Today on the podcast we talk about a variety of topics that we think you will find helpful. We discuss tax credits, foreign tax credits, insurance tax code changes, and how a 7702 is not something we are excited about at WCI. We talk about Roth conversions during retirement and a host of other topics. We also have a husband and wife doctor duo on the podcast. They are guests we have had before, and they are the creators of the online course Zero to Freedom that will teach you all about cash-flowing real estate properties.
In This Show:
Tax Credits
“Hi, Dr. Dahle. I'm in a fairly unique situation in that I'm graduating from residency in the military and my income will ideally only ever go up from here. Projecting out my federal taxes this year, it looks like I will likely have zero federal taxes from the various credits I'm eligible for, with a good amount left over. My understanding is that most of these credits are unable to carry forward to a future tax year. I’m curious if I can take advantage of this situation to offset future taxes in other ways. I have been fortunate to have grandparents who bought me stocks and bonds when I was a very young child that have appreciated significantly. Would it make sense to cash out these investments now and be able to offset a good amount with capital gains? If I wanted to keep the particular stocks that I have, can I just repurchase the same stocks which is essentially step up in basis? Thanks as always.”
This process is called tax-gain harvesting. You've heard a lot on this podcast about tax-loss harvesting, which is what people do who make more money than you do. When you have a relatively low taxable income, which is not unusual for a resident and is certainly not unusual for anybody in the military, you can do the opposite, and you can update the basis on your investments. That way, when you sell them down the road, you'll have less of a gain. You don't have to wait 30 days. There's no waiting period with this. There's no wash sale. You can simply update the basis. Now, of course, those capital gains are going to flow through onto your taxes if you do that. So, you better be sure there's not going to be a whole bunch of income at the end of the year, which could cause those to become taxable.
But given that the 0% capital gains tax bracket is fairly sizable, especially in the year you're coming out of medical school, for instance, that can be a pretty significant amount of capital gains that you can realize. So, that's a good idea. You certainly can do that. Other things to keep in mind, other opportunities you might have, would be like a Roth conversion. If you can do a Roth conversion at 0%, that's pretty much always a good move. When people go into medicine as a second career, for instance, and they have some retirement accounts and then they go back to medical school, in that second and third year of medical school, you have no taxable income whatsoever. You can do a pretty fat Roth conversion and pay no taxes on it whatsoever. Take advantage of those times in your life when you have low taxable income to update your basis, to do Roth conversions, any other opportunities you may find there to really arbitrage that super low tax rate. I'd call it artificially low; it's just low relative to the rest of your life.
More information here:
Top 5 Ways to Pay No Tax on Capital Gains and Dividends
Foreign Tax Credit
“Hi, Dr. Dahle. Thank you so much for all of the education you've provided over the years. I have a question about the foreign tax credit. I read an article by William Baldwin at Forbes that explained that at a certain point, there's a complicated adjustment to the foreign tax credit calculated on Form 1116, which could lead to losing much of the credit. This occurs when you receive over about $20,000 of foreign dividends, which corresponds to holding several hundred thousand dollars of a foreign fund in a taxable account. I'd love to hear your thoughts about this. Should someone approaching this situation preferentially hold foreign funds in their deferred or Roth accounts going forward? Thank you so much.”
Michelle, congratulations. You have asked the hardest question that's ever been asked on this podcast. We had to pause the recording for 15 minutes while I tried to figure out what the heck you were talking about. This has never affected me. I looked at my last tax return that I have done, which is 2020, and I only had $11,000 in foreign dividends on that tax return. This doesn't affect me or did not affect me. In 2021, I think it will, though. I haven't completed those taxes yet; I just filed the tax extension. But at any rate, yes, you're right, or your tax person is right. There is a limitation on this credit. If you dive into the details of Form 1116, specifically line 18, you get in there and there is a limitation on your qualified dividends. They basically get multiplied in step 9 of the worksheet by 0.5946.
In essence, one of the exceptions to not have to do that worksheet is having less than $20,000 in dividends. Once you have more than that, you have to do this worksheet, and it looks to me like that limits your dividends by 60%. This is going to reduce it by about 40%. Essentially, this is going to decrease your foreign tax credit from what you might think it was going to be. Unfortunate, but there is nothing you can do about it. This is the way it's calculated, and your tax software will take care of it or if you're paying someone else to do your returns, their tax software will take care of it. Anybody who's still doing their entire return by hand and is having to do worksheets like these is just a glutton for punishment.
But your question is, “Should this change your asset location decision?” Well, in my case, all of my US total stock market stocks are now in a taxable account, and all of my foreign total international stock market and small international stock market index fund are all in taxable. It's all in taxable anyway. I'm going to get what I get. It's not going to affect my tax location decision. But if you were at that stage in a tax location, where you are trying to decide whether to put total stock market into taxable or you're trying to decide whether to put total international stock market into taxable, I guess this could sway your decisions slightly. But the truth is, this was always about the same anyway. Because foreign stocks pay a little bit more in dividends, but you get the foreign tax credits. That kind of offsets that. US stocks pay a little bit less in dividends, but you don't get the foreign tax credits. They're about equal when it comes to tax efficiency.
If you're really debating which one of these is more tax efficient, total international or total stock market, you win. You've won the tax location game. You have won the investing game. You've gotten down to something that really doesn't matter all that much. Will this change my decision? No, because there's not really a right decision here anyway. It's really trivial: which one of those two funds goes into taxable first. If you're like a lot of us, you're going to end up with both of them in there eventually anyway. So, yes, it's an interesting bit of tax trivia that I just learned today. Thank you for that education, but is it really going to affect your tax location decision? Not by much. Expect your foreign tax credit to be a little lower once you're pretty wealthy. That's the bottom line.
Insurance Tax Code Changes
“Hi, Dr. Dahle. I've been meeting with an independent financial advisor. First, I just want to say thank you for everything you do for us. And he was talking to me about a couple of the larger life insurance companies and this recent tax code change. I believe it's tax code 7702 that allows the cash value to grow on a much faster rate than it previously was otherwise. I know you've got some pretty negative thoughts around the whole life insurance, but some of the companies sounded like they pay a very nice dividend and have historical good return. So, as an alternative to bonds, I thought this might be a good idea, particularly ones that are paid up in 10 years and required no more premiums. The cash value was growing at a fairly nice rate of return. I didn't know if you had any new thoughts on this based on the tax code, or what your opinion was. Thank you again. I appreciate everything you do.”
I kind of hate 7702 because these guys that sell whole life insurance, they use things like these tax code numbers to sell whole life insurance. Instead of saying, “Hey, this is whole life insurance,” they say, “Here's a 7702 retirement plan. It's brand new from the government.” It makes you think that you're dealing with a 401(k) or something. It's not the same thing. This is just a section of the tax code that talks about life insurance. It's not some new retirement plan, by any means. There is a post out on the blog that was probably published since you had recorded this question on the Speak Pipe. It came out on June 11 on the White Coat Investor blog. It's called, “Why You Shouldn't Buy a TFRA or 7702 Plan.” There was a guy out there selling these things, and he was selling them hard. I wrote this post just ripping them up one side and down the other. My team said I had to neuter it. I could not run it in the form I had written it. It was entirely too personal. We were going to end up having legal problems with it, etc, etc. It was just downright mean. So, I neutered it back but left in enough that you can learn exactly what I think about someone selling whole life insurance using a name like a 7702 plan. I don't like it, is the bottom line.
What were the recent changes to section 7702? Basically, it lets you pay more premium for less permanent death benefit. A little bit more of the premium paid goes toward the cash value. That's it. That's the change. Do you still have to buy a permanent death benefit? Yes. Does it still go through all these fees and commissions that the insurance company makes you pay? Yes. Is it a great idea as an investment? No, it still isn't. They'll tell you, “Oh, we don't sell them as investments. We sell them as life insurance. It's not an investment, it's insurance.” Here's the bottom line. If you are skipping out on a retirement account in order to put money into a whole life insurance policy, that's almost surely a mistake. If you are skipping out on an investment that likely has higher investment returns—we're talking stocks or real estate—if you are putting that money into whole life insurance, that's almost surely a mistake. You are far more likely to grow your wealth faster in a riskier, but maybe less risky over the long run, investment like stocks or real estate than you are in whole life insurance.
If you look at the policies being sold today and you hold these policies from the time you're 30 or 35 until you die, over 50 years, your guaranteed return on that is about 2% a year. That's the guarantee. That's if you hold it the whole time, right? If you sell this thing in five years, you're probably selling it at a loss. The projected return will be up around 5%. That's the return they'll put in the illustration that they're projecting. What will you actually get? You'll probably get something in the 3%-4% range. That's what I would expect, holding a whole life insurance policy in the long run. I don't think this change on 7702 significantly changes that. I would expect about the same thing in the long run.
Now, if you sit back and think, “Well, what about investing in bonds in a taxable account? This might compare favorably to that.” Well, OK, it might. There are some downsides, though. For example, if I invest in bonds and I want my money in one year or five years or 10 years, I'm almost surely coming out further ahead with the bonds than I am with whole life insurance, because it's going to take 5-15 years to break even with whole life insurance. Now, you don't get a death benefit like you do with whole life insurance, but you can buy that pretty cheaply with term life insurance—at least for your working years.
