This and the next WealthWISe will open your eyes and fill your pocketbook!

Tax Reform is generally good news for small businesses but in most cases, you have to know about a deduction and act to qualify for it. One exception is the 20% deduction on the lower of business profits or taxable income. It works as long as you don’t make too much. Oh, and don’t incorporate without discussing it with me.

Let’s talk about some tax savers that are frequently missed or underused:

+ vehicle deductions, + new equipment, + home offices, + hiring the kids, + charitable contributions as business expenses, + tax preparation costs for your business, + home equity credit lines used for business purchases. + Itemized deductions that do more good as business deductions. Most taxpayers shortchange themselves on these deductions. Read on!

The IRS has issued 184 pages in proposed regulations explaining the new 20% deduction for domestic income from pass-throughs, which includes one-man businesses and landlords. If your taxable income does not exceed a threshold of $315,000 (joint filers), or $157,500 (all other taxpayers), there are no further limits to this deduction.

Think twice about incorporating — you may be taxed twice!! Now that corporations qualify for a 21% tax rate, everyone is wondering whether they should incorporate. Most taxpayers are better off not incorporating, because corporate earnings can be taxed twice: first on the corporation’s earnings, then to the shareholder when it takes those profits out!

Now for some underused tax savers that I teach my clients to use:

Business vehicles: Clients often underuse their auto deductions. They keep poor records and then they underestimate their business mileage. They overlook additional deductions, like parking and interest on their car loan. Ask me about extra mileage with a home office. Certain large vehicles (more than 6000-pound gross vehicle rating) produce spectacular deductions, using the §179 deduction and bonus depreciation.

Buy and use the equipment before year end. The §179 deduction is available to write off furniture and equipment placed in service before year-end but it cannot exceed profits from the business.

Bonus depreciation. If the §179 deduction is available you may deduct instead up to 100% of assets placed in service this year if first used by the taxpayer.

My Advice: You can save taxes if you depreciate these costs over several years if your income is increasing.

Entertainment. Generally under tax reform entertainment expenses are not deductible. However, business meals in which business is discussed remain at least 50% deductible and may be 100% deductible if included in the price of a business presentation.

My advice: Be alert for expenditures paid with your personal checkbook or credit cards that are actually business deductions, like business gifts, supplies, publications and subscriptions. Purchases at Walmart may be mixed business and personal. Try to tag these:

My advice: Look for normally personal expenditures that help your business, such as cell phones, cable, furniture, and computers.

My advice: Hire the kids. I am a longtime advocate of legitimately hiring your children. You deduct what you pay them. A minor child can earn up to $12,000 without paying taxes and is exempt from FICA and FUTA taxes. If they are older, put them on the payroll. Another advantage, hiring your child can allow you to fund Roth IRA contributions for the child.

The next issue will get into Schedule A Itemized Deductions gambits — when itemized deductions become business deductions.

REAL ESTATE TRICKS AND TRAPS:

I bet you can’t guess how many ways there are to transfer real estate at death. You can do it with or without a will, with a defective will, with a tenancy by the entirety, with joint ownership with survivorship, with a muniment of title, holographic will and finally my favorite, a revocable living trust.Which way is best for you?

1. With a will. With a will, the property goes to whoever you specify in the will. Of course, the will must be approved by the Probate Court, which means the Executor is subject to the Probate Process. The Executor must follow the Probate Court’s rules and procedures. This takes time and money. Clients are never happy with the Probate Process.

2. With a will, without full Probate. Muniment of title. If an estate contains nothing but real estate, I can file the decedent’s will with the Probate Court but not open a Probate estate. The will is called a “Muniment of title,” and it acts like a deed to pass the home to the beneficiary named in the will. This saves most of the cost of probate. A recent client was very pleasantly surprised to find out how easy this was.

3. Without a will. In Tennessee, if you die with no will, things get worse for your family. State law controls and the Probate Court supervises the transfer of your property, so your family is subject to Probate requirements. In this case, the Court appoints an “Administrator” to manage the estate instead of an Executor. Your real property is inherited by your heirs according to state law. For example, if you are married with one child, the property goes equally to your surviving spouse and child. If the child is a minor, the Court will appoint a guardian. This situation is much easier with a good lawyer, which is where I come in.

