I have a friend who is a tax attorney. He likes to chat. Whether by phone, email, Skype or smoke signal, he’s usually fine 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 doing. His secretary said he was attending a tax planning conference.
I tried again last week. The same thing. Another meeting of tax attorneys.
I ended up texting him that I had a lead on an urgent tax opinion request. It made me call back.
Opinion requests are mine. He’s working on this case.
You see, since the start of this year, it seems all I’ve been doing was studying the Withholding Tax and Employment Act, the new law that governs our tax code.
There’s good reason for my urgency… you’re losing money every day in 2018 that goes by without you knowing and acting on new opportunities and threats in the tax area.
If you act now, you could potentially save thousands of dollars in federal taxes this year. The sooner you act, the more you will save.
Here are the main things to look out for…
Tax Savings for Pass-Through Entities
Pass-throughs are business entities that do not pay taxes…they “pass” their profits or losses to their owners for tax purposes. They include limited liability companies (LLCs), partnerships and S corporations.
Starting January 1, many pass-through owners will pay no federal income tax on 20% of the profits from their business. That’s right, zip, nada. For many, this could mean a major reduction in their effective federal income tax rate.
The rules for giving this to pass-through holders are straightforward for people whose taxable income falls into the low six figures. After that, they got more complicated.
No matter how you cut it, the new tax law creates opportunities for very large tax savings.
- action items: If you’re a lawyer, doctor, or other professional in private practice, get tax advice right away to see how dividing your business into sections can save you tens of thousands of tax bills.
- action items: If you are self-employed or operating through an LLC or small partnership, cut your personal paycheck immediately. It increases the “profit” of your business… the amount from which you can deduct 20% tax free.
- action items: Even if you are employed, consult a tax attorney to see if you are better off becoming a consultant. For many, the answer is yes.
- bonus tips: Owners of shares in real estate investment trusts (REITs) or publicly traded partnerships (PTPs) do not pay taxes on 20% of REIT-qualified dividends and PTP earnings.
Key Reduction Removal
The purported aim of the tax bill passed in late December is to reduce tax rates and simplify the tax code. The first was partially achieved – until the cuts ended in 2025, at least – but the second did not. Instead, legislators include some “simplification” measures that can hurt you if you don’t prepare for them.
First, when the press started referring to the “removal of SALT” late last year, I thought the Trump administration would abandon the Cold War-era nuclear weapons treaty between the US and Russia. The truth is better, but for many of us, not much.
Starting this year, you can only deduct a maximum of $10,000 state and local income and property taxes (SALT) from your federal taxes. For most people it doesn’t matter as the standard deduction for joint whistleblowers has been doubled to $24,000. But for many people -and not just in high-tax states like New York and California – it means an effective way increase in federal taxes.
However, legislators in a growing number of states are considering ways to get around this. You know the section in your local newspaper that covers state legislatures? It’s time to start reading it.
Second, the new law eliminates all “miscellaneous” deductions…including for headquarters costs. If you’re an employee working remotely at your employer’s request, or if you run a small business from home, kiss the deduction for business use from your home bye. In my case, for example, it was a significant tax increase.
action items: Find out if your state legislators and city councilors are considering steps to convert income and property taxes into a deductible form of federal income tax. Let them know what you think!
action items: If you work from home, model the tax implications of lost deductions that a home business uses. You can probably rearrange things to compensate, at least partially.
bonus tips: Deductions for unpaid job expenses, job search expenses, tax preparation fees, home appraisal fees, victim and burglary losses, gambling losses, multiple investment fees and expenses and losses on an IRA Possible been eliminated, subject to a future IRS decision.
Get Ready to Withhold Taxes on Your Retirement Income
If you are not retired, and are getting the right amount of annual income, I have two Action item for you:
- If you don’t already have one, open a Roth IRA.
- Create a C corporation with your Roth IRA as the sole shareholder.