Year-End Tax Planning for Traders

Tax planning is very tricky this year with the fiscal cliff. Most people hope Congress and President Obama will act soon—after the November election and before year-end—to bring clarity to the fiscal cliff, especially making a decision about the crucial Bush-era tax cuts. In this interview with trader and investor tax expert Robert Green, CPA, we discuss the several things traders can do to minimize their taxes this year and what you need to know about how taxes will change come January 1, 2013. We also discuss trading within a business entity (LLC or S, or C-Corp) and the basics of choosing which entity to form.

Tim Bourquin: Hello everybody and welcome back for another interview for a Trader Talk Podcast. Thanks for joining me for this. Today, it's Robert Green. He is a tax expert, a CPA. He speaks at The Traders Expo. He's going to be at the Traders Expo next week in Las Vegas. He's got a couple of sessions there we'll talk about in a little bit.

But I wanted to get Robert on the phone because I always like to have a phone call with Robert at year-end to talk about what's coming in 2013 and things that maybe you can do before the end of the year and things to think about, start thinking about for next year as well. So first of all, Robert, thanks for joining me on Skype today.

Robert Green Thank you very much, Tim. Good to speak with you again.

Tim Bourquin: Well, Robert is trying to clean up here from hurricane Sandy there in Connecticut so he's been out of pocket here for about a week so I appreciate, Robert, you getting on the phone. I'm sure you got a lot of catching up to do, but let's talk about that things that traders should consider here. I know it's a broad question but what kind of things should traders be doing here at year-end to prepare for next year?

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Robert Green Well, the big issue is the election, which is tomorrow. When you distribute this, it's over. I voted before I left Connecticut. That's got a big effect on what's going to happen with the taxes, although most likely it won't be a mandate election and it will be a divided Congress and they have the fiscal cliff issues. Every year normally when you do tax planning, the name of the game is what income can I defer to next year? What expenses can I accelerate? Let me lower my taxable income, lower the taxes that I owe Uncle Sam, and that constitutes good tax planning.

So you do tax-loss selling, you avoid wash sales, you accelerate expenses, retirement plan deductions for your trader tax status business. You do those types of things, but this year it may be turned upside down. Why? Because of the fiscal cliff and because of the Affordable Care Act, otherwise known as Obama Care. That 3.8% tax on unearned income, the Medicare tax on unearned income for the first time starts on January 1st. That's not part of the fiscal cliff, that's a done deal.

Tim Bourquin: All right, Bob, so I know we've got a lot of unknowns here in terms of the fiscal cliff and what's going to happen with the Bush era tax cuts and whether or not those are going to stick. It sounds like it's about tough a time now to do any tax planning as it has ever been, right, with what's going on right now?

Robert Green Well, absolutely. I think we should wait until the middle of December and hopefully this current Congress and President in the lame duck session before the next Congress and President sits in January will decide the Bush era tax cuts issue and the AMT patch, that's another real big one before year-end.

Because the Bush tax cuts expire at year-end and the rates skyrocket up so taxpayers need to know hey, am I doing tax loss selling or am I doing tax gain selling, that's really the basic difference. Should I do the Roth IRA conversion or not? The Roth IRA, you can do it. If it's not a good idea, you can reverse it but you can't reverse your sales of securities.

NEXT PAGE: Looking at key points in the blog.


Tim Bourquin: Let's talk about some of the points on your blog. You had a great article on your blog about year-end tax planning and you mentioned this already, the accelerating your income this year-end. What kinds of things can I do to make that happen?

Robert Green Well, you know, Tim, when I wrote this blog, I kind of figured that President Obama might win the election or he is going to be the President during the lame duck session. He's wanted to raise the taxes on the rich and the job creators as Republicans say from day one in his '08 campaign for President. In every one of his budgets, he really feels very strongly about this issue. He feels that the upper income should pay more and not just through growth but through rate hikes and that instead of balancing the budget as the President says the backs of the poor, he wants the rich to pay what he calls a fair share.

I guess he says they're not paying a fair share now, I disagree. So he's really dead set on that. He was throughout the negotiations over the last fiscal cliff and when they broke down those negotiations with Boehner, you could read it about it in Bob Woodward's book The Price of Politics. Everyone if you have time, read parts of that book, because part 2 is coming up and it's the same game plan. So the President, I think, wants those rates to go up on the rich.

