Male Speaker: Would you like an opinion on a financial matter you're dealing with, whether it's about retirement, investments, taxes, or 401(k)s? Scott Hanson and Pat McClain would like to help you by answering your call. To join "Allworth's Money Matters," call now at 833-99-WORTH. That's 833-99-WORTH.

Scott: Welcome to "Allworth's Money Matters," Scott Hanson.

Pat: Pat McClain, thanks for joining us.

Scott: That's right. You know, we are halfway through the year.

Pat: Yes, yes, yes, yes.

Scott: I don't know if I'm just getting old. I don't want to be one of those guys, "Time goes by so fast."

Pat: "You know when I was young. Kids nowadays."

Scott: "Kids now."

Pat: "What's that music they listen to?"

Scott: Anyway, both myself and my co-host here before we start going down on tangents that we typically do, we're both financial advisors, certified financial planner, charter financial consultant, and we're here talking about financial matters, taking some calls and having a little fun with the program.

Pat: Questions about 401(k)s, investments, taxes, taxes, taxes.

Scott: No one wants to think about taxes mid-July.

Pat: This is exactly when you should be thinking about...you should be thinking about taxes all the time.

Scott: You know, it's hilarious. So, my 27-year-old daughter...it's fun watching your kids grow up, right? Because when they start paying their own taxes, and so she's self-employed, so she does quarterly taxes.

Pat: So, she feels it.

Scott: Yes. And so, this is a couple weeks ago. One of the things I appreciate, she's 27, she'll reach out for business advice quite frequently, "So, Dad, can you help me figure out the quarterly taxes?" So, I'm explaining to her how the concept works for these quarterly taxes. "This is just stupid," she says. I'm like, "Yeah, well, I mean, no one says taxes are...you know, there's some, like, great plan that someone sat down and let's figure out the best system of taxation. It's all been a conglomeration of a hundred years of taxes."

Pat: Scott, and later on in the show, I want to talk about this. I was in Norway visiting relatives and they have a wealth tax there. A wealth tax, and...

Scott: Which is Elizabeth Warren's...

Pat: I was talking to a business owner and he told me exactly how it works and it just...I was like, "This is unbelievable, how it works." And so, let's talk about that then.

Scott: I thought Norway is like one of the happiest countries on the planet.

Pat: Oh yeah. Most of them.

Scott: Most of them except for the employers. Anyway...

Pat: Well, remind me, we're going to talk about it because that is a tax and there's proposals for wealth taxes.

Scott: No, I do want to hear about that. It's a relatively small country, right, 7 million people, something?

Pat: And it's completely homogenous.

Scott: They don't have any immigration issues like the rest of Europe?

Pat: Very, very few.

Scott: That's close enough, yeah.

Pat: Yeah. Very, very few.

Scott: And a lot of oil.

Pat: But so, when we talk about taxes, back to taxes, we should be thinking about taxes in your portfolio all the time.

Scott: All year long. I know.

Pat: All year long. So, we're going to get to that, talk a little bit more about taxes, and then I'll share a little bit of my views of talking to business owners in Norway about a wealth tax, which I found just anti-growth and perplexing.

Scott: Yeah. Anyway, we've got Andy Stout, our chief investment officer is going to be joining us right now and chatting a little bit about what's happening in the economy and then we'll take some calls and have some fun on the program. So, let's talk with Andy Stout. Andy, thanks for joining us today.

Andy: Thank you.

Scott: So, I read just last week that Powell said, "It could take years to get inflation under control." Well, something along those lines.

Pat: Yes. And not even pre-pandemic, just to what he would consider, I've read it a couple places, "A reasonable inflation rate." Your thoughts?

Andy: He's probably right. If you look at where inflation is right now, it's still elevated and it's relatively entrenched or embedded in the economy, and it's probably going to take some time to get that back down to what the Fed targets as a 2% inflation rate. I mean, we've certainly seen some improvements in the supply chain. Energy isn't really a factor, but if you look underneath a little bit, what you see is that the interest rate hikes that Chair Powell has done haven't truly been felt by the economy because there's a lag effect. I mean, it takes a while to really get in there.

And then you got to take into consideration that employers, they've had a hard time finding employees, so they're reluctant to let them go, even though they see the writing on the wall, that the economy is slowing down. That adds to some wage inflation, and that just keeps inflation more in front of our minds and in the economy. So, yeah, it's going to take some time.

Pat: So, when you say that, right, so...I can see from an employer standpoint, which is, "I bet that it's going to slow, the economy's going to slow and I lay people off now, or, you know, get rid of underperformers to leave, if the economy doesn't slow, I'm going to be stuck, right?"