I don't think this changes the calculus of whether you ought to buy a whole life insurance policy. I don't own one anymore. I got rid of the crummy one I had sold to me as a medical student, which is basically malpractice, financial malpractice, if you will. I really don't think you ought to buy one. But if you understand how it works, you really have a clear understanding of what you're going to get out of this policy and you still want it, go buy it, knock yourself out. I don't care. I don't get more money or something if you don't buy a policy. I don't get more money if you do buy a policy. But what I'm sick of is running into docs who got suckered into buying one when they had a better use for their money, like maxing out their retirement accounts, like paying off their student loans. I mean, you get in this investment that maybe you make 3%-4% in the long run while you're running around with 6% student loans. It doesn't make any sense. I'm sick of that.
If you look at the statistics from the society of actuaries, about 75% of these policies, 75%-80% of these policies, are surrendered prior to death. Four out of five people that are buying them are regretting it. You ought to really understand the reason why they're regretting it before you buy one. When we've surveyed White Coat Investors who have actually bought a whole life insurance policy, 75% of them regret it. Take from that what you will.
More information here:
Why You Shouldn't Buy a TFRA or 7702 Plan
Racela: Is Whole Life Insurance a Scam?
Inherited IRA
“Hey, this is Jared in the Northeast. I'm a surgical subspecialist and have been in the highest income tax bracket. My question is I recently had an inheritance, about $100,000 in a traditional IRA or inherited IRA. My question is what should be my policy on taking that money out and transitioning it out of the IRA? I’m early in my career; I have no plan on changing jobs. Does it make more sense to hold onto that money in the event that I change jobs and drop income brackets, from a tax standpoint? Does it make more sense to move that money out now or potentially during any recession we have moving forward? We'd love to hear your thoughts and kind of get a framework on how to manage it. Thanks so much.”
It used to be with these stretch IRAs that you could stretch withdrawals from this IRA over the rest of your life. You can't do that anymore. The IRS says you have to have the money out within 10 years. Your options are to take all the money out now, take all the money out in 10 years, or take the money out in some manner over those 10 years. In your case, you're in the highest bracket. It sounds like you don't need the money. You're making a gob-ton of money. You're clearly saving a significant portion of that. This is not money you need to spend. It doesn't sound like you're planning to give it away, although if you give a bunch of money to charity, giving it out of an IRA is usually not a bad way to do it.
But the bottom line here is maybe you'll be in a lower tax bracket in 10 years. Probably you'll still be in the top tax bracket. You might as well enjoy 10 years of tax-protected growth before you take the money out. That's what I would do. I would just leave it in there for the next 10 years, take it all out after 10 years, and invest it in taxable or whatever you want to do with it. Spend it at that point. I don't know what your life's going to have going on at that point. But if this were me, that money is sitting in that IRA for the next 10 years.
Now, for other people that aren't in the top tax bracket, that may not be the plan. For example, let's say you're in the 24% tax bracket and you want to get all this money out of there and maybe it'd have to be more than $100,000. Let's say you inherited a $500,000 traditional IRA. Maybe you take that money out over years 7, 8, 9, and 10. You divide it into four and you take it out over those four years so that you can take it all out in the 24% tax bracket. That might be a smart plan for you, but in the case of this surgical specialist who's in the top tax bracket now and expects to be for the foreseeable future, leaving it in there for the whole 10 years and then taking it all out at once and paying the taxes on it is probably the right move. You're going to be paying 37% on it whenever you take it out. You might as well maximize the asset protection, maximize the tax-protected growth, and go from there.
More information here:
Roth Conversions and Retirement
“Hi, Dr. Dahle. This is Mark from Madison, Wisconsin. I recently heard about some research from Dr. William Reichenstein about maximizing income and minimizing taxes in retirement to fill up lower tax brackets and avoid hitting higher tax brackets in later years, as well as avoiding more costly Medicare income thresholds. If I understand correctly, some of his technique involves doing Roth conversions in retirement to fill up those lower tax brackets. The recommendations are fairly complicated, and he says his technique runs counter to the conventional wisdom on retirement drawdowns. I don't fully understand the recommendations, but he claims the savings can be significant. I was wondering if you're familiar with this research and what your thoughts might be on it. Thank you so much for everything you do.”
I'm not familiar with Reichenstein. Well, that's not true. I mean, I've read a few of his articles over the years. William Reichenstein is a Ph.D. and a CFA. He's the head of research at some software firms, Social Security Solutions, Inc.. and The Retiree Inc., which is incomesolver.com. He's a professor or professor emeritus at Baylor. He had lots of articles in the Journal of Financial Planning. Does he know what he is talking about? Yes. Are his recommendations contrary to conventional wisdom? I don't know. It seems a little bit of a strawman to say that.
Here's the deal. Roth conversions can be done, and they can be done in retirement. They're frequently done in the early years of retirement before you start taking Social Security, maybe before you start taking pensions. It can make a lot of sense to do that, so that, over time, your overall tax rate in retirement is lower. This can especially become an issue if one spouse dies many years before the second spouse. What happens is after the first spouse dies, all of a sudden, the second spouse is now paying taxes in higher tax brackets, because they're paying it in the single tax brackets whereas they used to pay in the married filing jointly tax brackets. Roth conversions can absolutely be a very smart thing to do. You basically want to avoid the extremes. If you're not converting anything in those years, that's probably wrong. If you're converting everything in year 1, when you retire, that's almost surely wrong.
There is probably some amount of Roth conversions that make sense for most retirees to do in between the time they retire and when they start taking Social Security. That's probably the best way to think about it. It is complicated. How much you convert each year depends on variables that are unknowable today and may even be unknowable at the time you do the conversion. You don't know what tax brackets are going to be when you're 78, when you're 62. You don't know how well your investments are going to do. You don't know what the markets are going to do. You're forced to make these decisions without having complete information. You can make the best guess that you can. But know this: most of the time with most reasonable assumptions, most people should probably do a few Roth conversions during those first 5-10 years of retirement. On average, that's probably going to work out pretty well for them.
I don't think of that as being contrary to the conventional wisdom. I think that is the conventional wisdom. But yeah, if he can show you with the numbers that that's the way it works out, I would probably believe him because that's what it shows when I run the numbers and when most other people do it. I trust the numbers. I wouldn't go crazy doing some Roth conversion when you're 55 years old and making $700,000 a year just because you heard that Roth conversions were good. It's far more complex than that. You have to run the numbers, and decide how much to convert. Especially if you can do that at a lower tax bracket than you're likely to be in later in retirement, that's going to work out well for you.
More information here:
Roth Conversions and Contribution: 10 Principles to Understand
Vanguard Total Stock Market Index Fund
“Hey Dr. Dahle. Thanks for all you do. I'm an anesthesiologist in the Southwest. I had a question about some investments I made that seemed to be doing worse that I would've guessed. I had a couple hundred thousand dollars earmarked for a remodel project that we thought we would cancel. And not wanting to sit on that much cash, I put it in the stock market in Vanguard's Total Stock Market Index, VTSAX, but it declined more than the stock markets declined overall, and I'm not sure why. I put in $100,000 on July 16, and it looks like the stock market's been down 5.18% since then but the values declined almost $8,000. I put another $100,000 in on September 13, and it looks like the stock market declined 7.18% but the value is down $11,000. I'm just not really sure why my losses are worse than the stock market decline. I’m curious if you had an explanation for that. Thanks again for all you do.”
The answer to your question is that you're mistaken, because over the last year and over the last 20 years, the Vanguard Total Stock Market Index fund has almost precisely tracked its index. It does so very well. They're very good at doing this at Vanguard. Their computers are top-notch. If you look at the end of every year for the last 20 or 30 years, it has essentially tracked the stock market perfectly within 10 basis points. It's not that hard to do with an index fund, No. 1. And No. 2, Vanguard is better at it than anybody else. They really do a good job of tracking the overall market and tracking their index.
What that tells me is that you're mistaken. Now, why might you be mistaken? Well, probably the most common reason why people would make this error is because they're not reinvesting their dividends. It may be that you are not reinvesting your dividends and you're looking at the total return of the fund, but you've been taking money out. So, obviously your fund has less money than that because you took the dividends and did something else for them. That's a common reason why people might make this mistake. Another reason might be if you're not looking at the exact same starting and ending points. That could make a difference. If the index return you're looking at is the end of the month to the end of the month and you're looking at money you invested mid-month, that'll be a little bit different.
If you're buying the ETF version, it doesn't sound like you are, but the ETF version of this fund is VTI. That’s the ticker symbol. That fluctuates during the day. If you buy that at noon, it may not have the same return as the fund that gets bought at 4pm. On a really volatile day, that could be 1% or 2% different. There are lots of reasons why you might be mistaken, but I am quite confident that you are mistaken. I would have to sit down with you and run your numbers and look exactly at your forms to try to figure out why that is. But I'm confident that there's a pretty good explanation there. The explanation is not that Vanguard started sucking at indexing because they're awfully good at it.
I'm sorry to hear about your losses. The good news is everybody has lots of losses this year. If you're investing in taxable, make sure you tax-loss harvest them. You can probably use those losses to offset up to $3,000 of your ordinary income this year as well as an unlimited amount of your capital gains that you may have from other investments during the year. It's also a good time to remember that this is not a short-term investment. Stocks go up, stocks go down. Often when they go down, they do not come back for two, three, or four years. That's not unusual with the stock market. Money that you piled in in 2021 or even the early months of 2022, you've got significant losses on. I think probably as I record this, this fund is probably down 25%. Many of us that have this as a major holding in our accounts are down a lot of money. I may have lost seven figures in this fund this year so far because it's a major holding in my portfolio and it's gone down a lot. You have to expect stocks to be volatile. Hopefully, you're not buying them with renovation money you need in a year and you're not buying them with some money you're going to use to pay off your mortgage in six months or something like that. This is money that you don't need for 10, 20, 30, 40 years. That's what you buy stocks with. Same thing when buying real estate. This is not money you need soon. Make sure you're not mistaking this for a short-term savings account. It definitely is not.
