127: How to Pay Less in Taxes w/ Karlton Dennis

24:28I think this is absolutely amazing because most taxpayers out there that are self-employed are looking for ways to leverage their spending to reduce their tax bill. And by buying the right types of equipment, vehicles, you name it, you are now able to reduce your tax bill and do something that the government has incentivized you to do. So bonus depreciation, absolutely a huge one. Robert, I know you probably have taken advantage of that tax code before in the past. And last but not least, I would say the Trump account. If you guys are familiar with that The Trump account gives a$1 ,000 deposit for kids born between 2025 and 2028, and parents can contribute an additional$5 ,000 into that account.

25:03However, that account is solely invested into index funds. The good thing is there are no income limits. So if you're a high earner, it doesn't matter. You'll still be able to receive the Trump account and still be able to make contributions to it. However, that Trump account is solely focused on funding, education, the purchase of a home for your child, or starting a business after the age of 18. and your child must be a United States citizen. So I love it. However, we already know that if you're working as a business owner, you can hire your children, place them on payroll and set up the ability to offset taxes by shifting income to your children.

25:35And if you're really smart, you would open up a Roth IRA for your children with taxes neither you or I paid money on and put that money into a Roth IRA so they have money growing tax-free. So Carlton, let's say that I get my wife pregnant and we have a kid next year. How do I get this$1 ,000? Do I just like send some sort of email maybe? Or do I, oh, I think there's a Robinhood account announcement that came something with that, but you're saying, so the government's going to fund it with$1 ,000 and then I can then fund it up to$5 ,000 on top of that. That is 100 % correct. I believe we are getting information now that some people are going through their financial advisors to set up these accounts.

26:12Some people are talking to their employers to figure this out. I think we'll probably get more information and details here pretty soon on exactly what is the desired route for new parents to take for their kids. However, you nailed it on the head in the fact that that$1 ,000 will be deposited, and then you'll have the option to contribute$5 ,000 additionally, Austin. That's awesome. I appreciate you walking through all those. And speaking of investing here, I want to remind everyone too, and Carlton, you mentioned the oil and gas stuff. You mentioned short-term rentals, real estate, but also these retirement accounts, right?

26:42We love Cary.com, C-A-R-R-Y.com. Shout out Ankur Nagpal. He was on the show a couple times now, but I have a mega backdoor Roth solo 401k. Robert's got something similar. We've got SEP IRAs. We've got all these cool, awesome, different retirement accounts that are afforded to us as business owners that allow us to write off 50, 60,$70 ,000 of contributions into these investment accounts off of our earned income. I mean, if you're at a tax bracket like me, where you're paying 33 % effective tax rates, sometimes. You put$70 ,000 in. I mean, we're talking tens of thousands of dollars that you are saving on your tax bill by just investing the money correctly in the right accounts.

27:23I love that because most people don't think about growing tax-free dollars. They just think about trying to pay the least amount of taxes possible. And it's a double-edged sword. I mean, if you're going to try to pay the least amount of taxes possible, you're looking at qualified retirement accounts that are going to drop down your taxable income. But if you're trying to build money tax free, I would always side on that side of the fence. We have to look at the sacrifices that we're making to build money tax free. If we incorporate the right types of tax strategies, even contributing to a solo 401k or a SEP IRA, and then converting that into a Roth dollars, even though you're going to pay taxes on it, might be the best thing for you to do because you decided to leverage other strategies like a short term rental that year, or the Augusta rule, or you switch to an S corporation.

28:09And so when you start layering strategies on top of each other, it opens up opportunities like converting taxable dollars into non-taxable dollars for a lifetime. I know that we didn't talk about this beforehand, but I think this also was positively impacted by the big, beautiful bill. Can you talk about the qualified business, the QBI thing? Is that a thing? QBI, are you familiar with that? Yeah, so a lot of people get confused on like, what the hell is a QBI deduction? And to simplify this, if you're somebody that is self-employed and you have an LLC or an S corporation or a sole proprietorship, you may qualify for a 20 % deduction.

