Taxing Subjects & Wealth Building

Learn more about taxes and how you can use that knowledge to build wealth…

Understanding your income taxes at a basic level is important in the current economy and with recent changes to the tax laws it is more important than ever that you understand your taxes at the state and federal level and know some of the ways that you can minimize your taxes and build wealth more efficiently.

 

In this discussion TheWealthIncreaser.com will briefly discuss a number of individual tax topics as it relates to the IRS that could possibly be of benefit to you or a loved one.

 

It is important that you understand that you have a “bill of rights” that came into effect in 2014 (give thanks to National Taxpayer Advocate Nina Olson) that outlines what you can and can’t do as it relates to filing your federal income taxes and your relationship with the IRS if you are a U.S. citizen or subject to taxation by the IRS.

 

Your Rights:

 

*Be Informed *Quality Service *Pay no more than the correct amount of tax * Challenge the IRS’s position and be heard *Appeal an IRS decision in an independent forum *Finality *Privacy *Confidentiality *Retain representation *A fair and just tax system

 

Go to taxpayeradvocate.irs.gov/taxpayer-rights to learn in more detail about your rights…

 

What is the difference between injured spouse and innocent spouse?

 

Injured Spouse

A: An injured spouse is simply someone whose tax refund is used to cover the past-due debts of a spouse or exspouse. When married taxpayers file a joint return, each spouse has an interest in the jointly reported income and in the debt.

 

Generally: If you file Form 8379 with a joint return electronically, the time needed to process it is about 11 weeks. If you file Form 8379 with a joint return on paper, the time needed is about 14 weeks. If you file Form 8379 by itself after a joint return has already been processed, the time needed is about 8 weeks.

 

It will primarily benefit you if you file form 8379 and you are the spouse who is injured (the injured spouse) on a jointly filed tax return when the joint over-payment was (or is expected to be) applied (offset) to a pastdue obligation of the other spouse.  By filing Form 8379, as the injured spouse you may be able to get back your share of the joint refund that was initially taken by the IRS to settle a debt that was owed by your spouse.

 

To qualify for an injured spouse claim, you must meet the following conditions:

 

You are not required to pay the past-due amount.

 

This means that the debt is one which your spouse incurred before you got married or that the debt is one for which only your spouse is liable.

 

Form 8379 lets you (the “injured spouse“) get back your portion of a jointly-filed refund if it’s seized or offset to pay your spouse’s debt. You must file jointly to use this form. Filing an 8379 will delay your federal refund by up to 14 weeks.

 

But it could — if you file the injured spouse form allow you to get back a portion of the refund.

 

As an injured spouse, you are in essence asking the IRS to pay attention to whether you or your spouse has the refund and who has the debt. 

 

It’s not just federal tax debt that gets collected. A potential refund could be used to offset past-due child support, defaulted student loan payments, state or local taxes, or any other money owed to a state or federal agency. The IRS will inform you and your spouse if an offset takes place. A formal Notice of Offset will be mailed to the taxpayer’s address, which gives the taxpayer time to respond by filing Form 8379 as an injured spouse [source: IRS].

 

For example, if you were newly married, and were filing taxes jointly for the first time and you always filed individually in the past and you were used to getting a nice refund and your spouse doesn’t usually receive a refund because the IRS garnishes any tax over-payments to cover past-due student loans–you could potentially file as an injured spouse using form 8379.

 

Once you file as a couple, your refund will be used to cover your spouse’s back student loan payments. By filing for injured spouse relief, you are asking the IRS to keep your refund away from your spouse’s debt.

 

The IRS takes many things into account when calculating how much the injured spouse might be due. There are two formulas used, including subtracting your share of joint liability from your share of the credits and income. There is also a separate tax formula, which looks something like this [source: IRS]

 

IRS Formula:

 

(Injured spouse’s separate tax liability / Total of spouses’ separate tax liabilities)
x Joint tax liability shown on return= Injured spouse’s share of liability

Instructions for filing…

Innocent Spouse

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) “improperly reported items or omitted items” on your tax return.

 

The IRS will figure the tax you are responsible for “after” you file Form 8857!

 

In contrast, as mentioned above an injured spouse is someone “whose tax refund is used to cover financial obligations” of a current or former spouse.

