Real Estate

Act now on tax reform and save thousands

I have a friend who is a tax attorney. He loves to chat. Whether it’s over the phone, email, Skype, or smoke signals, it’s usually good for three or four calls a week.

I haven’t heard from him since the end of November.

I called his office in the first week of January to see how he was doing. His secretary said she was at a tax planning conference.

I tried again last week. The same thing. Another meeting of tax attorneys.

I finally sent him a text that had a lead on an urgent tax opinion request. That got me a call back.

The request for opinion was mine. He is 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 that governs our tax code.

There is a good reason for my urgency… you are losing money every day of 2018 that goes by without knowing about and acting on the new opportunities and threats on the tax front.

By acting now, you can potentially save thousands of dollars in federal taxes this year. The sooner you act, the more you’ll save.

Here are the main things to keep in mind…

Tax Savings for Pass-Through Entities

Transfers are business entities that do not pay taxes…they “transfer” their profits or losses to their owners for tax purposes. They include limited liability companies (LLCs), partnerships, and S corporations.

Starting January 1, many transfer owners will pay no federal income tax in 20% of the profits of their businesses. That’s right, zip, nothing. For many people, this could mean a big drop in the effective federal income tax rate.

The rules for this gift to transfer owners are simple for people whose taxable income is well under six figures. After that, they get more complicated.

No matter how you look at it, however, the new tax law creates opportunities for enormous tax savings.

  • action itemTip: If you’re a lawyer, doctor, or other professional in private practice, seek tax advice right away to see how dividing your business into parts could save tens of thousands on your tax bill.
  • action item: If you are self-employed or operate through an LLC or small partnership, reduce your personal salary to the minimum immediately. That increases the “profit” of your business… the amount from which you can deduct the 20% tax-free.
  • action item: Even if you have a job, consult a tax attorney to see if becoming a consultant is right for you. For many, many people, the answer will be yes.
  • bonus tip: Owners of shares in real estate investment trusts (REITs) or publicly traded companies (PTPs) do not pay taxes on 20% of their qualified REIT dividends and PTP income.

Elimination of key deductions

The stated goal of the tax bill passed in late December was to lower tax rates and simplify the tax code. The former was partially achieved, until the cuts expire in 2025, at least, but the latter did not. Instead, lawmakers included a few scattered attempts at “simplification” that could cost you dearly if you don’t prepare for them.

First, when the press started referring to “eliminating SALT” late last year, I thought the Trump administration was going to abandon the Cold War-era nuclear weapons treaties between the US 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 property taxes (SALT) from your federal taxes. For most people, that won’t matter because the standard deduction for joint filers has doubled to $24,000. But for many people, and not just in high-tax states like New York and California, this will mean an effective increase in federal taxes.

However, lawmakers in a growing number of states are considering ways around this. You know those inside sections of your local newspaper that cover state legislative issues? It’s time to start reading them.

Second, the new law eliminates all “miscellaneous” deductions…including those for home office expenses. If you’re an employee working remotely at the request of your employer, or running a small business from home, say goodbye to the business use of your home deduction. In my case, for example, that is a significant tax increase.

action item: Find out if your state legislators and city council members are considering steps to convert income and property taxes into forms that could be deducted from federal income tax. Let them know what you think!

action item: If you work from home, model the tax implications of the loss of the deduction used by the home business. You may be able to rearrange things to compensate, at least partially.

bonus tip: Deductions for unreimbursed work expenses, job search costs, tax preparation fees, home appraisal fees, casualty and theft losses, gambling losses, many investment fees and expenses, and IRA losses May have been eliminated, depending on upcoming IRS decisions.

Prepare to reduce taxes on your retirement income

If you are not yet retired and earning the correct amount of annual income, I have two action items for you:

  1. If you don’t already have one, open a Roth IRA.

  2. Create a C corporation with your Roth IRA as the sole shareholder.

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