Now the Republicans won't decouple. They will not give up their leverage and say okay let the rates continue for the middle class and let's all agree on that as the President says, let's drill down on 98% and then work out that other part later. Republicans will not decouple, they lose their leverage. So I kind of think the Bush tax cuts might expire and rates will skyrocket up. Now if President Obama wins, he'll want to pass a middle class tax cut but then the Republicans are going to want tax reform, meaningful tax reform to them, and we'll be back into brinksmanship and the tax cuts may not pass so fast. So I'm kind of thinking that I need to tell my clients hey, get ready for the rates to go way up.

Don't just take for granted that they're going to punt this thing last minute as they always do in the past. Don't take that for granted. This may be a great opportunity to accelerate income, to pay a long-term capital gains rate of 15%, a dividend rate of 15%.

Tim Bourquin: Yeah. I was going to ask you about that, that capital gains, that's another great way right. If you think capital gains taxes are going up, now is the time to sell and take those lower taxes.

Robert Green Right. It's the reverse of the normal year-end planning. It's get the income into this year. Now yes, sell your capital gains, the long-term gains, and pay 15% rather than 20%, plus next year you'll have the 3.8% Medicare tax if you're over the income threshold of $250,000 on a married couple. So it's 15% versus 24% for many, for the rich, or 15% versus 20% for the middle class. Dividends go from 15% to 39.6% the ordinary rate, plus the Medicare tax really close to the 44%.

These are huge increases so why not get your dividends if you have your own C corp? Pay out those retained earnings if you've been running, let's say, a C corp as a management company, as an investment manager, take those capital gains. Wash sales can be your friend, they take income this year and defer losses to next year.

Now don't necessarily defer your expenses because those expenses may not be deductible at all next year if they do tax reform ala Romney's plan or the President hints that similar reform by saying that rich people have limited deductions, can only deduct them at 28% rates. So if you get a deduction that you can take this year factoring in AMT, and again the patch, AMT patch is not passed yet, that hasn't passed Congress yet. If you see you can deduct something this year, absolutely take it. Don't take for granted that you can get that deduction next year like charity, you know, investment interest, mortgage, your investment expenses. Same for your business deductions, if you're a business trader this year, deduct it this year. You may not be a business trader next year.

So yes, you might want to accelerate income but don't necessarily defer your expenses. Now again this is, you know, risk-on, risk-off. It's that type of thing. If it's Bush tax cuts are expiring for you and think about what matters for you. Don't worry about everyone else, think about your rates. If your rates are skyrocketing up, accelerate income, take the deductions when you can.

Tim Bourquin: Worst case, right, that the taxes stay the same. They're not going to probably go down any time soon because of the debt crisis and that sort of thing. So you're basically, the odds are, even if they keep them, at least you're paying the same as what you would, they're not going to go up. It gets rid of that risk I guess.

NEXT PAGE: A big problem with tax reform.


Robert Green Right. See I was worried when I came out with this idea of accelerating income that what if they do meaningful tax reform next year and the rates go down to the Bowles-Simpson 23%? Then you checked out and paid taxes on income this year when the rates could actually be down next year. Well Bowles-Simpson and tax reform is about one rate. There is no long-term rate so that means that it went from 15% to 23% in Bowles-Simpson.

There's a big problem with tax reform, Tim, that they're just talking at each other. When the President insists on tax hikes and he absolutely insists on it for the rich. The Republican answer from Eric Cantor and John Boehner is: we'll give you more taxes, with growth from tax reform. Well CBOE won't score growth so and the Republicans will never agree to a tax rate hike. It's tough luck on the Bush tax cuts, those expire and there's a tax hike and there's nothing they could do about it, which again is why I think it's going to happen. But if the Republicans have an option, they're going to say no to any tax hike.

Now if there is tax reform and both sides are not listening to each other, here's how they do it and they're worlds apart. Democrats want progressivity, that's the whole idea. They want the rich to pay more through higher progressive rates. They want the tax code more progressive. Republicans want to shrink it to that flat tax concept of just like two or three brackets. They want to make it less progressive. Now the President will agree to, you know, a lower rate, not 25%.