 

Please note that the financial obligations can be outside of your federal income taxes as mentioned above!

 

You are an injured spouse if “your share of the over-payment” shown on your joint return was, or is expected to be, applied (offset) against your spouse’s legally enforceable past-due debts.

 

IRS Definition:

 

Innocent spouse relief provides you relief from additional tax you owe if your spouse or former spouse failed to report income, reported income improperly or claimed improper deductions or credits.

 

If you qualify for Innocent Spouse Relief, you “will not” be held responsible for your spouse or ex-spouse’s unpaid taxes.

 

You may qualify as an Innocent Spouse if all of the following are true:

 

*You filed a joint tax return.

*Due to the circumstances, it would be unfair to hold you liable for the unpaid taxes.

 

Am I responsible for my spouse’s debt?

 

If you were married when your spouse incurred the back taxes, then yes.

When you file jointly, then you assume “joint and several” liability.

 

Instructions for filing…

You must file Form 8857, Request for Innocent Spouse Relief, to request any of the methods of relief. Publication 971, Innocent Spouse Relief, explains each type of relief, who may qualify, and how to request relief.

 

What is the benefit of purchasing a home as it relates to the filing of my income taxes?

 

If you purchase a home you will enjoy the benefits of your own dwelling (privacy, equity build up, peace of mind and the like) along with a number of potential tax advantages at the federal and possibly state level as well.

 

Those advantages will be unique to you based on your income, family size, state of residence, loan amount, real estate taxes paid, interest paid, whether you have mortgage insurance and the timing of your purchase among other factors.

 

It is important that you put yourself in position for success by knowing on the front end whether you are properly prepared to purchase and you know how you will benefit in a proactive way–not after your purchase.

 

What effect does interest and investment income have on my taxes?

 

It depends on the amount and whether the interest and/or investment income was earned inside or outside of your retirement account.

 

If earned outside of your retirement account(s) you may have to pay annual taxes at your ordinary income or capital gains tax rate depending on the type of account and the amount of your income.

 

Your family size and whether you itemize deductions and other factors will have some effect on the overall taxes that you will pay or the amount of refund you will receive.

 

If earned inside of your retirement account(s) you may defer or possibly avoid taxation until your retirement years or possibly later depending on the “type” of investment and your (including your spouse if filing jointly) overall income at the time of retirement and the years thereafter.

 

Conclusion

 

Taxing Subjects can be a broad area and this discussion only touched the surface as far as taxes are concerned.

 

Even so, your high level of comprehension and proper application of the subject matter that you learned in this discussion that you can use in your life at this time (or later on down the road) can put you far ahead of those who go about their daily life with no real concern or understanding of their tax position and where they want to go in life.

 

Also be aware of and look for ways that you can improve your tax position in other areas outside of your income taxes.  Can you improve on the payment of your real estate taxes, ad valorem taxes, sales taxes, utility fees, telecommunication fees and other taxes or fees that are not defined as taxes but have the same effect?

 

All the best toward paying less and continued success…

 

 

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Qualified Business Income & Taxation

Learn how you can use QBI (Qualified Business Income) to lower your taxes…

 

After the tax cuts and jobs act of 2017, a popular buzzword or acronym that has crept up in the American lexicon is QBI or Qualified Business Income as it has the potential to lower the taxes for those who qualify.

 

In this discussion TheWealthIncreaser.com will try to explain what QBI is and show you ways that you can use this new tax change that occurred as a result of the tax cuts and jobs act of 2017 to reach your future goals more efficiently.

 

What exactly is QBI and why should I be concerned about QBI?

 

QBI stands for Qualified Business Income!

QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business as the result of the 2017 tax cuts and jobs act that occurred in the United States.

In  laymen terms if you have income from a sole proprietor, partnership or other pass through entity you could potentially deduct 20% of the income and lower the taxes that you pay on your tax return.

The pass-through deduction is a personal deduction that you may take on your Form 1040 whether or not you itemize and the deduction is taken on line 9 (second page) of your Form 1040.

It is not an “above the line” deduction on the first page of Form 1040 that reduces your adjusted gross income (AGI).

Furthermore, the deduction only reduces income taxes, not Social Security or Medicare taxes so keep that in mind.

 

Can QBI be used for rental property?

