YNAB Podcast Episode 69: Managing Your Life's Single Biggest Expense

Hello YNABers. My name is Jesse Mecham and this is podcast number 69 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt, and save more money.

And you save money with the big wins, and one of the big wins – the biggest win of all big wins in saving money – your biggest expense in your life, without question, unequivocally, is taxes. And it is tax season. You’ve heard the H&R Block commercials on the radio: “Hi, my name is Jim. I’m a former CFO and now I do people’s taxes.” And then, they give a disclaimer saying if there was an error and we didn’t do this correctly, they’ll do some kind of a refund guarantee. Everybody focuses on the refund, enter it with their Turbo Tax, maximize your refund; TaxACT, maximize your refund; maximum refund guaranteed. Well, the fact of the matter is what you put in is what you get out.

And today I am interviewing my tax advisor, Casey Murdock, author of the book ‘Tax Insight,’ really nice guy. I mean, he does taxes so he’s a little weird, but beyond that, super nice guy and super, super smart when it comes to taxes. You’ll hear in the interview how he saved me over $20,000 back when I had one guy do my taxes and then I brought them to him, and then he did a little “switcherooski,” waved his magic wand, all the stars aligned, and yes – it was $20,000 that I immediately used to help pay down my mortgage.

Can you… Doesn’t that make you feel a little bit sick to your stomach, to think that you could be overpaying and you have no idea? And you can’t tell me you don’t pay taxes, and if you tell me I get a refund so I don’t pay taxes and we’re sitting face to face with each other, you’ll probably hear me scream LOUD – because you DO pay taxes. When you get a refund, all that means is you paid more than you should have and they’re giving some of your money back. So please, you pay taxes. You have a pay check; you pay taxes. Your employer pays your taxes on your behalf as well. You pay taxes all the time. When you’re pumping gas, you’re paying taxes. When you die, you pay taxes. When you’re born… I don’t know if you pay taxes then. It might be the only event, the only life event, where you don’t pay taxes.

So, without further ado, because that was quite a bit further and of the ado, here’s my interview with Casey Murdock, my tax advisor. If you want to talk with Casey, shoot him an email at [email protected] [or [email protected]], and ask him to do your taxes for you. His rates are awesome, his knowledge is awesome, his thoroughness is awesome, and I use him for my taxes. So, what else can I say?

With that endorsement, let’s go over to the interview. I’ll see you guys on the other side. And ladies, please try and resist my sexy voice. I have a serious head cold. Here we go.

J: Alright, I’m here with Casey Murdock. He is my tax advisor and I want to welcome him to the program. Thanks for coming on, Casey.

CM: You bet. I’m glad to be here, thank you.

J: So Casey, you… Give us a little background on who you are and how you got mixed up in taxes.

C: Alright. Well, my first delve into it was when I became… when I was in college and decided to do accounting, and taxes were the part that I really liked about. So, I went from there. I’ve worked for a couple of CPA firms, and for the last six years I’ve been doing it on my own. I’m an enrolled agent with the IRS and I also do investment advice and things like that. My firm is [?? 0:04:17] advisors. I’m a partner here, and I lead the tax practice.

J: Cool. So you liked taxes when you were in college and kind of got involved that way. It is… You’re kind of… how should I say this? You’re an odd man out because most people can’t stand taxes. And, they’re probably happy just to have something or someone do it for them. Right now we’re seeing a lot of advertisements where people… you know, these different ads for TaxACT or Turbo Tax or H&R Block – they all have these advertisements that say, “Maximum refund guarantee,” or, “Maximize your refund,” or even worse is “Refund Loan Places.” But, a lot of emphasis is put on the refund from all this software and they try and entice people to jump on board with that software. How do you… I mean, what’s the difference for you being a tax advisor, between you and someone doing it on their own with any of the number of options of tax software out there?

C: Well, I think the first, the biggest thing that comes to mind is the tax software can only ask you the questions that it’s been programmed to ask. And, it can’t really probe very well, or hear something that you say, and think about other things. And so, the biggest difference that I see is the software asks… “Do you have a W2?” “Yes.” “Okay, put in the information and do this.” “Yes.” “No.” … and you go from there. Whereas, if I am preparing a tax return for somebody and see something that’s a little out of the ordinary or a little different, then I can delve into that; or if I see a planning opportunity, I can talk to them about that for the current year or for the coming year, and help them find ways to improve their situation.