Scott: And the economy doesn't seem to have slowed much, right?

Pat: And it doesn't seem to have slowed much. So, if the economy does slow, do you think that would lead to mass layoffs? Would it all of a sudden, like, turn on a dime and we'd see, like we've seen in the tech sector, a significant downsizing? Although the tech sector hasn't had a significant downsizing, there's just been large numbers. As a percentage, it hasn't been significant. Would we expect to see that, a shrinkage in the employment?

Andy: I mean, you would see some for sure. Absolutely. The question though is, how much...I mean, if you just think about the past couple of years in the post-COVID world, you hear about all of these job openings, like 1.7 job openings to the number of unemployed people where employers just cannot find people to work. So, they may be more reluctant this time around to let those workers go and just, you know, suck it up with, you know, higher expenses, lower margins because they know it will eventually pass. And then when the economy recovers, they don't have to go and find those workers again. They already have them there. They might be judging whether or not it's more beneficial to keep the workers for now rather than trying to find new ones later.

Scott: Well, one thing we know, whatever market cycle is going to come is going to come and it's going to then be over and we'll have another market cycle and that will end and a new...So, I mean, no one can predict these things. And like Andy, I appreciate we just did the quarterly recap that you can find on our website, if you know how to subscribe to our newsletter, and it goes through the last quarter. But all the predictions about inflation and where the economy's going and no one gets it right.

Pat: And that's a question I have is, at the very beginning of this, when they talked about...a number of people talked about, even in the Fed, that inflation was going to be transitory. We said on this program itself, we doubt it's transitory because if a producer can increase their prices, they're reluctant to lower them again relatively. They're going to test the supply-demand, the resiliency of the consumer. Was that wishful thinking? In your opinion, was that wishful thinking at the time? Do you think they really believe that? Were they completely off base by using this term transitory?

Andy: Well, in hindsight, they were off base, but I think at the time it was so much emphasis on the supply chain disruptions where the Fed's thinking was, well, once the supply chain heals, these temporary prices from the raw inputs, you know, will start to at least normalize a bit. And the supply chain problems drug out a lot longer and that just fed onto itself causing more and more problems. So yeah, the Fed, I don't think you'll ever hear them use the word transitory again. It's a four-letter word now from the Fed's perspective.

Pat: Yeah. And actually, I think that was the first time we had ever heard it from the Fed.

Scott: Well, that was a political spin term, wasn't it?

Pat: It might have been.

Scott: Yeah.

Pat: Well...

Andy: It's just a fancy word to say temporary. That's all it is.

Pat: Yes, yes. So, we expect some rate increases in the near future, middle future, distant future, all of the above?

Andy: Yes, to answer your question. So, just to go back a second ago, you were talking about how people can never get predictions correct. I'll tell you, I was doing a seminar last week and I got one correct. I was asked if there was going to be a recession and I said yes. I didn't have to give any timeframe.

Scott: That's right. And Andy, so, in the last...we have just another moment or two here, but let's assume that we have a recession. What's that mean for long-term investors? Historically, what have we seen?

Andy: Historically, you do see stock markets decline prior to the beginning of a recession by a few months. But every single time the markets have recovered, and if you can pick that exact top in the market because recession is on the horizon, good luck to you. I will tell you though, leading economic indicators, which are data points that move before the broad economy moves, they've been signaling for a recession for a while now. I mean, the yield curve has been inverted for a couple of years. So, when you try to even time things based on that, I mean, you could have missed out on some pretty large gains. I mean, the market's had a pretty good start to the year so far. Had a little bit of roughness last year, but trying to, you know, time that exact top and then when to get back in, it's not going to pan out too well for most investors. Most people are much better off just riding the cycles, making sure you got the right mix of stocks, and bonds, and cash in your portfolio so you can sleep at night and weather the storm and enjoy the recovery.

Scott: Yeah. And making sure you've got enough money that's not tied to riskier assets that are...I don't say risky, volatile assets, things that fluctuate in price. Make sure you have enough cash to meet your needs in the next couple years, right?

Pat: So, you're not selling into a down market, right?

Scott: Yeah. Ride it out. So, hey, Andy, thanks for taking some time.

Pat: Appreciate your time and appreciate you being a team member at Allworth.

Scott: Yeah. And our chief investment officer. Have a great...I guess 4th of July is coming. So, enjoy that. You know, essentially with inflation, so I graduated high school in 1984. You were what?

Pat: '81.

