put anything on a tax return that I don't feel comfortable defending in an audit. Even if we're playing in the gray area, as long as I feel comfortable defending it, then I'll go for it. There's going to be items on this list that we're discussing today that I wouldn't touch with a 10 foot pole, but that's because I just don't feel comfortable that I could make it stand muster in an audit.

But with land easements, I've followed the legislation around it really closely and I have really great resources and some of the top attorneys that defend these, as well, that I've spoken with. And when I've also done the math, if you were to take the tax savings that you receive over the six to 10 year period that this investment is open, because the thing is that at least the ones that I invest into, they do a land conservation easement, but they also put some of the money that you've invested into a strategic fund that also invests in other real estate, venture debt, just other kinds of investments.

Because one of the stances that the IRS has is that you can't create a partnership for the sake of a tax deduction. This allows, “Yes, we're investing in this one development, but we're also investing in other things ,as well.” And so, over that six to 10 year period, you are earning some money off of your investment, but it is small compared to obviously what the major tax benefit is in that first year that you have.

But I've found that if you take that investment or the tax savings and then you invest it even in an ETF, which over the past 10 years, it's been about 9% in earnings per year, you'll earn more off of that savings than you would in the interest and penalties that would be involved if it were even to be completely denied.

And from my research and understanding is that even the ones that have been adjusted, on average, you're still maintaining 80% value, so you're maybe getting an adjustment of 20%. It's kind of like playing an interest game essentially. With this strategy and any of these strategies we're talking about, it really depends on your situation. It really depends on how you or your advisor feels about those situations and whether they're willing to feel comfortable in defending it before you even think about investing in it.

The education is extremely important, and that's one thing with Cerebral and what we do is we don't take any commissions or kickbacks, we don't sell any products and it's really about educating and showing the options. Then that way you're at least aware of them and then it's up to you whether or not you want to move forward with it.

Dr. Jim Dahle:
All right, let's move to the next one on the list. And we had somebody on the podcast a few weeks ago talking about captive insurance companies. He basically sells them, for lack of a better description, as 831(b) plans. Your thoughts on how captive insurance companies work and where the line is when it becomes abusive?

Alexis Galati:
I have not had any clients that have done this plan. I've recommended it to some of my clients. And the major reasoning behind it is because you're able to really help mitigate risk within your business, but you have to earn enough money to make it a good cost benefit because they're very expensive to administer, they're very complicated to administer. You have to use a company that is dedicated to them.

I highly don't recommend doing them yourself, but essentially what you're doing is you're creating your own insurance company and instead of you paying some other insurance company these high premiums, you're able to move the money from your business being taxed at ordinary income tax rates to being a deduction for your business.

Let's say you pay $100,000 in premiums and that $100,000 is income to your captive, which is basically a C Corp, but you don't have to pay tax on, I think right now it's about $2.4 million, $2.5 million in premiums. Your captive is not paying any tax on it, it's going and investing in it. It's going into a pool that basically if you do need to make claims, then you can do that.

But what's great about it is at the end when you want to close it down and take the money out, it's now being taxed at capital gains rate. That's really nice savings. But I've seen other advisors when I've gotten their plans, when they're recommending these, in my opinion, you need to have at least $2.5 to $3 million gross in revenue before you even start, before it's even a good cost benefit. Because this is costing anywhere from $50,000 to $100,000 a year for you to administer properly, which is a deduction, not in the first year, but in subsequent years. And so, it's really a very specific subset of people that can do this and make it work. And you need to have a genuine risk that you're trying to mitigate, or have it replace some of your insurance that you already have.

Dr. Jim Dahle:
Yeah. I think it's important to point out, too, as I understand it, while the money is in the C Corp, while it's in the captive insurance company, it doesn't grow tax protected like a 401(k) or a Roth IRA would.

Alexis Galati:
Correct.

Dr. Jim Dahle:
You're paying at corporate income taxes on earnings on that money while it's in there, correct?

Alexis Galati:
Correct. Yes, yes. You're at that 21% at the moment. That's nice. It's going to be lower than your rate if you had taken it as a distribution or salary. But yes, there is that. And then like I said, when you go to take it out, you're going to pay tax on it, as well.

Dr. Jim Dahle:
Yeah. Obviously, you don't want to do this unless you have a pretty successful business going. But when do people get too aggressive with this?

Alexis Galati:
When if they try to do too much into the plan, like you got to make sure that the amount of premiums that you're paying are equivalent to the premiums you would pay if you were to buy an outside plan. And also, too, trying to do it yourself. I've only seen, it wasn't one of my clients, but a colleague who had a client that tried doing it themselves and it was a big mess and they got in a lot of trouble with the IRS and they ended up having to close it all down and tons of penalties, tons of interest.

Dr. Jim Dahle:
Yeah. All right. The previous two we've talked about, land conservation easements and captive insurance companies. I've never done either of those, but the next four things we're going to talk about I have done and continue to do most of them. The first one is self-rentals. Basically you are renting, for example, your home to your business. Tell us how this works and when you've gone too far.

Alexis Galati:
Some of you might know it as the Augusta Rule or the 14 day rental rule. It's called the Augusta Rule because it originated in Augusta, Georgia, where the Masters are at. And I actually have some clients that do this. They rent their home for two weeks during the Masters and they get $30,000, $40,000 in income and they don't have to pay any tax on that income.

Basically if you rent your home to your business for this 14 days or less, it doesn't have to be consecutive, your business gets a deduction for the rent and then you as an individual don't have to pay tax on that income. And it has to be your primary residence. That's one of the catches. It can't be like another rental property or anything. It has to be your personal residence.

And one area that I've seen people get in trouble besides not using the proper home is that they try to do too big a reasonable rental rate. I've seen this strategy so much on TikTok and social media, and I'm a little more conservative in this area when it comes to determining reasonable rental rate, but you can look at comparable Airbnbs, you can also look at conference rooms in the area for like Regis centers or hotels, etc.

And what I like to do is get a price per square foot of what a one-day rental would be for something like that and get two or three of them and average them out. And what a lot of people will do though is they'll take a super nice Airbnb and say, “Oh, it's $2,000, $3,000 to rent for the week or the month or something”, and it's not comparable to their home, or they try to do it for the entire house, as well.