More information here:
FSKAX vs. VTSAX: What Is the Best Total Stock Market Index Fund?
Changing from Actively Managed Funds to Low-Cost Index Funds
“After listening to your podcast, I've now decided to change my actively managed mutual funds to low-cost index funds. When should I make the change? Is it OK to do so when the market is low, in a bear market right now or should I wait until it gets better when we come out of the bear market?”
If you're investing in a taxable account, there might be a capital gains cost. If you have a bunch of gains on these investments, if you've held them for a long, long time, you might have significant gains. You might have so many gains that you don't actually want to realize them. But if you're going to sell, the time to sell in a taxable account is in a bear market. I'm not saying selling and going to cash. I'm saying selling an actively managed fund or some other investment you don't want for the long term and buying an index fund or some other investment that you do want for the long term. This is the time to do it. Your capital gains will be the lowest they'll ever be. You might even have losses that you can use for tax-loss harvesting, essentially. I would change now. If you realize this is not something you want to own for the long term, now is a great time to change, while the market is down 25%.
More information here:
6 Things to Do in a Bear Market
Zero to Freedom with Dr. Letizia Alto and Dr. Kenji Asakura
We've got two guests on the podcast. They are guests you've heard before. They are Dr. Letizia Alto and Dr. Kenji Asakura. They created the Zero to Freedom course, and we have talked about it on the podcast before. This course is something that a lot of white coat investors have taken. This is for you if you are interested in direct real estate investing. If you want to go buy rentals, whether they're houses, duplexes, triplexes, small apartment buildings, you want to get into direct real estate investing, this is the course that teaches you how to do that. You can get more information about this at whitecoatinvestor.com/rental. This course opens up a couple of times a year and it's going to be enrolling from July 25-August 3.
Dr. Letizia Alto:
Thank you for having us. We're excited to be here.
Dr. Jim Dahle:
Now we've had you on the podcast before, but I don't know that we have ever heard your story. Take us from the beginning. Take us from when you were at zero to now when you have freedom.
Dr. Letizia Alto:
Actually, Kenji has been investing in real estate since 2001, and we started investing in 2015. When we started investing in 2015, he actually didn't really have anything, because from 2001, until that point, he had been doing appreciation plays. He had been buying raw land and really type A fancy condos that didn't cash flow. He was doing appreciation plays where he was hoping that a property would gain in value.
Dr. Kenji Asakura:
It was a lot of lessons learned. I was just out of medical school and working at a company called McKinsey. I had some extra money and started investing in real estate. As Leti said, back then, there were a lot of opportunities to buy properties, have them appreciate $100,000, $200,000, leading up to the market crash in 2007, 2008. You could also buy these properties with very, very little money down, which is what resulted in a lot of people getting into trouble, myself included. I think the main thing is that we learned a lot from it. Leti benefited from that, as well, because we took all those learnings and put it into the course. I've invested through two recessions, and I really had a chance to experience what that's like and learn from it. Probably the one property that actually saved me was a property that was an eight-unit townhouse complex, which cash-flowed, and I was able to force appreciation. In other words, I was able to increase the value of that property by about $200,000 just by increasing the rents. This was in the middle of the recession. That showed us that this is a really great recession-proof investing method, where we invest in cash-flowing rentals and we increase the value of those properties using rents, and it's called forced appreciation.
Dr. Letizia Alto:
When we got together, one of the things Kenji had asked me was, “Hey, what do you want our lives to look like?” I had started describing kind of the current path we were on. He said, “No, no, if there were no limitations, if there was unlimited money, if that didn't matter, what would you want your life to look like?” I then described a very different life. One of the things that came out of that is we realized we need to have a source of income that doesn't rely on us trading our time for money, because we were both working more than full time. And that wasn't going to get us to the life I was describing of having a villa in Italy, and having all our friends there and a big family there, and the ability to travel. It just wasn't in the cards working W2 incomes.
What we started doing was looking for ways to get there. About six months later, real estate actually intervened because we were on this trip to New Zealand and I started reading Rich Dad, Poor Dad, which Kenji had already read and suggested for me to read. I started reading it, and I got so excited. We read it out loud to each other. About halfway through that book, we were already convinced that this was the key. It was getting real estate and getting real estate that paid us every month instead of what Kenji had been doing previously, which was real estate that actually took money out of his pocket every month to support but he was hoping would gain in value.
At that time in our lives, we were just married. We had saved up a down payment for a primary residence. We were going to buy a house in Seattle and came back from that trip and said to our agent who had been helping us that we no longer want a primary residence. We said we're real estate investors now; we only buy properties that make us money. We switched things completely.
Dr. Kenji Asakura:
That $200,000 that we had saved for the primary residence went to rental properties. We haven't bought a primary residence since. We've just been putting our money into rental properties. Then, within three years, we had achieved financial freedom. We achieved enough cash flow from our properties to pay for our expenses. Currently, we own over 150 apartment units.
Dr. Jim Dahle:
Congratulations on your success. That's pretty awesome. What's even better is you're teaching other people how to do the same thing, which is paying it forward in the best tradition of medicine to see one, do one, teach one, right? Let's get into the weeds a little bit and talk a little bit about something that people have been doing a lot in the last few years, especially while bonus depreciation laws have been in place, which is a cost-segregation study. Can you explain to us what a cost-segregation study is and why real estate investors like to do them?
Dr. Letizia Alto:
I'll give a little context and then Kenji can explain what a cost-segregation study is. In the government's eyes, an investment property loses value every single year. Let's say you buy a duplex, a two-unit property. In the government's eyes, that structure, the building will go to value of zero over 27 1/2 years. Every year you get to write off a certain amount of a loss on that property—it's called depreciation—off your taxes. It's lowering your taxes, but your property might be gaining value. It's irrelevant what's going on in the market. Actually, the building is seen as losing value.
Dr. Kenji Asakura:
Another way to kind of think about it is when you drive a car off the lot. You hear the story, “The day you drive the car off the lot, it loses value.” That's depreciation. Unlike cars, with houses, you can actually write off that depreciation to offset the income that your rental property generates. That's why a lot of times we say cash flow is tax-free because that depreciation is essentially what makes your cash flow, your net income, the money that you have left over after expenses, zero or negative.
Dr. Letizia Alto:
If you're using straight-line depreciation, which is you're writing off that same amount over 27 1/2years, it's a certain amount of money you're writing off every year. But then there's this thing called 100% bonus depreciation, which has been around since the end of 2017. What that allows you is to take the first 20 years’ worth of stuff in that building and write it off in year 1. It's effectively taking the first 20 years of depreciation and writing it off your first year. That's really important, especially if you can shelter your income from taxes with that depreciation. The way that you get the ability to figure out in your building what amount you can write off is you use a cost-segregation study.
Dr. Kenji Asakura:
To give a real tangible example: if you have, let's say, a $1.2 million property and $1 million of it is the building and $200,000 is the land, then you can only depreciate the $1 million worth of building. Then, you do a cost-segregation study. They identify all the components in that building that have a useful life of less than 20 years. Then, that's the stuff that you can write off immediately. For $1 million or $1.2 million, just the back of the envelope might represent about $300,000. That's the depreciation expense that you can add to all your other expenses to offset the income that your property generates. Therefore, you show a loss when you do income minus expenses.
Dr. Letizia Alto:
There are a couple different ways to do a cost-segregation study. What we do is we get an engineer to come over to our properties, and they walk around and they look at everything and they really start categorizing everything. Then that's taken to a cost-segregation company, and they tell you how much money you should be able to write off. You give that to your CPA, and then they write that off your taxes.
Dr. Jim Dahle:
There's a seven-year property and 15-year property. Some of the stuff in your building qualifies for faster depreciation, right?
Dr. Letizia Alto:
Yes. I want to give you an example using a short-term rental because I know a lot of people are buying short-term rentals right now. We bought a $660,000 cabin, and we ended up doing about a $50,000 rehab on that cabin. It was a short-term rental. We bought it and, in that year, we achieved something called material participation. We made it active by really participating in our property. What that allowed us to do is take that cost-segregation study, which is almost $200,000, and write that off to shelter active income. So, shelter our W-2 income from taxes, just using the bonus depreciation.
Dr. Kenji Asakura:
Then on top of that, you can also bonus-depreciate the renovation, the $50,000. So, you have the $200,000 from depreciating the building plus the $50,000 renovation for a total of $250,000 that you can write off.
Dr. Jim Dahle:
It's pretty awesome. It's a pretty powerful tax technique to be able to use that. We are now in the enrollment period for your Zero to Freedom course. The enrollment period for this time is July 25-August 3. This podcast is going to drop on July 28. So, we're already into it. If you're in this podcast, this is your chance to sign up. You can do so at whitecoatinvestor.com/rental. What can they expect to learn in this seven-week course?
Dr. Kenji Asakura:
The goal of our course is really to take somebody who knows little or nothing about real estate or investing in real estate, and feel really confident at the end of it to go out and be as good as an experienced investor. We really feel like the people that graduate from our course—and we hear this from a lot of the students that go through our course—that they go out there and they can compete with even the most experienced investors. I think in a time like this, it's a really great time to learn. There may be some really great opportunities coming up, especially if there is a downturn, a recession, then this is when you want to get trained. This is where you want to invest.
