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Tax Planning Strategies 2018 (AND 2019) Year-End Tax Planning Strategies


– Hey guys, Toby Mathis from
Anderson Business Advisors, and today we’re going to talk
about year end tax planning. For the last 20 or so years,
I’ve been in the field of taxation and really tax planning, and there’s a huge difference between tax preparation and tax planning. A lot of people go to a tax preparer and they don’t realize
that that individual is not actually a tax planner. In other words, they’re
reacting to what occurred in the previous year, they’re
putting it in the right columns and everything
and that’s about it. A planner is, during the year
they’re going to be looking at what’s going on and
trying to use their crystal ball a little bit to say
hey, what’s the best way for us to land? They want flexibility as a result, and they understand that
there’s things that can be done even after the tax year
end so long as we set things up correctly to still have options. And let me give you an example. If you are an individual
and you want to make a contribution to your IRA, you have all the way up until
you file your tax return. Now there are phaseouts
depending on your income as to whether you can
still take a deduction by putting money into a traditional IRA. That does not exist on other
types of retirement plans like 401Ks, profit sharing
plans, et cetera, DB plans, those types of things. We can literally go up
until the entity files its tax return that is sponsoring that. And that brings us to kind
of one of our first issues, is this idea of income shifting. When we’re doing year end tax planning, a good planner, make you
smiley face right there, understands that there’s different places the money can land from a tex standpoint. If you’re just to 1040, maybe
we have an IRA to play with. Maybe we phase out, so we
have this little world. Maybe we can give some money to a charity or something where it’s going
to go as an itemized deduction. But we’re fairly limited,
so maybe we have a 501 C3 where we can give some money. But we’re fairly limited
in our individual world. Once we start looking beyond that, maybe we go into the entity
world where we may say hey, we have a corporation,
let’s say it’s an S corp where we’re running an active business and we’re separating it out. Now that S corp may have
a qualified retirement plan or 401K. Maybe you even set up your own non-profit where you can actually
control how the funds are actually used. In addition, you may have your own C corp that may be managing another LLC, may be managing all of these. And now we have how many
different tax returns where things can land? We have you, we still have the IRA, we now have a, we still have the 501 C3, we have the QRP, we have the S corp, we have the C corp. This guy, generally
speaking, is just a conduit. It’s going to flow onto one of us. It’s not going to necessary
be a separate taxable entity, but we start looking at these things. Now if you have children, let’s put our kids out here, and they say hey I want
to work as well dad, or hey how do I get to
work for these entities? We may have another one
where we can move money into another tax bracket. That’s what tax planning is about, it’s like where do we want it to land and what’s the implication
if it lands there? So if I have a bunch of rental properties and I do nothing else, let’s say this is real estate rent, if I do nothing else, it’s going to end up on my 1040. If I pay the C corporation
a management fee, then a portion of it is going
to end up on the corporate return, and a portion of it
is going to roll down to me. That C corp may have better
tax treatment than I do especially if I’m in
the highest tax bracket, that C corp may allow me
to write off everything or things that I can’t
do as an individual, but also it’s a flat 21%. This S corp flows down to me
if I let it have the profits, if I leave the profits in there. But I can avoid the social security tax, also known as FICA, if I pay myself a salary and then the profits, I can avoid this, which you
think is small, it’s 15.3%. I can help avoid that. I can avoid all taxes by
deferring income into my QRP, I can actually take, for
both me and a spouse, up to 18,500 of the first dollars I make go straight into the plan for each of us, if we’re over 50 it’s 24,000. I can put a whole bunch
of money, excuse me, 24,5, 24,500, I can put a bunch
of money into there. If I have too much money sitting in here and it gets towards the end of the year, now I have some choices. I can just put money into my 501 C3. And you’d be shocked at
what qualifies for a 501 C3. For example, low to
moderate income housing is a charitable activity,
residential assisted living, charitable activity. There’s lot of things out
there, transitional housing, providing housing for
vets, all those things could literally be considered
a charitable activity. Now I can write off up to 60%
of my adjusted gross income by putting assets into that 501 C3. It could be cash or
assets, fair market value if it’s like real estate. So I start looking say hey I have choices, I can still use that IRA
if I’m not phased out over a dollar amount. But now I actually can
control how much is hitting me so I can actually do that. My kids can do their own IRA,
my kids can do their own QRP, my kids can also contribute to my 501 C3 and I start having choices. Then we get to the end of the year, and you say alright Toby. This is all neat and dandy,
but what if I’m in February or March, what can I do? Well, I don’t have to
close this thing out. From a tax perspective,
it can make contributions on my behalf off of what I paid, it’s not my deferment
but it’s not my match. I can make that match up
until it files its tax return. In an S corp, that’s going
to be with an extension, September 15th. For an individual, I can
be making a contribution into my IRA up until I file a tax return. April 15th. So I still have choices,
depending on what other type of retirement plans. If I have a defined benefit,
if I have other plans, I can be making contributions
even after the year’s end, I can still be doing these things. Everything else is pretty
much I have to do the transfer during the year. I actually have to know
before December 31st, but even after the year I
still have plenty of time to do some more planning. Hey, I don’t have enough
money to put into my 401K, this stinks, what do I do? It comes to January,
February, March, April, June, July, and you say hey,
I have the extra money now, can I make a contribution? Yes, you can do your
match all the way up until you file that tax return,
one of the reasons why we like to do extensions around here. I could actually be making a contribution in September, of let’s say
it’s 2019 for the tax year, my tax year of 2018, so I could
still be lowering my taxes. That is how we do year end tax planning. I have to know what’s
out there, I have to have just about everything set
up, I have to have everything other than my IRA. I have to have everything
set up during the tax year. So quite often what you’ll see is somebody putting a plan in place,
trying to put some money in it right before the end of the
year, knowing that they’ll have some extra leeway
in the following year, but it’s always better to
be prepared ahead of time, so hopefully you’re
setting these things up in anticipation of that as you’re growing. But that is tax planning to a T, is deciding which bucket it would be best to have it land in, making
sure that it’s reasonable to have it land there,
and then setting things up and making sure that the
reality backs that plan up so that the money is going
where it needs to go. And that, again, there’s
a legal justification that everything’s reasonable,
I’m taking a reasonable salary so I can contribute to a QRP, the QRP is already in place, I’m making a contribution
to it, then the employer’s making a contribution when it can. I’m making sure that if I’m using a 501 C3 that it’s already been
filed, that it’s got its exemption letter and everything else, but I’m doing all these things proactively and then I’m using them during the year. The best time to do tax planning is before it’s too late, which means, realistically, October, November, December
is when you should really be doing your year end tax planning. It makes sense depending
on how much you’re making, how big your tax bill is,
to do at least a little bit of tax planning all throughout the year so you’re not put underneath the gun. But at a minimum, year end
tax planning looks like this. Hope this helps.

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