28:46Now, in order to receive this deduction, the IRS wants to make sure that any of the income that you didn't pay yourself out of the business is less than a certain threshold in order for you to be subject to this 20%. Normally that threshold holds right around$380 ,000 to$400 ,000. Right when you're over that amount, you no longer receive this QBI deduction, qualified business income deduction. But let's just say that you're making $100 ,000 self-employed and you have an LLC. Well, great. $100 ,000 is going to now be taxed at$80 ,000 after receiving this QBI deduction. So you had 20 % of your business profits no longer subject to taxes at all.

29:26So somebody at a 37 % tax rate would possibly be saving quite a substantial amount of money. I could talk about this stuff forever. I swear. I love learning about this. Yeah. I think the biggest takeaway for me in this episode, so thank you, Carlton, is that so many people out there when they're building wealth and they're trying to figure out how to get ahead, we always have this hate the rich or the rich have all these advantages. No, they don't. We don't. It's all about understanding the tax code is the blueprint for all of you to exploit in a legal way to build your wealth and do things like the rich people and the really ultra wealthy people.

30:03So Carlton, we really appreciate you stopping by. Everyone listening, please take notes on this episode. Really do your research so you can understand that as you make more money, it always comes down to it's not how much you make, it's how much you keep. So Carlton, tell people where they can find you. What's next? What are you working on this summer? Let it rip. Tell our listeners what's going on. Yeah. So first off, thank you guys so much for tuning into this episode. We hope that you found a lot of value. If nothing else, you've got one step closer to building tax-free wealth for you and your family.

30:35Right now, we're hosting the Tax-Free Wealth live event. It'll be kicking off August 4th through August 8th. So if you guys are interested in learning a little bit more about tax-saving strategies that you can utilize, go to www.thetaxfreewealthchallenge.com. We'd be more than happy to see you on that live event. You guys can also tune into our YouTube channel by visiting Carlton Dennis on YouTube and Instagram. We put out educational content every single week, teaching you advanced tax strategy, and we've been doing this for well over five years. We are here to help you keep more of your hard-earned money, and it starts with education, and we believe in providing that.

31:06So we look forward to helping all of you guys. Let's go, Carlton. My man. Thanks so much for joining us, my friend, and we can't wait to have you back. Thank you, guys. Take care. Thanks, Carlton. All right. Robert, I had a blast talking with Carlton. I feel like every time I talk with these tax strategists, I learn something new as someone who pays well over six figures a year in taxes, which feels criminal at this point. But yeah, it's just I feel these conversations are so important because on one side of the equation, you've got the everyday person who, you know, he pretty much said, listen, if you're making 60, 70,$80 ,000 a year, you should not focus on trying to lower your tax bill.

31:39Right. That's not going to be the needle mover. The needle mover for you is getting money invested, earning money while you sleep, right, becoming an owner, not just a consumer. And so I totally agree with that. Where on the flip side, he was like, listen, if you're making a couple hundred thousand dollars a year, well, now you're paying 50, 60, 70 ,000 a year in taxes. Let's figure out how to bring that down by 10, 20, 30 ,000 and have a good time doing it. And it's so cool to see that there's so many options, right? Not just some stuff mentioned in the big, beautiful bill with tips and overtime and all the other things like that.

32:09But also you've got these investment options. You've got these different types of bonus depreciation, right? There's a lot of things out there that if you are someone who's trying to strategize your taxes, there's options and there's strategies and there's hacks. And we hope this episode was an opportunity for you to learn some. So true. It's just too many people take their eye off the prize. They get their 401k. They maybe get their Roth IRA, but they're not continually learning or engaging with people that can help them figure it out. Along the way over my 30-year journey, I've learned so many things and I continue to learn every day.

32:44And that's why this episode to me is a very important episode. To help people really understand, it is not just what you make. We want you to focus on earnings, but it is what you keep through really good strategies and understanding the options you have in front of you. So I love this episode. I think it's going to be very impactful for everyone. And I'm so glad we did it. I am too. Now, before we jump to our Q &A section of this episode, we need to take a moment to shout out Nios Investments. This episode of the Rich Habits podcast is brought to you by Nios Investments. Nios offers ETFs that seek high levels of monthly income with a keen focus on tax efficiency, while providing core portfolio exposure across equities, fixed income, real estate, cryptocurrency, and cash alternatives like T-bills.

