061: 5 Tax Facts (& Hacks!) You Probably Don’t Know
Welcome back Cashflow Multipliers! Thank you for joining us today wherever you’re listening from, we’re so thankful for this community of passive investors!
Today we’re excited to be debunking some myths and shedding light on one of our favorite topics– taxes. 🤩🤩
Here at the Kitti Sisters, we have a mantra we repeat often: If you want to change your tax, change your facts. And there are a lot of weird facts out there–including about our bestie Warren Buffet! Did you know in 2020 he finally ditched his flip phone for an iPhone 11 after Tim Cook flew to Omaha to personally offer him tech support?
Is that why he hasn’t been returning my calls?!
I’m sure he’ll get back to you soon.
When we say if you want to change your tax, change your facts we don’t mean make up whatever rules, and come tax season you’re living in your made-up reality where the IRS is questioning your statements. 😘😘
And please, for the love of God, do not be adding random deductions and tell Uncle Sam we said it was okay.
Yeah, we don’t want to be associated with that. But what we do want to be associated with is teaching you more about the financial system we live in and letting your dollars work for you.
Most of us understand the basics when it comes to taxes, right? The amount of taxes you owe is based on your particular business and personal financial situation. This includes how much you earn, how you earn it, and how your expenses are structured around it.
How many of you have experienced that when any of those variables change, your tax bill changes as well? 🤔🤔
Like when we entered a different tax bracket by making serious money in the fashion industry and forked out a six-figure tax bill? Yeah, that was traumatizing.
Exactly. ➡️ If you’re looking to reduce your taxes, you need to look at which of these facts you can and are willing to change that will allow you to lower your bill.
Right, so these variables of how you earn, how much you earn, and the expenses structured around it need to be evaluated carefully and with a critical eye. These fact changes are powerful tax planning strategies.
How do you start? By examining your surroundings and analyzing your current financial situation to identify opportunities that will improve your tax efficiency. This all comes back to what your current tax strategy is, and asking yourself if you’re creating a system that allows you to keep more of your money… or giving it up easier than you anticipated?
You can build your wealth faster by creating a sound structure and knowing what to look for when it comes to these vital facts. Your tax strategy and wealth strategy work hand-in-hand. 💡
And we’ll let you in on another secret– the best time to change your facts is now.
Today we’re diving into the top 6 tax planning strategies for anyone looking to save on tax by changing their facts!
Start with Strategy
We’re all pretty familiar with the circle of life, right? No need to break out the freshman year biology book, but when it comes to the planet and how wildlife sustains itself, there are two main camps– consumers and producers.
Most governments, including the US, view how we make our incomes in a similar light. Let’s break it down for you. 😇😇
How you earn your money has a significant impact on how much in taxes you pay. 🤓🤓 Governments tend to incentivize business owners, investors in real estate, and producers of commodities such as agriculture and energy. Because these activities support economic growth, legislators structure tax codes so that these producer activities are taxed at much lower rates than the traditional salaries of most consumers.
If this sounds like a teacher playing favorites, you wouldn’t be too far from the truth. But hey, think about it, if you’re supplying jobs and supporting economic growth, the Fed is going to want to keep you there and keep you happy by letting you keep your money. Simple enough concept, right?
Part of your tax planning strategy needs to include examining how you earn your money. Look for opportunities that interest you that will allow you to move from being a consumer to a producer. ✨
Producers in the ecosystem tend to be things like grass and algae, and while we know that may not sound sexy they are life-giving to their consumers– rabbits 🐇 and fish 🐠. You can breathe life into the economy by changing how you make your income. As you have more control of the money you make, you also will have more control of when you recognize your income from a tax year perspective.
Here is where the facts change for tax. It’s a common misconception that you’re better off pushing income later into the year to reduce your taxable income in the current tax period. However, there are times when the more strategic option is to accelerate your income. Let’s break down what we mean.
If you’re a small business owner, we recommend being mindful throughout the year to keep your income and distributions on track to support your planning strategy. While we can’t tell you what your exact tax strategy should be, your tax advisor can. So we recommend checking in with them as you map out this next year.
A few things to consider are whether reducing your income now causes you to lose any of your available deductions and if you anticipate tax rates increasing in the upcoming year. All of this is about creating a system that works for you and wealth-building goals. 😊😊
The second thing to note when it comes to checking your facts is checking out entities. 🧐🧐 Entities are just a fancy way of what we commonly know as setting up an organization to conduct business. Launching one for your business is probably one of the best tools for reducing taxes. In fact, adding the right entity to your portfolio at the right time can save as much as $10,000 or more each year in taxes.
This is especially good news 🥳️ for our friends in high-tax states such as New York, California, New Jersey, Illinois, Wisconsin, and Connecticut. In some cases, you might find it worth your while to pay more in tax as a business versus as an individual.
The tricky part is different types of entities are taxed differently, so choosing the right entity and planning wisely is essential.
Entrepreneurs often launch a venture as one type of entity with the intent of electing a different form later once the venture has reached a certain income threshold. And with all the hustle and bustle of growing and owning a business, it’s easy to forget to make the switch once the income threshold has been reached. That mistake can prove costly.
Our best advice here is to review your entities every year as a part of your tax planning strategy, just build it into your tax checklist. The addition or removal of an entity or ownership status change can significantly impact your taxes and the preparation process for completing your tax return. 😉😉
So change the facts and check your status to max out those tax returns!