I tend to go and say, “Hey, get that price per square foot, that average, and then apply it to the areas that you're using.” I don't include my home office because I'm doing my home office deduction. I don't include the upstairs where my kids' bedrooms are at and the playroom. I just do it for the kitchen, the living room, hallway to the bathroom, things like that.

And so, that's definitely a lot more conservative than other people, but I always try to look at things from the eyes of an auditor. For example, if I tried to include my home office, they'd be like, “Well, I can see that as being double-dipping.” And so, that's kind of my take around it.

Dr. Jim Dahle:
Yeah. And that's how we've done it, is comparable Airbnbs. We actually print them out on the day that meeting was and keep those in the file in the event we’re ever audited. But I think I might actually be more aggressive on this one than you are. I generally have used the whole house. I've not tried to limit it to whatever space was touched for the meetings we have there. WCI doesn't have a headquarters outside of my house. And so, that's what we've done there.

Okay. Let's go on to the next one. The next one is employing your spouse or children. Also something that I have done. Tell us about this, how it works, why you might want to consider it and where the lines are.

Alexis Galati:
Yes. I do the same. I have four children. My three oldest are working in my business. And so, I use the court-tested age of seven as the minimum age. And that's just what has, like I said, been tested. I've seen other people do much younger. I've sometimes had clients try to do their 1-year-old or their 2-year-old. They've gone off what I feel is an old strategy model of, “Hey, my kids are models in my business.”

And I feel like back in the day that worked really well because it was really difficult. Not everybody had cameras like we do now. If they were doing other things, then great, but most of the time now, to justify, let's say if you want to do enough, to put money into the Roth IRA, you'd want to pay him $6,500 and next year in 2024, it's $7,000. It's hard to justify an annual salary for one picture on your website of that. It's really important when you go to hire a child that they have a legitimate job in your business. You want to actually create a job responsibility card for them and also keep track of the hours that they're working.

For my kids, for example, they're shredding paper, they're stuffing envelopes, they're stamping envelopes, they're cleaning my office. I want to basically create enough work for them that they can earn their $6,500 or $7,000, however much the Roth IRA contribution is. Then that way I can start going and putting money towards their retirement.

Where people get in trouble is they want to hire their 7-year-old kid and pay them $14,000 a year and they're not doing the proper documentation and they're not making sure that their kids are on payroll. They have to actually be on payroll. You don't want them to be 1099 because then they're going to be subject to self-employment tax on their return.

But it's great if you have a sole proprietorship or a partnership. You're not having to pay any tax at all, income tax or for federal or state as well as social security and Medicare tax if they're in either of those types of entities. If they're an S Corp or a C Corp, you have to do pay social security and Medicare.

But yeah, overall the major areas that I find people having problems is not properly documenting, not having a separate bank account for their kids, putting that money into theirs going and spending that money on non-kid things. Whether it's their retirement or their parents take it out and then spend money at the grocery store or such instead of on kids' activities, etc. It really needs to be geared towards the kids. The whole point is to try to write off some of the support and get a deduction for the business. And then you're shifting that income from your higher tax bracket to their ideally zero tax bracket.

Dr. Jim Dahle:
Yeah. I think the keys are legitimate work, legitimate pay for that work and then proper documentation. Because they're employees, you got to do an I-9, you got to do a W-4, W-2, W-3 every year. You got to have a time card, you got to have a separate bank account. As you mentioned, I don't want people to gloss over this too quickly. This doesn't work for a corporation. It only works for sole proprietorship or partnership where the only owners are your parents. If the structure of your business is an S Corp, you're going to need another business if you're going to do this. But I've never paid my kids enough to max out a Roth IRA. I always thought that was a little excessive, even with a good time sheet for the work they were doing. But I paid them a few thousand for a number of years. Have you seen this sort of thing audited frequently or no?

Alexis Galati:
No. Knock on wood. No, I don't see it very often. I know some people worry about, “Well, how can my kid be working? Aren't there child labor laws and such?” But there is a federal exemption against that, especially if your kid is working for your personal business.

I have to disagree with you a little bit on not doing it for S Corp or in the C Corporation. You can still do it. You just have to pay the social security and Medicare tax. But a lot of the times, the tax savings is still going to be more than what you're paying and adding your kid to your payroll as well as paying the payroll taxes on it.

Dr. Jim Dahle:
Yeah. You mentioned the IRS age of seven. And I can tell people, having done this younger than seven, you will get a letter every year. It actually comes from the social security folks. And the letter has about three questions on it. What is this person doing for your business? It’s the main thing. What is the job? And you got to put a job description in there. I never heard back from them after sending that in, but I've had to send it in when I had kids younger than seven. So, expect to hear from somebody if you got a really young kid you're using as a model or something like that.

Okay. Now, another one I get asked a lot by docs is they're at a 1099 or something and they want to employ their spouse. I think the main goal they have most of the time is to be able to make 401(k) contributions for the spouse, is what seems to be the goal. Can you talk about employing your spouse and where the lines are?

Alexis Galati:
Yeah. That's exactly how the conversation usually goes with my clients as well. The only reason to really employ a spouse is to let them participate in retirement. It's the same thing, though, as with the kids. They have to have a legitimate job in your business, and you have to treat them just like any other employee.

There's some other benefits. It could be that if you go travel somewhere for business and your spouse has the legitimate reason for coming with you, then you can go and write off their travel expenses, as well. There are some benefits to it, but you just have to make sure that what you're paying in social security and Medicare isn't more than what any other tax savings would be.

And I've even used this strategy for hiring parents. If you have a parent that you're supporting, and let's say you send them $1,000 a month and you want to write off their support and they can have a legitimate job in your business. Well, have them do some admin work for you, have them do something in the business. Then that way you can write that $1,000 a month off through the business.

You just have to be careful if you have older parents that might be on social security or have any other state benefits, that if their income increases, it might make them ineligible. That's something you just have to work with your tax advisor on and just look at the numbers to make sure it works out so you're not screwing your parents over.