So, let me give you just a brief example that happened last year. One client that I’ve been working with for several years had a rental and had some other things going on. They had a self-employed business and the other spouse was an employee; they had a bunch of different things going on. But, the rental property was kind of status quo, had always been the same each year, and their income had been roughly the same. He was going to school and doing a little bit of part-time work. She had the little side business that she did on her own, and their income was really low, while he was in college. And this particular year, they did a couple of things with the rental in the way they took the deposit – and a few other little things like that that I won’t go into – that actually bumped them over investments or passive income limit that eliminated them from a significant credit that they could have received. And so instead of getting a $5,000 refund like they had seen each year, a couple of hundred dollars’ difference in this type of income made it so that they owed some money instead of getting the $5,000 back that they thought. It’s nearly a $6,000 difference, and that difference could have been easily avoided had they talked to me. And, we’d talked exactly about what they were doing differently. And so as we worked it through, I was actually able to find a way that worked and we were able to get that credit. Turbo Tax or whatever, TaxACT or whatever, would never have asked them. It would have said, “Here’s what your refund is,” or, “Here’s what you owe,” and there’s no explanation and there’s no analysis done to figure out what was the difference here from year to year; what caused it; is it something we can fix or change?

J: Yes. Now, I have… I had an advisor doing my taxes – I can’t remember when you started doing them, maybe it was my 2008 returns, maybe – but, it was a while ago and I had an advisor doing it. I hadn’t done any hiring of him; I had just kind of found one, gone with him, hadn’t shopped around. And, I’ve told this story a lot to people that have read the blog about how you basically… I can’t remember if you took… I think he had already prepared my business returns, is that right?

C: Yes. He’d done your business but not your individual.

J: Not my individual. So I had you do the individual, and then when you were looking. Maybe explain to people how that happened, because it would have been a SIGNIFICANT, like a $20,000 plus tax difference – tax liability difference.

C: It was, and what had happened was I looked at some of the things that were on your personal return and some the things that had been done on one of your business returns. And, just realized that had you accounted for things a little bit differently on the business return, in a legitimate way – it’s just a matter of where you show it, and I don’t want to get into the details of that for these people – but where that expense was accounted for could have happened either way and the tax code then would have been just fine. But it made a very… like you said, it was about a $20,000 difference for you tax-wise, because what happened is you were right at the cusp of reducing many of your deductions, eliminating them, some credits and things like that, and right at that line you were over it having done it the way that the original accountant did. And if we switched it taking those deductions out of your personal return instead, you were below those limits and therefore could take advantage of the deductions that had been eliminated. So, I went back and amended that business return and saved you a lot of money.

J: Yes. It was… At the same time I was very happy and disturbed. Because you realize, you don’t know what you’re missing necessarily.

C: Exactly. And that’s another example: a software program is not going to analyze that for you. It’s going to ask you a question, it puts in the answer, and it doesn’t say, “Oh, wait a minute, but if you did it this way, look at all the money you could save.” That’s where the advantage is in meeting someone who’s actually paying attention.

J: Now, clearly I didn’t do a good job picking an advisor in the first place. Because what you were doing wasn’t like crazy rocket science as far as tax advisors go, so it’s not like saying you were the only one that had some exclusive patent and strategy on this thing. But clearly the guy was using… either missed it or had a lot of other returns to do, I don’t know what it was; but I was sad that he had done that. I don’t know if I had missed… if I had maybe overpaid in prior years because of that. But what’s scary is it’s like going to a car mechanic – you know, you don’t really know because you don’t understand your car and the engine and how everything works. It’s tough to know how to hire a good advisor as well. Would you have any advice for people…? I mean, clearly I’d tell everyone to work with you, and you work with people not just in California where you are, but… But what would you tell someone if they were going to say, “Okay, I’m going to go look for an advisor?”

