The point of tax strategy is to increase the equilibrium point between revenue, costs and income tax to where the maximum amount of money sticks to the wall. Sometimes this is achieved by paying more taxes.
The number one tax shelter known to man is a wholly owned business. Always has been. Always will be until they change the constitution, either by legislative action or neglect.
There are always a few year-end things to do to make sure you’ve positioned yourself adequately to keep your taxes at the legal minimum over time. Our intention is to decrease taxes in a way that does not become taxable in a subsequent year. It is not a good thing to lower taxes this year only to increase them more next year. Thus we don’t normally include timing differences in our recommendations. Timing differences are the bread and butter of tax firms trying to give you the last minute impression they are looking out for your best interests.
Also of salesmen trying to make year-end quotas. Never do anything just for taxes. Always call us first.
IRA & 401(k)
It doesn’t make any difference if you want to put a couple thousand dollars into an IRA or 401(k). But there are people out there who have millions in 401(k)s, and those people are playing a fool’s game adding to their 401(k). It’s far better to pay your taxes and put what’s left in an investment. At least if you make a profit, your taxes will be half of what they otherwise would be. This is by far the best approach and the one I make to all my clients. If you need help with an investment adviser, let me know and I can recommend some.
However, if you’re employed and your employer is matching your contribution, the previous paragraph goes out the window. In that case, go high enough to maximize your employer’s match and then stop. Your goal here is to get as much as possible from your employer because that should pay the taxes when you want out. Don’t forget the entire amount is taxable plus an 10% penalty if you are younger than 50.
Taxes Trending Up
You are all aware that basic tax rates are up. Noticeably up. To the extent that you will feel the pain. We are seeing that in more ways than not. We are also seeing more of our clients post record years, so their tax bite is taking a double whammy. More than any year since 2008. As I have said before, if you have your business in order to operate smoothly and efficiently you will experience year over year gains. Competitors down the street who are not operating smoothly and efficiently will eventually hit the wall.
In the 21st century, infrastructure is everything.
Medical Insurance Deduction
The primary reason I am writing this post is because of health insurance on S corp owners. If you are an owner of an S corp and your insurance is not provided by a C corp, the cost needs to be reflected on your W-2 in order to be fully deductible. If it’s not, the only option is to include it on your personal return as an itemized deduction where it will be phased out up to 10% of your total income. If you’re audited, the IRS will expect a legitimate reason why your health insurance plan is not under your S Corp name. For example – Some States don’t allow it, or the insurance provider doesn’t allow the particular group plan……..
NOTE: This doesn’t apply to C corps with a medical reimbursement plan. IN that case, the C corp can either reimburse you or pay the premiums directly. This is for you getting your insurance personally or from your S corp. We will be updating Medical Reimbursement Plans this year.
Two years ago, it didn’t make any difference because the result is the same regardless of how you calculate the deduction. Then, surprise, surprise, the IRS began enforcing regulations they had never enforced, added new guidelines, disallowing the self employed health insurance deduction on page one … and suddenly, many, many S corp owners began losing their insurance deduction. Now the insurance premium must be paid by the S corp, included on your W-2, and your W-2 wages must be equal to or more than the insurance deduction.
We have been communicating with many of you on this issue. If we have and you have already dealt with the information we need, that’s good. If you fit the requirements of this and you want to be included in this, please let us know today. We have only a limited amount of time to comply.
Tax Projection Efforts
This is also why we’ve stepped up our tax projection efforts. With taxes and income both on the rise, we are seeing a lot of clients surprised at their tax liability. If we didn’t communicate with you on your tax projection, we probably looked at it and decided you were probably OK. If you are experiencing higher income and want to make sure, let us know.
We want to make sure you all understand what’s going on, and why we have been pestering you for this information. There have been other examples of this kind of tightening the requirements to increase tax revenues, but this one is most widely felt. You can expect this kind of development to be a normal undertaking of the IRS for years to come. They are in a revenue raising mood. And we are their target.
That’s why we’re in business … to offset all their moves to your best advantage.
The edge to survive in a perilous world