Dr. Jim Dahle:
Yeah. The other thing I think people get really abusive on these is “The spouse isn't doing anything.”

Alexis Galati:
Yes.

Dr. Jim Dahle:
They're not actually doing any legitimate work, they're just trying to put them on payroll. And so, that's usually what I emphasize to people is yeah, if your business has actually hired your spouse to do real work and is paying them a fair wage for that work, then you can do this. But a lot of times what that means for the stay-at-home parent married to a doc is that they're paying a whole bunch more in social security tax than they would otherwise, and they're still paying at that couple's marginal tax rate. You are not saving anything on tax here usually. You're getting access to another retirement account and maybe the ability to write off some expenses.

Alexis Galati:
Yeah.

Dr. Jim Dahle:
Okay. Our next subject is going to be tax loss harvesting. And we've beaten this up ad nauseum on this podcast and on the blog for many years. The thing that I think hangs people up a lot is they read the description of what the fund or ETF that you're exchanging into is from the IRS. And the words of the IRS is not substantially identical, is the phraseology that they like to use. And they say, “Well, shoot, switching from a Vanguard total stock market fund to a Vanguard 500 index fund has a correlation of 0.99.” The IRS is going to look at that and call it substantially identical.

But in my experience, as long as it doesn't have the same CUSIP number, nobody seems to care. They view it as different and I feel like I could justify just about anything because the fund I'm swapping into follows a different index or has a different number of stocks in it or whatever. What are your thoughts on tax loss harvesting and how much people should worry about that substantially identical tax loss harvesting partner?

Alexis Galati:
I agree with you 100%. I've never seen it ever brought up in my 20 plus years in this industry and is also being an NTPI fellow. That's a three-year fellowship that I did in IRS representation. That wasn't even something that was ever brought up as a major item.

I think the only time you have to worry about it is if you're doing something else on your return and then they start looking at it trying to dig for other things to kind of nail you on. Again, yeah, like you said, if it's a low correlation, then I don't really think that there's going to be much of an issue with it.

Dr. Jim Dahle:
Yeah. Okay. All right, our next one is setting a low salary. Forming an S Corp and then making your salary really low to save on, certainly, Medicare taxes for most docs. Sometimes people set the salary so low, they're actually saving on social security taxes. What are your thoughts on this strategy? How do you know when somebody is taking it too far?

Alexis Galati:
When they're not paying themselves a reasonable salary, that's when that is. Everybody that I work with when it comes to S Corps, and even the C Corps, I want to make sure that they are paying themselves a reasonable amount. And there's different methods, but my favorite is the many hats method, basically.

The problem is that people just assume, “Hey, I'm earning X in gross revenue, I'm only going to pay myself this much to save on that social security and Medicare.” But this is one area that the IRS loves to nab people on. This is probably I would say the number one thing that is audited on S corps. And so, you need to really take a look at what your rate is if you were to hire yourself off the street and you can then take a blended rate though of the different jobs that you do in your business.

So, yes, you're a physician, but you are also your travel agent, you are also your admin, you are also doing your bookkeeping. Depending upon if you're doing it all yourself or if you have employees, etc, you got to allocate your time between. So, if you're working 40 hours a week, and that's the standard by the way, for a reasonable comp. If you're a physician, you work 80 hours. The comp is still based off of a 40 hour week. And so, you take your 40 hours and if only 60% of your time is actually doing work as a physician, then we only want to take that higher rate for that 60% of the time.

So, taking a blended rate is great, but you have to substantiate it. You have to look at the different jobs that you're doing, find an average rate, and you can look at census data, you can do research, go look on salary.com or all these other websites, to determine what would be reasonable for you. And then take that blended rate so then that way it does help to lower your salary.

But where people try to get cheeky and just do it too low, the IRS might take a few years for them to find it, but they'll nab you for it real fast and then you're going to owe interest and penalties and payroll tax penalties and interest, which are far worse than income tax penalties. You don't want to screw around with payroll. You got to make sure you're doing it properly, otherwise it can really bite you in the butt in the end.

Dr. Jim Dahle:
Yeah. A good example of a doc who's abusing this, let's say it's an ophthalmologist who's actually practicing full-time and claims a salary of $50,000. That's going to be a big red flag.

Alexis Galati:
Exactly. Yeah. The IRS has these statistics. And so, if they see that, “Hey, this is really low”, they might need to inquire, “Hey, why was it so low? Did you have to take a medical leave or something else happening?” There are some legitimate reasons for taking a lower salary one year or more, but again, if you can't substantiate it, then they're going to go and get you with those interest and penalties.

Dr. Jim Dahle:
Yeah. A couple of rules of thumb that I've heard and probably even used over the years, tell me what you think of them. The first one is, especially for a doc, don't set your salary below the social security wage limit. That way you're only saving Medicare taxes and it doesn't look quite as abusive to the IRS. And the other one is pay yourself at least 50% of what the business is making as salary. Do you think those rules are worth anything? Do you think it's really about getting into the details and just figuring out what a reasonable salary is, or is there some value to those rules of thumb?

Alexis Galati:
The IRS has not provided any guidance or has any set formula for figuring out what's considered reasonable comp. I never ever go based off of percentages. That's because I've seen when I've run reasonable compensation analysis for my clients, I've even had ophthalmologists for example, that their salary is below the social security wage amount. And so, it just depends on what other jobs you're doing and everything.

And so, I think it is worth the time to investigate, like I said, all the jobs that you're doing and find the proper hourly amounts and then take blended rate between all of them. And something that you only really have to do maybe every two to three years or if there's a big change event in your business, or you retire or slow down or maybe only start to work three or four days a week. I've never seen any merit to those standard amounts.

Dr. Jim Dahle:
Fair enough. Okay. Let's get into the next one. And this one's really popular among direct real estate investors that I've seen. That's where this comes up most often. It’s cost segregation studies. Can you describe what that is and when somebody is maybe taking it too far?

Alexis Galati:
Yeah. Cost segregation study is basically when you want to accelerate the depreciation in a building. So, what happens is if you, let's say, have a commercial building and it's normally depreciated over 40 years. And so, if you let's say buy a million dollar building, then that million dollars is depreciated straight line. You divide it by the 40 years and that's how much you can take each year.