Scott: Okay. So, that's when inflation was high, but it didn't really mean much to me as a young person. I remember my parents, my mom would go to different grocery stores because she would complain the price would go up day after day. But essentially then through college and then I entered to this industry in 1990 and since that time we've had a relatively low inflation, but it's always been an issue with our clients. Like, particularly if you're going into retirement, inflation could be the silent killer on you, right, because if you're not structured well for inflation, you're going to get poorer and poorer as time goes.

Pat: Your purchasing power is going to drop.

Scott: Right, if you have a pension with no cost of living adjustment.

Pat: Yeah. You'll feel good about your accounts because they're yielding more because if you're in fixed income, you're going to look at that right now, right? You're going to look that...

Scott: "Oh look, I'm making some money on my CD now."

Pat: "I'm doing this. Look how great I am." But your real purchasing power is going backwards, which is really what you're interested in, is purchasing power for your money.

Scott: And the reality is we are probably in an era...well, we clearly have inflation with us right now and probably in an era where we're going to have higher inflation in the next 20 years than we had the last 20 years.

Pat: Oh, you would think so. The last 20 years have been...well, obviously, since the great recession, I just think that the interest rates have actually been too low.

Scott: Well, we're seeing a lot of the hangover from that, so.

Pat: Right?

Scott: I know. Anyway...

Pat: Even during the time, you're like, how could...what happens is when the supply of money becomes so cheap, decision-making becomes poor.

Scott: Poor.

Pat: Right.

Scott: You see that with startups where they have tons of cash, they do all kinds of crazy things because it doesn't really matter because money's free.

Pat: Yeah.

Scott: Yeah. And same thing with personal, humans, we make those kind of mistakes.

Pat: Yeah. Yes.

Scott: Mortgage rate's so cheap, you end up buying a house that's probably bigger than you really can...

Pat: Because you look at the monthly payment...

Scott: Yeah. Until you have to...

Pat: ...how can you miss?

Scott: Until you have to get your roof replaced, right? All right. Let's take some calls. 833-99-WORTH is the number. If you want to join us, we'd love to take your call. We're in Ohio talking with Paula. Paula, you're with "Allworth's Money Matters."

Paula: Hi, Scott. Hi, Pat. Love your show.

Scott: Thank you.

Pat: Well, thank you.

Paula: [crosstalk 00:12:58.089] podcast every week.

Scott: Oh, good. Thank you.

Paula: I'd like to ask a couple of questions about withdrawal strategies from our investment income. Currently, we have...

Scott: Before you start, well, you know, when you bring that up, I was just thinking, a withdrawal strategy is so unique to the individual and the family. Like, if you had retired from the same company, it was five colleagues and had relatively similar lives, your withdrawal strategies could be completely unique to one another. So, tell us about your situation.

Paula: Okay. My husband is 73 and I am 63. We're both retired. We have a little bit over $4 million in investments. Currently, about 60% equities, 40% fixed. Our gross income without withdrawals every year between Social Security and pensions is around $92,000. And we're pretty big spenders right now because we're traveling a lot and we, you know, spent our lifetime savings. So, we spend about $225,000 to $240,000 a year. And a big chunk of that, of course, is travel right now.

Pat: Is that pre-tax or net of tax?

Paula: Which number?

Pat: The $225,000.

Paula: Oh no. That's after tax.

Pat: Okay.

Paula: Okay. So, historically what I've done, I've been retired for about six...oh no, longer, actually about nine years. My husband's longer than that, and I have always taken out of my brokerage account. So, I think what I'm focused on or concerned about is that $4 million, about $600,000 of that is in a brokerage account, $2.7 million is in my IRA, and the $580,000 that's remaining is in my husband's IRA. So, even though with the SECURE Act, I don't have to withdraw with an RMD until I'm 75, that's 12 years away. In the past, I've always taken out of my brokerage account and just paid taxes on the capital gains. But I'm getting a little nervous about that number increasing in mine, and I think I missed the window to do Roth IRA conversions already. So, I'm wondering if I should start withdrawing slowly from my IRA in addition to taking capital gains.

Pat: So, how much are...

Paula: Go ahead.

Pat: So, how much are you actually, on that brokerage account...So, you've got $92,000 in gross income from your pensions and Social Security. So...

Paula: Correct.

Pat: ...in order to get to the $225,000, you're probably drawing out two and a quarter a year out of the brokerage?

Paula: Well, my husband has to take RMDs. So, you know, that's been another $30,000 every year and this year it'll be around $21,000. So, I kind of want to make up that money and I'm trying to contemplate, I'm talking to my accountant. Should I be taking, you know, my capital gains, take some out of brokerage and then, you know...?