C: Well, there are a lot of things that are important. I actually really… I have two pieces for the answer: one’s directly from what you’re saying, one’s another piece to it. I think it’s important, regardless of whether you use software or you do it on your own and you’re actually reading the manuals and making the calculations, or if you go to a professional tax preparer, it’s important for you to have an understanding of your tax picture. It’s important to not put blinders on and just say, “I don’t want to deal with this or think about it.” And, to get a decent knowledge of how taxes work – not to learn all the little minutiae, but a decent knowledge of it so that you can recognize situations in your personal situation that are important for your tax consequences. So, to me, that’s one of the first things to do, even before going to look for a professional preparer, is to know what questions to ask, is to understand a little bit about what’s going on.

Then when you go and you talk to them, I think you definitely want to have somebody who has a decent amount of experience, who has some credentials; but I don’t think those are the end all/be all of it. To me, more important is asking them about how they go about preparing your return. Do they… How many clients do they have personally whose returns they’re preparing and things like that? And if they have 1,000 people that they’re preparing tax returns for…

J: Is that real? Are there guys that really do have 1,000 clients?

C: Yes, there are. I know several of them personally. And the chances are that it’s going to happen like what happened with you. I don’t think that the CPA that you were working with originally didn’t know about what I did – I’d be shocked if he didn’t. I think that it’s just a matter of so many of them have so much that they’re trying to do so fast in the tax season, they ask you for the information, you give it, they stick it in and that’s done. And that’s where it makes a big difference in what you want to understand about the preparer you hire – to be sure that they actually are going to take the time with you to really analyze what’s going on, to ask you a lot of questions about your situation each year, because it does change and little things really make a difference. And maybe they do that before tax season starts – you know, the end of the previous year. Or maybe they do it a couple of times mid-year, and maybe you pay them a little more to do that. But if that’s important to them, then they’re going to take the time to really pay attention and help you. That would be part of their natural process of what they do.

J: I see. Well, that’s great, that’s good advice. I think people listening could use that. We’re kind of changing gears a little bit from the advisor side, and you’d mentioned that people maybe need to get a better understanding of their tax picture, which is why you wrote the book ‘Tax Insight’ originally, and now it was picked up by a publisher. What’s the name of your publisher? I’ve forgotten.

C: They’re called A Press.

J: A Press, that’s right. And, available on Amazon and on taxinsight.net. So, pretty exciting. But the book that you sent to your publisher and the book that you and I promoted to YNAB people back in the day, they are two very different things. Tell me a little bit about what you added to the book this time, and just kind of how it’s evolved now that it’s gone to a real publisher and will be available in bookstores and all that.

C: Yes, the first version we did – this is the fourth version, so three years ago, I guess – was just a little… you know, 80 pages or something, [?? 0:16:11] and it was really just trying to get something out there the first time. And then the next year we put it up to about 200 pages of information, and that’s when I felt like it started to develop into a little more what I wanted it to be. So when the publisher found it they liked it, they liked how I explained things in an easy to understand way, and the only thing they wanted was for it to be doubled in its size again. So, our aim was 400 pages. The way it worked out, the page proof issues ended up backing it down to 375. But there’s just a lot more information and guidance. I actually thought I was just going to take the first 200 pages and add another 200, and as I went through it I basically rewrote the first 200 pages too.

So I can’t say it’s a 100% new book, but it’s been rewritten completely, what was already there, and then added a lot more information – more strategies, more deductions and credits and things to be aware of. And a lot of the rework that I’m most excited about is actually the basic, simple stuff at the beginning. There’s five chapters that really help you understand just the ins and outs, the real nuts and bolts of taxes and how they work; and also how the tax code, in a lot of ways, is kind of rigged against you unless you understand it – and if you do understand it, then you can take some of those things to your advantage to get in a better situation.

J: Tell me a little bit about that. I haven’t read that new chapter. I know that your publisher wasn’t super-… Was that the chapter where you’d kind of… your publisher kind of pushed back, they weren’t super happy with it and then you convinced them? Is that the one?

C: Yes – I think you were probably the only one that knew that until now, but… I think the gut check reaction was that, “No, that can’t be right, and I don’t like that, and I don’t want to think the tax code’s really set up that way.” So he really challenged me and he looked up a lot of information and kind of threw it at me and said, “It can’t be this way.” But as I explained it to him more clearly – and maybe I’ll find a better way to explain it in coming times – but he recognized that that really is the case and that… The difficulty in the tax code, it’s set up to help people who are poor or somewhat help people who are middle class, but the way it’s structured is very difficult for people who are trying to improve their situation – it’s punishing in that regard.