 

The new Section 199A regulations make it clear that merely owning rental real estate that generates rental income is not a trade or business of being a real estate investor, and as such, wouldn’t qualify for the QBI deduction.

However, if you actively manage your rental real estate—there is the potential for some or all to be classified as QBI.

 

Who qualifiies for the QBI deduction?

 

If you are self-employed or your business qualifies as a pass-through entity, the Tax Cuts and Jobs Act says you may deduct up to 20% of your QBI on your federal income tax return if you meet the qualifications.

The QBI deduction is known as the pass-through entity deduction that you may have heard about!

 

The following would have to be subtracted out of your business income when calculating the QBI deduction:

 

* capital gains and losses

* dividends or interest

* annuity payments

* foreign currency gains or losses

* reasonable compensation for owner/employees of S-Corps

* guaranteed payments to partnerships and LLCs

 

Are there Income Thresholds?

 

The QBI Thresholds for the 2018 tax year are:

  • $157,500 for single filers, and

 

  • $315,000 for people filing joint returns

 

The numbers will be adjusted for inflation after the 2018 tax filing season.

 

Also, keep in mind that  for certain businesses that provide services such as law firms, accounting firms, and doctors’ offices, the limitations are steeper and the deduction is phased out altogether when taxable income reaches $207,500 ($415,000 for joint filers).

 

Example 1:

You formed a new company in 2018 and operated as a sole proprietor.

During 2018, your w-2 wages total $82,183, you itemize, make IRA contributions and pay tuition and fees (both of which would be non-deductible due to your combined income exceeding the threshholds) and your businesses generates a loss of ($11,763) from business 1 and a gain of $196,987 from business 2.

Your QBI deduction would be $34,956 calculated as follows:

$196,987 gain from business 2 minus ($11,763) loss from business 1 equals net gain of $185,224 less 1/2 of self employment tax paid of $10,442 equals QBI deduction of $34,956.

You file jointly with your spouse for 2018, and the combined “taxable income” for the year for both you and your spouse, after subtracting out your itemized deductions of $24,765 and the QBI deduction or qualified business income deduction, is $198,084.

You have two dependents that allow you to claim the “credit for other dependents” of $1,000, and your other taxes total $20,912 which consist of self-employment tax of 20,883 and an additional medicare tax of $29 since AGI exceeded the $250,000 threshold for married filing jointly.

Your total tax would be $56,031 and with federal withholding of only $3,198 you would owe taxes in the amount of $52,833 for the 2018 tax year.

 

Deduction for Income Above $315,000 ($157,500 for Singles)

 

If your taxable income exceeds $315,000 if married, or $157,500 if single, calculating your deduction is much more complicated and depends on your total income and the type of work you do.

 

Your first step would be to determine whether your business falls within one of the following service provider categories:

 

  • health (doctors, dentists, and other health fields)
  • law
  • accounting
  • actuarial science
  • performing arts
  • consulting
  • athletics
  • financial services
  • brokerage services
  • investing and investment management, or
  • trading and dealing in securities or commodities.

 

There is a final catchall category that includes any business where the principal asset is the reputation or skill of one or more of its owners or employees such as that of TheWealthIncreaser.com’s.

 

This likely includes many individuals who provide services not listed above.

 

Architecture and engineering services are expressly not included in the list of personal services.

 

Pass-through owners who provide personal services are not favored under the pass-through deduction.

 

They lose the deduction entirely at certain income levels.

 

There are no such limitations on pass-through owners who do not provide personal services and that discussion follows.

 

Deduction for Non-Service Providers (Income Over $315,000/$157,500)

 

If your business is not included in the list of service providers, and your taxable income is over the $315,000/$157,500 thresholds, how you figure your deduction depends on your taxable income.

 

Non-service Provider Taxable Income Above $415,000 ($207,500 for Singles)

 

If you’re a non-service provider and your taxable income is over $415,000 if married filing jointly, or $207,500 if single, your maximum possible pass-through deduction is 20% of your QBI, just like at the lower income levels.

 

However, when your income is this high a W2 wage/business property limitation takes effect.

 

Your deduction is limited to the greater of:

 

  • 50% of your share of W-2 employee wages paid by the business, or
  • 25% of W-2 wages PLUS 2.5% of the acquisition cost of your depreciable business property.