Scott: How much capital gain have you been realizing the last couple years on an annual basis?

Paula: Let's see. I've been anywhere from $12,000 up to $50,000.

Scott: So, some years you've probably paid no capital gain tax because you could have...as a married couple, you could have about $90,000 of adjusted gross income before there's any capital gain tax. And if your gross income is $92,000, you figure a standard deduction, you've probably had about $20,000 or so of capital gains with zero tax on it.

Pat: Yeah.

Scott: So, you most certainly should be pulling out of your IRA.

Paula: Okay.

Pat: The question is how much, and it looks like...You know, I wish you had called the show a couple years ago.

Paula: Me too.

Scott: Well, whatever.

Pat: And this goes...

Paula: I missed that window for those conversions. Yep.

Pat: No, well, you might have...Conversion or not conversion, you may have been better off in years past and that's what...you know, when we started the program, we talked about tax, tax, tax. Tax should always be on your mind in your investment points.

Scott: That's funny, we did.

Pat: Right? Not knowing that this call was coming. But this is an example.

Scott: But the reality is, we've got around $20,000 of capital gain that have zero capital gain tax. If we either take a withdrawal from the IRA or do some Roth conversion or combination of the both, then we're going to be paying 15% capital gain tax on it.

Pat: But I'm looking at...

Scott: I understand. I'm just throwing that one thing out. And it's a very small amount, $20,000...

Pat: That's right. We're looking out multiple years. So, if a brokerage account was larger today, other than $600,000, you want to use that brokerage account for tax strategies around the edges.

Scott: Yeah. Absolutely.

Pat: Right? So...

Scott: Yeah, $3.3 million in retirement plans that all have to be taxed one day.

Pat: Yeah. So, my guess is that you're probably going to end up pulling $200,000 a year out of that IRA and maybe I would actually use the husband's IRA first. No, I would use your IRA.

Scott: So you have less required minimum distributions.

Pat: Less required...you have more flexibility down the road.

Scott: Yes, I would...obviously, you've got to do required minimum distributions on him. I'd probably just do the required minimum.

Pat: On him. And...

Paula: That's what I was planning this year, $21,000.

Pat: So, the answer to your question is you absolutely...

Scott: You didn't have a required minimum distribution last year, is that correct?

Paula: Yes, he did. Because he'd already been 72.

Scott: And your gross income of $92,000, does that include the required minimum distribution from his IRA?

Paula: No, that does not.

Scott: Okay. So, what I discussed about capital gain taxes, it's a moot point because we're already at the point where...

Pat: So, to go through the analysis, the answer to your question, yes, the money should come from the IRA. In fact, you use that brokerage account around the edges to stop yourself from going into a higher marginal rate. But my guess is if you sit down and did the analysis, in order to get to what your income needs are, which by the way, $200,000 on $4 million, easy, easy numbers. So, the distribution as a percentage is fine, especially if you've got a 60/40 portfolio. Then the question is, how much from that IRA? My guess is it's going to be between $175,000 and two and a quarter, Scott?

Scott: Probably because you don't want to get to the point where you draw down that brokerage account to where $600,000, now it's $400,000 now it's $200,000, and now you're thinking...I mean here's the reality, right? So, I appreciate the fact you guys are living your life. You're 63, your husband's 73, very statistically strong chance that he's going to predecease you. Right now, my guess is you're both in pretty good health, that's why you're out traveling. At some point in time, that's going to deteriorate. That's how life works, right? And so, I think it's wise that you're enjoying doing what you want to do today. But it's probably taken $300,000 a year of gross income...

Pat: That's right. And so...

Scott: ...to generate that, which is...

Pat: What I would do is I would work it up to the 24% marginal rate before it hits to the 32%.

Paula: Okay.

Pat: And so, what...

Paula: And don't concern myself with IRMAA because you know, I'll get bumped up in IRMAA for him.

Pat: Yeah. If you want to worry about that, but you're worrying about the wrong thing, right? We had this conversation with someone that called the show...

Scott: In the last week or two.

Pat: ...a couple weeks ago, which is he was so focused on this one thing, he missed the big picture. You couldn't see the forest through the trees, right. Just focused on this one thing. That IRMAA, look, you're going to pay it, too bad. Too bad. What we're talking about is tax ramifications over your lifetime...

Scott: You've got $3 million that's going to be taxed somewhere between 22% to 37%, assuming tax rates don't go higher in the future for higher income. And if you don't touch your IRA by the time you hit your required minimum distribution, 75, I mean it's going to at least double by then, right? Now, we're talking about $5 million required minimum distribution, a couple hundred thousand just under required minimum distribution.