To him, a lower rate is 30%, or even the Bush rates of 35%, but then he wants no deductions and he wants one rate. They don't want that Mitt Romney 15% capital gains rate. That's why they had the Buffet rule minimum tax at 30%. They don't want long-term capital gains, which means no 60/40 rates either. Republicans will never agree to one rate unless it's a Bowles-Simpson's 23% rate, that's a 60/40 rate. No way will the Democrats go under 30% in tax reform.

So I think tax reform, first of all, will take six to 12 months to negotiate and do and they are so far apart on tax reform that that is not the answer. Now the negotiators will use that to keep the negotiation moving forward because when the President says I need revenue, Republicans say okay, yeah, tax reform revenue, growth. But the President knows that that's not real. That's why no deal will be made on the condition of tax reform. So we've made no progress from the past.

That's why we're in this mess with the fiscal cliff. We're probably going to go over it and there'll be more fiscal cliffs because the debt ceiling comes up again. So we're kind of in trouble here in a negotiating basis.

Tim Bourquin: Let me ask you about the one you mentioned already too is the Roth IRA conversion that you can roll back if something happens. Talk about that.

Robert Green Yeah, I'm glad because I was getting a little too much into the politics there. It's a little too rich.

Tim Bourquin: Well politics have a lot to do with it, you know.

Robert Green Yeah. Well what I like about the Roth is how can you have your cake and eat it, too, because we're talking about a gamble here. Are rates going up or are they going down? You and I agree, Tim, they're probably going up and they're not going to really meaningfully go down but maybe they could. What's great about the Roth IRA conversion is that you can do it, check out, pay your taxes. Take your traditional IRA convert it to a Roth IRA or a mini Roth IRA or Roth Mini 401(k) so you go from temporarily tax free to permanently tax free.

You got to pay taxes on what's in the account as if it's a distribution, there's no penalty, no 10% excise tax penalty, which is normally the case when you take an early withdrawal under age 59 and a half for IRA or 55 for a qualified plan.

There's no penalty. Pay your taxes at 2012 rates, those lower rates, put that money in a Roth account. You can trade that Roth for the rest of your life tax free. They can raise taxes all they like, federal, state, city, have a field day, can't touch you. You're good to go for the rest of your life tax free like Mitt Romney's IRA. You can grow it.

Now let's say you convert a $500,000 account, pay your taxes on that at 2012 rates and you go ahead and lose $200,000 and you say to yourself why did I pay taxes on that $200,000 I lost. If I would have taken the money out after, if I hadn't done the conversion, my taxes would have gone down a lot. I would get the benefit of those losses in the account. Well, or let's say that tax rates actually down next year and you all of a sudden say why did I do that, that's where the beauty is, you can reverse it. It's called a recharacterization.

By the due date of your return including extension October 15, 2013, you can reverse it as if it never happened, do over. So to me that seems like a pretty good idea to do. The only downside is you got to work with your accountant, maybe your insurance person, your estate person if you're talking big bucks and your broker and pull the trigger on it and do it.

NEXT PAGE: How to handle gains or any trading profits.


Tim Bourquin: Right.

Robert Green Maybe do it before we go over the fiscal cliff and everyone wants to do the same and then just sit pretty knowing you can reverse it any time you want.

Tim Bourquin: There's not too many situations where you can do that where you can roll some…

Robert Green No.

Tim Bourquin: …back and get the best of whichever happens, so good idea there. Well let me ask you a little bit too, Robert, about so for newer traders who haven't set up an entity yet to do their trading through. Is there anything they need to do prior to year-end? Can they set something up now to handle all their gains or any trading profits they've had during this year? Anything they can go back on?

Robert Green Well, that's a great question, Tim, and that was a blog I wrote before this last one on the fiscal cliff when we had a webinar and I said the last chance to use entities. We have a lot of clients that are business traders this year and they would like a retirement plan deduction to put away $17,000 into an individual 401(k) defined contribution plan. If they're over age 50, $5,500 more plus go up to a total of $50,000 or $55,500 with that catch-up revision with the profit sharing plan.

They can save $17,000 or more with this strategy. If they've traded as an individual sole proprietor business trader with trader tax status all year, they can't do that unless they have another source of earned income on the side.