But with a cost segregation study, what it does is it takes that million dollars and then breaks it up into different components of the building that have a different depreciable life. For different parts of the building that have maybe a five to 15 year depreciable life, you can take that amount and depreciate it over that shorter period of time. And then you can start getting into like bonus depreciation as well and et cetera.

What ends up happening is you get a really nice big deduction that first year and then get nice little deductions continuing forward. But the point is that you're accelerating that depreciation.

Where people can get into trouble is that they don't do a proper cost segregation study. If your building itself is worth, I'd say the hump is about $600,000 or more, then you really need to have a proper cost segregation study done. There are different tools out there for doing mini cost segments for properties that are not as expensive. But what I've found is that generally overall, this is a very legitimate strategy and a great way to reduce. But what also too people can get in trouble is that they don't realize that unless you are doing REP status or maybe you have a short-term rental, you can actually get a benefit of that accelerated depreciation, spending unnecessary money on doing that cost segregation study.

If you're subject to those passive loss rules and you can't take any losses against your ordinary income, because as I mentioned, you don't qualify for that short-term rental or REP status, Real Estate Professional status, then like I said, you've just paid too much money for something that really doesn't help.

The problem is that even if you did it in the beginning, you're like, “Hey, I'll get REP status next year.” That's still considered passive losses. You can't change the character of those losses from prior years to now be considered active. So, it's always best to wait until you know you're going to qualify to actually take the loss before doing it.

Dr. Jim Dahle:
Yeah, good tips there. Not really a do-it-yourself project. That's kind of what I've taken away from cost segregation studies. You got to hire a firm that specializes in these, and if you don't qualify for the short-term rental loophole or real estate professional status, it's not worth doing

Alexis Galati:
Basically. Yes.

Dr. Jim Dahle:
Yeah. Okay. Let's get to another one that you occasionally see. Usually more in the world of reducing estate taxes, which is a qualified personal residence trust, a QPRT, basically an irrevocable trust that allows you to get your home out of your estate to reduce the amount of estate taxes that gets paid upon your death. But they also allow you to remain living on the property with the retained interest in the house for some period of time, and then the rest is transferred to the beneficiaries as remainder interest. Who should be thinking about these, if anybody?

Alexis Galati:
If you have an estate problem, basically, is when you want to start thinking about that because most of the time your residence will be a large portion of your estate. But the problem with these is that you lose your step up in basis and that could be a significant tax savings for your heirs, basically. And also too, after a certain period of time, if you're still living and you're living in this house and it ends, you have to start paying rent to your beneficiaries. That rental income is taxable to your beneficiaries. So, if you don't have a good family dynamic, then that could start to be a kind of sticky situation. But my major thing is the fact that you lose that step up in basis.

Dr. Jim Dahle:
Yeah. That is a big thing. And something those of us with the estate tax problems definitely worry about. The mainstay of our estate tax plan is a trust in which that step up in basis is lost. And so, you got to look at it and offset, “Well, is the savings in estate tax going to be worth the additional cost in income tax down the road when these things get sold?” In our case, we've decided it was, but certainly a lot of people may decide just the opposite. And this would be a total waste if you don't end up with an estate tax problem anyway.

Alexis Galati:
Yeah, and that's the problem. It’s that we don't really know where estate tax exemptions are going. It kind of depends on who is in power and what they decide. Right now, it's very generous but that could go revert back to early 2000s levels where it was like a million, maybe $5 million. And a lot of docs, if they're doing things right with their finances, will hit that very easily, and then they'll have estate problems.

Dr. Jim Dahle:
Yeah. Right now it's $27 million and indexed to inflation, but starting in 2026, it's going to be half that if Congress doesn't change anything. It's already set in place in the law that it's going to be half starting in 2026 and it definitely will grab a lot more people at that time. And obviously if they reduce it back to where it's been in the past, it's going to affect most White Coat Investors. But right now it's $27 million. It's affecting very few of them.

Okay. Let's get onto one that I hear about a lot. Everybody is interested in car-related deductions. Let's talk about the section 179 deduction for cars greater than 6,000 pounds. Can you explain how that works and when someone knows they're abusing it?

Alexis Galati:
Yes. Basically what happens with this is you purchase a vehicle, and if you're using it 100% for business, you can go and write off the cost of that vehicle. And there's bonus depreciation involved and then, like I said, the section 179. So, it can be really powerful if you need a car. One phrase that I always love that you have, was it “Don't let the tax tail wag the dog?” Don't buy a vehicle unless you actually need the vehicle. And I see this all the time with my clients. They're like, “Hey, Alexis, what can I do? Should I just go out and buy a car?” And I'm like, “Well, do you need the car?” And they're like, “No, no, but it'd be okay.” And I'm like, “Don’t do it. It doesn't make sense.”

And so, what a lot of people will do is they'll not use that car. Sometimes it’d be a personal vehicle, personal and business vehicle, but they're not using it enough. And there's usually that 50% rule where you need to be using it more than 50% in order for it to qualify. And even if it's not just the first year, if you subsequently go down in the next year, then you can get in trouble for that. You have to actually be buying a vehicle that will be used for business.

Also, we'll have some clients that will purchase the vehicle at the very end of the year and drive it one mile and say it's all business. And again, that ties into, “Well, okay, make sure that you're using it 100% for business next year, or at least over that 50%.” So, that's generally where people get in trouble. Or they, “Whoops, I bought a car that really wasn't qualified for that 6,000 pounds.” I've seen that happen before, too.

Dr. Jim Dahle:
Why do you think there's this 6,000 pound limit? They're okay with ambulances, they're okay with big work trucks, but they're apparently not okay with you using a Honda Civic as your business vehicle to get this deduction. Why is that?

Alexis Galati:
That's a good question. This one's been around for a while, and I'm not sure why they decided that. Maybe because most of the real legitimate work vehicles are going to be over 6,000 pounds. And so, they're trying to make it more affordable for business owners to go out and buy that fleet of trucks that they may need.

Dr. Jim Dahle:
But what ends up happening is the realtors buy Suburbans.

Alexis Galati:
Exactly. Yes, exactly.

