Welcome, BoomXers. Let's throw out the old playbook. It's time to tear down the traditional way of looking at your life and money. And leverage the laws of money to our advantage. That's right. There are laws of money and those who learn and leverage the laws of money. And sometimes win big. Stay tuned as asset protection attorney, Darol Tuttle, educator, and leader of the boom X nation shows us how.
Beginners, investors, entrepreneurs, fellow attorneys. Are you ready? Are you ready? Let's arm this bomb. Now here's the Boom X Show, the laws of money.
Welcome back. The topic today is taxes and death. Death and taxes are the two certainties in life. Now I have a special friend to give me my sounding board, my friend, my at this point colleague in the podcast world. And her name is Michelle Mendoza and you have met her before on the prior episodes about limited liability companies. Michelle, how is that going? Do you did you follow the steps I laid out for you? Yeah.
What we're doing right now is working on some of the nuances lately. Yeah, that's right now, I'm going to take you back in time if I can figure out how this fancy machine works on my desk, I'm going to, I'm going to push a button. Yeah, it's a contraption. And if this contraption works correctly, it will generate sound that I hope you can hear. And when you hear this sound, I'm wondering if it will take you back to your childhood, the way it takes me back to the child.
And then once you hear it, I'm going to ask you if you can identify it. And then we're going to see if we can understand about something a little bit more about the American political system. Are you ready? Here we go. I'm ready. Let's play the game. You sure. Got climb. A lot of steps to get to this Capitol building here in Washington. I wonder who that said little scrap of paper is. I'm just a bill. Yes. I'm only a bill and I'm standing here on Capitol Hill. Yeah. Yeah. Whatever happened to school house rock. That's school house rock. It just brings you back to circa 1970, whatever it was.
And I actually think about that quite a bit as an attorney and if you're unfamiliar or you probably, if you were in your thirties maybe or younger, you would have no idea what we're talking about, but there's all these musicals coming out like Mamma Mia is a great musical. Hamilton is about Alexander Hamilton.
There's even one about Mormon the book of Mormons wouldn't it be great to have. In law school, there's three years of law school. The first year is called one L a musical of one L and it's basically like the preamble you just did. Songs about the law. Why not come on. If you're going to have one about the book of Mormon, you can have one about the constitution or the tax code.
That's what I'm saying. That's all I'm saying. No, you don't buy that think people ticket. I'm hoping that would make it less boring, but I'll give you this. You have a way of bringing it to, okay. Thank you for that. I don't, I do my best to make the tax code interesting. That should be my epitaph at the end of my life.
But with off mic, we've talked about, I brought you up to speed on these new tax increases that a fact the rich more so than the middle class. But, in the military we talked about like concept of blow back or the fog of war unintended consequences. I did just curious is it okay to tax the rich and is it really, 330,000 jobs might be lost. And all of these complications, but what do you think as a person who's not as immersed in it as I am. I'm trying to get some kind of rational, reasonable person to guide us.
It's really baffling in a way, because it seems that the marker for where we, what we consider rich, how do we really determine that? And it seems that Congress usually determines it's someone who makes a little bit more than me, I don't know how that works. Our tax code is as confusing to me as it was filing for my business license. There's a lot to it that I just don't understand and that if every one has to do it for it to be so complicated, It just seems a bit inane to me where I might be more in favor of a flat tax that just takes all of the guesswork and all of the deductions and all of the ways that big companies and people with lots of money can get out of paying taxes. But regular folks like me, we just don't have that power. I'm wondering if If we've just tried to a politicized taxes way too much, be the side of decide that those are the rich because they make more than me. And finally, if it wouldn't just be easier to simplify the tax code and do something like a flat tax, everyone pays 3%. Everyone pays 5%. Boom. Yeah.
The American tax system is, we have marginal tax brackets. And it's said to be progressive, meaning the more you make, the more your tax, which makes, like in sense of fairness, it's not fair for a super high net worth individual with hundreds of millions of dollars to pay 3%. Whereas a person who's living below the poverty line to, to pay the same amount, because the impact on the families' comfort support health and even their maintenance is just proportionately, so just much higher for the poor people than it is for the rich people. And you think even though the yes, I had a small percent it is different, but at a 3%. Okay.
There's no way 3% is going to finance the government like that 3%. No. One's going to argue with 3%, tax brackets are starting it. However, when you have people who are extraordinarily rich, that are pretty much paying nothing. We walked through that with our last president. Really? How much are you paying for your taxes? This is the guy that tried to deduct. This is the guy who tried to deduct $52,000 for hair product. First of all, there is no provision in the tax code that allows a deduction for a hair product period. Second of all, not 52,000. A lot of hairdressers might disagree with that.
