Tax Strategy Summary
Project Tax Savings 15,000 Dollars!
Introduction
How the Tax System Works
Former President Jimmy Carter called the tax code “a disgrace to the human race.” If you’ve ever wondered how it works, here’s a brief introduction. … page 2
Avoid the Alternative Minimum Tax
The Alternative Minimum Tax has effectively become a “flat tax” for millions of families, wiping out deductions for state and local taxes, miscellaneous itemized deductions, and more. Avoiding AMT has become more important as more taxpayers become subject to the tax. … page 9
Withholding and Estimated Taxes
Withholding and estimated taxes are the key to making the tax system work. Review these amounts any time your income changes to avoid an April 15 surprise! … page 12
Family, Home, & Job
Tax-Smart Day-Care Choices
Congress has traditionally used the tax code to favor families with children. Make sure you understand how to claim Dependent Care Credit benefits. … page 14
Avoid “Kiddie Tax”
Shifting investment income to your children can significantly cut your overall family tax bill. But there are important rules to follow with children under age 19, and dependent full-time students under age 24. … page 15
Tax Strategies for College Savings
Section 529 plans, Education Savings Accounts, U.S. savings bonds, and permanent life insurance policies all offer tax advantages for your family’s college savings. … page 16
Tax Strategies for College Financial Aid
Traditional tax planning strategies can backfire when it comes time to apply for college financial aid. Be sure you understand how your tax choices affect the Free Application for Student Financial Aid (“FAFSA”) that colleges use to assess financial need. … page 17
Make the Most of Home Equity Interest
Borrowing against your home lets you convert nondeductible personal interest (credit cards, auto loans, etc.) into deductible home equity interest. However, there may be limits. … page 20
Potential Savings: Up to $250 in income tax for every $1,000 of personal interest converted to home equity interest.
Make the Most of Your 401(k) Plan
401(k) plans let you make the largest allowable contributions at most income levels. These have become increasingly popular choices for employees as well as self-employed individuals. … page 21
Potential Savings: Up to $4,500 in income tax for deferral contributions.
Your Business
Strategies for Limited Liability Companies
A limited liability company can be used to help avoid self-employment tax and shift income to lower-bracket family members. Make sure you consider all of these opportunities. … page 22
Potential Savings: Up to $38 for every $1,000 no longer subject to employment tax, plus $288 in income and employment tax for every $1,000 shifted to lower-bracket taxpayers.
Strategies for “S” Corporations
Consider establishing an “S” corporation. This may help limit self-employment tax and lower your risk of audit. … page 23
Estimated Savings: $9,525, based on a stated salary of $0.
Strategies for “C” Corporations
Consider establishing a “C” corporation to provide the broadest range of deductible employee benefits. However, be aware that these corporations require the most ongoing administration to avoid double taxation and other potential costs. … page 24
Maximize Car and Truck Deductions
You can choose two different methods for deducting business car and truck expenses: “actual expenses” or the mileage allowance (57.5 cents/mile for 2015). The right choice can add thousands in deductions and easily justify recordkeeping requirements. … page 25
Estimated Savings: $2,176, based on $7,800 in new deductions.
Make the Most of Business Meals/Entertainment
Business meals and entertainment, along with business gifts and business travel offer potentially valuable
deductions. Be sure to take advantage of every deductible dollar. … page 27
Estimated Savings: $349, based on $2,500 in new M&E expenses.
Make the Most of Business Travel
Reporting business travel expenses may seem straightforward. However, combining business with vacation travel can maximize your travel dollar and reward you with tax-deductible fun. … page 29
Separate Entities for Business Assets
Segregating business assets such as equipment, vehicles, and real estate in separate entities may offer valuable tax breaks as well as enhanced asset protection. … page 31
Take Advantage of “Certain Fringe Benefits”
The tax code offers a variety of little-known fringe benefits, even for startup and sideline businesses. Make sure you take full advantage of these opportunities. … page 32
Potential Savings: Up to $288 in income and employment tax for every $1,000 in qualifying deductible benefits.
Hire Your Family
Hiring your children lets you shift income that would otherwise be taxable to you (at your top rate) to them, to be taxed at their lower rate. This, in turn, lets you “deduct” the private or parochial school tuition, summer camps and activities, and college savings you fund with their income. … page 33
Potential Savings: Up to $288 in income and employment tax for every $1,000 paid to a “zero-bracket” taxpayer.
Consider Health Savings Accounts
Health Savings Accounts let you cut health insurance premiums with high-deductible policies, then establish deductible savings accounts for you and your employees to fund unreimbursed expenses. Make sure you understand the pros and cons of this new opportunity. … page 34
Potential Savings: Up to $838 in income tax for single coverage and $1,663 for family coverage.
Consider a Medical Expense Reimbursement Plan
A Medical Expense Reimbursement Plan lets your business reimburse you for your family’s uninsured medical expenses. This avoids the usual limit for deducting medical expenses (10% of Adjusted Gross Income) and may also save self-employment tax if your business is taxed as a sole proprietorship or partnership. … page 35
Estimated Savings: $1,074, based on $3,850 in deductible medical expenses.