Dr. Jim Dahle:
All right. I think the key here is to remember that this is a business deduction. You have to use the car for business at least 50% of the time. And if it's not 100%, you have to prorate it.

Alexis Galati:
Yes, exactly. And that can be a problem, too, is people don't realize, they try to purchase the vehicle through the business which I don't recommend doing unless it's going to be 100% for business. And the thing is that if you're using it for 95% business, there is some dominion rules. If you use it for a little bit, “Hey, I went to the grocery store after work” sort of thing, that's fine. But what I found, it's easier just to purchase everything personally. For one thing, insurance rates are a lot less expensive for personal versus business. And so, if you decide to purchase the vehicle, then you just want to make sure that you're doing it on the up and up.

Dr. Jim Dahle:
Can you explain to the doctors out there listening that their drive from their house to the hospital is not business use?

Alexis Galati:
Well, sometimes it can be. If you have your home office, and it's a legitimate home office, a lot of times I have some physicians that they're on call, they come home and they're using it to look at images, etc. They have a legitimate home office. You actually can take your mileage from your home to your other place of business, and that is legitimate mileage. However, if you don't have that legitimate home office established, then yeah, you can't do your commuting miles.

Dr. Jim Dahle:
Now, what does it mean to establish legitimately a home office? Does that just mean you're taking the home office deduction, or does that mean you actually do work in that home office before and after you commute each day?

Alexis Galati:
Basically, you have it set up properly as a home office. You are actually doing work from it. You don't have to necessarily do it right before, right after, but you need to be using it on a consistent basis. It has to be considered ordinary and necessary to have it. And it's considered convenience for the employer.

Dr. Jim Dahle:
And I know to take the deduction for the home office deduction, you have to use it regularly and exclusively.

Alexis Galati:
Yes.

Dr. Jim Dahle:
Is that also a requirement if you're trying to deduct your commute?

Alexis Galati:
Yes. For me, for example, Cerebral is 100% virtual. I work from home. If I go from here and I go to a meeting with a client or I go to Staples to buy office supplies, that is business mileage. And it can be even, too, for a physician, if let's say they're doing telehealth, or my husband, for example, he doesn't have his own home office here at the house, but he looks at images all the time when he's on call. If you're using it regularly and exclusively for business and you have that need, it's considered, like I said, a convenience for the employer, then yes, you can go and take it. Knock on wood, I have not had any issues with it.

Dr. Jim Dahle:
Okay. I think we beat that one to death. Let's move on to one I know you're not a huge fan of, and I am not either, but people have probably heard about it and wondered about it. Let's talk about the Restricted Property Trust. And you'll see this out there and you'll try to figure out what it is and you read and read and read and nothing tells you what it actually is because the people selling it are trying to hide what it actually is, which is usually a whole life insurance policy.

Alexis Galati:
Yes.

Dr. Jim Dahle:
Tell us about Restricted Property Trust, what you think about them.

Alexis Galati:
Yeah. Full disclaimer, I don't recommend these, I don't do any of them. I don't know a ton about them because I'm like you, my husband and I were talked into a whole life insurance policy when he was in residency. And so, I'm not a fan of whole life insurance, as well. When I hear it, it's like a dirty word.

But anyway, Restricted Property Trust is designed to help business owners, physicians, etc, mitigate their income tax. That's kind of how it's sold. The main objective is, it's a long-term, non-taxable cash growth and cash flow using conservative asset class, which is basically the life insurance policy. This basically means that when you're putting that in, you're getting a deduction for that. But the thing is that it's not a full deduction. If I remember correctly, you're still having to pay tax I think on like 30%. It's considered income. And then you're only getting like a 70% deduction. And then the theory is that when you want to take money out, you can take money out, but it's going against your death benefits.

Dr. Jim Dahle:
Yeah. These get sold under lots of different names. Split dollar policies is sometimes what they're called. But it's basically your employer is buying you a life insurance policy, is what it comes down to. And the question is whether the tax benefits of being able to partially deduct the premiums into the policy are worth the fact that your money's going into a whole life insurance policy. And you have to run the numbers and decide if that's really worth it to you. But it certainly adds complexity to your life, and my gut reaction to most things whole life insurance is I don't want to get involved. I don't want to deal with it because at the end of the day, what do you own? You own a whole life insurance policy, which I don't really want to own again.

Alexis Galati:
Exactly.

Dr. Jim Dahle:
All right. Well, this has been great, Alexis. It's been great to have you on. We'll have links to your course as well as your book in the show notes. Looking forward to seeing you again soon. Am I going to see you this year at WCICON?

Alexis Galati:
Yes. Yes. I'm going to be discussing just about different strategies that taxpayers should be doing, just the basic things. A lot of people come to me looking for the bells and whistles, and sometimes you just got to concentrate on those basic things first so that you can maximize your savings.

Dr. Jim Dahle:
Yeah, I think this podcast is going to drop on the day WCICON ends, but if you want to hear Alexis's talk, you can still buy the virtual version. We call them Continuing Financial Education, package them up into an online course each year, all the material from the conference. If you want to learn more about this and about other topics that are talked about at WCICON, you can get that. It'll be ready in just a few weeks and obviously we'll make a big announcement on the podcast and the blog when that becomes available.

Thank you so much for your time today and explaining some of these more intricate and aggressive maybe, certainly more advanced and difficult to understand tax techniques that people are using out there.

Alexis Galati:
Thank you so much, Jim. I had a great time.

Dr. Jim Dahle:
Okay, I hope you enjoyed that as much as we did. We will have a link to all of Alexis's stuff, a book course. She's got some freebies on her website. We'll have that in the show notes so you can get to that. But it's basically www.cerebraltaxadvisors.com/whitecoat. You can learn more about that.

It's fun to talk about these things and you get to decide which ones of these you want to use. Maybe you want to use a QPRT and you don't want to use a land conservation easement, or you want to do tax loss harvesting, but you don't want to form an S Corp. It's your choice. So, talk with your tax preparer, if you use one, and decide which of these techniques you would find most useful.