Taking Stock
I received a book from Jordan Grumet MD, aka Doc G. You may know him from The Earn & Invest Podcast. It is a podcast I have been on. He sent us his book called Taking Stock. He emailed me to make sure I had gotten it a couple of months after he sent it, and I didn't have it. You know why I didn't have it? It’s because Cindy took it, and she was reading it when it came in the mail. Then, Katie took it, and she was reading it. They both loved the book.
His book is available for purchase and there's a lot of good stuff in there, but one of the best parts I think is a section he calls, “Defining Enough Before It's Too Late.” Here's his recommendation. I think this is really important. If you don't know how much money enough is, you may be doing work that you don't enjoy to get more money than enough.
It's really important to define enough. This is Jordan's recommendation for figuring that out. He says:
“Clear your schedule for an hour, for two or three separate days over the next week. Turn off your electronics, make sure you're well rested and fed in a quiet, comfortable place. Close your eyes, imagine you've gone into the doctor's office for your annual physical and feel great, and your doctor's got a serious face on. He tells you you have one year to live. If you feel some anxiety arise while doing this exercise, know that is natural. Take some deep breaths; help it pass. And now that you know the timing of when you're going to die is no longer in question, what do you feel empowered to contemplate and question?”
Then he says, “Make a list of all those things you feel would be important to do, experience, or achieve before you leave this earth.” These might be traditional bucket list items, but maybe you think about the story of your life so far and think about what's missing. He says, “Be specific. What relationships in your life need repair? What lifelong goals have I yet to achieve? What deep needs have I not had the courage to fulfill? What have I denied myself because I was too afraid to spend money? Which places have I always wanted to go? What legacy do I want to leave for my family and friends? In what areas do I not yet have enough?”
Then he says:
“You'll notice that enough is not about a specific number. Not yet anyway. And the next chapters will explore how to use both fiscal and human capital as leverage to get to enough sooner. For now, simply ask yourself where you don't have enough and be generous with your answers. Don't be afraid to tackle each concept on different days. Maybe the first hour is spent thinking about that moment in the doctor's office, the second hour, asking those important questions, and the third hour exploring enough.”
It is a great book by Jordan Grumet, MD. It's called Taking Stock. You can get it on Amazon. I encourage you to check that out. Thanks, Jordan, for the review copy.
Sponsor
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Zero to Freedom
If you are interested in learning more about direct real estate investing and you would like to learn from an online course, we have a partner for that as well. That course is called Zero to Freedom. Go to whitecoatinvestor.com/rental to sign up for that. The course launches July 25-August 3. Once the deadline closes, it will be a minimum of 6-8 months until it opens again. Lots of docs have gone through this course. Not only do you learn lots of material about how to do this direct real estate investing, but you also have a cohort of peers that you can get support from as you go along and start buying your first property.
Correction
We had a podcast a while back where we talked a little bit about asset protection on cars, and I got something wrong. We also talked about tenants by the entirety titling. It turns out that in some states you can do that on your car. You can title your car as tenants by the entirety. The beautiful thing about that, of course, is that if only one of you is sued, then they can't take the car. If you have a really valuable car, like a $400,000 Ferrari or something, you could kind of protect it that way.
The problem is that cars are mostly a liability. They're a toxic asset. In fact, if you look at umbrella insurance, 80% of the claims for umbrella insurance are auto-related. When you put both of your names on that car, that actually can bring additional liability there. So, you may not want to do tenants by the entirety on your cars. I got a couple of emails about that from people in Florida who are basically saying maybe don't do your cars as tenants by the entirety. But if you can in your state, you generally want to do that with your house. If your state allows it, you can often do it with bank and brokerage accounts and provide yourself a little bit of extra asset protection that way.
Quote of the Day
Rick Ferri said,
“Stuffing money in a mattress is also diversification, but I wouldn't do that either.”
Milestones to Millionaire
#76 — Naturopathic Medicine Physician Is Back to Broke
Six years out of training, this doctor is back to broke! With an income range between $100K-$200K, what helped her the most was bargaining hard for more pay. Increasing your income can speed you up on your financial goals.
Sponsor: SoFi
Full Transcript
Intro:
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 273 – Tax credits and passive versus actively managed funds.
Dr. Jim Dahle:
Now, SoFi has exclusive rates and offers for medical professionals, which could help you save thousands by refinancing your student loans. If you're still in residency, SoFi offers a lowered interest rate and the ability to reduce your payment to just $100 per month while in school.
Dr. Jim Dahle:
If you're out of residency, SoFi's great rates could help you save money and get on the road to financial freedom. Check out their payment plans and interest rates at sofi.com/whitecoatinvestor. SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.
Dr. Jim Dahle:
Welcome back to the podcast. Thanks for what you do out there. I know it's not always easy. I was in the ED last night. Let's see, we're recording this… What is today? July 6th. This is going to run on July 28th.
Dr. Jim Dahle:
But I was in the ED last night. I had a patient, bent over backwards, really pulled in some favors with a consultant and hospitalist to get them taken care of. And then they eloped from the ED because I couldn't tell them what time their procedure was going to be the next day. I don't know if you guys deal with that sort of stuff all the time. And it's not easy to put up with that sort of stuff. So, thanks for what you do out there. If nobody said thank you today, let me be the first.
Dr. Jim Dahle:
All right, let's start with some “mea culpa” here. I got this wrong. We had a podcast a while back where we talked a little bit about asset protection on cars. And we also talked about tenants by the entirety titling. And it turns out that in some states you can do that on your car. You can title your car as tenants by the entirety. And the beautiful thing about that, of course, is that if only one of you is sued, then they can't take the car. So, if you have a really valuable car, you got a $400,000 Ferrari or something, you could kind of protect it that way.
Dr. Jim Dahle:
The problem is that cars are mostly a liability. They're a toxic asset. In fact, if you look at umbrella insurance, 80% of the claims for umbrella insurance are auto related. So, when you put both of your names on that car, that actually can bring additional liability there. So, you may not want to do tenants by the entirety on your cars.
Dr. Jim Dahle:
And I got a couple of emails about that from people in Florida who are basically saying maybe don't do your cars as tenants by the entirety. But if you can in your state, you generally want to do that with your house. If your state allows it, you can often do it with bank and brokerage accounts and provide yourself a little bit of extra asset protection that way.
Dr. Jim Dahle:
All right, let's get into some more of your questions. This one comes from a military resident who has some questions about tax credits. Let's take a listen.
Speaker:
Hi, Dr. Dahle. I'm in the fairly unique situation in that I'm graduating from residency in the military and my income will ideally only ever go up from here. Projecting out my federal taxes this year, it looks like I will likely have zero federal taxes from the various credits I'm eligible for with a good amount left over.
Speaker:
My understanding is that most of these credits are unable to carry forward to a future tax year. I’m curious if I can take advantage of this situation to offset future taxes in other ways. I have been fortunate to have grandparents bought me stocks and bonds when I was a very young child that have appreciated significantly. Would it make sense to cash out these investments now and be able to offset a good amount with capital gains? If I wanted to keep the particular stocks that I have, can I just repurchase the same stocks which is essentially step-up in basis? Thanks as always.
Dr. Jim Dahle:
All right. Great question. Yeah, this process is called tax gain harvesting. You've heard a lot on this podcast about tax loss harvesting, which is what people who make more money than you do. When you have a relatively low taxable income, which is not unusual for a resident and is certainly not unusual for anybody in the military, you can do the opposite and you can update the basis on your investments. That way, when you sell them down the road, you'll have less of a gain.
Dr. Jim Dahle:
And you don't have to wait 30 days. There's no waiting period with this. There's no wash sale. You can simply update the basis. And now of course those capital gains are going to flow through onto your taxes if you do that. So, you better be sure there's not going to be a whole bunch of income at the end of the year, which could cause those to become taxable.
Dr. Jim Dahle:
But given that the 0% capital gains tax bracket is fairly sizable, especially in the year you're coming out of medical school, for instance, that can be a pretty significant amount of capital gains that you can realize. So that's a good idea. You certainly can do that.
Dr. Jim Dahle:
Other things to keep in mind, other opportunities you might have would be like a Roth conversion. If you can do a Roth conversion at 0%, that's pretty much always a good move. When people go into medicine as a second career for instance, and they have some retirement accounts and then they go back to medical school. Well, in that second and third year of medical school, you have no taxable income whatsoever. You can do a pretty fat Roth conversion and pay no taxes on it whatsoever.
Dr. Jim Dahle:
So, take advantage of those times in your life when you have low taxable income to update your basis, to do Roth conversions, any other opportunities you may find there to really arbitrage that super low tax rate. I'd call it artificially low, but it's just low relative to the rest of your life.
Dr. Jim Dahle:
All right, let's take another question. This one is from Michelle about the foreign tax credit.
Michelle:
Hi, Dr. Dahle. Thank you so much for all of the education you've provided over the years. I have a question about the foreign tax credit. I read an article by William Baldwin at Forbes that explained that at a certain point there's a complicated adjustment to the foreign tax credit calculated on Form 1116, which could lead to losing much of the credit.
Michelle:
This occurs when you receive over about $20,000 of foreign dividends, which corresponds to holding several hundred thousand dollars of a foreign fund in a taxable account. I'd love to hear your thoughts about this. Should someone approaching this situation preferentially hold foreign funds in their deferred or Roth accounts going forward? Thank you so much.