J: So are you talking about someone that’s maybe a higher income earner, trying to break into a new level of wealth – it’s rigged against that person? Or is it just anyone trying to move up the economic ladder, like middle class to upper middle class, or upper middle class to whatever’s next after that?

C: No, it’s really anyone that’s trying to move up. I mean, people who are already up in upper class, the tax code is written very advantageously. If you’re at a point where you can live off of investment income and do it right, you’re in great shape – the tax code isn’t going to touch it. All this stuff we heard about Warren Buffett doesn’t have to do with how much money he makes or how much money he has; it has to do with the kind of income he has and the sources of it. Even from the lower class moving into middle, the middle class moving into upper middle, or upper middle to upper, what you have to do to do those things is earn more money than you’re spending and be able to start putting money away and getting ahead. And as you try to do that, the more you earn, the more all these things are taken away from you in the tax code. And there are some critical points within the tax code – quite a few of them, actually – where you will have a significant difference based on an insignificant amount of income once you cross certain thresholds.

J: And that doesn’t just happen for people that are earning… I know that some of these credits things phase out – I can’t remember numbers now, obviously – but you’re not just talking about upper middle class, like someone making $120,000 or something like that, that those kind of points of… I don’t know what it is, but bigger… a big disadvantage coming down from just a marginal increase in that person’s earning, that can happen at even lower income levels?

C: Yes. Some of the most dramatic ones are at the lowest income levels. $15-20,000 or $25,000 of income can trigger major changes. And then you see it again in the $30-60,000 range depending on single or married or what other things are going on. And then you see it again in the $80-90,000 range, and then again in the low hundreds. There’s these certain areas, and depending on what’s happening in your tax picture they can be significant, where the effective tax rate on that little bit of income in the margin there is WAY higher than what your actual tax bracket is at the time, because deductions and credits are being pulled away from you and the overall effect can be pretty big.

J: Interesting. And that’s where we have about savings. For me, I was obviously at one of those points where they’re going take things away, and you brought me behind, back past or off that point some – which made all the difference.

C: Yes. That was one year it happened to be the cards played out right in that situation. If you had been earning significantly more or significantly less, the savings from that would have been much different. So that’s… again, that’s another reason why being aware of what’s going on in your situation and potentially working with somebody who’s going to pay attention to that can make a big difference. Because what you think is not a whole lot different year to year; sometimes there are little things in there that are very different.

J: Yes. I’ve always said that… Since I started kind of promoting the idea of being aware of your taxes, I’ve told people it’s their life’s single biggest expense. And some people have called me out on that and said, “Well, no. I only make X so it’s really not.” But a lot of times, taxes that we pay we don’t necessarily feel. And one of the common myths – I don’t know if I’d call it a myth, but a misunderstanding – is where people will say, “Well, I don’t pay taxes. I get a refund.” And it’s like nails on a chalkboard to me hearing them say that, where they’re missing the fact that they are paying, they just happen to have overpaid and now the Government’s paying them back. And actually, that was said by someone that was a CPA, so that really threw me off! But what are some common tax myths that you see as you work with clients that come in?

C: Oh, there are quite a few of them, but I’ll tell you two that come to mind. One is there’s really a misunderstanding for what deduction means. You know, it’s a deduction, so… And it may sound silly to the people listening, but I’m amazed at how many people in their minds, even if they know it’s not really this, in their minds a deduction means it’s free. Right? “If I spend money on this and it’s a deduction, well, it’s like I didn’t spend the money. And best case scenario, that deduction is going to save you however much you spend times your marginal tax bracket. Now, if you’re in the 15% tax bracket, okay, you’ve got a 15% off for spending that if it’s a deduction. Sometimes it’s a deduction, really it means it can be a deduction. If you listen carefully on the radio, for example, let’s say it’s solar energy and they say, “Yeah!” often what you’ll hear in the little disclaimer at the end when they talk fast is “potentially a deduction” or “could be a deduction” or something like that. But consult your tax advisor, because a lot of times deductions actually don’t help you. It’s depending on what’s going on in your tax return. That deduction may make no difference in your taxes because you’re already to the point where the standard deduction is taking control or whatever.