 

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All right, don't forget, if you want to come to WCICON next year, and you should want to come, it's going to be awesome. It’s in San Antonio. The dates are February 26th through March 1st, a little later than this year. So, it's about 13 months away. You can register at wcievents.com, but this is the best price it will ever be. Of course, we're going to give you a good price. You're buying a year in advance. But $1,499 in-person general admissions. And you can cancel through July 31st, just a $99 cancellation fee. If you're interested in coming, wcievents.com.

Thanks for those of you who are telling your friends about the podcast. It does help spread the word, so does leaving five star reviews. Our most recent one comes in from afjahoor, I think is how you pronounce that. Just came in the month we're recording this, which is December.

This person says, “Dr. Dahle’s material is a must for all doctors. Becoming financially literate, and subsequently financially independent, is going to be very important if doctors are to ever take back control of medicine. Dr. Dahle is leading the charge with books, blog posts and a podcast that are all very informative and entertaining. I wish I had come across his material earlier. His advice is honest, well-researched and practical. He may not ever brag about it, but I am certain he is making a major positive impact in the medical profession by helping doctors and other healthcare professionals become financially literate.” Five stars.

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But one way, if you're one of those people that have not necessarily ever bought anything from us or even our advertisers, this is one way you can give back. A five star review does help spread the word.

All right, great episode. We'll see you next week. Keep your head up, shoulders back. You've got this and we can help.

 

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Milestones to Millionaire Transcript

Transcription – MtoM – 156

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
This is Milestones to Millionaire podcast number 156 – Family Doc pays for a dream wedding with cash.

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All right, students, the webinar is coming right up. It's February 21st. This is my annual webinar I do for students. This is the talk I would give if I came to your medical or dental school, and had an hour with you. I call it What Medical and Dental Students Need to Know About Money. I'm going to be doing it together with Student Loan guru Andrew Paulson. We're going to talk about not only student loans, but we're going to talk about why your patients need you to be financially literate, the secret to being a financially successful doctor, how to invest during medical school, should you be lucky enough to have funds to do that, how to save money during residency interviews, and maybe why you shouldn't buy a house during residency.

You can sign up for this at whitecoatinvestor.com/student webinar. It's going to be at 06:00 o'clock on February 21st. 06:00 o'clock Mountain Time. Sign up even if you're not sure you can be there. I'm sure we'll be recording it and get you a copy of that, but we'd love to see you live. It's going to be live. I'm going to take live questions. We're going to stick around long enough to answer all your questions, just like I would if I'd come out to your school and talk to your class. So, I’m looking forward to doing that with all the students out there.

We've got a pretty exciting interview today. This is a unique milestone. I love celebrating unique ones. I'm perfectly fine celebrating people paying off their student loans and becoming millionaires, but every now and then, it's good to throw in something unique. And this one certainly is. Stick around afterward, I'm going to talk for a minute about how to wire money.

 

INTERVIEW

My guest today on the Milestones to Millionaire podcast is Adam. Adam, welcome to the podcast.

Adam:
Hi. I’m happy to be here.

Dr. Jim Dahle:
You've been listening to this for a long time. Now it's your chance to be on it. Tell us what milestone we're celebrating with you.

Adam:
We are celebrating, my wife and I had our dream wedding.

Dr. Jim Dahle:
All right. Congratulations on getting married, first of all.

Adam:
Thank you.

Dr. Jim Dahle:
I think the financial aspect of this, however, is the fact that it was a dream wedding. So, tell us what you mean by your dream wedding.

Adam:
Well, when I had initially proposed and engaged, I actually called in to your podcast, back in 2021 or 2022 asking about recommendations for a wedding ring. And you gave some really good advice. And I broke down and I bought basically her dream ring and then after I proposed we were planning the wedding.

And when it came to finances and timing, she said, “Well, I'm going to need at least two years to plan all this.” I said, “No, no, no, we can do this in one year.” And she said, “Oh, we're going to need so much money, we're going to need at least $100,000.” I said, “What? Dave Ramsey said you can have a nice wedding for $10,000.” And that was my perception. You can have a nice wedding for $10,000.

I had no idea how much it would cost. And I told her, “Well I'm working and I have enough saved up so I can basically give you this much of my paycheck.” And it was basically $60,000 at the time because I was working extra and I had signed on early for a job and I said, “$60,000 should be okay.” Well, it ended up costing about twice as much. It was about a $120,000 wedding.

Dr. Jim Dahle:
Wow. And this is not a classic Indian wedding with elephants or anything like that.

Adam:
No elephants, but we did have some big surprises for guests.

Dr. Jim Dahle:
Okay. Very cool. Because I've talked to people that have been to weddings. I don't know that they had weddings. The flowers were $250,000. A wedding is one of those things that's a little bit like an education in that it costs what you're willing to pay.

Adam:
Exactly.

Dr. Jim Dahle:
Some people get married for $200, and other people spend $5,000 or $10,000 or $25,000. And obviously you can spend half a million dollars on a wedding if you like. So, it's all about what you want and what you can afford. And it sounds like you guys decided it was a $120,000 wedding. All right. That's impressive, I think, to pay for that with cash. You didn't borrow any of this money for this wedding?

Adam:
Nothing borrowed.

Dr. Jim Dahle:
Okay. So, how'd you do it? You started with $60,000 in the bank, but somehow you came out with another $60,000. How'd you get all this money together for this dream wedding?

Adam:
Yeah. I think we cash flowed most of it. My resident salary is about $60,000 and about half of that, $30,000 goes into my retirement.

Dr. Jim Dahle:
Wow.

Adam:
403(b), HSA, Roth IRA. In 2021, I spent about $15,000 for the engagement ring. And then in 2022, our hospital has some moonlighting and so I made about $90,000 in moonlighting. And then in early 2023, we got married in May of 2023, I had some money from moonlighting in early 2023. And so, that plus her salary, she's an anesthetist, was able to help pay for this. She's an AA and she makes about $200,000.

Dr. Jim Dahle:
Okay. So, over what time period did you save up the money?

Adam:
About a year.

Dr. Jim Dahle:
And it sounds like that was not the only thing you saved for. You were continuing to save for retirement at the time.