Dr. Jim Dahle:
All right, Michelle, congratulations. You have asked the hardest question that's ever been asked on this podcast. We had to pause the recording for 15 minutes while I tried to figure out what the heck you were talking about. This has never affected me. I looked at my last tax return that I have done, which is 2020, and I only had $11,000 in foreign dividends on that tax return. So, this doesn't affect me or did not affect me. In 2021 I think it will though. I haven't completed those taxes yet, just filed the tax extension. I'm still waiting on K-1s actually as we record this.
Dr. Jim Dahle:
But at any rate, yes, you're right, or your tax person is right. There is a limitation on this credit. If you dive into the details of Form 1116, specifically line 18, you get in there and there is a limitation on your qualified dividends. They basically get multiplied in step 9 of the worksheet by 0.5946.
Dr. Jim Dahle:
In essence, one of the exceptions to not have to do that worksheet is having less than $20,000 in dividends. And once you have more than those, you have to do this worksheet and it looks to me like that limits your dividends by 60%. So, in essence, this is going to reduce it by about 40%.
Dr. Jim Dahle:
In essence, this is going to decrease your foreign tax credit from what you might think it was going to be. Unfortunate, but there is nothing you can do about it. This is the way it's calculated and your tax software will take care of it or if you're paying someone else to do your returns, their tax software will take care of it. Anybody who's still doing their entire return by hand and is having to do worksheets like these is just a glutton for punishment.
Dr. Jim Dahle:
But your question is “Should this change your asset location decision?” Well, in my case, all of my US total stock market stocks are now in a taxable account and all of my foreign total international stock market and small international stock market index fund is all in taxable. So, it's all in taxable anyway. I'm going to get what I get. It's not going to affect my tax location decision.
Dr. Jim Dahle:
But if you were at that stage in a tax location, where you are trying to decide whether to put total stock market into taxable, or you're trying to decide whether to put total international stock market into taxable, I guess this could sway your decisions slightly.
Dr. Jim Dahle:
But the truth is, this was always about the same anyway. Because foreign stocks pay a little bit more in dividends, but you get the foreign tax credits. That kind of offsets that. US stocks pay a little bit less in dividends but you don't get the foreign tax credits. So, they're about equal when it comes to tax efficiency.
Dr. Jim Dahle:
If you're really debating which one of these is more tax efficient, total international or total stock market, you win. You've won the tax location game. You have won the investing game. You've gotten down to something that really doesn't matter all that much. So, will this change my decision? No, because there's not really a right decision here anyway. It's really trivial, which one of those two funds goes into taxable first. And if you're like a lot of us, you're going to end up with both of them in there eventually anyway.
Dr. Jim Dahle:
So, yes, it's an interesting bit of tax trivia that I just learned today. Thank you for that education, but is it really going to affect your tax location decision? Not by much, not by much. But expect your foreign tax credit to be a little lower once you're pretty wealthy. That's the bottom line.
Dr. Jim Dahle:
All right. Let's do our quote of the day. This one comes from Rick Ferry. He said, “Stuffing money in a mattress is also diversification, but I wouldn't do that either.” There are a lot of people that try to justify the addition of an asset class to their portfolio by the fact that it has low correlation with stocks. Well, there's lots of things that have low correlation with stocks, including putting money in a mattress. If it doesn't also have a halfway decent return, you may not want to invest in that.
Dr. Jim Dahle:
Hey, by the way, I got a book sent to me. This is from Jordan Grumet MD a.k.a. Doc G. You may know him from The Earn & Invest Podcast. I've been on his podcast. He sent us this book. He's got us his first book, his only book out. It's called “Taking Stock.” And he emailed me to make sure I got it a couple of months after he sent it and I didn't have it. And you know why I didn't have it? It’s because Cindy took it and she was reading it when it came in the mail. And then Katie took it and she was reading it. They both loved the book.
Dr. Jim Dahle:
So, this is out and there's a lot of good stuff in here, but one of the best parts I think about it is a section he calls “Defining Enough Before It's Too Late.” And here's his recommendation. I think this is really important. If you don't know how much money enough is, you may be doing work that you don't enjoy to get more money than enough.
Dr. Jim Dahle:
So, it's really important I think to define enough. And this is Jordan's recommendation for figuring that out. He says “Clear your schedule for an hour, for two or three separate days over the next week. Turn off your electronics, make sure you're well rested and fed in a quiet, comfortable place.” It doesn't say pour yourself a strong drink like you should when you add up all your student loans, but you might want to do that too.
Dr. Jim Dahle:
“Close your eyes, imagine you've gone into the doctor's office for your annual physical and feel great and your doctor's got a serious face on. He tells you you have one year to live. If you feel some anxiety arise while doing this exercise, know that is natural. Take some deep breaths, help it pass. And now that you know the timing of when you're going to die is no longer in question, what do you feel empowered to contemplate and question?”
Dr. Jim Dahle:
Then he says, “Make a list of all those things you feel would be important to do, experience or achieve before you leave this earth.” So, these might be traditional bucket list items, but maybe you think about the story of your life so far and think about what's missing.
Dr. Jim Dahle:
And he says, “Be specific. What relationships in your life need repair? What lifelong goals have I yet to achieve? What deep needs have I not had the courage to fulfill? What have I denied myself because I was too afraid to spend money? Which places have I always wanted to go? What legacy do I want to leave for my family and friends? In what areas do I not yet have enough?”
Dr. Jim Dahle:
Then he says, “You'll notice that enough is not about a specific number. Not yet anyway. And the next chapters will explore how to use both fiscal and human capital as leverage to get to enough sooner. For now, simply ask yourself where you don't have enough and be generous with your answers. Don't be afraid to tackle each concept on different days. Maybe the first hour is spent thinking about that moment in the doctor's office, the second hour, asking those important questions, and the third hour exploring enough.”
Dr. Jim Dahle:
Great book, Jordan Grumet MD. It's called “Taking Stock.” You can get it on Amazon, but I encourage you to check that out. Thanks, Jordan, for the review copy.
Dr. Jim Dahle:
All right, let's take another question. This one about life insurance tax code changes off the Speak Pipe. I wonder if they're trying to beat Michelle for the hardest question ever asked. Let's find out.
Speaker:
Hi, Dr. Dahle. I've been meeting with an independent financial advisor. First, I just want to say thank you for everything you do for us. And he was talking to me about a couple of the larger life insurance companies and this recent tax code change. I believe it's tax code 7702, that allows the cash value to grow on a much faster rate than it previously was otherwise.
Speaker:
I know you've got some pretty negative thoughts around the whole life insurance, but some of the companies sounded like they pay a very nice dividend and have historical good return. So as an alternative to bonds, I thought this might be a good idea particularly ones that are paid up in 10 years and required no more premiums. The cash value was growing at a fairly nice rate of return. So, I didn't know if you had any new thoughts on this based on the tax code, or what your opinion was. Thank you again. I appreciate everything you do.
Dr. Jim Dahle:
Okay. 7702. I kind of hate 7702 because these guys that sell whole life insurance, they use things like these tax code numbers to sell whole life insurance. Instead of saying, “Hey, this is whole life insurance”, they say “Here's a 7702-retirement plan. It's brand new from the government.” And makes you think that you're dealing with a 401(k) or something. It's not the same thing. This is just like a section of the tax code that talks about life insurance. It's not some new retirement plan by any means.
Dr. Jim Dahle:
There is a post out that was probably published since you had recorded this question on the Speak Pipe. It came out on June 11th on the White Coat Investor blog. It says “Why You Shouldn't Buy a TFRA or 7702 Plan”. And there was a guy out there selling these things and he was selling them hard. And I wrote this post just ripping them up one side and down the other. And my team said I had to neuter it. I could not run it in the forum I had written it. It was entirely too personal. We were going to end up having legal problems with it, etc, etc. And it was just downright mean.
Dr. Jim Dahle:
So, I neutered it back, but left in enough that you can learn exactly what I think about someone selling whole life insurance using a name like a 7702 plan. I don't like it as the bottom line.
Dr. Jim Dahle:
What were the recent changes to section 7702? Basically, it lets you pay more premium for less permanent death benefit. A little bit more of the premium paid goes toward the cash value. That's it. That's the change. Do you still have to buy a permanent death benefit? Yes. Does it still go through all these fees and commissions that the insurance company makes you pay? Yes. Is it a great idea as an investment? No, it still isn't. And then they'll tell you, “Oh, we don't sell them as investments. We sell them as life insurance. It's not an investment, it's insurance.” Well, whatever, you're trying to sell it to us to use our dollars for instead of putting them into a real investment.
Dr. Jim Dahle:
So, here's the bottom line. If you are skipping out on a retirement account in order to put money into a whole life insurance policy, that's almost surely a mistake. If you are skipping out on an investment that likely has higher investment returns, we're talking stocks, real estate. And instead putting that money into whole life insurance, that's almost surely a mistake. You are far more likely to grow your wealth faster in a riskier, but maybe less risky over the long run investment like stocks or real estate then you are in whole life insurance.
Dr. Jim Dahle:
If you look at the policies being sold today, and you hold these policies from the time you're 30 or 35, until you die, over 50 years, your guaranteed return on that is about 2% a year. That's the guarantee. And that's if you hold it the whole time, right? You sell this thing in five years, you're probably selling it at a loss.