Let's go tax fraud. But now I don't mean to denigrate anybody. That to me was just a little bit humorous. In tax laws, there's that expression, pigs get fed hogs, get slaughtered, meaning, know what your deductions are and you have a moral and even a legal duty, really to leverage lawful deductions. And some people are more aggressive on that than others. For example, in business, as you will learn, once you get this thing filed is there is a meals and entertainment deduction, but it's limited to, it's not a hundred percent deduction. It's a 50% deduction, but a business people go out and they schmooze other business people business to business, networking, trying to land deal in restaurants and shows and re recreation. There's a deduction for that. Now me personally I've always been very conservative on meals and deduction because usually the guys I was trying to schmooze were also my friends. We're doing business together and we're going out and watching the game.
We're not really talking about business except we're complaining about something, but other business owners would be very aggressive about that. And I know, I personally believe that a deduction for hair product. It's just there's no category for something like that for the president to claim, not for the president, not for the president, anybody else like me, I'm completely bald.
Maybe that would help, but what's I'm not sure this is very relevant, but I took a class in law school that was taught. Cyrus Vance Jr. Now Cyrus Vance is a famous name. He was a democrat and he was appointed and Google it because he was thinking he's on the Kennedy administration for years and years.
He's like a famous lawyer. His son is Cyrus Vance Jr. And he was a very bright man. And we, I felt very lucky to have this course taught by him. And I was one of his students and he was known for being the Tylenol murder prosecutor. And I don't know if you remember this, but back in the late eighties, early nineties, somebody was putting poison in Tylenol pills. You remember that case? Oh gosh. Yeah.
And the grocery stores, like you just go in and buy Tylenol and somebody had poisoned it and they tracked this guy down. How you can find a DNA, I don't even know, but he was the prosecutor and successfully prosecuted the defendant in those cases. He's now the prosecutor in the Trump tax evasion cases in New York city in that state law, not federal law.
And I'm like, man, I that's the one guy I wouldn't want prosecuting me for tax fraud. I'll tell you that. But when I look at these tax proposals, we're talking about my wheelhouse is estate tax, mostly estate. Tax capital gains tax to some extent. Now, Michelle, when you buy a stock and let's just assume it's not in your retirement account, so you need to get your IRA or your 401k or your SEP or your 403B.
Those are all employment-based retirement savings accounts that have special treatment under the law. And the way it works is if you make a investment within certain parameters into your retirement account, you get a tax deduction for that. So if you make a hundred thousand dollars and you are allowed to invest $13,000 into your SEP self-employment pension, which is probably something that you should think about with, for your business, then you can deduct $13,000 from your overall gross income to a derive at your taxable income.
So now you've made this contribution, so you didn't make a hundred thousand, you made a hundred thousand dollars, but your taxable income is reduced to 87,000. So that's an example of tax deduction. What's amazing about it is the gain that occurs inside of that account is also tax deferred. So if you bought a stock inside your CEP, Microsoft, apple Starbucks, Costco, whatever. And it appreciated from a hundred dollars a share to $150 a share if it was in a different kind of account and you sold it, you would have to pay a tax and income tax capital gains tax. If it's inside of the retirement account, you do not. And so you've got compounded tax deferral inside of your retirement account. And so one of the reasons why I'm on. On you about getting your business formed is so that you can set up one of these retirement accounts for yourself and start making contributions. Now I know what you're thinking.
You're probably thinking, yeah, but I can do that even without a business. I can do that with an IRA. That's what you were thinking, right? The sounds you were hearing well okay. But the point is you can make far larger contributions. Yeah. What? I don't even know because I've always had a retirement account inside of my business, so I don't even really know what the IRA contribution limits are. I think they're low, like 3000, 2000 3 or 4. Look, Google that very low. However, with something like a self-employment pension, I can make contributions that has the exact same tax deferral and tax deductions against income as the IRA, but can contribute far more into the retirement account. And w I'm trying to say in a polite way, these tax proposals are significant.
Now, if you're going from something that was 28% for some high net worth individuals, up to 43%, that's real money that's an astounding increase in tax for some people. Now you're not going into business to be poor. It seems like you're, it seems like some people were saying, I certainly hope not.
I'm not rich, so it doesn't apply to me. I know, but you're an American and Americans want to be rich. That's like what our goal is to be wealthy. And it just like understanding how these rules work is important and moving money into categories that aren't subject to this tax is a financially responsible decision, concede that. I'm waiting for your concession. Okay. It was demanded with me, I will give it to you.. No, but look, it's a hard topic. It really is. Do you think I would much rather play school house rock again? Another conjunction junction. What's your function? I was proud of myself cause I remember that one, remember conjunction junction what's your function but we can't make money. And we can't make money on tax savings, but we can avoid paying unnecessary tax to the government, especially when they're in this tax obsessed. This isn't, this is insane. I mean these increases for the record Michelle and I are pretty good friends and we have different political views.