Pat: Yeah. So, without sitting down and doing the analysis, my guess is it's going to be between 175, maybe even 250, coming from the IRA. What you want to do is try to keep it in the 24% or lower marginal tax rate.

Paula: Okay.

Pat: Right. By the way, beneficiaries on the IRA, who are they?

Paula: The beneficiaries, he's mine, I'm his, and then it goes to our trust.

Pat: And do you have children?

Paula: Yes. One child, one grandchild, one great-grandchild.

Pat: Okay, perfect.

Scott: And by the way, so the IRMAA, which is how much extra we have to pay for Medicare, for married filing jointly, if your just gross income is roughly under $200,000, you just pay whatever the standard Part B premium is, which is whatever it is.

Paula: Yeah. I think it's 190 or something was the number, yeah.

Scott: If it's between 200 and 250, you pay 1.4 times that amount. If it's between 250 and 320, you pay 2 times that amount.

Pat: Which is the marginal tax rate. If people focus on this IRMAA so much, what are they...? I'm thinking about taxes over your lifetime.

Scott: Yeah. So, let's call it 200 bucks each. So, you're paying $400, right? So, let's assume you had it so your income was up to $320,000, and instead of paying 400 bucks, you're...So, you'll end up paying about $5,000 more a year in income taxes. But when you've got $3.3 million that over a third of it can be taxed, over a million dollars in taxes, we're talking. So, we're trying to balance those two. And that's to your point, Pat. It's like don't spend too much time focusing on that.

Pat: I've had this conversation with clients, which is, look, if you want...

Scott: People...no one likes paying...well, and...

Pat: Of course, it's...

Scott: And you can have people with very high net worths that have their incomes under $200,000, right?

Pat: Oh, yes.

Scott: Like we're seeing here. Yes. Very common in retirement.

Pat: Yes. But as a client once told me, they always fly first class because they know when the kids get the money, they will.

Paula: That's right.

Pat: Right. So, what great trips have you gone on? What's the best trip you've ever been on?

Paula: Oh, truthfully, we're in love with Alaska.

Pat: Oh, I do like Alaska.

Paula: We're going to go again next year, third time. I mean, we've done a lot of the national parks. I mean, we have just the most beautiful national parks here. I just...

Scott: Do you have a motor home?

Paula: No, we don't.

Scott: Oh, you don't.

Paula: We fly, and...

Pat: So, there's a great book called...

Scott: Pat's read every book under the sun. Your next life, you should be a librarian.

Pat: "Great Lodges of National Parks." And they actually talk about the history of the lodges in national parks. So, Crater Lake, Yellowstone, Zion, all national parks, these great lodges. Great beautiful, coffee table book. If you haven't read it, pick it up. It'd be right in your wheelhouse.

Paula: Oh, great. Thank you for taking my call and thank you for the information.

Pat: Oh, thanks, Paula. I appreciate the call.

Paula: Okay. Bye-bye.

Scott: I love going to national parks, but they tend to be so...like in the main areas, they're so crowded in the summertime.

Pat: Yes.

Scott: And they're not building lodges like they used to build. That probably is kind of an interesting...they're all about a hundred years old, right?

Pat: Oh, yeah. They're...

Scott: And all these big beautiful log...

Pat: Yeah. I've stayed in many of them.

Scott: Of course you have, Pat. In addition to your travels to Norway and other Northern European countries. Look, are you done? Well, it's funny, like, well, I've lived in the Sacramento region 30 years. Yosemite is a less than three-hour drive. And I've met people that have never been there. They've lived here their entire lives. And I'm thinking, look, and if you don't have the money to stay for...like, get up at 4:30, drive down, enjoy the day, and drive home.

Pat: By the way, the lodge at the Ahwahnee in the National Park in Yosemite, fabulous.

Scott: Oh, really? You think so?

Pat: Yeah. Not the rooms themselves, just the open spaces, the common areas.

Scott: Yeah, I agree with that. We got to take a quick break. We'll be right back.

Male Speaker: Can't get enough of "Allworth Money Matters?" Visit allworthfinancial.com/radio to listen to the Money Matters podcast.

Scott: Welcome back to "Allworth's Money Matters," Scott Hanson.

Pat: Pat McClain. Thanks for sticking with us. Although, if you're a podcast, I don't know where you would've gone. So, I went to Norway.

Scott: Well, it could have dropped off.