That leads me to the second example, real quick. People think, “Well, you know, if I go buy a home I get the mortgage interest deduction, and that’s great. It’s going to help me, it’s going to make it that my mortgage payment is cheaper effectively.” And you’ll hear… Well, that would take me on a different tangent – maybe I’ll say that in a second. But the reality is, that’s only the case if you itemize your deductions. So for a married couple this year, the standard deduction’s going to be $12,200, and if your total interest you’re paying on your house is $8,000 and you don’t give a whole lot to charity and you don’t have a whole lot else that’s going on, you’re not going to itemize. And so you receive zero benefit from that interest. There’s no deduction for you because you’re taking the higher standard deduction anyway. There’s no additional benefit.

J: And it’s not like you can recapture that later or something, obviously. It’s gone forever.

C: And so what you thought was really going to benefit you may be based on decisions that really didn’t have any effect at all.

J: What was the tangent you were going to run down with that?

C: I forgot!

J: That’s what tangents are there for.

C: Yes!

J: What’s one piece of… We’ll just kind of close with this maybe. What’s one piece of actionable advice that you could give the podcast listeners? Besides going and checking out your book, which I think is… I can only recommend that because, well, I had one guy on Facebook when I posted about your book, he said, “Well, I don’t know if it’s really that clear or simple of a book to understand because it’s 376 pages,” and I said, “Well, that’s a function of the tax code, not how simple the book is.” You know, there’s just so much to digest. And I think that’s where people are sometimes scared to dig in with the taxes, but I can only recommend that people get to know it a little bit, at least to a degree that you can, because it is your life’s single biggest expense. And it can mean massive savings over the long haul. So my recommendation would be for everyone to check out your book on Amazon. Just search “Tax Insight”, or go to taxinsight.net. But I wanted to ask you if you had anything actionable for these podcast listeners that they could take away? Some piece of advice that you could give that maybe is commonly ignored but is something they could implement.

C: Well, really, my biggest advice is what I’ve said and what you just said. Not necessarily… be it my book or something else, but really understanding the ins and outs of the code. The book is 376 pages, but those first four chapters really are the essence of the tax code made simple, and that’s the kind of stuff you want to get a hold of. And then the details, the specifics that each individual deduction you can start to understand – it’s advice to you after that. Wherever you find that information, I think you have to do that because nothing in taxes… what you think you understand is not going to be the reality unless you really put forward the effort to learn it.

But beyond that – and maybe this is another part of the myth or whatever – but if there is a specific strategy that you’re going to engage in, make sure that you understand how to apply it to your personal tax return. If you decide, “I’m going to save money in an IRA,” or, “Should I do it in a traditional or a Roth IRA,” understand what that means and will a deduction help you, how much is it going to save you, is that worth the type of taxes you’re going to pay when it comes out, and would it be better off to do a Roth, and how they’re going to play out in your return. Because the tax code is a crazy beast, and because of that and because there’s so many moving parts it becomes very individual. And I think that’s the most important thing for people to understand, is there’s not a catch all/be all scenario or great tax tap because every single thing that is offered out there in the tax code really has a different implication and application for each person as they do it on their own – how it’s really going to help or not help. And there are actually some tax strategies that will help some people and they will harm others; and so understanding those things and how they specifically apply to you is probably the best thing you can do.

J: So this is more like a doctor giving a prescription based on an in-depth knowledge of the patient’s health versus prescriptions given out willy-nilly over news channels or something; where everyone says, “Oh, you’ve got to do this strategy or do this thing,” but kind of what you’re saying is it’s extremely individual and people just need to be aware. That’s what we teach a lot – just being aware. Be aware of what your money’s doing, be aware of what your taxes will be, and just be in the know regarding your finances in the end.

Well, Casey, I’ll have you on again and we can talk maybe some specific strategies. I want to talk about HSAs next time, and then maybe we could also talk about pros and cons of Roths versus traditionals. I have some interesting thoughts on that that I’ve kind of distilled since I’ve been working on this other product, so we’ll talk about that later. But it was good to have you on. I appreciate the time you took and everything. And everyone, check out taxinsight.net when you get a chance and educate yourself on your life’s single biggest expense. Thanks, Casey.

C: You bet. Thank you.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.