Professionals call it tax planning. Analysts call them tax games. We’re calling them tax hacks. Every tax bill has little incentives or loopholes that encourage some behaviors and discourage others. The bill recently passed by the Senate is no different: It is full of little opportunities to make money — or at least save some.
We’ve put together a list of some of the most interesting and useful tricks, with help from some of the country’s leading experts in law and finance. This isn’t meant to be real tax advice — for that you’ll need to hire a professional — but it does shed light on the key features (or holes) in the Senate bill.
Many are changes that involve doing something right now, in the final days of 2017. Others would take longer to pull off but could have lasting payoffs, reaching into the next generation.
We focused on the Senate’s version of the legislation, because experts say the final bill is likely to resemble it in important ways. But Senate and House negotiators are still working out a compromise, so some rules might change before the bill becomes law. Here are some money-making opportunities in the current legislation, ranked by degree of difficulty.
Our colleague Neil Irwin, who writes on economics and business, is paid as an employee of The New York Times. But under the Senate tax bill, he’d be much better off turning himself into a business and collecting the equivalent of his earnings and benefits as payments to a hypothetical new company, Irwin Scribblings, LLC.
Mr. Irwin’s company would be joining the ranks of the most common type of business in America: the pass-through. In typical corporations, the company’s profits are taxed twice: once on the company’s income and again on the dividends passed on to its shareholders. But in pass-throughs, the company’s income is essentially “passed through” to the owner and taxed at whatever tax bracket the owner is in. Most kinds of freelance and consulting businesses operate as pass-throughs. So do companies that are organized as partnerships, like law firms, dental practices and many real estate firms.
If you run a pass-through business that earns up to $250,000 a year if you’re single ($500,000 if you’re married), you get a 23 percent tax break on all profit that comes through your company — in other words, only 77 percent of that income would be taxed. That might make it worthwhile for some workers to switch from salaried work to freelance, though there are a few complications, like obtaining health insurance and getting your employer to agree. Those earning more might still be better off as a pass-through, but there are more rules about what types of income qualify for the deduction.
This shift is something that actually happened. In 2012, Kansas instituted even more generous pass-through rules, leading many people — perhaps 1 out of every 500 workers — to persuade their employers to pay them this way.
My mentor, got this company paying $1.2 M a year in taxes down to about $100K or less, I can’t remember the amount but it was like 80%+ savings.
Many CPAs, and tax preparers are like parrots, they just repeat what they read or know without knowing the tax code in its entirety. They just type your numbers, that’s all they need. Most of the saving components on these tax loopholes derive from employer giving employees some benefits. 5% < > for the employee, the rest are benefits for the employers. A win, win situation.
One question I have: does it pay to make an LLC and move my stock account there? I think inside a Corp capital gains are just regular income. So I will get 23% loped off right off the bat right? And the rest is taxed at low rates?
So many ways to game the system! Capitalists (and accountants) rejoy!
It makes sense to convert if you are in a tech job with a rental that is throwing off more cash then you can write off. I will probably move my commercial property in sacramento to it.
It generates enough rent that it is positive after costs (since I have held it for quite a while now). if I add that to my W2 income, each dollar of income is taxes higher then 23%. So i might as well change it to an LLC, and pay 23% on the profit (it is not really 23% as there is some overhead costs of maintaining an LLC)
As I said, our people at the office, with 35+ of experience reading, and comprehending the tax code know more than your regular CPA. Not all of them, but many CPAs are your run of the mill guy who just gets updated on anything the IRS has to offer or take, and they are not interested in learning how to use the tax loopholes.
Ask your CPA this:
I am going to sell my home, a $2.5M home. I don’t want to use 1031. What is it in your files I can use so I don’t pay capital gains for 30 years. Then, tell him to do it. He won’t.
Did you know that an irrevocable trust is revocable?
That if you own more than one property it’s advised to never put them all together in a single trust?
Any trick regarding taxes, your aim, your bulls eye should be at never paying taxes again or at a minimum. For that, you need a good person knowing the secrets of the tax code, if the guys allegedly creating a new tax code come up with anything favorable. Meanwhile, sit tight.