 

Therefore, if you have no employees or depreciable property, you get no deduction.

 

This is intended to encourage pass-through owners to hire employees and/or buy property for their business in order to stimulate the economy.

 

The business property must be depreciable long-term property used in the production of income—for example, the real property or equipment used in the business (not inventory).

 

The cost is its unadjusted basis—the original acquisition cost, minus the cost of the land, if any.

 

The 2.5% deduction can be taken during the entire deprecation period for the property; however, it can be no shorter than 10 years.

 

Example 2:

Example: David and Monica are married and file jointly. Their taxable income this year is $1,000,000, including $800,000 in QBI they earned from their nightclub business they own through an LLC or limited liability company.

 

They employed eight employees during the year to whom they paid $300,000 in W2 wages. They own their nightclub building outright and are not leasing.

 

They bought the nightclub building  two years ago for $1.2 million and the land is worth $200,000, so its unadjusted acquisition basis is $1 million.

 

Their maximum possible pass-through deduction is 20% of their $800,000 QBI, which equals $160,000.

 

However, since their taxable income was over $415,000, their pass-through deduction is limited to the greater of:

 

(1) 50% of the W2 wages they paid their employees $150,000, or,

 

(2) 25% of W2 wages (75,000) plus 2.5% of their nightclub building’s $1 million basis (25,000) equals $100,000.

 

Since (1) is greater, their pass-through deduction for tax year 2018 is limited to $150,000–not $160,000 that was initially calculated above prior to the limitations being applied.

 

Many owners of pass-through businesses, especially landlords, have no employees, thus the 25% plus 2.5% deduction is of most benefit to them.

 

Conclusion:

 

We will conclude this discussion by defining what a pass through entity is and then reiterate how you can make the QBI deduction work better for you and your family.

 

Definitions:

Pass-through entity:

 

A pass-through entity is a business entity that passes through its income to the owners of the business. The owners then report the business income on their personal returns.

 

Generally, pass-through entities include partnerships and S corporations, but the qualified business income deduction also applies to other unincorporated entities such as sole proprietorships and single-member LLCs.

 

Partnership

S-Corporation

Sole Proprietorship

Single-Member LLC

 

Common Questions:

 

How can I make the Qualified Business Income Deduction work for me?

By becoming a business owner or continuing as a business owner with the right form of ownership (discussed above) you can deduct up to 20% of your qualified business income or, if lower, 20% of your taxable income net of any capital gain.

 

This deduction would be claimed on your individual tax return.

 

Generally, qualified business income refers to the business’s profits (income minus expenses).

 

Qualified business income does not include salary or wages paid to you–either as W-2 wages from an S corporation or guaranteed payments from a partnership.

 

This basic formula applies if the taxable income that business owners report on their individual returns does not exceed certain thresholds that were mentioned earlier–and will be presented again to further your understanding.

 

The thresholds for taxable income are:

 

$157,500 for single filers and $315,000 for people filing joint returns.

 

The numbers will be adjusted for inflation after 2018.

 

If taxable income does exceed these thresholds, the deduction factors in limitations relating to the wages the business pays to its employees and depreciable assets the business owns–also discussed above.

 

A key point to keep in mind – the latest pass-through business tax reform reduces “federal income tax” but does not reduce self-employment taxes for income from partnerships and sole proprietorships, or income for purposes of the alternative minimum tax.

 

How can I benefit throughout the year?

If you have the right form of business ownership and your income passes through on your federal 1040 return you can adjust your estimated taxes to account for this reduction in taxable income.

 

But, be sure to use caution because if you “underestimate” how much income you’ll earn in a year, the penalty for underpayment of estimated taxes can hurt you during filing time as you will be penalized.

 

In the examples presented above in this discussion “estimated taxes” were not taken into consideration and in both examples “a penalty” would more than likely apply for underpayment of estimated taxes!

 

If the new tax reform for pass-through entities sounds complex—you can increase your understanding by comprehending this article and site, gaining a real handle on your personal finances and hiring competent professionals if you now have a pass through entity or you anticipate having one in your future.

 

What is QBI?

The new qualified business income deduction provision in the Tax Cuts and Jobs Act (TCJA) gives a 20% deduction for qualified business income.

QBI is also called the section 199A deduction.