33:30Their ETFs may be especially interesting for folks looking to generate tax-efficient monthly income inside of their investment portfolios. Their funds may serve as a compelling income-focused alternative or complement to many of the investments already in your investor portfolios. If you're looking to add passive income-focused ETFs to your portfolio, consider learning more about NEOS ETFs at neosfunds.com. And as with any investments, investors should carefully consider their investment objectives, risks, charges, and expenses of NEOs exchange-traded funds before investing. To obtain a prospectus containing that and other important information, please visit neosfunds.com and please read the prospectus carefully before you invest.

34:15An investment in NEOs funds involves risks, including possible loss of principal. There is no guarantee that NEOs ETFs will make monthly distributions and the amounts may fluctuate from month to month. Cryptocurrency is relatively new and the markets have their own specific risks. So NEOs ETFs are distributed by Foreside Fund Services, LLC. All right, Robert, let's now jump into our first question in the Q &A portion of this episode coming from Sarah on Instagram. Sarah says, hey, everyone, what does a normal advisor client relationship look like? I'm 55 years old and I have one brokerage account that I've had for the last 20 years from an inheritance.

34:53I've basically just been letting it ride, but I don't feel like this money has grown for me as much as it could have. I can probably count on maybe just two hands the communication I've had with my advisor. I freelance and I want to retire by 60 and now I'm very concerned about that. In 2007, this account was valued at$43 ,000 and now it's valued at$200 ,000. This account consists of mutual funds and a few blue chip stocks. I've reinvested all the dividends, but I haven't been proactively overseeing it, and I've just kind of trusted the process. Listening to you all is making me question my relationship with my broker.

35:27Thank you so much for answering my question. So Sarah, I'm going to help you take a deep breath here. From$43 ,000 to$200 ,000 since 2007 is 365 % return. During that same period of time, the S &P 500 delivered about a 320 % return, which means that you are par for the course, right? You're not really outperforming too much. You're not underperforming. You're just moving up with the markets during the same period of time. So don't feel like you've lost out on generational wealth. Don't feel like this, you know, 200 is really supposed to be 2 million, right? It just, it's not. You're doing a wonderful job just letting it ride and staying consistent, keeping this money invested.

36:09Robert, I'll let you jump in though and talk more about like the type of relationship that you think that Sarah should have with her financial advisor and maybe any advice you might have for her. Yeah, I love this question. And unfortunately, my response isn't going to be great, but it happens every single day. So make sure you understand that. Like Austin said, you've done all the right things because you've reinvested the dividends. You've let it ride and it is doing quite well. But that doesn't mean that the person handling your money is doing their job. because at the end of the day, you hear Austin and I talk about it all the time that we don't want people to have knee-jerk reactions, but we do want people to have an eye on the prize and have active management on their money.

36:50And so many people just trust the process. And unfortunately, you can't take your eye off the prize. And I feel like you have because you don't know what to do. In my experience through my personal finances and Crow Capital over the last 25 years, I have noticed that what they do is they do a quarterly call with every client. And I think quarterly is enough for most people as they're building their wealth. And as you get more and more items and more and more structure and more and more investments, then maybe you bring that up to once a month call. But I think quarterly is fine. So for you to only have a few interactions with this person over that long of a period of time, I think is a little egregious.

37:31So I would have a call with them. I would reach out and say, hey, I'm getting a little nervous. I see the returns have been decent. I want this to be more active. I want to improve on my situation. How can we better communicate to make that happen? Because like Austin alluded to, you're doing fine. You've turned this money into a meaningful sum, but it could be optimized further. And I think with more communication with that broker, you'll find yourself in a better place, but you'll also feel more comfortable. Because what a lot of people do, they fear the unknown. So it's kind of out of sight, out of mind with their money.

38:07And that is the absolute biggest mistake you can make. You wouldn't be here today asking this question if you're not ready to take the next step into understanding what's happening with your money and optimizing it. So we really appreciate the question. But that is what I would do to put yourself in a better position to understand how to maximize your earnings over the coming years leading into retirement. So tactically speaking, Sarah, here are three things you can do from my perspective to make sure that you're$200 ,000 if you decide to keep it with your advisor, which you probably should, right?