Dr. Jim Dahle:
The projected return will be up around 5%. That's the return they'll put in the illustration that they're projecting. What will you actually get? You'll probably get something in the 3% to 4% range. That's what I would expect holding a whole life insurance policy in the long run. I don't think this change on 7702 significantly changes that. So, I would expect about the same thing in the long run.
Dr. Jim Dahle:
Now, if you sit back and think, “Well, what about investing in bonds in a taxable account? This might compare favorably to that.” Well, okay, it might. There are some downsides though. For example, if I invest in bonds and I want my money in a year or five years or 10 years, I'm almost surely coming out ahead with the bonds than I am with whole life insurance because it's going to take five to 15 years to break even with whole life insurance. Now you don't get a death benefit like you do with whole life insurance, but you can buy that pretty cheaply with term life insurance, at least for your working years.
Dr. Jim Dahle:
So, I don't think this changes the calculus of whether you ought to buy a whole life insurance policy. I don't own one anymore. I got rid of the crummy one I had sold to me as a medical student, which is basically malpractice, financial malpractice, if you will. And I really don't think you ought to buy one.
Dr. Jim Dahle:
But if you understand how it works, you really have a clear understanding of what you're going to get out of this policy and you still want it, go buy it, knock yourself out. I don't care. I don't get more money or something if you don't buy a policy. I don't get more money if you do buy a policy.
Dr. Jim Dahle:
But what I'm sick of is running into docs who got suckered into buying one when they had a better use for their money, like maxing out their retirement accounts, like paying off their student loans. I mean, you get in this investment that maybe you make 3% or 4% in the long run while you're running around with 6% student loans. It doesn't make any sense. I'm sick of that.
Dr. Jim Dahle:
And if you look at the statistics from the society of actuaries, about 75% of these policies, 75% to 80% of these policies are surrendered prior to death. So, four out of five people that are buying them are regretting it. You ought to really understand the reason why they're regretting it before you buy one. And when we've surveyed White Coat Investors who have actually bought a whole life insurance policy, 75% of them regret it. So, take from that what you will. I hope that's helpful.
Dr. Jim Dahle:
All right, let's take another question about an inherited IRA. This one is from Jared.
Jared:
Hey, this is Jared in the Northeast. I'm a surgical subspecialist and have been in the highest income tax bracket. My question is I recently had an inheritance, about $100,000 in a traditional IRA or inherited IRA.
Jared:
My question is what should be my policy on taking that money out and transitioning it out of the IRA? I’m early in my career, I have no plan in changing jobs. Does it make more sense to hold onto that money in the event that I change jobs and drop income brackets from a tax standpoint? Does it make more sense to move that money out now or potentially during any recession we have moving forward? We'd love to hear your thoughts and kind of get a framework on how to manage it. Thanks so much.
Dr. Jim Dahle:
Okay. It used to be with these stretch IRAs that you could stretch withdrawals from this IRA over the rest of your life. You can't do that anymore. The IRS says you got to have the money out within 10 years. So, your options are to take all the money out now, take all the money out in 10 years or take the money out in some manner over those 10 years.
Dr. Jim Dahle:
But in your case, you're in the highest bracket. You don't need the money, it doesn't sound like. You're making a gob ton of money. You're clearly saving a significant portion of that. So, this is not money you need to spend. It doesn't sound like you're planning to give it away although if you give a bunch of money to charity, giving it out of an IRA is usually not a bad way to do it.
Dr. Jim Dahle:
But the bottom line here is maybe you'll be in a lower tax bracket in 10 years. Probably you'll still be in the top tax bracket. So, you might as well enjoy 10 years of tax protected growth before you take the money out. That's what I do. I just leave it in there for the next 10 years, take it all out after 10 years and invest it in taxable or whatever you want to do with it. Spend it at that point. I don't know what your life's going to have going on at that point. But if this were me, that money is sitting in that IRA for the next 10 years.
Dr. Jim Dahle:
Now, for other people that aren't in the top tax bracket, that may not be the plan. For example, let's say you're in the 24% tax bracket and you want to get all this money out of there and maybe it'd have to be more than $100,000. Let's say you inherited a half million-dollar traditional IRA. Maybe you take that money out over years, 7, 8, 9, and 10. So you divide it into four and you take it out over those four years so that you can take it all out in the 24% tax bracket.
Dr. Jim Dahle:
That might be a smart plan for you, but in the case of this surgical specialist who's in the top tax bracket now and expects to be for the foreseeable future, leaving it in there for the whole 10 years and then taking it all out at once and paying the taxes on it is probably the right move. You're going to be paying 37% on it whenever you take it out. So, you might as well maximize the asset protection, maximize the tax protected growth and go from there.
Dr. Jim Dahle:
All right. We've got a guest I'm going to bring on here. This is a guest you've heard before. This is Leti who you have been introduced to her and Kenji, her husband's, Zero to Freedom course in the past. And this is something that a lot of White Coat Investors have taken. They enjoy this course if they are interested in direct real estate investing.
Dr. Jim Dahle:
If you want to go buy rentals, whether they're houses, duplexes, triplexes, small apartment buildings, etc, you want to get into direct real estate investing, this is the course that teaches you how to do that. And you can get more information about this at whitecoatinvestor.com/rental.
Dr. Jim Dahle:
But this course opens up a couple of times a year and it's going to be enrolling from July 25th to August 3rd. So, we're right in that enrollment period as you listen to this, if you're listening to it on the day it dropped. But if you were interested in taking this course, I recommend you check it out at whitecoatinvestor.com/rental. And let's bring Leti on to talk for a few minutes about real estate investing.
Dr. Jim Dahle:
All right. Our guests today on the White Coat Investor podcast are Dr. Letizia Alto and Dr. Kenji Asakura, the creators of the Zero to Freedom online course that will bring you from zero to freedom in cash flowing rentals. This is the course you've probably heard about on the podcast before that helps you get into direct real estate investing, particularly in cash flowing rental properties. Welcome to the podcast guys.
Dr. Letizia Alto:
Thank you for having us. We're excited to be here.
Dr. Jim Dahle:
Now we've had you on the podcast before, but I don't know that we have ever heard your story. So today, take us from the beginning. Take us from when you were at zero to now when you have freedom.
Dr. Letizia Alto:
Yeah. Actually, Kenji has been investing in real estate since 2001, and we started investing in 2015. When we started investing in 2015, he actually didn't really have anything because from 2001, until that point, he had been doing appreciation plays. And so, he had been buying raw land and really type A fancy condos that didn't cash flow. And so, he was doing appreciation plays where he was hoping that a property would gain in value.
Dr. Kenji Asakura:
Yeah, it was a lot of lessons learned. I was just out of medical school and working at a company called McKinsey. And so, I had some extra money and started investing in real estate. And as Leti said, yeah, back then, there were a lot of opportunities to buy properties, have them appreciate $100,000, $200,000, leading up to the market crash in 2007, 2008.
Dr. Kenji Asakura:
You could also buy these properties with very, very little money down, which is what resulted in a lot of people getting into trouble, myself included. But I think the main thing is that we learned a lot from it. And Leti benefited from that as well because we took all those learnings and put it into the course. And I think it's really important, especially kind of looking at maybe a downturn coming, I've invested through two recessions. And so, I really had a chance to experience what that's like.
Dr. Kenji Asakura:
And even at that time, I did have a property. Probably the one property that actually saved me was a property, was an eight-unit townhouse complex, which cash flowed. And I was able to force appreciation. In other words, I was able to increase the value of that property by about $200,000 just by increasing the rents. And this was in the middle of the recession. And so, that showed us that this is a really great recession proof investing method, where we invest in cash flowing rentals, and we increase the value of those properties using, and it's called forced depreciation.
Dr. Letizia Alto:
Yeah. When we get together, one of the things Kenji had asked me was, “Hey, what do you want our lives to look like?” And I had started describing kind of the current path we were on. And he said, “No, no, if there were no limitations, if there was unlimited money, if that didn't matter, what would you want your life to look like?”
Dr. Letizia Alto:
And I described a very different life. One of the things that came out of that is we realized, “Well, we need to have a source of income that doesn't rely on us trading our time for money, because we were both working more than full time. And that wasn't going to get us to the life I was describing of having a villa in Italy, and having all our friends there and a big family there, ability to travel. It just wasn't in the cards working W2 incomes.
Dr. Letizia Alto:
And so, what we started doing was looking for ways to get there. And about six months later, real estate actually intervened because we were on this trip to New Zealand and I started reading “Rich Dad Poor Dad” which Kenji had already read and suggested for me to read. And started reading it I got so excited. We read it out loud to each other. And about halfway through that book, we were already convinced “This is the key. It’s getting real estate and getting real estate that pays us every month”, instead of what Kenji had been doing previously, which was real estate that actually took money out of his pocket every month to support but he was hoping would gain in value.
Dr. Letizia Alto:
And so, we, at that time in our lives were just married. We had saved up a down payment for a primary residence. We were going to buy a house in Seattle and came back from that trip and said to our agent who had been helping us. And we were getting outbid left and right. We said to him we no longer want a primary resident, we're real estate investors now, we only buy properties that make us money. And so, we're switching things completely.
Dr. Kenji Asakura:
Yeah. So, we did that $200,000 that we had saved for the primary residents and focused just on rental properties. We haven't bought a primary residence since. We've just been putting our money into rental properties. And then within three years we had achieved financial freedom. We achieved enough cash flow from our properties to pay for our expenses and then currently we own over 150 apartment units.