I tend to be left of center. She tends to be of me. It doesn't mean she's conservative, but on many issues I'm more liberal. However I'm also a fiscal conservative, which I know doesn't make sense, but think about it. I'm a business owner, first of all. So all business owners are concerned about the fact that businesses pay higher taxes.
For example, the tax proposals will increase the corporate tax rate. I had it right here. I didn't memorize. Just get, be patient. I'm going to find it. The corporate tax rate to 28%. I'll find it before the podcast is over. That's a substantial increase in the taxation on a C Corp for example. All business owners, we don't like that because what we think we can do is we can take that money that the government's going to take from us and we can invest it better.
This proposal will have an effect on the economy in some ways it's a negative effect in some ways, for sure. And it's just all about policy like this. Are you curious what these tax increases will pay for? Like what the idea is? We can know what the ideas, but with all of the pork, do we ever really know? But overreaching, let's talk about what are they meant to pay for? Yeah, so one is infrastructure like that. That's like the big thing. So roads, bridges, whatnot. And I'm old enough to like, I used to believe everything, I've read it.
I believed it. And now I just older and crankier and so on. And what I've noticed is all of a sudden something becomes a fat and I conducted a a webinar for some of my clients, and I was talking about the recession because the government has been printing money four years ago, when COVID broke out, the government just started sending out stimulus checks. And so all this money is going out the door. They're increasing the monetary supply of the United States government. It's not as if Congress and the president. Just took up paper routes made money and they're giving it to the American people. They just made more money and send it out. That caused inflation and then interest rates were down at zero. All this has to be paid back, but there is no such thing as a free lunch right. Now, right around that same time all of a sudden, everyone was concerned about infrastructure. I'd never heard that before. Like I hadn't heard that our roads were bad. I've been on I5. You want to see bad roads coming to Puerto Rico.
When I drive on roads and Florida, and I drove all the way from the United I've drove from Seattle Washington down to Miami. I didn't see any bad roads. I didn't see any bad bridges, but everybody believes the infrastructure is a problem. Now, all of a sudden, you remember the Reagan days when there were $13,000 toilet seats in $15,000 hammers. Oh my gosh. Yeah. That was a real thing. You would see a $15,000 hammer is coming from the Pentagon and suddenly we're going, huh? What are our tax dollars? I can guarantee you, it wasn't a $15,000 hammer. It was a $5 a hammer and a 4,900 blah, blah, blah. Going to Ecuador to the freedom fighters.
That's like government pride was what that was now for this is infrastructure, but if you read the proposal it's also soft infrastructure. And so I'm like, okay, hard infrastructure I get all of a sudden Americans believe that bridges are bad. I've been over the narrows bridge a lot. I, it looks good to me. And then soft infrastructure is things like medical and vision benefits under the Medicaid program. So one of the things is a Medicaid expansion and that's how we keep the people of America health. And that's what we're spending the money on. And it really is a monetary battle that is related to hard infrastructure of America, but also the social structure of America. And, it could go down in history is one of the most, it could be like remember Lyndon Baines Johnson, great society after Kennedy was killed men. For example, Medicaid was invented after John F. Kennedy was killed. There was so much sympathy for the president and that Lyndon Baines Johnson had so much good will.
Never let a good tragedy go the way. Yeah. He's going to ride that pony for sure. And he did a good job because. Think about American values it, so on one hand I'm a fiscal conservative, I'll share that with you. However, I'm also an elder law attorney, which is, a social worker like elder law attorneys are basically social workers. Cause we're trying to help people who are suffering. And there are I have traveled to countries, India, and I stepped over a corpse in the street in India. I've seen people with elephant Titus in this world. We don't have those kinds of values here in America. Now we don't, we considered an American diet to not let our disabled narrow elderly die like that. And, but it all comes at a price tag. This is a hard topic to get your brain around. I think what's going to happen from what I can understand is it's got to go through it's in ways and means committee now in the house. And then it has to go to the Senate. Some prominent Democrats are already talking about now it's going to be more like a 25% tax. So all of this is going to be scaled down quite a bit. And I don't know. It may not even go through, it impacts you and me because businesses will start. I don't know. It may cause I think my worry is just how fragile the economy is right now. We're just getting over a recession then, like businesses I've been given so much free money.
The stock market somehow, but others have, because they've been forced into obscurity. So what a weird time, were in? Yeah. That's the problem is consumer confidence and spending in some categories has gone up, but for the most growth flatlined or decreased in some categories, but the stock market went crazy because there was so much money pumped into the economy. They could go out and buy stocks and do all this stuff so that, so they're spending on the business side, but not on the consumer side. And that historically has been the formula for an economic depression, not a recession, but a depression. And now you're throwing in taxes on the wealthy and taxes on high net worth individuals and increased corporate tax. And the worry is that they'll just stop spending. And then we'll have a set point. Let me we need to get back to stock prices, for example, being related to actual production, I believe we're in a bubble. And so it'll be I can't wait to see what happens.