The goal of the legislation is to improve the benefits for flow-through entities and sole proprietors, who did not receive the major tax cuts that were given to C corporations (regular corporations) where their tax rate was reduced to 21%.

Whether the rule meets the goal remains to be seen. Any strategies you consider should be approached with  caution as the new law has some grey areas.

However, you can review the basic rules and strategies and see how they may apply to you, and what questions you may want to explore further as you expand and grow your business.

 

What exactly is a qualified business?

A qualified business is any business except those “specified service businesses” and the income earned by an employee, from guaranteed payments or personal interest, dividends or capital gains.

The specified service businesses can be in health, law, accounting, consulting, brokerage services, financial services, and others, but exclude architects and engineers.

 

What forms of ownership qualify?

QBI is available to sole proprietors and owners of pass-through entities such as S-Corps, LLCs, and partnerships.

 

Are there any limitations?

QBI is subject to limitations based on the taxpayer’s income and the type of business they operate.

Service businesses face additional limitations, however non-service businesses face limitations based on:

 

(1) 50% of the W2 wages they paid their employees or,

(2) 25% of W2 wages plus 2.5% of their capital expenditures

 

W- 2 and depreciation limits apply to non-service businesses but they are always allowed a deduction of some amount if they qualify (contrast that with a service business where elimination of the deduction will occur at some income level).

 

Exactly how does a Qualified Business Deduction work?

The QBI deduction reduces your taxable income, but not your adjusted gross income and can be taken regardless of whether you itemize deductions on your tax return.

To get the full benefit of the deduction, and not be subject to further wage and capital limitations, taxable income must be no greater than:

$315,000 for married filing jointly (phases-out through $415,000);

and $157,500 for single or married filing separately (phases out through $207,500).

 

  • If the pass-through entity owner is over the dollar threshold and a specified service business, it does not get the deduction; but if it’s a qualified trade or business it does, although it is subject to wage and capital limitation.

 

What is the amount of the deduction?

The deduction is the lesser of: 20% of the taxpayer’s qualified income, and a wage and capital limitation.

The wage and capital limitation is the greater of: 50% of the W-2 wages; or 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property–whichever is greater.

In addition, there is 20% deduction of REIT dividends and distributions from publicly traded partnerships.

 

What is the W-2 wage limit all about?

The W-2 wage limit minimizes the deduction if the business does not employ a substantial number of people relative to its size, or invest in a substantial amount of property under the “wage-and-property limit.”

Specified service businesses that rely primarily on the efforts of their owners or those with limited employee or capital investments will be affected the most and they may not be able to fully utilize the new qualified business income deduction.

In addition, there is an overall limitation on the deduction!

The limitation is the lesser of: the combined qualified business income, and 20% of any excess taxable income minus the sum of any net capital gain plus any qualified cooperative dividends.

The total amount cannot exceed the taxpayer’s taxable income (minus the taxpayer’s net capital gain) for the tax year.

 

How can I better qualify for the deduction?

If some portion of your qualifying business income comes from a “specified service business” you could:

  • Redefine your business if done so legally

 

  • You could consider spinning off portions of your business (separating the specified service business portion from the other qualified trade or business portion)

 

  • You could consider operating as a real estate investment trust (REIT), which do especially well. There is only one level of tax, and shareholders are entitled to a 20% qualified business income deduction for ordinary distributions with no W-2 basis limitation. On the flip side, REIT compliance and maintenance rules are complicated.

 

  • You could consider operating as a publicly traded partnership (PTP), which are not subject to the W-2 wage limit and qualified property cap.

 

  • If you are participating in an S corporation, it may be beneficial to take advantage of reasonable compensation so that you could meet the 50% of wages limitation by paying out more in compensation.

 

  • You could possibly rearrange your employer-employee relationship to one in which there is a partnership under an agreement in which the individual’s income from the partnership would be higher and their salary would be lower, thus making them (or you) eligible for the deduction.

 

  • You could use a gifting strategy (give up a percentage of business ownership) to bring in more people that qualify under the  “$157,500 per person threshold.”

 

  • If you are in a partnership, consider switching from guaranteed payments, which don’t qualify, to preferred returns, which do.

 

  • You could possibly increase the W-2 limit by switching from 1099 independent contractors to W-2 employees–think this process through carefully as there may be other negative effects as well.