38:40That's fine. But make sure it's working hard for you. The first thing is ask that advisor if you are invested into the S &P 500, the NASDAQ 100, the Dow Jones Industrial Average. These are the three most popular and best performing index funds in sort of ETFs, right, that continue to do well over a long period of time. So they probably have you in like mutual funds that have a strategy that's benchmark against those things. I don't care about if the strategy is benchmarked against it. I care if you are actually investing in the S &P, actually investing in the NASDAQ, things like that, because anyone can benchmark a strategy against anything they want.

39:19Strategy can underperform, which it seems like you're not, right? You're doing fine. But just make sure you're investing in those specific indices. The second thing, I want to make sure that you're auditing your expense ratios. Make sure that you're not paying for a, you know, double dipping of your financial advisor, which means you're paying them 1%. And they're also putting you into these high cost mutual funds that are also at half a percent, one percent, one and a half percent. And now you're paying, you know, over one, one and a half percent, maybe two percent a year in management fees. Right.

39:47Since 2007, I mean, that is it's like 50 percent return right there. So, like, just make sure you're not getting robbed from a expense ratio perspective. And then the third thing is I want you to promise us that you're going to have those quarterly calls with your advisor. You said you've talked to them a handful of times here over the last 15, 20 years, and that's not going to cut it going forward, right? You're 55. You want to retire in five years, which means you need to have a lot more visibility. You need to have more ownership as it relates to what you're doing with your money. So set up a quarterly check-in with your advisor.

40:18Be proactive and just don't have that set it and forget it mentality. Instead, switch to a proactive mentality going forward, Sarah. Thank you so much for your question, and we are rooting for you. Our next question is actually going to stay anonymous. so we'll just call them F because that's what their first name starts with. F says, good evening. I had a question for you guys and I'd like to remain anonymous. Soon I'll be receiving $30 ,000 from a lawsuit and I wanted to see what you all would think I should do with it. Specifically, what should I invest it in? I want to get into real estate in the next year or two so I don't have to pay for housing at my college because rent is high.

40:53I'd much rather buy a property than lose$40 ,000 over the next two years renting an apartment. Thank you so much for your time. Robert, do you have any advice for F? Yes, I think it would be a bad idea to get this $30 ,000 and immediately dump it into a property because you don't have your base built. You don't have any investments as of this question and what we know. So I think you should continue renting, find a suitable place that works. And I would take this$30 ,000. I would immediately get it into a Roth IRA on public.com. I would max out the Roth IRA. I would invest in the basket of index funds that we talk about all the time, the VOOs, the QQQs, the VGTs, and the like.

41:37That's what I would do. Get your base built first. Because at the end of the day, so many people still believe that when you're paying rent, that you're losing money. It is cheaper in almost every instance right now to rent versus buy. And at the end of the day, the last thing you want to do is take all$30 ,000 invested into a property because you believe you're saving money on rent and then find yourself house broke while you're trying to get through the next few years of school and getting into whatever position you're going to be in career wise. So that's what I would do. I would not take the money and immediately dump it into a property because 30 ,000 isn't going to be enough if you have issues or carry costs, or let's say that the renovation costs more than you thought.

42:24So that's what I would do. Build your base first, get to a hundred thousand dollars, saved and invested, then consider buying a property. And I would never buy a primary home as my first property. I would buy a duplex, triplex, or a quadplex, do a Fannie Mae 5 % down mortgage, and you will be set up and on your way to financial freedom. Yeah, I think what people forget about is, for example, the home I'm in right now has a 6.5 % interest rate on the mortgage. I pay about$2 ,350 a month in monthly mortgage, and that's my payment. And so what people think of like, oh, so he's paying$2 ,350 a month.

43:00He borrowed$320 ,000. So every month he's paying$2 ,350 off of the principal. Now, that's not the case at all. Right. That's not the case with any mortgage, right? First off, it's amortized very much so where you pay a lot of interest in the first three, five, seven years on your mortgage. And then you pay a lot of principal on the back half, if not back 20, 25 years of the mortgage. It's an amortization schedule that makes it so you pay a lot of interest up front. The second thing to call out is to Robert's point, renting is cheaper than buying a home right now in America. I just went to rent.com.

