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Tax Tip of the Week | Pay Your Taxes Like a Billionaire: Carefully December 12, 2018

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , trackback

Pay Your Taxes Like a Billionaire:  Carefully

One of the more common comments I hear is that the “rich” don’t pay income taxes. That is simply not true. However, many of the “rich” own and operate a business, sometimes more than one. These businesses do offer some great planning opportunities not available to many non-entrepreneurs. Often, some of the major components of these tax saving strategies revolve around the use of accelerated depreciation methods for qualifying assets and some sophisticated retirement plans.
The following excerpts from Laura Sanders (WSJ, December 1-2, 2018) further explain some of the intricacies of extended planning for individuals and businesses under the new tax laws.

-Mark C. Bradstreet

“The richest Americans have long saved billions from multi-year tax planning. Now it makes sense for many others to do the same. Advisors to high earners have always done multiyear analyses of items like operating-loss carryforwards or stock options for their clients. But because of last year’s tax overhaul, filers earning less have an incentive to use this approach.

Individuals may decide to speed up or slow down their charitable donations, while business owners may want to spread out certain deductions instead of taking them all at once. The result could be a significantly lower tax bill over time.

One key driver of the change is the near doubling of the standard deduction, the amount taxpayers get if they don’t itemize write-offs like mortgage interest, state and local taxes, and charitable donations on a Schedule A. This write-off is now $12,000 for single filers and $24,000 for married couples.

This is where multiyear planning helps.

Say that John and Jane have paid off their mortgage, owe $15,000 in state and local taxes, and give $10,000 a year to charities.

For 2017, they deducted the $25,000 total on Schedule A because it was greater than their standard deduction of $12,700. But their 2018 state-tax write-off is capped at $10,000. Thus, their deductions total $20,000, less than their $24,000 standard deduction this year.

Now see what happens if they accelerate their $10,000 of 2019 donations into 2018. They can deduct $30,000 on Schedule A for 2018 and take the standard deduction for 2019, which is $24,400 after an inflation adjustment. By doing this, their write-offs over two years total $54,400 rather than $48,400.

“People should maximize charitable deductions, as it’s often the only Schedule A strategy left,” says David Lifson, a CPA with Crowe LLP in New York.

Multiyear planning is also newly important to owners of pass-through businesses like a proprietorship, partnerships and S corporations. They now get a 20% deduction, as long as their own taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples. Above that, the deduction can shrink or disappear.

Owners with income above the limits can use various strategies to get below it. Among them: investing in depreciable equipment; making charitable donations; and saving more in retirement plans with deductible contributions.

Say a married business owner has a taxable income of $330,000 and buys $100,000 of equipment. The law allows him to deduct 100% of the cost right away, which gets him far below the $315,000 income threshold – for one year.

Instead, says Mr. Porter [a CPA in Huntington, W. VA], the owner should consider spreading out these deductions, as is often allowed.  If he takes the $100,000 write-off over five years, perhaps he can lower his income so it’s below the threshold for that period, qualifying him for a full 20% write-off each year.

With year-end nearing, here are other tax moves.

•    Take capital gains and losses as needed.  Don’t let the tax tail wag the dog, but remember that capital losses can offset taxable capital gains from investments and reduce a filer’s bill. Up to $3,000 of excess capital losses can also be deducted against “ordinary” income like wages.

Investors who sell losing securities can’t repurchase them for 30 days before or after without running afoul of Internal Revenue Service rules. Winners can be rebought right away.

•    Beware of the 3.8% surtax. The 3.8% tax on investment income applies to most married couples with more than $250,000 of adjusted gross income and most singles with more than $200,000.

It’s levied on net investment income, such as interest, dividends, capital gains and royalties, above the thresholds.  Thus, if a single filer has $150,000 of income and a $75,000 capital gain, $25,000 would be subject to the 3.8% tax.

Some people can avoid this tax by planning, such as by selling part of an investment before year-end and the rest early in January.

•    Take required IRA payouts.  These are typically from traditional individual retirement accounts held by taxpayers 70½ and older.  The required payout is a percentage of total assets on the prior Dec. 31. Except for those taking their first such withdrawal, the payout must be taken by year-end.

IRA owners taking their first required payout have a later deadline:  April 1 of the year after they turn 70½.  But waiting means the IRA owner will owe tax on two IRA payouts in the second year, pushing some into a higher bracket, so it may make sense to take it before year-end.”

-Laura Saunders, WSJ

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

–until next week


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