Adam:
Yeah. Yeah. That's sort of a non-negotiable for me. Every year I maxed out my retirement accounts, those three. And when we started dating, I told her she has to do the same and planning for our future.

Dr. Jim Dahle:
Yeah. What's your specialty?

Adam:
Family medicine.

Dr. Jim Dahle:
Family medicine. Okay. And you're what year? You're a PGY-3 now or what?

Adam:
I just graduated, so I'm about five months into my job as a nocturnist.

Dr. Jim Dahle:
Okay. But it was right at the end of residency, basically, when you got married?

Adam:
Yeah.

Dr. Jim Dahle:
Okay. Very cool. All right. Well, tell us about the wedding.

Adam:
Yeah. It was very exciting. I'd say the first thing that we did was we looked at venues because with COVID we knew a lot of people that had planned weddings and they got canceled and they planned them again and they got canceled again. So, that's partly why I want to do this quickly if a year is quick.

But we looked at venues for some time in the spring. I felt like that would give us enough time. The weather would be nice. It's an indoor wedding. The venue ended up costing about $20,000 to $30,000, about $20,000, and then $8,000 or $10,000 in add-ons, extra food, extra lighting, things like that. And then we looked at churches. Churches were about $2,000. And then the rehearsal dinner was $10,000. We booked all those several, several months in advance.

Next, she knew she wanted a lot of flowers. And I had no idea flowers were going to be so expensive. She got a florist and the flowers cost about $20,000. She got two dresses, alterations, a veil, I'm counting in makeup, the wedding rings, the tux, groomsman gifts. This was all about $26,000.

The first dress was $8,000, the second dress was $6,000, $2,000 in alterations, $3,000 for the veil. The entertainment, that was depends on what you count, but we had circus performers, because I'm a former circus performer in Acrobat. We had a DJ, we had a surprise dancing robot at the end. We took professional dance lessons to perform our first dance. There was sushi, there was cake, crème brûlée. We spent $5,000 on these really nice invitations.

We helped pay for out-of-towners. We booked their spot at the hotel as well as gave them sort of welcome gifts. There was a party bus to transport people from the church to the venue. There was just a lot of extras that came in. And I'm very thankful for our wedding planner to help guide us through all this. Because with both of us working full-time and me picking up extra shifts in residency, it was very stressful. And so, she helped organize all this. And it was difficult to find a good wedding planner, but I think once we found one, she was very helpful.

Dr. Jim Dahle:
How many guests total did you have?

Adam:
We invited 200 and about 175 attended.

Dr. Jim Dahle:
Okay. And this was not a destination wedding, it doesn't sound like. This was in your hometown.

Adam:
Yes.

Dr. Jim Dahle:
Okay. And what'd your family and friends think of this wedding? Were they just totally wowed by this or is this par for the course in your culture and community?

Adam:
No, I think everyone was very surprised. We sent out really nice, very fancy, expensive invitations, and I think people kind of knew that this was going to be a really exciting wedding. My parents didn't, I mean, they helped a little bit. They helped with the tips and they hosted some parties here and there, but this was all paid for by us. I worked my way through college. I paid my way through school. And so, I never really expected my parents to help out with anything. And I think them seeing me do that and then do this is really impressive for them.

Dr. Jim Dahle:
Yeah. So, it's been six to eight months now. Looking back, any regrets whatsoever on things you wish you hadn't spent as much on or that you wish you'd spent more on?

Adam:
Yeah, I would say it was tough when we first started to find a wedding planner. I don't want to say we kind of got scammed a couple times, where we would set up with someone and we'd send them an unrefundable deposit and then they would stop emailing us and stop texting us and we wouldn't hear anything for two or three weeks. And then it's like, “Okay, well, we don't want to continue working with you.” And so, you lose that deposit.

And it was really odd because the first week when you're kind of deciding whether you're going to work with them or not, and they're helping you out a little bit, they were great. And then as soon as they get the money, they just drop off the face of the earth. I wish we would've taken some early recommendations before we found our really good wedding planner.

Dr. Jim Dahle:
A lot of people would look at this and just think you're nuts. For example, we've been married for almost 25 years, we've probably spent $5,000 on our wedding. That's what you spent on invitations. Some people might criticize you and say, “That $120,000 would've gone a long way toward getting you started off in your financial life, paying off debt or going toward retirement, financial independence.” What's your response to those sorts of criticisms?

Adam:
I say I'd be one of those people making the criticisms before I met my wife. I think I always dreamed of a really nice wedding, and she did too. And I think just based on my upbringing and struggles throughout life, I became more of a super saver. “Just work hard, save up a lot of money. I don't really need a lot to live. I'm pretty happy just with not a lot.”

And so, a lot of my friends did that. I started seeing more of a trend of people getting married in a courthouse or not spending a lot of money. And I thought, “Oh, you could spend that money on a down payment for a house or a nice honeymoon.” And my wife, she always wanted a big wedding. And the more I thought about it, I thought, “Well, there's not a lot that I'm going to spend money on.” And so, I think the few things that I do spend money on should be really, really nice.

Dr. Jim Dahle:
Yeah. Very cool. My guideline is if you can pay cash for it, you can afford it. That's the same with cars as it is with vacations and weddings. Clearly you can afford this. You saved up the money, you saved it up in a year or less and paid for it. So, you should give yourself a pat on the back financially speaking for doing this.

There's a lot of people out there that they go borrow $30,000 or $40,000 or $50,000 for a wedding and 10 years later they're still in debt for their wedding. And I think that's a terrible way to start off a marriage. But this sounds like dancing robots and all to be a pretty great way to kick off a marriage and to show that you guys can work together and save up and cash flow expensive things. And I think that's a great thing to a great foundation, a great financial foundation to start a marriage with. So, congratulations to that.

What advice do you have for somebody else that wants to save up for something? Maybe it's a wedding, maybe it's a honeymoon, maybe it's a dream trip around the world. Maybe it's a fancy truck. Who knows? What advice do you have for them?

Adam:
I'd say if you're like me and you work hard, you love your job, you save up enough money, you can afford the nice things that you really like. I do think it's important to have that money saved up and have that money available as well as fully fund your future and protect against catastrophe, things like death and disability.

