tax planning for the real estate … planning for re prof - 2013.pdf2013’s list of celebrity tax...
TRANSCRIPT
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INTRODUCTION
TIMOTHY W. NELSON, CPA, CVA, CFEREID H. RIKER, CPA, MAcc
• “Financial Translators”• Accountants with personality
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INTRODUCTION
DISCLAIMER(the “neighbor” clause)
Much of what we will discuss is generic in nature andintended to be an overview of these issues. While wewill address all questions, some answers are extremelyspecific to your facts and circumstances and may requirethe gathering of additional information or furtherexplanation on our part.
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INTRODUCTION
IN THIRD PLACE
Beyonce’s dad Mathew Knowles - $1.2 million in taxes and penalties for failing to pay on
income in 2010 and 2011. Who knew you had to pay taxes on income you made managing
your daughter’s career?
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INTRODUCTION
IN SECOND PLACE
Singer-Songwriter Mary J. Blige received a tax lien for $3.4 million of taxes and penalties for failing to pay on income in 2009, 2010 and
2011 – this does not include the $900k she owes to New Jersey! Rest assured – she says
her “team” is working on it!
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INTRODUCTION
IN FIRST PLACE
Beanie Babies founder Ty Warner – assessed a $53 million PENALTY for his Swiss bank account. Oh, by the way, this was for not reporting the account
or the earnings, which were only $3 million!
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TODAY’S TOPICS
TAX PLANNING
•Tax Planning is legally avoiding income taxes
•Tax avoidance vs. tax evasion
• Tax evasion is knowing you owe the taxes and not paying them or hiding the income
• Tax avoidance is taking legal positions to reduce the amount of tax you pay
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TODAY’S TOPICS
+ Revenue- Deductions
= Taxable Income
+ Tax- Credits- Payments
= Due (Refund)
Your Tax Return(simplified)
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TODAY’S TOPICS
How to Reduce Taxes?+ Revenue Decrease Revenue
- Deductions Increase Deductions
= Taxable Income
+ Tax Decrease Taxes
- Credits Increase Credits
- Payments
= Due (Refund) Or Pay More!!!!
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DECREASING REV
How to Reduce Taxes?+ Revenue Decrease Revenue
- Deductions Increase Deductions
= Taxable Income
+ Tax Decrease Taxes
- Credits Increase Credits
- Payments
= Due (Refund) Or Pay More!!!!
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DECREASING REV.
Realtors are usually cash basis taxpayers(If you didn’t get it, you don’t pay tax on it)
Presumes a relatively level taxable income from year to year
2013 2014
Receive Dec 31 Receive Jan 2
Pay by April 2014 Pay by April 2015
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DECREASING REV.
If you are having a great year and want to decrease your taxes, delay receipt of
income/revenue until 2014 (if possible)
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INCREASING EXP.
+ Revenue Decrease Revenue
- Deductions Increase Deductions
= Taxable Income
+ Tax Decrease Taxes
- Credits Increase Credits
- Payments
= Due (Refund) Or Pay More!!!!
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INCREASING EXP.
Don’t spend a $1.00 to save $0.40!!
Presumes highest individual tax rate. Lower tax rates are even more important!
SpendDon't Spend
Expense ($1.000) $0.000Tax Savings $0.396 ($0.396)
Net Economic Result ($0.604) ($0.396)
If an "unnecessary" expense, you are 20.8 cents better off by NOT spending the $1 and
paying the tax!
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INCREASING EXP.
GOAL: Find ways to deduct items that you are
already buying, or spend money on productive goods and services
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WHAT IS DEDUCTIBLE?
Under IRC § 162(a), generally ANY expense can be deducted if it meets certain tests, as follows:
•Incurred in connection with your business
•Ordinary
•Necessary, and
•Reasonable
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WHAT IS DEDUCTIBLE?
What is an “Ordinary” expense?
•Common and accepted in your business
What is a “Necessary” expense?
•Helpful and appropriate for your business
What is a “Reasonable” amount?
•Determined based on circumstances
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WHAT IS DEDUCTED?