Pat: That's true. In which case, it wouldn't matter. So, every year I do a family vacation. My kids are all out of the house and live in different areas. And I have found that if you really want to spend some quality time with your adult children, they will show up for...

Scott: Well, a trip to Europe. Come on. That's a pretty nice deal.

Pat: Yes, yes. And so, my wife and I...

Scott: You don't always do the big trips like that though, you...

Pat: No, no, no, no. Yeah, I mean in the States too. But my wife's brother lives in Norway and we have never visited him there, and he's lived there for 30 years.

Scott: Hence, you don't know always take these big trips.

Pat: That's right. And I have a niece and a nephew that live there. So, my wife and I and two of my children went to Norway, and then the others joined us in Iceland for a couple days as they could only get so much time off. So, I was in Norway and my nephew and niece, one works in banking, the other is a business owner, and his mother, my brother-in-law and his ex-wife, but my nephew's mother runs a fairly decent-sized company in Norway. And so I was asking about this wealth tax and they described it to me.

Scott: How wealthy do you think this family was? And what's the relation again? You lost me.

Pat: So, it's my brother-in-law...

Scott: Your wife's brother's...

Pat: Children and his ex-wife owns a business together. So, the kids and mom own a business together. Successful business. It's been in the family for 35 years, multi-generation business.

Scott: Got it. Got it. Got it.

Pat: Started in the fishing industry and moved into other areas. But...

Scott: What kind of fish? I'm joking now. Okay.

Pat: My guess would be cod. So, anyway, upper 10%, but my nephew, I was asking about the wealth tax and he said the wealth tax on businesses is a predetermined formula based on revenues and assets and has nothing to do with profitability or EBITDA, earnings before income taxes, depreciation, and amortization. Nothing to do with it. So I said...

Scott: What happens if you have a bad year?

Pat: They borrow money in order to pay the wealth tax. And this is how they described it. So, it's a formula that you would think that the...

Scott: So, I'm thinking you're a business. You get later in the year, it's now October. You're thinking, I'm not going to have much in the way of profits this year. I've got this tax due, and the only way to reduce my taxes is to lower my revenue. I'm going to go to my big customer and say, "Hey, can we hold off on delivery from December until January?"

Pat: So, and there is a little bit of a profit component, but it's not the major component. So, there's a formula that is applied to your companies that does this wealth tax. And so he said what happens is that businesses start in Norway but they don't grow in Norway. They move to other European countries that don't have the wealth tax. So he says it really stifles innovation in Norway itself because of this wealth tax. So to the point that...

Scott: Are there any big Norwegian companies besides Norwegian Cruise Lines?

Pat: Absolutely. Oh yeah, there's some very, very large Norwegian...but it's not a very big country either.

Scott: I mean, global companies out of Norway?

Pat: Yeah, there's a number of them.

Scott: That are still domiciled in Norway? I can't think of any.

Pat: Yeah. Hansen...well, it's not a big one, but Hansen Helly is there, which is a...

Scott: Ski clothing.

Pat: Ski clothing.

Scott: Outdoor clothing.

Pat: But the...

Scott: Expensive clothing, by the way.

Pat: There's a couple other ones, but most of their revenue, 58% of their exports have something to do with oil. I mean, it is blessed with oil.

Scott: That's how they can get away with losing companies because they got all this oil.

Pat: That's right. That's right.

Scott: Do they have something like the fund that Alaska had or has or...?

Pat: They do.

Scott: Yeah. Well, you're resident, I mean, think about...

Pat: Yeah, but the taxes are...I mean the taxes, it's a very expensive country to live in. The taxes are quite high, but I tell you, it's absolutely beautiful. The roads are perfect. The transit system's perfect. I mean, there's no homeless you could see. And so we talked about socialism.

Scott: It's too cold to be homeless in Norway.

Pat: Okay, Well, it was beautiful when I was there.

Scott: Did it rain?

Pat: Yeah, it rained a little bit. Because there's proposals in California to start a wealth tax, and I thought to myself...

Scott: Well, and it was on the national stage until a couple...we haven't heard much in the last couple years. But this, it's going to pop back up.

Pat: This can take so many different flavors. So, when people say wealth tax, I always thought, "Well, they're going to tax someone's value of their portfolio." But then I start thinking...

Scott: What's the value?

Pat: What's the value?

Scott: And what if you don't have the liquidity?

Pat: And what happens if your value of your portfolio falls? Let's say, start a company, and the government decides it's worth a hundred million, and then the next year it's worth $50 million, could you go back and recapture those taxes that you paid? And the answer in Norway, according to my nephew...