But I think the whole point of having money is to spend it and it doesn't do any good just sitting there in the bank. It was really tough for me to part ways with this money and spend it. I think it's hard for me to spend on anything, even going out to eat and spending $50. I prefer to cook at home, but if it's worth it, I think you should buy it.

Dr. Jim Dahle:
Awesome. What's next for the two of you in your financial goals?

Adam:
Well, my plans are to finish paying off my student loans. That's number one. I borrowed about $200,000, I'm putting about $20,000 a month. And so, I should be done in the next five months. And then after that I want to save $250,000 a year for about 20 years. And then I should be able to retire around age 50. I don't plan to retire. I actually really love my job and I want to continue working as long as possible, but that's probably next on my goals. Max out my 457, start a 529. We're working on having kids, so build a family, support our parents, and then probably plan to spend more money on travel and a nice house.

Dr. Jim Dahle:
Pretty awesome, pretty awesome. Well, congratulations to you on your success. Thanks so much for being willing to come on the Milestones podcast and using it to inspire others to do the same.

Adam:
Thank you for having me. Best of luck for everyone out there and everyone single or planning on getting married.

Dr. Jim Dahle:
Okay, great interview. I don't know how many of you spent $120,000 on your wedding? I'll bet it's not that many of you. I have talked to White Coat Investors that have spent far more than that though. So, there is a huge variation. Anywhere from $50 for a marriage license in the courthouse to half a million dollars probably. Much like education, it costs what you're willing to pay. Figure out what you're willing to pay, pay for in cash, have a great time and learn to save for things that you really want. I think that's a great advice.

 

FINANCE 101: HOW TO WIRE MONEY

Now, I promised you at the beginning of this podcast, we're going to talk about wiring money. And some of you have never actually wired money. Here's the deal. There's lots of ways to send money from one place to another. For example, you can write a check. You hand somebody a check and they go take it to their bank and they cash it and then the money sits there for a little while, while it clears. And then eventually it's in their account instead of your account.

Well, you can do it a little bit faster doing an ACH transfer. This is essentially an electronic check, but once it gets to their bank account, again, the bank is not 100% sure it's there. It takes a few days for it to clear. Well, if you don't want that to happen, the way you move the money instantly to their bank account, and everyone believes the money is actually there is by wiring it. And so, for lots of big purchases, like when you buy a house, for instance, you need to wire the down payment or the lender needs to wire the funds to the seller of the house. Or if you're making a big investment, like if you're putting $100,000 into a private real estate fund, you'll almost surely want to wire that money.

And so, you need to get used to wiring funds. It's one of those financial chores you need to learn how to do. And you can do it by going into the bank. For many years that was what you had to do. You had to go into the bank and you talk to the teller and you show them some ID and they ask you some questions and you're in there for 20 minutes or 30 minutes and eventually that wire is sent out. Sometimes the bank charges you a fee. It might be $20 or $30 to send it. Sometimes it's included in your benefits for having a bank account there. It's probably more likely at a credit union than it is at a bank account, but I've had both of them charge fees for me before.

You can wire money out of your brokerage account. You can wire money from Vanguard for instance. A nice thing about Vanguard is at least at a certain level of assets, they stopped charging you for wires. And so, you can do free wires out of there. I noticed I mistakenly sent one out of a bank account instead of out of my Vanguard account and had to pay $29 for it. And so, I should have just wired it straight out of the Vanguard account. Instead, I transferred it from Vanguard to the bank and then wired out of there, which not only took longer, but cost more money.

However, when you call somebody up like Vanguard or when you walk into the bank, they will ask you how you verify the wiring instructions. And the wrong answer is by email. Email can be hacked. Assume that nothing you ever send by email is private because it can all be hacked. One of the worst scams out there are people that start intercepting emails and pretending they're the person on the other side of your emails and they eventually get you to give them your bank account information.

This happened to a White Coat Investor a few years ago. They were investing into a real estate investment and they ended up emailing mistakenly with a scammer and they wired their investment money into the scammer's bank account. And the problem with a wire, this isn't like a check, you can't go back and cancel the check. This isn't a credit card transaction where you've got some recourse with the credit card company. The money is now in their bank account. They pull it out, they close the account, they disappear, the money is gone. And so, you got to be real sure that you're wiring it to the right place.

So, email doesn't cut it. It's okay if they email you the instructions, but you need to call them up and verify on the phone, using a number that you looked up elsewhere, not that was emailed to you. Verify on the phone the wiring instructions. And Vanguard and most other reputable places will ask and actually demand that you confirm those wiring instructions in person or by phone or they won't send the wire. It's one of the requirements. I've gotten halfway through the wiring process before and they asked, “How do you verify this?” And if you say “By email”, they won't send it. So, you got to get off the phone, go verify the instructions, come back, call them up, go through the whole process again. So, don't do that.

The information you'll need to know, of course, is the routing number. Basically, every bank in the country has one of those. And the account number you're wiring into. Everything else is kind of superfluous. The name on the account is nice to know for the benefit of, which is usually you. It's nice to know that. Sometimes it's good to have the address of the bank, those sorts of things. But the main things are the routing number and the account number. Sometimes they want to know what kind of an account it is, checking or savings. It's almost always going to be a checking account you're wiring into or out of, but it could be a savings account. So, you need to know that as well.

But for the most part, it's a pretty straightforward process. You prove who you are. You have the information you need to wire, you make sure you didn't get it from email only, and then you send the money and usually that same day it's transferred from your account to their account or vice versa.

So, get used to wiring money. It's one of those financial chores you'll need to know how to do. For me, it's been an increasing number of times in my life. There are many times where I only send one wire in two or three or four years. Now I feel like I'm doing it a half dozen times a year or more. So, you better get used to it.

 

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All right, this has been the Milestone to Millionaire podcast and you can sign up and come on this podcast. You can apply at whitecoatinvestor.com/milestone and we'd love to have you on and celebrate what you've accomplished and use it to inspire others to do the same.

Keep your head up and shoulders back. You've got this. We'll see you next time on the Milestones to Millionaire podcast.

 

DISCLAIMER

The hosts of the White Coat Investor podcast are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.