•Outside Services/Wages
•Auto & Travel
•Rents & Desk Fees
•Retirement Contributions
•Advertising & Promotion
•Dues, Memberships
•Telephone/Internet
•Continuing Education
•Meals & Entertainment
•Gifts & open-house expenses
Major Deductions
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LOWER TAXES+ Revenue Decrease Revenue
- Deductions Increase Deductions
= Taxable Income
+ Tax Decrease Taxes
- Credits Increase Credits
- Payments
= Due (Refund) Or Pay More!!!!
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LOWER TAXES
Basic Income Tax Types
• Income Tax• Self-Employment Tax• Medicare Tax (new 3.8%)• Pension “Penalties”
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LOWER TAXES
2013 FEDERAL INCOME TAX RATES/BRACKETS
TAXABLE INCOME
Rate Single Married JointHead of
Household
10% 8,925 17,850 12,750 15% 36,250 72,500 48,600 25% 87,850 146,400 125,450 28% 183,250 223,050 203,150 33% 398,350 398,350 398,350 35% 400,000 450,000 425,000
39.6% 400,001+ 450,001+ 425,001+
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LOWER TAXES
Y1 Y2 Y3 Y4 Y5 Y6 AVGTaxable Income
Joe 200,000 50,000 200,000 50,000 200,000 50,000 125,000 Sally 125,000 125,000 125,000 125,000 125,000 125,000 125,000
Marginal Tax RateJoe 28% 15% 28% 15% 28% 15%
Sally 25% 25% 25% 25% 25% 25%
‐
50,000
100,000
150,000
200,000
250,000
Y1 Y2 Y3 Y4 Y5 Y6
Tax Rate/Effect
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LOWER TAXES
Self Employment Taxes
• Tax on your self-employment earnings• Basically Social Security and Medicare• Social Security capped ($113,700 in 2013, $117,000 in 2014)
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LOWER TAXES
ENTITY TYPE
(sole proprietor, LLC, S-Corp)
can have a HUGE impact on Self-Employment Tax
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LOWER TAXESSELF EMPLOYMENT TAX
BASIC EXAMPLE
Sole Proprietor S-Corp
Total Earnings $200,000 $200,000
Net compensation to proprietor 200,000 N/ASalary paid via W-2 N/A 100,000 Return on investment N/A 100,000
Income Tax (MFJ rates) 42,743 42,743 Payroll / Self-Employment Tax 28,259 14,130
Total Tax Paid $71,002 $56,873
Savings from S-Corp structure $14,130
Assumes MFJ tax rates and no other income or expenses
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ENTITY CHOICE
Deciding whether to be a sole proprietor, LLC, S/C - Corporation can impact:
•Regular and self-employment taxes paid
•Taking profits out of the business (draws)
•Personal liability
•AUDIT rate
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3.8% MEDICARE TAX
• In March 2010, Congress passed the Patient Protections and Affordable Care Act
• It included a new provision for a 3.8% tax on income from interest, dividends, rents & royalties and other “unearned” income excluding active S corporation or partnership income (called the NIIT or net investment income tax)
• It applies to persons making AGI over $200k single or $250k married
• It went into effect on January 1, 2013
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3.8% MEDICARE TAX
• Only applies on amounts OVER the $200k/$250k
• If this applies, you should have been including in your estimated tax payments for this year
• Your clients should know it applies to their rentals
• VERY important to watch your AGI – keep under the limit if possible
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3.8% MEDICARE TAXEXAMPLE
NIIT Example
Wages 200,000$ Interest 20,000 Rentals 40,000
AGI 260,000 Threshold (MFJ) (250,000)
Amt subject to NIIT 10,000
NIIT rate 3.80%
Additional tax this year 380$
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TAX RATE COMPARISON
MAXIMUM TAX RATESYear Over Year Comparison
2012 2013 2014
On income over 388,350 450,000 454,500
Federal 35.0% 39.6% 39.6%NIIT (Medicare) 0.0% 3.8% 3.8%
Total Federal 35.0% 43.4% 43.4%
CA ($1 mm) 10.3% 13.3% 13.3%
Total Income Tax Rate 45.3% 56.7% 56.7%