43:36the average rent in America is only up 0.4 % year over year, and it's at$1 ,607 a month. So$1 ,600 and you can rent a one-bedroom apartment for$1 ,600 right now in America. Compare that to the median monthly mortgage payment in the United States, which is$2 ,250 right now. And depending on how much you put down, it seems like it's even up even to$2 ,275. That's for a median home priced at$395 ,000. So I guess what we're trying to say is don't feel like renting, especially right now, you know, is throwing away$40 ,000 over a two year period of time. It's not. Here's how you need to think about it.

44:19You need to live somewhere. You need to pay somehow, someway, somehow, right, to live. And if it says that it's going to cost you$40 ,000 to live, then that's how you're going to pay for your living. Either you're going to do it via renting, or you're going to do it by putting down a big down payment, by having to repair the dishwasher and the microwave when it goes out in three weeks and six months from now, and then also by paying a bunch of interest over the short period of time here, because interest rates on mortgages are seven, seven and a half percent, especially if you're in college, right?

44:49You don't really have a work history. So like, think about it as a blessing to take this 30 ,000. I'd love for you to max out that Roth IRA. I'd love for you to start building your base, getting those rich habits implemented. So the$30 ,000 over the next several years turns into$100 ,000,$200 ,000,$500 ,000 by the time you're in your 30s and 40s. And then when you're ready to go buy a home, do what Robert said. Go house hack. We have a whole episode with Brandon Turner talking about house hacking, different ways to do all that stuff. Go check that out. It's an incredible episode. But there's so much to do strategically as it relates to living and having a housing structure around you where you're not throwing money away, right?

45:27Because I think that's what a lot of people think. I'm throwing money away with renting. I'm throwing all this money away with my interest on my mortgage, whatever. There's a ton of different strategies that you guys can implement to ensure that you're building equity. You're maybe getting some cash flow and you are house hacking. Yeah, I think the biggest issue for me is most people never consider the total ownership cost when they're thinking of renting versus buying. So if you're going to rent like Austin illustrated, it's$1 ,600 a month. You know that's what the rent is. You're going to sign a lease.

45:55It's in stone. You know what you're going to pay. You can add in your cable, your Netflix, your water, electric. You know exactly where you're at. When you buy that first property and you're getting used to home ownership, you don't know what's going to happen. You could be in that house for one month and the furnace goes out and it's$5 ,000 replace. Then two years later, you could have a roof go bad and it's$10 ,000 replace. That is why people get it wrong when they think own versus rent. We want everyone to own property. Everyone that follows us should own real estate, but they should own it on the correct terms.

46:30Too many people get started with buying a house right out of the gate. They live beyond their means and their house broke and it delays them from ever being able to invest properly towards financial freedom later on. That's why we want you to build your base, then consider house hacking. That's what we would do. Now, before we jump to our final question coming from Mia, let's take a moment to hear from Blossom. You guys always ask us, what are you guys investing in right now? And you know we aren't gatekeepers. But we also don't blast our portfolio all over the internet either. If you want to see it, you got to follow us on Blossom.

47:02You guys know we've been big fans of the Blossom app for a while. It's a free social investing platform where people actually show you what they're investing in. And just to be clear, Blossom is not a brokerage. It's like a social network for investors. Think Instagram meets investing. And what we love is the transparency. You can literally see our portfolios, track our changes in real time, learn and discuss strategies with other real investors, among many other things. And the best part is the community in Blossom is long-term focused, not typical of what you see on the social platforms, which tend to revolve around trading, FOMO, and whatever's hype at the moment.

47:36And we all know there's always something hype at the moment, Robert. So if you're curious about how we're building our wealth or you want to just level up your own investing habits, download Blossom. It's completely free. It's easy. And we are both on there. Just search at Austin Hankwitz and at Robert Croak official. And huge news and highly requested, Blossom is now available on desktop. So you can head to BlossomSocial.com to join the investing community that everyone's talking about now on the big screen. And of course, it's totally free. So hit the link in the show notes below to join us on Blossom or head over to BlossomSocial.com so we can build rich habits together.