So you need to form an entity to financially engineer an administration fee that you pay yourself for doing administration of your company and then you can do this retirement plan deduction. The income tax savings is $17,000 more in some of the examples that I run especially with a married couple versus that tiny sliver of self-employment tax that you'll pay on that earned income piece only not on the trader games.

The window to do that, Tim, is closing. You would have to set up the entity before the end of November. You'd have to do some meaningful trading in it in December. You can't do this in the middle of December. So you have to jump on this one right away and you need the trader tax status to make it work.

Tim Bourquin: I know this maybe a loaded question but these days LLCs are more popular, S corps are still around obviously. Any opinion in terms of LLC versus S corp?

Robert Green Well, the LLC is better for governance in a corporation. Both an LLC and a corporation can elect S corp status so we prefer the S corp status through the LLC. If you're married, we usually recommend a husband-wife general partnership. There's no liability protection, it's not a corporation, it's not an LLC, but we can get it banged out within a day.

There's no filing fees in your state, there's no minimum taxes, it's easy to open, easy to close, and it still files a partnership return, the preferred tax return that we want because the partnership tax return has more flexibility than an S corp tax return. So a husband-wife general partnership or a husband and wife LLC both file a partnership return so they're the same tax wise.

If you're single and you don't have someone to be your partner, then we suggest a single member LLC with and S corp election. Now if you have the S corp, you got to do some year-end things, Tim. You got to reimburse your expenses before the year-end whereas with the partnership you can use unreimbursed partnership expenses on your individual return. You have more flexibility after year-end. So with the S corp, you got to pay the salary or the administration fee before year-end also with the partnership or the LLC, you got to make that fee payment to drive the retirement plan deduction strategy before yearend.

You also have to open up that individual 401(k) before year-end and you don't have to put any money in it, you just have to paper it up with your broker. That's pretty easy, they all have really good departments, it's free, they're cookie cutter plans but it will take you a half hour and don't try to do it after Christmas, do it now.

NEXT PAGE: Where the biggest savings are.


Tim Bourquin: Yeah. I got to admit I'm doing the solo 401(k) thing, but I'm not funding it until next year so that's a nice benefit there.

Robert Green Right. But if it's not open before year-end, you can't do it and then you got to go to a Sep IRA and all the juice, tax juice goes out of it. The biggest savings is on the 401(k) part because that's where it's 100% deductible. On the Sep IRA, it's a profit sharing plan that's only 20% deductible. You want that 100% deductible because don't forget you're paying a self-employment tax on the fee. So you could have a fee of $18,000 and deduct $17,000 with the individual 401(k) but if it was a Sep IRA, you could only deduct $3,600, 20% of the $18,000.

Tim Bourquin: Right. Robert, we've just scratched the surface here. There's so much to this. Tell people how they can get to your website and get a hold of you if they want help with some of their tax planning yearend.

Robert Green Thank you, Tim. Just go to or, read the blog articles, the webinars, the guide. Our CPAs are standing by to do this year-end planning and we'll see what happens after the election. We'll see what's happening with the negotiations and we are going to put out our final call on what we think people should do by early December and have webinars to boot. I hope to see a lot of people in Vegas, that's a great time where we're going to discuss this as well.

Tim Bourquin: Yeah, absolutely and, of course, if you've got an entity, you can write off your trip to Vegas as educational expense, can't you?

Robert Green Only if you have the trader tax status, if you're an investor then you can't. But if you have the trader tax status, you can and that gets to the heart of the content that we discuss in Vegas. If you can't make Vegas, you can attend the webcast so sign up for that of my free session. But a lot of people come to the paid half-day session because we really drill down on a lot of stuff and people get a lot of value out of that. Tax is money.

Tim Bourquin: Yeah.

Robert Green It's money in your pocket.

Tim Bourquin: Absolutely, and if any of this what we've talked about today is of interest to you, you're going to get a lot out of that half-day class that Robert is doing next week at the Expo too. So, Robert, I appreciate you giving us all this information. Your website is a goldmine of information as well so listeners go to, check that out. We hope to see you at the Expo next week as well. Robert, I know I'll see you there so thanks a lot and we'll see you next week.

Robert Green Tim, I'm looking forward to having a drink with you. Thank you.