I've absconded to Puerto Rico, which is part of the United States, but there's no capital gains tax here. It's like a it's yeah, the corporate tax rate. I'm a partial expat. American businesses can move to Puerto Rico and pay for 4% corporate tax compared to the 28% that Biden's. Now I don't know about you, but if I could figure out a way in fact I have, that's one of the reasons I'm here over in Rincon, which is about, and stood up your couch because as I'm setting up my business and realizing how much I'm going to have to pay, I don't have to sit.
I got an air mattress. I'll just need your couch. It'll be fun. I don't know. It, people get worked up about taxes. And one thing that does bother me and then I'll conclude the most generous provision in the tax code is not in the income tax book, part of the book it's in the estate tax part, and it's referred to as step up in basis. And step up in basis that is a misnomer. It's not a step-up in basis. It's an adjustment in basis and here's the way it works. You're from Washington state and a lot of my clients in Washington state hood there's hood canal. And if you're not from Washington, pull up Google earth and just look at hood canal. It's on the Puget sound and the ocean kind of flows into this wonderful finger like, arm like the finger-like body of water. And a lot of people have built recreational cabins on hood canal or on the coast or wherever. There's no special treatment for recreational property, like a personal residence.
When you sell it, if you're single or married, you get a capital gains tax exclusion. There's no special category for other types of real estate, except for commercial. I guess you could do an exchange, but personal, there's not. Now, little old ladies of my clients. I can think of one in particular, woke up one day and she just decided I'm going to give my hood canal property that's worth a million dollars to my only heir, my nephew. She recorded a deed. The problem was when the son or nephew turns around and sells, it is going to have to pay capital gains tax. The amount that he's going to pay for capital gains tax is the difference between the amount she paid and the amount he sold it for.
So if you buy it for a hundred thousand dollars, that's called the capital tax basis, tax basis. When you sell it, that's proceeds and you pay a capital, get a long-term or short-term capital gains tax on the difference between in this case, a million dollars. So she bought it for a hundred and it was assessed at a million. So you're paying long-term capital gains tax on 900,000 using the techniques that she used. That rule applies to everybody. However, the estate tax code says, if you die and leave the cabin to your nephew, who in your last will and Testament who then turns around and sells it, his tax basis, adjust to the fair market value of the asset at the time of her death. Which means she bought it for a hundred thousand. If she sold it, she pick up against tax. If she waits until she dies and gives it to her heir, he can turn around and sell it the very next day. And his tax bases is fair market value pays no capital gains tax. It's astounding. It's the most generous provision in the tax code.
Now that provision is under attack by. As people are listening. Can you just give us all just a moment ago? Thank God for small favors. There's something good. Let's just celebrate that for a we have so much to go. Are you kidding me? Oh my God. Ouch. Again, could just that one small favor. Take that moment. Enjoy it. We can, I can get even more excited about it. There are 12 community property states in America, right. Now, those 12 community property. It means all the assets acquired after the date of marriage is part of the community, marital community, and each spouse owns an undivided. I'm gonna repeat that undivided equal share of the community. Now you would think if husband and wife bought a hood canal property and then sold it, they pay capital gains tax. Correct. Now what happens if they don't sell it? And one spouse dies does is step up and basis for his half undivided equal share, or is it for the entire asset?
In a community property state, because it's undivided, it's a complete step up in basis. Even the half that's owned, like the mental map by the spouse, that's still alive. So you buy it at a hundred, you sell it at a million. First spouse dies. There's a double step up in basis to the fair market value she can. The surviving spouse can turn around and sell it the very next day and pay no capital gains tax at all. However, if you live in Oregon, Oregon's not a community property state. It's not. California is Idaho is Texas is Wisconsin is Arizona, New Mexico. I think Hawaii, Idaho, they're all community property states. They would get this double step up and basis. Every other state would only have half of the assets stepped up. Do you know how to get around that? How do you get around that? Okay. So Alaska, believe it or not, it has is a quasi community property state. They can't make up their minds. And so you can actually elect to have property treated as a community property in Alaska.
So you could form a trust in Alaska that has its jurisdiction in Alaska with an Alaska based trust company. If you move real estate into it, the real estate becomes personal property. It's wrapped in an LLC. And even in a different state, have a double step up and basis. If you follow those rules, see my friend, if you understand the tax code, you can, you're not making money, but as compared to the guy who didn't do it, correctly, you're making money and it's guaranteed as mathematically.
Thanks for listening to another episode of the Boom X Show laws of money podcast, where asset protection attorney, Darol Tuttle breaks down the complicated rules of estate, retirement and even long-term care planning. You can listen to past episodes of the Boom X Show by going to boomxshow.com or subscribing right from your smart phones' podcast player.
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