48:12All right, Robert, let's now jump to our final question coming in from Mia. So our final question comes from Mia on Instagram. Mia says, hello, Rich Habits Podcast. Thank you so much for all you do. I'm 37 years old. I'm a self-employed nurse practitioner, and I have$160 ,000 spread across five old 401k accounts from my previous employers. I've already opened a solo 401k a few years ago, and it was originally with Vanguard, but I've since transitioned it elsewhere. I'd like to consolidate all of my old 401ks into my solo 401k to simplify my retirement accounts and keep everything in one place.

48:45I understand this move should be done carefully to avoid tax implications. So can you please offer some advice as to what I should do about this situation, as well as what types of funds I should invest this$160 ,000 in? I love this. So as you probably heard on our advertisement earlier in the show, public.com is offering a 1 % match on all of those rollovers into their platform right now. So if you have old 401ks, all you have to do is open up a traditional IRA because a 401k is a pre-tax retirement vehicle, just like a traditional IRA is a pre-tax retirement vehicle. roll over all five of the values of those 401ks into your traditional IRA.

49:24You'll get a 1 % match on that$160 ,000 total rollover. So you'd get an extra$1 ,600 for free from public for just using their platform. And that's how you do it. There's no tax things to worry about. It's just, it's pre-tax to pre-tax. That's what matters most in the situation for you. And as it relates to funds, you can buy almost anything on public, especially ETFs, things of that nature. So, you know, we want encourage people to have VOO, the S &P 500, QQQ, which is the NASDAQ 100, VTI, which is the total stock market, VGT, which is the technology focused sort of strategy by Vanguard, VUG, which is a growth focused strategy.

50:04But then you also have things like VYM, which is a dividend strategy. PYI is a high income strategy from NEOS, but have the vast majority, I think 65 to 85 % of this money invested into VOO, QQQ, VGT, VUG, these very tried and true strategies and indexes that have been around for a very long time. I don't have anything to add. I think you crushed that. And that is exactly the playbook of what to do here. And public.com is a great place to do it. Robert, what another awesome episode in the books. I'm excited to be back. We're back.

50:42We're just a blessing. It's a blessing to be able to come back here every single week to film and talk with incredible human beings about awesome financial strategies that hopefully help everyone build wealth, save on taxes, and enjoy more time with the people they love. Use that money intentionally. Call your parents, tell them you love them, talk to your kids, do all the fun things with your friends and family because when they're gone, they're gone. And just coming to that realization is really heavy. So I want to make sure everyone is moving in the right direction. We're so excited that you guys are here joining us every single week.

51:13If you've not yet checked out the Rich Habits Network, it's our community for our biggest fans. Robert and I host weekly Zoom calls for our community members every Tuesday night. I had about 180 people show up to last night's Zoom call. It was pretty fun. It's awesome. We've got eight hours of video coursework over there. We're publishing a new video course actually about building small businesses, buying small businesses, making some money with that. Stay tuned. But there's going to be a link in the show notes below. And then also don't forget our new weekly episodes coming out Friday, August 1st.

51:41Really excited about those, the rich habits radar as we're calling them. And it'll be a breakdown of the week's biggest headlines and happenings that are moving your portfolio in real time. Yeah, I'm so blessed and grateful of this podcast in the community we built because, you know, we had a bumpy road for the last week or so. And it really makes you realize how important all of this stuff is. And so I'm very grateful for you, Austin and Christian and the whole team, but also the crowd and the audience that we've built around this message that personal finance is personal. And we are here to help guide all of you in every aspect of business mindset and finance that we can because they don't teach it in schools.

52:25And for us, it's just a wonderful, wonderful thing that we get to do each and every day for all of you. And we thank each and every one of you for stopping by, giving us those five-star reviews and sharing with friends. It's one of my favorite things that I get to do every day. And we so appreciate all of you. Yeah, this episode is one of those episodes that you should go share with your friends. If you know any high earners, if you know business owners, if you know people out there that need to save money on taxes, share this episode with them. Say, hey, these are some interesting strategies to consider.

52:54If you've not seen them already, go listen to the Rich Habits podcast to do a good job breaking that down. We would appreciate you. As always, thank you all so much.

53:30insurance company and affiliates excludes massachusetts and have a great start to your week