 

  • You could manage your total income and taxable income so it is below the phase-out thresholds in order to qualify for the deduction.

 

  • You could manage your pension contributions to reduce taxable income as no part of the pension contributions would be included in income, so the QBI deduction could apply.

 

  • You could make tax-deductible qualified retirement plan contributions to reduce  your or your employee’s  taxable income in order to qualify for the deduction.

 

  • You can use your imagination to come up with other scenarios that might allow you to legally qualify for the QBI deduction–be sure to run it by your tax professional to ensure that it falls under the QBI guidelines.

 

In summary, The Tax Cuts and Jobs Act (HR 1, “TCJA”) established a brand new tax deduction for owners of pass-through businesses that can provide a tangible advantage for those who put themselves in position to qualify.

 

Pass-through owners who qualify can deduct up to 20% of their net business income from their income taxes, reducing their effective income tax rate by 20%.

 

This deduction begins for 2018 and is scheduled to last through 2025—that is, it will end on January 1, 2026 unless extended by Congress–as it was not made permanent in the manner that the 21% tax rate for corporations were.

 

If you are a small business owner–or desire to be one–you need to understand this somewhat complex, but highly beneficial deduction.

 

Always remember that:

 

You Must Have a Pass-Through Business

 

  • a sole proprietorship
 (a one-owner business in which the owner personally owns all the business assets)
  • a partnership
  • an S corporation
  • a limited liability company (LLC), or
  • a limited liability partnership (LLP).

 

As an owner you would pay tax on the money on your individual tax return (as opposed to corporate tax return) at your individual tax rates.

 

The majority of small businesses are pass-through entities.

 

Regular “C” corporations do not qualify for this deduction; however, starting in 2018 they do qualify for a low 21% corporate tax rate–that was made permanent and could be more beneficial–depending on your type of business, revenue generation and your intended goals for the business.

 

Therefore, if you are structuring a new business or have an existing business you must determine the best form of ownership from both a tax and liability position among other considerations that you may have to determine the best type based on your future goals and the direction that you desire to take your future.

 

Other Key Points:

QBI is determined separately for each separate business you own.

If one or more of your businesses lose money, you deduct the loss from the QBI from your profitable businesses.

If you have a qualified business loss—that is, your net QBI is zero or less–you get no pass-through deduction for the year.

Any loss is carried forward to the next year and is deducted against your QBI for that year.

This serves as a penalty for having a money-losing business.

 

Example: During 2018, you earned $20,000 in QBI from a lawn care business and had a $40,000 loss from your office store business.

You have a $20,000 qualified business loss, so you get no pass-through deduction for 2018. The $20,000 loss must be carried forward and deducted from your QBI for 2019.

 

You Must Have Taxable Income!

To determine your pass-through deduction, you must first figure your total taxable income for the year (not counting the pass-through deduction). This is your total taxable income from all sources (business, investment, and job income) minus deductions, including the standard deduction ($12,000 for singles, $18,000 for head of household and $24,000 for married filing jointly in 2018).

 

You must have positive taxable income to take the pass-through deduction!

Moreover, the deduction can never exceed 20% of your taxable income.

Example: You are a single taxpayer who run a consulting business which earned $80,000 in profit this year.  You had no other income and you take the standard deduction ($12,000).

Your taxable income is $68,000 ($80,000 income – $12,000 standard deduction = $68,000).

Your pass-through deduction cannot exceed $13,600 (20% x $68,000 = $13,600).  Even though  you had $80,000 in QBI, your deduction is limited to $13,600, not 20% of $80,000 = $16,000 because you had no other income such as w-2 income.

If you have other income that allows you to take advantage of the full 20% deduction you can do so as long as your taxable income is below $315,000 ($157,500 for Singles).

 

If you exceed the above limits that is a good problem to have–just realize your QBI deduction may be limited or eliminated if you are a “service business owner” and you exceed the threshold limits.

 

Deduction for “Service Business Owners” (Income Over $315,000/$157,500)

 

If your business involves providing personal services, and your taxable income is over the $315,000/$157,500 thresholds, your pass-through deduction is gradually phased out up to $415,000/$207,500 of QBI.

 

And remember that if you fall at the top of the income range you get no deduction at all.