Dr. Jim Dahle:
Awesome. Well, congratulations on your success. That's pretty awesome. And what's even better is you're teaching other people how to do the same thing, which is paying it forward in the best tradition of medicine to see one, do one, teach one, right?
Dr. Kenji Asakura:
Yeah, exactly.
Dr. Jim Dahle:
Cool. Well, let's get into the weeds a little bit and talk a little bit about something that people have been doing a lot in the last few years, especially while bonus depreciation laws have been in place, which is a cost segregation study. And can you explain to us what a cost segregation study is and why real estate investors like to do them?
Dr. Letizia Alto:
I'll give a little context and then you can explain what cost segregation study is. In the government's eyes, an investment property loses value every single year. And so, if let's say you buy a duplex, a two-unit property, in the government's eyes that structure, the building will go to value of zero over 27 and a half years. And so, every year you get to write off a certain amount of a loss on that property. It's called depreciation off your taxes. So, it's lowering your taxes, but your property might be gaining value. It's irrelevant what's going on in the market. Actually, the building is seen as losing value.
Dr. Kenji Asakura:
Yeah. Another way to kind of think about it is like when you drive a car off the lot. You hear the story, “The day you drive the car off the lot it loses value.” That's depreciation. And so, unlike cars, with houses, you can actually write off that depreciation offset the income that your rental property generates. And that's why a lot of times we say cash flow is tax free because of that depreciation is essentially what makes your cash flow, your net income, the money that you have left over after expenses, zero or negative.
Dr. Letizia Alto:
Yeah. And so, if you're using straight line depreciation, which is you're writing off that same amount over 27 and a half years, it's a certain amount of money you're writing off every year. But then there's this thing called 100% bonus depreciation, which has been around since the end of 2017. And what that allows you is to take the first 20 years’ worth of stuff in that building and write it off in year one.
Dr. Letizia Alto:
So, it's effectively taking the first 20 years of depreciation and writing it off your first year. And that's really important, especially if you can shelter your income from taxes with that depreciation. And the way that you get the ability to kind of figure out in your building what amount you can write off is you use a cost segregation study.
Dr. Kenji Asakura:
Yeah. And just a real tangible example. If you have let's say a $1.2 million property, let's say a million dollars of it is the building and $200,000 is the land. And then you can only depreciate the $1 million worth of building. And then you do a cost segregation study. They identify all the components in that building that have a useful life of less than 20 years. And then that's the stuff that you can write off immediately. And so, for a million dollars or $1.2 million, just the back of the envelope might represent about $300,000. And that's the depreciation expense that you can add to all your other expenses to offset the income that your property generates. And therefore, you show a loss when you do income minus expenses.
Dr. Letizia Alto:
And how you do a cost segregation study is there are actually a couple different ways. But what we do is we get an engineer to come over to our properties and they walk around and they look at everything and they really start categorizing everything. And then that's taken to, you have a cost segregation company, and they kind of tell you how much money you should be able to write off, and you give that to your CPA, and then they write that off your taxes.
Dr. Jim Dahle:
Yeah. There's a seven-year property and 15-year property. Some of the stuff in your building qualifies for faster depreciation, right?
Dr. Letizia Alto:
Yeah. I want to give you an example using a short-term rental because I know a lot of people are buying short-term rentals right now. We bought a $660,000 cabin. And we ended up doing about a $50,000 rehab on that cabin. And it was a short-term rental. And so, we bought it and, in that year, we achieved something called material participation. So, we made it active by really participating in our property. And what that allowed us to do is take that cost segregation study, which is almost $200,000 and write that off to shelter active income. So, shelter our W-2 income from taxes, just using the bonus depreciation.
Dr. Kenji Asakura:
And then on top of that, you can also bonus depreciate the renovation, the $50,000. So, you have the $200,000 from depreciating the building plus the $50,000 renovation for a total of $250,000 that you can write off.
Dr. Jim Dahle:
Yeah, it's pretty awesome. It's a pretty powerful tax technique to be able to use that. All right. So, we are now in the enrollment period for your Zero to Freedom course. The enrollment period for this time is July 25th to August 3rd. This podcast is going to drop on July 28th. So, we're already into it. If you're in this podcast, this is your chance to sign up. You can do so at whitecoatinvestor.com/rental. And what can they expect to learn in this seven-week course?
Dr. Kenji Asakura:
Yeah. The goal of our course is really to take somebody who knows little or nothing about real estate, or investing in real estate and feel really confident at the end of it to go out and be as good as an experienced investor. And we really feel like the people that graduate from our course, and we hear this from a lot of the students that go through our course, that they go out there and they can compete with even the most experienced investors.
Dr. Kenji Asakura:
And I think in a time like this, this is a really great time to learn. There may be some really great opportunities coming up, especially if there is a downturn, a recession, then this is when you want to get trained. This is where you want to invest.
Dr. Kenji Asakura:
We actually interviewed Jay Scott recently. He's an author of several books, and that's what he was saying. He was saying the one thing that he would recommend doing right now is educate yourself, learn. That's the one thing that you can do that will really set you up nicely, no matter what happens.
Dr. Jim Dahle:
Cool. Awesome. Well, thanks for putting the course together. Thanks for introducing it to our readers. Again, the URL for that is whitecoatinvestor.com/rental. And thanks again for coming on the podcast and help us learn more about real estate.
Dr. Letizia Alto:
Thanks Jim.
Dr. Kenji Asakura:
Thanks Jim.
Dr. Jim Dahle:
All right, let's take another question off the Speak Pipe. This one is about Roth conversions and retirement from Mark.
Mark:
Hi, Dr. Dahle. This is Mark from Madison, Wisconsin. I recently heard about some research from Dr. William Reichenstein about maximizing income and minimizing taxes in retirement to fill up lower tax brackets and avoid hitting higher tax brackets in later years, as well as avoiding more costly Medicare income thresholds.
Mark:
If I understand correctly, some of his technique involves doing Roth conversions in retirement to fill up those lower tax brackets. The recommendations are fairly complicated and he says his technique runs counter to the conventional wisdom on retirement drawdowns.
Mark:
I don't fully understand the recommendations, but he claims the savings can be significant. I was wondering if you're familiar with this research and what your thoughts might be on it. Thank you so much for everything you do.
Dr. Jim Dahle:
All right, Mark. Good question. I'm not familiar with Reichenstein. Well, that's not true. I mean, I've read a few of his articles over the years. William Reichenstein is a PhD and a CFA. He's the head of research at some software firms, Social Security Solutions, Inc and the Retiree Inc, which is incomesolver.com.
Dr. Jim Dahle:
He's a professor or professor emeritus at Baylor. And he had lots of articles in the journal financial planning. So, does he know what he is talking about? Yes. Are his recommendations contrary to conventional wisdom? I don't know. It seems a little bit of a straw man to say that.
Dr. Jim Dahle:
Here's the deal. Roth conversions can be done and they can be done in retirement. They're frequently done in the early years of retirement before you start taking social security, maybe before you start taking pensions. And that can make a lot of sense to do that. So that over time, your overall tax rate in retirement is lower.
Dr. Jim Dahle:
This can especially become an issue if one spouse dies many years before the second spouse, because what happens is after the first spouse dies, all of a sudden, the second spouse is now paying taxes in higher tax brackets, because they're paying it in the single tax brackets whereas they used to pay in the married filing jointly tax brackets.
Dr. Jim Dahle:
So, Roth conversions can absolutely be a very smart thing to do. You basically want to avoid the extremes. If you're not converting anything in those years, that's probably wrong. If you're converting everything in year one, when you retire, that's almost surely wrong.
Dr. Jim Dahle:
But there is probably some amount of Roth conversions that make sense for most retirees to do in between the time they retire and when they start taking social security. That's probably the best way to think about it.
Dr. Jim Dahle:
But it is complicated. How much you convert each year depends on variables that are unknowable today, and maybe even be unknowable at the time you do the conversion. Because you don't know what tax brackets are going to be when you're 78, when you're 62. You don't know how well your investments are going to do. You don't know what the markets are going to do.
Dr. Jim Dahle:
And so, you're forced to make these decisions without having complete information. You can make the best guess that you can. But know this, that most of the time with most reasonable assumptions, most people should probably do a few Roth conversions during those first five to 10 years of retirement. And on average, that's probably going to work out pretty well for them.
Dr. Jim Dahle:
So, I don't think of that as being contrary to the conventional wisdom. I think that is the conventional wisdom. But yeah, if he can show you with the numbers that that's the way it works out, I would probably believe him because that's what it shows when I run the numbers and when most other people, I trust run the numbers.
Dr. Jim Dahle:
But I wouldn't go crazy doing some Roth conversion when you're 55 years old and making $700,000 a year just because you heard that Roth conversions were good. It's far more complex than that. You got to run the numbers, decide how much to convert and especially if you can do that at a lower tax bracket, then you're likely to be in later in retirement, that's going to work out well for you.
Dr. Jim Dahle:
Okay. Let's take another question. This one about my favorite mutual fund, the Vanguard total stock market index fund.
Speaker 2:
Hey Dr. Dahle. Thanks for all you do. I'm an anesthesiologist in the Southwest. I had a question about some investments I made that seemed to be doing worse that I would've guessed.
Speaker 2:
I had a couple hundred thousand dollars earmarked for remodel project, that we thought we were cancel. And not wanting to sit on that much cash, I put it in the stock market in Vanguard's total stock market index, VTSAX, but it declined more than the stock markets declined and I'm not sure why.
