What to do on Tax Day and after

If you haven’t filed your tax return, it’s time to get cracking! If you are a small business you will benefit by using an experienced tax professional. As a Super Lawyer in taxation, it is time for me to make sure that my clients get what they need. I provide tax preparation PLUS. Unlike many tax lawyers, I love to work with small businesses. As such, you get personal service and a caring attitude along with the expertise of a former IRS lawyer with years of experience. If you missed me this tax season, you can save taxes for 2020 by learning what I know.

As an Accredited Estate Planner, I don’t drop the ball during tax season or otherwise. Your family will not get advance notice of when they must use your estate planning. I have unusual experience with revocable living trust planning.

You can take advantage of a half-hour free consultation to find out if you will benefit from these services. Do it now, while you can! #tax planning, #estate planning

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MIND YOUR BUSINESS: What Form of business is best?

Many of my clients are small or family businesses. Diane & David Bowling of Commercial Construction and Renovation, LLC , Jackson, TN, said about my tax preparation: Thank you! You truly are a “Super Lawyer.”

New clients often come to me for advice on forming a new business. Some are interested in S corporations since S corporation earnings are not subject to the self-employment tax. There is a lot more to know before you choose an S corporation. I was once in house counsel and CFO of a $15 million dollar + S corporation. S Corporations have pluses and minuses. The rules are complex. They are audit magnets. One of my clients suffered criminal investigation because the IRS did not understand the rules.

The S corporation is an unusual hybrid business entity. It is a corporation under state law. However, for federal tax purposes, the IRS treats it much like a partnership. However, there are key differences between an S corporation and a partnership that confuse the shareholders.

For a corporation to become an S corporation it must file an S corporation election (Form 2353) within two months and 15 days (75 days total) of the date of formation for the election to take effect in the first tax year. The corporation itself is not taxed. Instead, the character and amount of income and deductions pass through to the shareholders. S corporation income is reported on a Form 1120 S and shareholder shares are reported on a K-1 form.

Shareholders’ wages. The IRS has ruled that S corporations must pay shareholders wages for their services, subject to social security and Medicare withholding, which must be matched by the corporation, so it is equivalent to self-employment tax. S corporations not paying wages to owners may draw IRS audits.
One class of stock. Furthermore, S corporations have other complicated rules and can lose their status easily. For example, an S corporation can have only one class of stock. No preferred stock.

Limits on shareholder loss deductions. Generally S corporation’s shareholders cannot deduct losses exceeding the sum of their stock cost plus what they loaned to the corporation. Loans to the corporation from third parties don’t count. Shareholders don’t like to worry about these nuances.

IRS Audits. Shareholders tend to misunderstand some rules and to abuse others. So, the IRS loves to audit S corporations. The IRS is challenging these cases and often wins in the Courts. Furthermore, the IRS does not understand the rules so I have seen them suggest criminal investigation where it was not warranted.

My advice. I have formed and managed several successful S corporations. However, they are not suitable for many taxpayers. I advise getting expert legal advice before making a deci.

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ESTATE PLANNING JUNE 2020

Is your estate plan or lack of an estate plan a trap for your family? Is it going to be expensive and aggravating for your family after your have passed away when life is already miserable? Let me show you how to save yourself and your family significant time and money for a lot less than going with your current “plan” talking with a professional, preferably an attorney who can draft or redraft documents

As an Accredited Estate Planner, I review a lot of estate plans. One of the most popular estate plans for wealthy clients prior to 2011 placed part of a deceased spouse’s estate in an irrevocable “bypass” or “credit shelter” trust when the first spouse dies. This strategy was designed to keep those assets from adding to the surviving spouse’s estate where it might be exposed it to a higher estate tax. However, these days, 99% of taxpayers have no need for such trusts since the lifetime estate and gift tax exemption per couple is ($11,580,000).

In general, funding a credit shelter trust at the first spouse’s death is a disaster. It is expensive and inconvenient to operate. Typically the trust has a separate trustee. It is a separate irrevocable taxable entity requiring a separate tax return and tax ID number. It deprives the surviving spouse of control. It has the highest tax rate at the lowest taxable income level of any taxable entity. It can increase capital gains in the spouse’s heirs.

If you have a will or trust that provides for a credit shelter trust, NOW is the time to remedy the situation. If you already have a credit shelter trust, Tennessee has laws under which, with professional help, you can eliminate these trusts even if you are deceased. An improved estate planning document can be much simpler and qualify for lower taxes. The assets can receive an increase in “cost” (stepped up basis) upon the surviving spouse’s death.

My Advice: This article is the tip of the iceberg. It is almost always painless to have your will, trust, and other estate planning documents reviewed. I offer a free ½ hour consultation that will get you started. Call me!

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INDIVIDUAL TAX PLANNING June 2020

I WON’T KID YOU!