 

That is, if your total income is $415,000 if you’re married, or $207,500 if you’re single, you get no deduction. This was intended to prevent highly compensated employees who provide personal services—lawyers, for example–from having their employers reclassify them as independent contractors so they could benefit from the pass-through deduction.

 

There is no such phase-out of the entire deduction for non-service providers.

 

All the best toward your effective use of QBI and your future  success…

 

 

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Hot Tax Topics & Wealth Building

As we enter the latter part of January many consumers in the U.S. and other parts of the world are gearing up for the filing of their 2018 income tax returns…

Learn about the latest tax news so that you can avoid the financial blues…

 

In this discussion TheWealthIncreaser.com will look at and discuss a number of critical areas of taxes that could help you maximize your tax position in 2019 and beyond.

 

In order to achieve more and maximize your personal income tax return it is important that you have knowledge of—and a practical understanding of how you can do the following more effectively:

 

Use the New Tax Rates to Your Advantage

 

If you are an individual and do not have majority ownership in a C corporation or S Corporation–your maximum tax rate is 35% versus the maximum for a corporation of 21% due to the job and tax act of 2017.

 

That means if you have high income that puts you in the upper income tax brackets you could possibly reduce the taxation of your income by establishing a corporation or keeping your income in the corporation as opposed to receiving a salary if you now have a corporation.

 

There are a number of ways that you can strategize to lower your taxes by using the new tax rates to your advantage and it is up to you and your professional team to find ways to do just that.

 

If You are a Business Owner or Desire to be One You Must Understand the Forms of Ownership

 

Sole Proprietorship

Limited Liability Company (LLC)

Limited Liability Partnership (LLP)

S Corporation

C Corporation

 

You must know and understand fully that certain types of ownership allows you to shield your personal assets against the liabilities of your business.

 

If you are operating as a sole proprietor where you are using your social security number as your Federal ID you are putting yourself and your family in position to be personally liable for actions that may arise out of liabilities of your business.

 

Whether a pass through entity or a corporation will be of greatest benefit to you will depend on your unique tax and financial position, the type of business you operate, the state that you are in, your liability (risk) exposure and the path that you desire to take to reach your goals once you lay out all of your intentions–whether you decide yourself or you decide to use financial professionals.

 

IRA’s

 

IRA’s and other tax favored retirement plans retain those tax advantages in spite of the tax cut and jobs act of 2017.  That means the “saver’s credit” and deductibility for a traditional IRA are still available.

 

In addition ROTH conversions can be done regardless of your income level and ROTH IRA’s still enjoy the tax free benefit upon withdrawal if done so according to IRS guidelines.  Contributions remain tax free upon withdrawal.

 

With both IRA’s the first time homebuyer withdrawal provision remains as well as several other “exceptions” that can help you avoid the tax bite.

 

HSA’s

 

A Health Savings Account may allow you to save more and meet your health care expenses in a tax efficient manner by allowing you to deduct the amount you contribute,  allow your contributions to grow tax free and allow you to withdraw your earnings tax free when used for medical related expenses.

 

Be sure to give the “triple tax benefit” of HSA’s real consideration.  In addition, be aware of the expenses that you will pay as that can eat away at your earnings.  Be sure to shop for the best plan available based on your financial position and health saving goals.

 

Know at the earliest time possible if you are going to utilize the standard deduction or itemize your deductions

 

Standard Deduction

 

The standard deduction has been increased for the 2018 tax year and many of those who once itemized will find that it is no longer to their advantage to do so.

 

Single is now at $12,000

Head of Household is now at $18,000

Married Filing Jointly is now at $24,000

 

Personal exemption eliminated for most—some dependents on your tax return may allow you to claim a $500 personal exemption.

 

Be sure to consider the effect on your state tax refund in determining whether to itemize or claim the standard deduction–as you may be surprised to find that a reduced itemized deduction at the federal level could still be to your benefit if you would get a higher overall refund or pay less in taxes when the federal and state amounts have been combined!

