Act Now on Tax Reform and Save Thousands
I have a friend who’s a tax attorney. He loves to chat. Whether by phone, email, Skype or smoke signals, he’s usually good for three to four calls a week.
I haven’t heard from him since late November.
I called his office in the first week of January to see how he was. His secretary said he was at a tax planning conference.
I tried again last week. Same thing. Another meeting of tax lawyers.
I finally texted him that I had a rule on an urgent tax opinion request. That got me a return call.
The opinion request was mine. He’s on the case.
You see, since the beginning of this year, it seems like all I’ve done is study the Tax Cuts and Jobs Act, the new law governing our tax code.
There’s a good reason for my urgency… you’re losing money every day of 2018 that goes by that you don’t find out about and act on the new opportunities and threats on the tax front.
If you act now, you stand to save potentially thousands of dollars in federal tax this year. The sooner you act, the more you’ll save.
Here are the top things to watch out for…
Tax Savings for Pass-by Entities
Pass-throughs are business entities that pay no tax… they “pass-by” their profit or loss to their owners for tax purposes. They include limited liability companies (LLCs), partnerships and S corporations.
Starting on January 1, many owners of pass-throughs will pay no federal income tax on 20% of the profit from their businesses. That’s right, zip, nada. For many people, this could average a big drop in their effective federal income tax rate.
The rules for this giveaway to pass-by owners are straightforward for people whose taxable income is well into the low six figures. After that, they get more complicated.
No matter how you slice it, however, the new tax law creates opportunities for huge tax savings.
Action item: If you’re a lawyer, doctor or other specialized in private practice, seek tax advice closest to see how splitting your business into parts could save tens of thousands on your tax bill. Action item: If you’re self-employed or function by an LLC or small partnership, cut your personal salary to the bone closest. That increases your business’s “profit”… the amount from which you can deduct 20% tax free. Action item: already if you’re employed, consult a tax attorney to see if you’d be better off becoming a consultant. For many, many people, the answer is going to be yes. Bonus tip: Owners of shares in real estate investment trusts (REITs) or publicly traded partnerships (PTPs) pay no tax on 20% of their qualified REIT dividends and PTP income. Elimination of meaningful Deductions
The professed goal of the tax bill passed in late December was to reduce tax rates and simplify the tax code. The first was slightly achieved – until cuts expire in 2025, at the minimum – but the second didn’t happen. Instead, legislators included a few scattershot attempts at “simplification” that could cost you dearly if you don’t prepare for them.
First, when the press began to refer to the “elimination of SALT” late last year, I thought the Trump administration was going to abandon the Cold War-era nuclear arms treaties between the U.S. and Russia. The truth was better, but for many of us, not by much.
Starting this year, you can only deduct a maximum of $10,000 of state and local income and character taxes (SALT) from your federal taxes. For most people that won’t matter because the standard deduction for joint filers has been doubled to $24,000. But for many people -and not just in high-tax states like New York and California – this will average an effective increase in federal tax.
Legislators in an increasing number of states are considering ways to get around this, however. You know those inside sections of your local newspaper that cover state legislative issues? Time to start reading them.
Second, the new law eliminates all “miscellaneous” deductions… including those for home office expenses. If you’re an employee who works remotely at your employer’s request, or if you run a small business from home, kiss the deduction for business use of your home bye-bye. In my case, for example, that’s a meaningful tax increase.
Action item: Find out if your state legislators and city councilors are considering steps to transform income and character taxes into forms that could be deducted from federal income tax. Let ’em know what you think!
Action item: If you work from home, form the tax implications of the loss of the home business-used deduction. You may able to rearrange things to compensate, at the minimum slightly.
Bonus tip: Deductions for unreimbursed job expenses, job-search costs, tax preparation fees, home appraisal fees, casualty and theft losses, gambling losses, many investment fees and expenses and losses on IRAs may have been deleted, depending on upcoming IRS rulings.
Get Ready to Cut Taxes on Your Retirement Income
If you’re not in addition retired, and earning the right amount of annual income, I have two action items for you:
If you don’t have one already, open a Roth IRA. Create a C corporation with your Roth IRA as only shareholder.