Speaker 2:
I put in $100,000 on July 16th and it looks like the stock market's been down 5.18% since then but the values declined almost $8,000. I put another $100,000 in on September 13th and it looks like the stock market declined 7.18% but the value is down $11,000. I'm just not really sure why my losses are worse than the stock market decline. I’m curious if you had an explanation for that. Thanks again for all you do.
Dr. Jim Dahle:
All right. Thanks for the question. The answer to your question is that you're mistaken because over the last year and over the last 20 years, the Vanguard total stock market index fund has almost precisely tracked its index. It does so very well. They're very good at doing this at Vanguard. Their computers are top notch.
Dr. Jim Dahle:
And if you look at the end of every year for the last 20, 30 years, whatever, it has essentially tracked the stock market perfectly within 10 basis points. It's not that hard to do with an index fund, number one. And number two, Vanguard is better at it than anybody else. So, they really do a good job of tracking the overall market, tracking their index.
Dr. Jim Dahle:
So, what that tells me is that you're mistaken. Now, why might you be mistaken? Well, probably the most common reason why people would make this error is because they're not reinvesting their dividends.
Dr. Jim Dahle:
Now that may be the case. It may be that you are not reinvesting your dividends. And you're looking at the total return of the fund, but you've been taking money out. So, obviously your fund has less money than that because you took the dividends and did something else for them. So that's a common reason why people might make this mistake.
Dr. Jim Dahle:
Another reason might be if you're not looking at the exact same starting and ending points. That could make a difference. If the index return you're looking at is the end of the month to the end of the month, and you're looking at money you invested mid-month, that'll be a little bit different.
Dr. Jim Dahle:
If you're buying the ETF version, it doesn't sound like you are, but the ETF version of this fund is VTI, it’s the ticker symbol. And that fluctuates during the day. So, if you buy that at noon, it may not have the same return as the fund that gets bought at 4:00 PM. On a really volatile day, that could be 1% or 2% different.
Dr. Jim Dahle:
Lots of reasons why you might be mistaken, but I am quite confident that you are mistaken. And so, I would have to sit down with you and run your numbers and look exactly at your forms to try to figure out why that is. But I'm confident that there's a pretty good explanation there. And the explanation is not that Vanguard started sucking at indexing because they're awfully good at it.
Dr. Jim Dahle:
So, I'm sorry to hear about your losses. The good news, everybody's got lots of losses this year. If you're investing in taxable, make sure you tax loss harvest them. You can probably use those losses to offset up to $3,000 of your ordinary income this year as well as an unlimited amount of your capital gains that you may have from other investments during the year.
Dr. Jim Dahle:
It's also a good time to remember that this is not a short-term investment. Stocks go up, stocks go down. Often when they go down, they do not come back for 2, 3, 4 years. That's not unusual with the stock market. And so, money that you piled in in 2021 or even early months of 2022, you've got significant losses on. I think probably as I record this, this fund is probably down 25%.
Dr. Jim Dahle:
And so, many of us that have this as a major holding in our accounts are down a lot of money. I may have lost seven figures in this fund this year so far because it's a major holding in my portfolio and it's gone down a lot. And so, you got to expect stocks to be volatile.
Dr. Jim Dahle:
You're not buying them hopefully with renovation money you need in a year, you're not buying them with some money you're going to use to pay off your mortgage in six months or something like that. This is money that you don't need for 10, 20, 30, 40 years. That's what you buy stocks with. Same thing when buying real estate. This is not money you need soon. So, make sure you're not mistaking this for a short-term savings account. It definitely is not.
Dr. Jim Dahle:
Okay. Next question. This one comes in via email. “After listening to your podcast, I've now decided to change my actively managed mutual funds to low-cost index funds.” Okay. That's almost truly a good thing. “When should I make the change? Is it okay to do so when the market is low, in a bear market right now or should I wait till it gets better when we come out of the bear market?”
Dr. Jim Dahle:
Well, here's the truth. I would do it now because the truth is you own mostly the same stocks in the index funds as you do in the actively managed funds. You're just paying more fees to do so. So, it'll cost you less when you own those stocks via an index fund than it will if you own an actively managed fund.
Dr. Jim Dahle:
So, if you're investing in a retirement account, an IRA, a 401(k), etc, there's never a cost to change from one investment to another. You can do that anytime. So, I’d just do that now.
Dr. Jim Dahle:
If you're investing in a taxable account, there might be a capital gains cost. If you have a bunch of gains on these investments, if you've held them for a long, long time, you might have significant gains. You might have so much gains that you don't actually want to realize them.
Dr. Jim Dahle:
But if you're going to sell, the time to sell in a taxable account is in a bear market. Now I'm not saying selling and going to cash. I'm saying selling an actively managed fund or some other investment you don't want for the long term and buying an index fund or some other investment that you do want for the long term.
Dr. Jim Dahle:
This is the time to do it. Your capital gains will be the lowest they'll ever be. You might even have losses that you can use for tax loss harvesting essentially. So, I would change now. If you realize this is not something I want to own for the long term, now is a great time to change while the market is down 25%.
Dr. Jim Dahle:
All right. As I mentioned at the top of the podcast, SoFi has exclusive rates and offers for medical professionals, which could help you save thousands by refinancing your student loans. Visit sofi.com/whitecoatinvestor to see all the promotions and offers available to medical professionals. That's sofi.com/whitecoatinvestor.
Dr. Jim Dahle:
SoFi student loans are originated by SoFi Bank, N.A. Member FDIC. Additional terms and conditions may apply. NMLS# 696891.
Dr. Jim Dahle:
Don't forget if you're interested in that Zero to Freedom course that you can sign up through August 3rd and then it's going to be closed again for six, eight months, who knows if it ever opens again. I guess there's no guarantee.
Dr. Jim Dahle:
But if you're interested in learning more about that, like most courses that we partner with or that we offer ourselves, there is a money back guarantee. You can kind of check it out, make sure you like it before you actually are committed to it. So, check that out at whitecoatinvestor.com/rental.
Dr. Jim Dahle:
Thanks for those of you who've been telling your friends about the podcast and or leaving us five-star reviews. Our most recent ones said, “Doc, what a great topic! We joke in our family about which restaurants will do well in our area.” They're talking about that non-food franchising episode we had. “I hadn’t thought as much about non-food business opportunities much to this point. Looking forward to discussing this after my wife listens to this episode!” ZXM Psychiatry, thanks a lot for that review. We appreciate it. It does help get the word out to other people.
Dr. Jim Dahle:
I hope you're having a great summer. I know we are. In between the time I'm recording this and when it runs, I think I'm going to float a river and have a great family reunion in Colorado. I hope you're also doing something awesome.
Dr. Jim Dahle:
Until we meet again, keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor 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.
Jim – would you wait the full 10 years and allow an inherited 401k to grow before paying taxes? Assuming top income bracket, curious if I should pay taxes now and let it grow in a taxable versus letting the money grow and then pay taxes 10 years from now.
If you’re going to pay taxes at the top rate anyway, then yes, I’d wait the full 10.
I thought that the irs recently said that you have to take a rmd annually over the ten years for an inherited ira.
https://www.forbes.com/sites/ashleaebeling/2022/03/04/irs-nixes-10-year-stretch-for-most-inherited-iras/?sh=5f928da36ac3
That’s correct. If I said something differently in the podcast, I misspoke.
Thanks. I was referring to the advice given to jared regarding the inherited ira.
Oh I see what you’re saying now. I better do a correction on the podcast. Stupid IRS.
Inherited IRA’s\the Revised Stretch Rule.
@Dan Gold too.
Fidelity here seems to imply the proposed rules have been published which will require RMD’s for those of us inheriting a Traditional IRA from a Parent…but I don’t know if they’ve been published\finalized yet. I know the proposed rules were open for comment until mid-June. But changing the game after a couple of years could have some ramifications for those who skipped the RMDs because the relevant IRS publication said they simply had to zero out the balance within 10 years
https://www.fidelity.com/learning-center/personal-finance/retirement/non-spouse-IRA
Yup, sounds like those are the new rules. I’ll be running a correction on the podcast soon.
Do RMDs only apply if the parent was over a certain age?
Can you be more specific?
The rules recently changed so it sounds like everyone has to take RMDs.
Thanks so much for posting these podcasts and blogs. They have helped me personally a lot.
Regarding the book Taking Stock by Jordan Grumet, MD.
The process sounds very similar to what George Kinder has described for years in his works. Specifically this sounds like one of his “three questions” in his book, “Life Planning for You”. I highly recommend this book, which gets to the heart to answering of the “why” of FI.
I put together the Form 1116 in Excel and started playing with the assumptions, and I think the commentary here re: foreign tax credit is wrong.
Basically your foreign tax credit cap = (your 1040 line 16 income tax) * (foreign income / worldwide income). Once you have >$20k of foreign qualified dividends and cap gains, there is in fact a ~40% down adjustment on that worldwide income (the denominator). But it’s actually hard to run into a situation where this ends up leading to a reduction in the tax credit in practice. For example, if you pay $15k in foreign taxes on the dividends and have $100k in US income tax on a $800k income, in most situations you get the full tax credit ($15k). The tax credit only starts getting reduced when you are paying a pretty low ETR (e.g., $50k US income tax on a $800k income, which is hard to do).
Thanks for getting into the weeds so deeply. I’m glad to hear it is unlikely to actually affect me, but I guess I’ll see when I do my taxes for last year and this year.