There are only a few weeks left until the new year so here are 9 ways you can continue to protect your wealth from Uncle Sam.
Tax planning does not have to be as dreadful as some people will have you believe if you know how to plan and what to consider when planning for your taxes. This is probably one of the most important and consistent financial issues you will face. It is a good idea to stay abreast of your tax obligations and responsibilities. Whether you are an individual taxpayer or business owner, a tax professional has the knowledge and experience to make the task as beneficial for you as possible.
Plain vanilla year-end tax planning strategies suggest that all taxpayers should generally defer income and accelerate expenses in order to reduce current-year taxable income and tax liabilities. But the AMT (Alternative Minimum Tax) is becoming an increasingly big problem, turning most tax planning logic upside-down.
Alternative Minimum Tax
AMT is catching more and more individuals. Those who happen to have significant deductions – those living in a state with a relatively high personal income tax rate and high real estate taxes – are vulnerable. The AMT makes year-end planning difficult and potentially dangerous if done in a vacuum.
Reducing regular tax liability through deductions, deferral, and overall rate reductions has increased the AMT liability exposure. All planning must consider multiple years to be truly effective. While a credit for prior-year AMT may be available against regular income tax in a subsequent year, there is no guarantee that the AMT will ever be recovered.
Individual Income Tax Considerations
• Bonuses and Salaries – If your employer will defer the payment into January next year, bonus and salary amounts will not be taxed on your return until next year.
• Stock and Bond Sales – You may want to consider not selling stock with a gain until January to defer recognition. Likewise, sell those stocks with losses before the end of the year to reduce any other gains you may have, including capital gain dividends.
• Deductible Expenses – Charge deductible expenditures on credit cards to get a current deduction even if payment of the charge will not be made until next year.
• Charitable Donations – Make charitable donations with appreciated stock owned for more than one year. The fair market value is used to measure the donation, and there is no tax on the difference between your cost and the fair market value. (If the fair market value is less than your cost, consider selling the item to recognize the loss and contribute the cash proceeds.) Remember that charitable contributions must be substantiated with bank records or receipts – the “miscellaneous” cash contribution is no longer allowed without a receipt.
• Retirement Contributions – Make the maximum contribution to retirement arrangements whether employer-sponsored or an IRA.
• Passive Activity – Dispose of a passive activity with suspended losses. When a passive activity has suspended losses, those losses become deductible in the year the activity is sold.
• Installment Sales – Consider an installment sale of property rather than collecting all proceeds this year. You can defer part of the gain on the sale until you collect the cash.
Tax Considerations for the Self-employed
• For cash-basis method businesses, send out invoices late in December so that collections will not be made until January.
• Establish a retirement plan before year-end. The deduction is allowed on the current-year return even if funded just before you file the return next year. While many plans can be funded next year for a deduction, only a SEP plan can be established next year. Other plans need to be established this year.
• Employ your minor children to perform administrative tasks and avoid Social Security taxes on wages – this shifts income to a lower bracket. (The children may establish Roth IRAs to gain future benefits.)
In addition, it’s very difficult to generalize about year-end tax planning because ideas that help one taxpayer could backfire on other taxpayers. What is useful depends on the specifics of each family, the source and type of income, etc.
Finally, please keep in mind that I do not subscribe to spending money just to save on taxes. Tax planning should always have a valid business purpose and should be analyzed critically to ensure that both the business and tax side of the business are taken into account.
9 Steps to Prosper
1. Stay flexible, look at your taxes differently from last year.
2. Make sure you’re in control
3. Know your numbers!
4. Get a good advisor
5. Schedule a strategy meeting with your tax advisor
6. Implementation – what action will you take?
7. Ongoing education – tax law changes all the time
8. Have quarterly check ins regarding your tax planning
9. Control the possibility of audits as much as possible
Here are some recent questions from my blog…
Question: “I was wondering what the tax difference is between selling a home before owning it for one year or after owning it for a year.. Is there a set tax percentage rate for both?”
My Answer: The main difference if it is a property held for investments is that the short term capital gains rate is your effective tax rate which can range from 10% – 35% but a long term capital gains rate is 15%. There is a set tax for the long term but the short term is based on your individual tax rate. Keep in mind however that if this is a rehab property (meaning it was not held for investment but for resale) then the length of time does not matter as the profits are treated as business income subject to the Self Employment tax and the regular tax.
Question: “I just bought a SFH through my LLC and I’m still not sure if I’m going to flip it or rent it. One thing weighing on my decision is taxes. If a single-member LLC owns a property, rehabs it, and sells it, are the profits deemed “business income” or “capital gains”? If I owned a home in my name, personally, I would probably rent it out for at least a year before thinking of selling in order to avoid short-term capital gains. Does this work with business owned properties as well?”
My Answer: Business income is subject to self employment taxes. Yes, if the business is a pass through entity, then it follows the same rules as our individual tax return rules.
TOP TEN YEAR END TAX PLANNING CHECKLIST
• For business owners, check that you have an EIN number, an operating agreement, and a separate bank account. Record all the income and expenses related to the business in the business bank account. This is a huge audit item.
• For investment property that was foreclosed or sold as a short sale, we will consider the impact of the cancellation of debt income on your individual income taxes and calculate the loss of sale of investment property.
• For active real estate income, we will restructure your business to minimize the impact of self employment taxes and for significant real estate education expenses, we will register a business in order to minimize your audit exposure by deducting these expenses.
• If you have significant business expenses and already have a registered business, we will look at converting to a partnership to avoid an audit flag
• We will examine your tax filing requirements for the states where your business is registered such as annual filing, personal property tax returns, etc. and if you own investment property, we will do a cost-segregation study in order to increase your depreciation expense.
• If you bought or sold property this year we will examine the impact of capital gains, adding rehab expenses to the basis of the property, and whether the holding costs (mortgage interest, taxes, and insurance) are deductible.
The Wealth Building CPA is offering an EXCLUSIVE one time deal for a ‘Do It Yourself’ Year End Tax Planning Kit. Normally priced at $299, this special is just $97. Get details HERE