 

Itemized Deductions

 

Medical

Long-Term Care (LTC) insurance that you pay, Medical Insurance that you pay, Health Care Insurance Premiums that you pay, Eye Care that you received during the year, Out of Pocket medical expenses that you pay for the year, Dental Expenses that you pay for the year, Prescription drugs that you purchase for the year, Mileage to and from your medical care destination and many other medical related expenses may all be deductible in 2018 if they exceed 7.5% of your AGI (Adjusted Gross Income–line 7 on page 2 of form 1040) and you itemize your deductions. 

 

The AGI limit increases to 10% in 2019 and beyond unless Congress acts.

 

Taxes

 

State income taxes and sales taxes, ad valorem taxes, property taxes and possibly other taxes may be deductible by you if you itemize and otherwise qualify.

 

Keep in mind that there are limitations on taxes in some instances—so keep that in mind—particularly if you are in a high tax state such as California, New York, New Jersey, Connecticut and several others.

 

Mortgage Interest

 

Mortgage interest deduction is now limited to $750,000 down from 1 million.

Mortgage Insurance Premiums (MIP) and Private Mortgage Insurance (PMI) are not deductible for the 2018 tax year and beyond unless congress acts.

 

Charitable Contributions

 

New rules apply to deducting charitable contributions that are non-cash as you must provide additional documentation for donations valued over $250.

 

As for church donations and others that are in the form of cash the maximum percentage that you can deduct has changed,  however the required documentation is basically the same.

 

2% AGI Deductions Eliminated

 

Tax related fees, investment fees, unreimbursed employee expenses (including automobile expenses) and other 2% of AGI deductions have been eliminated for the 2018 through 2025 tax years.

 

Social Security Income Threshold Increases

 

In tax year 2018 the maximum social security wage base is $128,500—however for the 2019 tax year that wage base will increase to $132,900 which means if you earned over $128,500 in 2018 you may see a tax increase in the amount of social security tax that you will pay (6.2% of the amount that is between $128,500 and $132,900 will now be taxed) when you file your 2019 taxes.

 

The Medicare portion limit did not change as a result of the tax cut and jobs act of 2017.

 

Conclusion

 

It is important that you realize that many changes have occurred over the past few years as it relates to your taxes and the filing of your tax return. 

 

The form 1040 has a new look and now includes “Schedules” that allow you to include in income or deduct many of the items that were on page 1 of the 1040. 

 

You will now sign on page one as opposed to page two.  1040EZ and 1040A no longer exist and you must use form 1040 to file your 2018 through 2026 tax returns. 

 

In most instances you won’t claim exemptions, however the child tax credit has gone up to $2,000 per child with up to $1,400 of the credit refundable.  Student loan interest deduction and other educational credits remain.

 

Whether it is the “Affordable Health Care Act” (penalty will be eliminated after the 2018 tax filing year) the “Tax Cut and Jobs Act of 2017” or any other incidental changes in the tax code—it is important that you put yourself and your family in position to take advantage of the changes and not let the changes take advantage of you.

 

Be sure to choose highly competent professionals and be sure to gain the knowledge that you need so that you can succeed. 

 

Be sure to engage with professionals who have a track record of success, someone who encourages you to ask questions and are willing to spend the time that is necessary so that you can fully understand the questions you ask–and someone who adds value to your financial and overall life from this day forward!

 

You want to put yourself in an informed position where you know what is going on “tax wise” so that you can position yourself in a way where you can’t easily be taken advantage of.

 

By landing on this page alone—you are showing a real commitment toward success in you future and you are on a path to maximizing your tax knowledge in a way that will put you and your family in position to achieve more throughout your lifetime.

 

By landing on this page and navigating this site you will put yourself in position to not be taken advantage of like many were during the financial crisis from 2007 to 2009.

 

You will put yourself in position to know how the recent tax changes over the past few years will affect you and your family—thus giving you the opportunity to plan proactively and improve the likelihood that you will achieve your goals.

 

You no longer have to let your ignorance of the tax laws, immaturity in approaching your finances, insecurity in approaching your finances or the inability to approach your finances due to fear–lead to idleness and not moving forward in the financial realm of your life!

 

Today is the day that the Five “I’s” die—and you more than just try!

 

Today is the day that you pursue a new road to success that has fewer turns and less stress—and allows you to give it your best!

 

Today is the day that you become aware, mature, believe in yourself, operate daily with character and move to action in a manner where the success that you see has already been achieved.

 

All the best to your new tax knowledge and new road to success…

 

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