Consider a SIMPLE IRA
A SIMPLE IRA lets you and your employees defer up to $12,500 of income, plus $2,500 more at age 50 and up. It’s easy to establish and administer, and may offer the maximum savings for incomes under $50,000. … page 36
Potential Savings: Up to $3,125 in income tax for employee deferrals, plus $250 for every $1,000 in employer contributions.
Consider a Simplified Employee Pension (SEP)
SEP accounts are the workhorse retirement plan choice for many small businesses and most self-employed individuals. Make sure you understand how to take full advantage of the opportunity. … page 37
Estimated Savings: $2,500, based on $10,000 deferred as a deductible SEP contribution.
Consider a 401(k) Plan
401(k) plans let you and your employees make the largest allowable contributions at most income levels. These have become increasingly popular choices for self-employed individuals as well as larger employers. … page 38
Potential Savings: Up to $4,500 in income tax for deferral contributions, plus $250 for every $1,000 in deductible employer contributions.
Your Investments
Make Smart Use of Tax Deferral
Tax-deferred accounts such as qualified plans, IRAs, permanent life insurance, and annuities can actually cost you extra taxes. Make sure you choose the right investments to include in these accounts. … page 39
Understand Mutual Fund Distributions
Different funds can have vastly different tax implications, even for funds with similar investment objectives. Be sure you understand how your funds are taxed before you buy, to build the most tax-efficient portfolio possible. … page 44
Fixed Annuities for Tax-Deferred Savings
Fixed annuities are insurance contracts resembling bank CDs in a tax-deferred wrapper. These can help defer tax on the fixed-income portion of your portfolio, and avoid tax on Social Security benefits. … page 50
Depreciate Real Estate for Maximum Savings
“Cost segregation” strategies let you maximize depreciation deductions, even for properties you’ve owned for years. Review your properties to determine if you can use these strategies to boost your deductions. … page 51
Potential Savings: Up to $250 in income tax for every $1,000 in increased depreciation.
Real Estate Repairs vs. Improvements
Real estate “repairs” are deductible immediately, while “improvements” depreciate over time. Make sure you characterize your fixups properly for maximum tax advantage. … page 52
Potential Savings: Up to $250 in income tax for every $1,000 shifted from “improvement” to “repair.”
Hire Your Spouse to Manage Your Property
Hiring your spouse lets you establish deductible employee benefits such as retirement contributions and medical expense reimbursements. Make sure you take advantage of these opportunities. … page 54
Hire Your Family to Manage Your Property
Hiring your children lets you shift income that would otherwise be taxable to you (at your top rate) to them, to be taxed at their lower rate. This, in turn, lets you “deduct” the private or parochial school tuition, summer camps and activities, and college savings you fund with their income. … page 55
Potential Savings: Up to $250 in income tax for every $1,000 paid to a “zero-bracket” taxpayer.
Cashing Out
Understand Capital Gains
Tax on most long-term capital gain is capped at 20%. But capital gains can cost you valuable deductions, credits and allowances, and subject you to the Alternative Minimum Tax. Be sure you understand how your gains affect your total bill. … page 60
Section 1031 Exchanges to Defer Tax on Sales
Real estate investors can take advantage of Code Section 1031 to exchange, rather than sell, their properties. This defers the tax on your gain you would otherwise pay, so you can use the savings to further build your investment. … page 61
Potential Savings: Up to $238 in income tax for every $1,000 of long-term capital gain deferred.
Charitable Trusts for Appreciated Assets
Charitable trusts let you sell appreciated assets such as stocks, real estate, or a business, avoid the tax you would otherwise pay on the gain, and take valuable charitable deductions. … page 62
Potential Savings: Up to $238 in income tax for every $1,000 of long-term capital gain avoided.
Consider a Family Limited Partnership or LLC
Family limited partnerships (FLPs) and limited liability companies (FLLCs) help minimize transfer taxes as you shift assets to your heirs and lower your family’s overall tax on FLP or FLLC income. Make sure you comply with IRS rules to take advantage of these breaks. … page 63
Avoid Probate on Taxable Assets
Probate imposes an indirect tax on assets held in your name at your death. Avoiding probate is generally not difficult, and helps maximize the after-tax legacy you leave your family. … page 64
Minimize Estate Tax
Federal income tax rates top out at 39.6%. But estate tax rates START at 40%, for estates over $5.43 million. Good estate planning can minimize or eliminate this most devastating tax. … page 65
Potential Savings: 40-90% of assets above $5.43 million.
Total Estimated Savings: $15,624
Based on the information you’ve provided, if we implement the strategies we’ve specifically estimated in this plan, we can reduce your tax bill by $15,624 or more. Potential savings from strategies not specifically estimated may be even greater.
Disclaimers
This report is based solely upon information provided by John & Mary Smith. David M. Warrick CFP, EA has made no effort to verify the accuracy or completeness of this information, and assumes no liability for errors or omissions based on incomplete or inaccurate information.
“Potential Savings” are based on your marginal federal income tax bracket, and where applicable, marginal employment tax bracket (FICA and Self-Employment tax), as calculated using the information you provided. These estimates do not include additional savings which may be available at the state and local tax levels.
Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.
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