Scott: Is no?

Pat: No. No. Once it's paid, it's paid.

Scott: So, your profits are declining, let's say your costs skyrocket or whatever. So, your profits are shrinking and shrinking. Your revenue number is still there. Maybe it's down a bit, but it's still...you're paying a tax. Your business is slowly dying.

Pat: That's right. But once again, it's not all revenue. There's other parts. It's assets and profitability. But you cannot make money. You can be losing money and still pay a tax on your wealth. And I'm like, "How do they come up with the money? If I am a small businessman, how do I come up with the money?" He's like, "The banks lend it."

Scott: This reminds me, Pat, of...this is probably 10 years ago. I was in Spain. [crosstalk 00:32:20.055]

Pat: Just for the listeners. I didn't grow up with a silver spoon.

Scott: No, no.

Pat: And I waited tables all the way through college. So I'm not apologizing to...

Scott: We camped. We camped. We camped as kids, and if we were lucky on the, like, last night, we'd stay at a Motel 6, be living the dream, man. Living the dream. So, I'm not apologizing to anyone. So, my point is, it was a cycling trip in Spain and there was a young woman who was our guide. She was early 30s or something. And I was talking to her and she had a degree in graphic design. And she was doing...she said some freelance work, but she quit doing the freelance work because she couldn't afford to do it anymore. And I mean, it's like, what do you mean you couldn't afford to do it? Like, I'm thinking, you're a leader on a biking trip, so you probably enjoy doing that for lifestyle reasons. Why couldn't you just do a little...?

Pat: On the side, whatever.

Scott: Five hours a week or whatever, right, doing some graphic design for people you know. That's the kind of thing that happens in the U.S. And she says, "Well, if you're self-employed, you have to pay a self-employment tax." I said, "Well, we have self-employment taxes in the U.S. as well based upon your profit." And she says, "No, it has nothing to do whether you have any revenue or not. If you sign up to be self-employed, you have to write a check every month because it covers some of your benefits, like your medical. So, automatically you're writing a check to the government whether or not you have any clients, any income, any revenue, any profit." So she says, "So, I can't afford to be a..." And I'm thinking, in Spain...I don't know what it is today. But at the time, if you look at the unemployment rate of those under 30 was like 30%. I mean, it was astronomical.

Pat: And tax code stifled innovation.

Scott: In a massive way.

Pat: Not only innovation, motivation.

Scott: In a massive way.

Pat: And so, when we think about taxes, there's a degree of social engineering that goes into all our taxes. Why is your mortgage deductible? Who said that? Why are credit cards used to be deductible but your rent isn't, right? Why is that? Well, that's social engineering. So, anytime they come up with a new tax proposal, I always ask myself, "What are the unintended consequences that I'm not even...?" And then you think about it, "How is this going to be good or bad for the economy over the long term?"

Scott: Yeah. Yep. Well, it's where we...

Pat: It's a good thing to think about next time when these...They're going to come back up again. The wealth tax is going to come back up. All that stuff's going to come back. Anyway, let's go to the calls here, take some calls. We're in California talking with Tom. Tom, you're with "Allworth's Money Matters."

Tom: Hi, Scott and Pat.

Scott: Hey, Tom, what can we...?

Tom: How you doing?

Pat: Good. What can we do for you?

Tom: Thanks for taking my call.

Pat: Our pleasure.

Tom: I just filed my 2022 taxes and ran into a little problem. I'm hoping you guys can help me out or at least point me in the right direction. And you may have listeners in your audience that this applies to as well. So, going back a few years, when I had a mortgage on my house, I used a tax accountant to prepare my returns. And after paying off the house, I switched to using TurboTax because I didn't itemize again. And, you know, I was using, you know, standard deductions. And it works fine if you take the standard deductions and don't itemize. Well, after COVID and after the tax laws started to change a lot, in two of the last three years, I've had trouble with the Fed and state returns being rejected back to me for rework through TurboTax. And these are still, they're still really straightforward returns, but...

Pat: What kind of errors?

Tom: ...I don't have enough expertise. Well, this last one was missed call on my team's part where we put too much into a 401(k) and an individual IRA. So, it was over a limit. Now, I'm at the age...

Pat: How much did you put in?

Tom: Yeah, I'm at the age where I can make makeup contributions. So, I had like 15% in my 401(k) and I put 7% in my individual IRA and 7% in my wife's IRA.

Pat: What's your income?

Tom: About $130,000. See, it should have been safe.

Pat: That's right. And I don't know why that would be flagged. You didn't do anything wrong there.