Don’t Miss Out on Deductions
Up next, let’s talk deductions. In general, this term can be overused in the finance world, especially when you have your own business.
I used to roll my eyes anytime 🙄 people claimed their dinner with colleagues was a “tax deduction” I thought it was just an excuse to go for that expensive bottle of wine!
I think those people might be the ones who are doing it right. On the other side of the scale, there are people who pay more in taxes every year because they fail to realize all of their available deductions. A surprising amount of people knowingly skip some or all of their available deductions out of fear.
What are they afraid of?!
An IRS audit. They gotta see the receipt for that bottle of wine!
I guess I can see that, somewhere down the line they were probably told certain tax deductions raise red flags with the IRS, so they willingly left deductions on the table.
Documentation is key 🔑 in this process. When you take tax deductions seriously and appropriately, you immediately improve your financial position. Of course, we’re joking about the wine, but here are other common missed deductions on the table.
Your Home Office is a great one, especially if you’ve been eyeing those dreamy Pinterest boards with all the work-from-home inspo. While this deduction may not be right for everyone, in some cases it can be the deduction that pushes you above the standard amount.
Plus, having a home office also leads to more opportunities to deduct from your car expenses. How these two connect we recommend working with your tax advisor to map out the best strategy.
The other one to consider is a new definition for 2020– the 20 percent pass-through deduction which significantly impacts all you pass-through business owners. A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax.
Instead, a pass-through business reports its income on the individual’s income tax returns. So in other words, you’re taxed from your personal taxes as a pass-through business owner.
So, what does this have to do with redefining 2020? Pass-through owners who qualify can deduct up to 20% of their net business income from their personal income taxes, reducing their effective income tax rate by 20%. This deduction became part of the tax law in 2017.
So to all the small business owners, you know– take note! This can mean big savings overall. ✨✨
The other key deduction is bonus depreciation for real estate investors and syndicators.
Like us! 😉
Yup! Since 2018, investors have had the choice to take bonus depreciation as a lump sum or spread it out. And our best advice to this is to do what’s best for you! Everyone’s circumstances and situations are different. Your tax planning strategy should include which approach works for you. In some cases, most of a property can be written off in the year it is acquired.
The Giving Tree
Next up, is the act of generosity. 🙌 We talk a lot about making money on the pod, and one of the biggest benefits of acquiring and building wealth is the ability to give and make an impact on organizations and causes you value.
Giving to others is a ripple effect of good, both for the organization and for yourself. Charitable donations are an incredible opportunity to reduce your taxes if you handle the contributions according to tax law.
Of course, your heart ❤️️ in the giving is positioned towards generosity and leaving a better impact in the world– reaping those tax benefits is just a plus!
However, that doesn’t mean you shouldn’t plan for these deductions when considering your tax planning strategy. To ensure the contributions you’re giving will enhance your tax planning strategy, make sure they’re going to a designated 501(c)(3) non-profit.
Of course, different organizations have different rules and regs, but most stay consistent across the board, including churches and trusts. Many states also give credits for charitable contributions– so ask your tax advisor if you’re eligible!
It’s Kinda Like, a Like-Exchange
As a passive investor, you have a lot on your plate. Add in apartment syndication, equipment, business vehicles, and other investments– now those plates are spinning.
And it’s on you to make sure they don’t fall!
You can minimize risk by discussing these investments and how they impact your tax planning strategy with your tax advisor. 😌😌
And watch the substantial savings opportunities pile in.
An example of this is making a like-kind exchange with your real estate purchases as a way to legally avoid taxes.
Yep, you heard that right. This process involves selling a piece of real estate and then turning around and using the proceeds to buy another property, thus avoiding tax on the property you sold.
They can’t tax you for something you no longer own, right?
Another option is to utilize bonus depreciation via apartment syndication which can massively give you extraordinary tax benefits.
Our last fact change for you today is hiring your kids! 🤓🤓
We know how this sounds but hear us out for a sec– kids are a joy to bring into this world but at some point they have to earn their keep, right?
I’m pretty sure that’s not how that works. However, claiming them as dependents and employees does you a lot of good in the long run! How so? First, their salary becomes a tax deduction for the business. You’ve created a job, and the tax law rewards this with a deduction.
Remember the whole consumer and producer thing? Yeah, the same rules apply under your roof, too!
Their income will most likely be taxed at a lower rate than yours. In the United States, children have a 10 to 12 percent tax bracket – far lower than their income-earning parents – and a $12,000 standard deduction. If you own a business and can legally hire and pay them a salary, the first $12,000 can be tax-free, and the rest of the money they earn can be taxed at a lower rate.
Like any good parent, you just want to see your kid succeed in the world. So having them work for you can be a huge step in the right direction while keeping your business running. 😘
If at some point your child does end up needing to pay taxes, they can reduce that by putting some of their income into a 529 college savings plan. Don’t worry– we’re still all about having a solid education under their belt too!
Teaching your children the value of work and helping them save for the future is grade A parenting– plus supporting your tax plan doesn’t hurt either!
So, what do you think Palm? Think they got some good, solid fact changes under their belt after today?
Definitely! Moving from consumers to producers, reviewing entities, maxing out those deductions, giving to 501(c)(3)s, and like-exchanges are solid places to start when mapping out a tax strategy. 😜
Talk about a solid foundation! You guys have a lot to work with after today’s episode and we are thrilled for whatever is next for you all!
Until next time, Cashflow Multipliers‼️
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