4. Without a will, using Affidavits of heirship. If the decedent has only a few heirs, this is not too bad. I establish that the heirs own the decedent’s real estate by preparing sworn “affidavits of heirship.” Signed and sworn by a friend of the decedent this document proves that the heirs are the sole heirs and therefore own the property. I file these with the Shelby County Register. The heirs can then transfer the property. You don’t need a deed.

5. Tenancy by the entirety. Property that you buy with your spouse is held as “tenants by the entirety.” If either of you die the survivor owns the property. That is fine when the first spouse dies, but what happens after the surviving spouse dies?

6. Joint with right of survivorship. This is similar to the tenancy by the entirety but the property is not owned by spouses. Bank and brokerage accounts can also be set up this way.

7. Holographic Will. A holographic will is one in which all of the material provisions are in the person’s handwriting and with his signature. It is valid under Tennessee law, so it is the same as With a Will, but I advise against it. If you have ever had a misunderstanding as the result of a poorly drafted text or email, you can just imagine how difficult it could be to interpret a ten-year-old will in handwriting when no one knows what the writer’s intentions were. My father made one of the largest fees ever, hundreds of thousands, in a lawsuit trying to interpret a holographic will.

8. Defective will. Unless your will states that it revokes prior wills it will be read together with the previous will. Very Confusing! We could end up in litigation here.

9. Revocable Living Trusts (“RLT”). I advise deeding property into your RLT in most situations.   Then Probate is not required when you die because you are not the owner. This likewise avoids Probate on property in other states. Furthermore, all the other advantages of RLT’s are available so you can make sure your family is taken care of.

This article gives you just a taste of what happens to your assets at death. Do your family a favor and plan your estate. 

Are you throwing away tax savings?
I bet you are. There is a saying about taxes: “You don’t know what you don’t know.” Most taxpayers miss thousands of dollars in tax benefits and I find them, so I pay for myself.
I spend thousands of dollars on daily updates on taxes, so take advantage of my knowledge. With my custom designed TAX MASTERY© (TM) software, I apply over 350 factors and give you a written report on how to save taxes and how much you will save.
For example, the new “standard deduction” is $12,000 for single and $24,000 for joint returns. My TM report shows you how to beat the standard deduction with actual deductions for medical expenses, sales taxes, mortgage interest, investment interest, and charitable deductions. If you want to know more, read on.

Medical expenses for 2018-2019 must exceed 7.5 percent of adjusted gross income. May include a portion of doctor prescribed home improvements

State and local taxes. These are now limited to $10,000 per year but you can combine sales, real estate, and income taxes. Most of my clients spend a lot more on sales tax than the IRS table amount. Do you? Many clients can save $1,000 or more by calculating their actual sales tax and maintaining records to prove it.  One client proved over $10,000 in sales tax by getting receipts for materials used to build an addition to their house. Don’t forget the sales tax on boats and cars.

My advice: Come on in and let me help you calculate your actual sales tax and show you how to prove it.

My advice: If your taxes exceed $10,000, see my Business and Rental articles in this WealthWISe.
My advice: If you have a business home office deducting its portion of the real estate taxes may save self-employment tax.

Mortgage interest You may deduct interest on 2018 mortgage debt borrowed after 12/15/17 to buy a home up to $750,000. The $1,000,000 limit applies to former debt. I have one client who saves more than a thousand dollars per year by deducting home mortgage interest on his sailing yacht as a second home since it has living quarters.

My Advice: Mortgage insurance premiums you can deduct these on the purchase of your principle residence.

Heloc interest new or old is not deductible unless used to purchase your home, a rental property or a business property.

My advice: Make interest on a HELOC  deductible by using it for a home addition, a rental property or a business.

Net investment interest.  One client was surprised to find that investment interest, such as margin interest, is deductible up to investment income (reduced by investment expenses). You may elect to count capital gains and qualified dividends.

The next WealthWISe will get into Charitable and Miscellaneous deductions.

Miscellaneous deductions repealed. In 2018 you can no longer deduct employee deductions, tax preparation fees or investment expenses. I can help you determine if they qualify as business expenses.