Raising children is expensive! You cannot afford to overlook tax breaks. Here are some of my favorites. There are $2,000 and $500 child credits. There is a child-care credit for up to $600 per child up to $1,200. Tax credits reduce taxes dollar for dollar. The rules are complex. I have a surprise or two for you.
CHILD CREDITS. There is a $2,000 child credit for parents of a “qualified child,” replacing the previous $4,000 deduction for dependents. In addition, there is a $500 credit for “qualified relatives.” The credit phases out if you have “modified adjusted gross income’ exceeding $400,000 for married filing jointly and $200,000 for other statuses. These rules are simplified so do not act upon them without advice.

QUALIFYING CHILD: entitles parents to a $2,500 credit.

  1. your legal child, stepchild, or foster child,
  2. under 19 or under 24 and a full-time student.,
  3. provided not more than half of his or her support,
  4. claimed as a dependent on your tax return,
  5. lived with you in the U.S. for more than half the year,
  6. a U.S. citizen, and

QUALIFYING RELATIVE. A qualifying relative entitles parents to a $500 credit.

  1. who is not a qualifying child?
  2. a household member who is a close relatives or in-laws or certain others.
  3. who made less than $4,200 in gross income in 2019 (the former deduction for a dependent).
  4. is one for whom you provided more than half of the total support during the year.
    For exhaustive information, see IRS Publication 501

DEPENDENT CARE CREDIT

The dependent care credit is a valuable tax benefit for parents, up to $1,200 (20% of qualifying expenses). This credit applies to expenses for the well-being and protection of your child that are necessary for the gainful employment of the parents. Here are some requirements.

To qualify: (1) Must be your qualifying child who is your dependent and who was under age 13. The expenses must be for that person’s care. (2) You must share your principal residence with the qualifying persons. (3) You must pay the expenses so that you and your spouse can work, and each must have income from work that year. (4) Your expenses may not be paid to someone you can claim as a dependent. If you are married, you must file a joint return. (5) Necessary household services qualify like the services of a housekeeper, maid, or cook but not the services of a chauffeur, bartender, or gardener.

NOT qualifying are amounts for food, lodging, clothing, education, and entertainment. Education means kindergarten or a higher grade but does not include before or after-school care.

Amount limits. The qualifying expenses are limited to the lower of a dollar limit and an earned income limit. The dollar limit is $3,000 for the first q ($6,000 for two or more qualifying persons). The earned income is the smaller of your or your spouse’s earned income for the year. The credit is 20% of qualifying expenses, so it can be up t o $1,200
TIP: A qualifying child’s Summer day camp costs qualify for the dependent care credit including day camps for sports, computers, math, theater or just for fun, and includes camps to help improve reading or study skills. Not qualifying are overnight camps, summer school, and tutoring.
This article is oversimplified and before you try to apply it, I suggest that you ask a professional. Here are a mere 20 pages or so that the IRS has provided of guidance in IRS Publication 503 Child and Dependent Care Expenses.

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The Tax WISard’s Thoughts for Investment Advisors June 2020

Taxpayers pay unnecessary taxes every year because they are ignorant of the tax laws. For example, a tax return client bragged to me about over $50,000 in dividends, all foreign companies. That client paid TWICE as much tax as he would have with domestic dividends, 32% versus 15%. To help remedy this situation, I recently sent my guide, The Tax Wizard’s Thoughts for Investment Advisors to over 50 top investment advisers.

Capital gains and losses. Long Term Capital gains (on investments held 12 months or more) are taxed at lower rates than ordinary income, generally half as much or less. For short-term gains, the tax rate can hit 40.8%. Timing is everything.

If you or someone you know are interested in some of the strategies let me know. Read more

Pick your cost. A great trick: If you purchased several blocks of stock over a period of time, you can specify which you are selling, saving taxes by selecting those that cost the most.

Capital Losses. You can save taxes by selling loss investments toward year end to offset up to 100% of your gains from such sales. You can use excess losses to offset up to $3,000 of other taxable income. If yet more losses remain, you can carry them forward to offset gains in future years.

Qualified dividends” are those from domestic US companies. Qualified dividends are taxed at lower rates, just like long term capital gains.

3.8% Surtax on net investment income. This tax applies to the lesser of: (i) net investment income or (ii) “modified adjusted gross income” that exceeds $250,000 for joint filers, $125,000 for married separate filers or $200,000 for other taxpayers. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. See Form 8960.

Net investment interest. If you pay interest on debt used to purchase investments, like margin interest or interest on a loan to purchase an investment partnership, S corporation, LLC or corporation, the interest can be deducted on Schedule A as an itemized deduction up to the amount of net investment income. You can elect to increase net investment income with long term capital gain or qualified dividends but they are then taxed as ordinary income.

More important rules and strategies in the next WealthWISe.

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