Tom: And I don't understand it either. And so kind of here's coming to my question is, you know, I'm tired of getting these things rejected and not really having a source to go to. Once you kind of sign up for TurboTax, you're kind of getting a robot doing your taxes.

Pat: That's right. That's right.

Tom: You just put in the information and it just spits it back.

Scott: And you don't know the questions to ask? I mean, they ask a lot of questions in fairness. Right?

Pat: They ask foreign income, all kinds of questions, esoteric oftentimes.

Tom: That's right.

Scott: Yeah. I don't understand why you're...

Tom: They aren't specific. They aren't specific about why they got kicked. They're very vague. So, I have to do three and four rounds of reworking the taxes from scratch. And...

Scott: So, here's how I avoid that.

Tom: Yeah.

Scott: I've had someone do my taxes since I was in college. In college, I remember I hired my professor because he had a tax business on the side to do my taxes. I had a little tree trimming business, and I've hired someone to do my taxes, and I've got a degree in finance. I took a course in income tax. But the challenge is like, and there's been correspondence with the IRS over the years on a variety of things. That's the last thing I want to deal with is figuring out how to deal with the IRS. I'd rather have someone...and oftentimes these accountants had to spend time as an agent with the IRS. They know the system. So, what might take me six hours might take them six minutes.

Tom: Exactly.

Pat: Yeah. So there's nothing that you said that would cause me to think that your tax return should be rejected. Nothing. And I agree with. So, my wife who is an accountant by education, and my daughter just did my daughter's taxes together. And...

Scott: My kids used Turbo Tax or something along those lines. And I was actually proud of them, my adult kids, 27, 25, they both did their taxes without even talking to me and completed them themselves. And maybe they're actually growing up a little bit.

Tom: Well, that's the hope, isn't it?

Pat: Well, I don't know. I don't know. I would just bring it down to a little local shop and pay the 300 or 400 bucks and, you know, just that's...you know, or try something different than TurboTax. There's a bunch of software programs out there.

Tom: There are other software programs and, you know, I said two of the last three years, I've gotten them kicked through TurboTax, but in between there, I tried H&R Block and I felt like they really didn't get enough information from me.

Scott: Well, I don't want to make any comments about any big tax companies, but there are tax companies that will literally hire people in the fall, train them on income taxes and have them work the tax season helping people do their taxes. So, if I were you shopping for an accountant, I definitely wouldn't want to go to the major, one of the big four accounting firms because they might not even want to take you. And if they did, they'd cost you a fortune, and I wouldn't want to want to go to one of the lower-end ones when there's someone dressed up, patriotic costume on the corner. I would probably look for someone in my community, a local CPA, two or three or four accountants all have a business together. That's the kind of firm I would look for.

Tom: Yes. And I tried that and I got the things that...they weren't interested in my taxes because I just don't have enough going on.

Scott: Well, you do now.

Tom: They like to do itemized. Well, apparently now, yeah. I want to prevent this from happening.

Pat: I understand. And we have no idea why it happened. So, I would...And quite frankly, you felt that the people at H&R didn't ask you many questions. There are not many questions...yours is pretty straightforward. There are not a lot of questions.

Scott: You didn't have multiple employers, did you?

Tom: No, I didn't.

Scott: Okay. Because sometimes you can exceed the 401(k) limits if you contribute to employers.

Tom: Yeah. And the problem with this past year was we did make a bad call on over-sheltering money. I had money that came in and I wanted to shelter it so I put it in traditional IRAs, and apparently I went over some limit and...

Scott: Well there, okay, now there's new information you just threw our way.

Tom: Well, I don't have access to that. I thought we were safe.

Scott: You contributed to an IRA when your income was too high. Unless it was a non-deductible IRA?

Tom: Is that or did I actually shelter too much in the 401(k)?

Pat: You said 15%, so that doesn't sound like it.

Scott: My guess is something...I hate to say it, Tom. My guess is there's something on your end that wasn't quite correct and that's what happened. But I'd hire a good CPA at a kind of medium-sized firm and I think you'd be well served.

Pat: All right. Well, this is the end of our program, unfortunately. Time always seems to blow by awfully quick. But anyway, it's been great having everyone with you. We appreciate the program, appreciate the opportunity to be here. And hey, everyone enjoy your 4th of July. See you next week.

Male Speaker: This program has been brought to you by Allworth Financial, a registered investment advisory firm. Any ideas presented during this program are not intended to provide specific financial advice. You should consult your own financial advisor, tax consultant, or estate planning attorney to conduct your own due diligence.