Tax Musings From a Burbank CPA: Do You Really Like Loaning the Government Money?

This is a reprint of a blog I wrote over three years ago, but it still makes sense today.

 So, you have filed your income tax return with the IRS and your state, and are now waiting for the refund the government(s) owe you. You are thinking of all the things you can do with that money when you get it. Here are some things to think about as you wait: 

1. These refunds are in effect interest-free loans you have made the government(s) over the year through excess withholding. They are just paying you back the money you earned over the previous year that won’t even earn interest unless you file an extension and wait even longer for your money. This is even worse than that bet that your buddy owes you because at least you know where to find him if he doesn’t pay you right away. With our government you call on the phone and wait an hour for them to tell you that the refund is being processed or go on their website and find out there is a problem and you have to call anyway!
 
2. You could be earning some income on this refund if you take it with each paycheck instead of putting it into additional withholding. Even with the low-interest rates now you could be making something on the money if you transferred it each pay period into some form of savings or maybe a retirement account. 

 

3. When you get this refund back and blow it on some splurge purchase before it burns a hole in your pocket, you should realize if you were getting this money back on each paycheck, you would probably be earmarking the smaller amounts for some goal rather than buying a new iPhone. By automatically withdrawing the additional money from your checking and stashing it in some other account, you have a better chance of allowing it to accumulate without seeing dollar signs when you get that refund. 

 

Just remember, the best tax planning advice is to pay some tax on April 15, not enough to owe a penalty, but enough so you have the most use of your money and the government has the least use of it. 

 

If you want to call or email me we can talk about it further and maybe change your withholding so you are the borrower, not the lender in this case. 

 

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Tax Musings of a Burbank CPA: How Home and Security Ownership Is Affected by Tax Reform

In 2018, The Tax Cuts and Jobs Act of 2017 will create tax changes to home and securities ownership by changes to itemized deductions on Schedule A.

If  you own or are buying a residence and/or second home, you may have the following limitations on your itemized deductions:

1. The combination of real estate and state income or sales taxes paid each year will be limited to a maximum deduction of $10,000.  This will be a killer in high state and local tax states. State and local taxes (SALT) normally include state income taxes or state sales taxes (usually the higher of the two) and state and local property taxes,  which can include real estate and personal property tax.

2. Interest limitations on new home purchases in 2018.  Interest on new home loans has been limited to mortgages of $750,000.  If you have a mortgage of $600,000 on your principal residence before 2018, you can only add another $150,000 in 2018 to the loans that deductible mortgage interest would be allowed on a purchase of a second home (meaning if you buy a second home for $300,000, only half the interest on the loan would be deductible on Schedule A.)

If you have non – retirement plan investments in securities like stocks and bonds, you will probably lose any fees you pay directly to your financial advisor to manage your investments, since they are deducted as miscellaneous itemized deductions subject to limitations of 2% of your adjusted gross income (AGI).  That category of itemized deductions has been repealed as part of the tax reform (which also includes unreimbursed employee business expenses, tax preparation fees, attorney fees and safe deposit boxes, among other things.)  None of these deductions are now an allowable deduction as an itemized deduction.

So going forward, you may have to decide if owning certain real estate or investments is still worth it without the tax savings that used to be included with them. Some planning going forward should become much more important so you know what to expect from an income tax standpoint.

 

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Tax Musings of a Burbank CPA: What Entities Qualify for the New Sec 199A Business Writeoff?

In 2018, a new tax write-off has been created for qualifying businesses – the Section 199A Business Deduction.

This deduction equates to 20% of Qualified Business Income assuming you meet income and salary limitations.  Also, shareholder reasonable compensation, interest, dividends and capital gains and losses don’t qualify. But if you meet these requirements, exactly what entities and businesses have Qualified Business Income?  Based on my research, here are the qualifying businesses: 

1. Sole Proprietorships – Schedule Cs.

2. Individual Owners of Rental Properties – Schedule Es.

3. S-Corporations (net of reasonable compensation to shareholders.) 

4. Partnerships and LLCs (on form 1065.)

5. Trusts having business income or Rental Property income. 

6. S-Corporations, Partnerships and Trusts owning any of the above pass-through entities (future regulations will give guidance on how to determine the deduction in case of tiered entities.)

Basically, any non-C-Corporation will probably qualify for the Section 199A deduction.  It is interesting that rental property income will qualify for this tax benefit. 

What it means is that with proper planning, the new deduction can significantly benefit many types of small businesses going forward.

So now you have the information; now you need to see your tax preparer to see how this will benefit you and your business(es).

 

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