If ever there were a case to make for understanding how taxes work, now would be the time. With the massive tax reform changes taking place over the past year, we are far removed from the days where you could afford to turn your head and look the other way. Besides missing out on key deductions and loopholes, you could actually end up with a surprise tax bill by simply not paying attention to your finances throughout the year. Also the likelihood is much higher for filing incorrectly or trusting the wrong person to file taxes on your behalf. But even with all the change and uncertainty there are still ways to take advantage now while positioning yourself for the most favorable outcome in the future.
Hire A Tax Professional (Even If You Normally Wouldn’t)
Although there is no limit to available information these days, that doesn’t mean it’s always accurate or helpful. This is especially true when it comes to taxes; an area seemingly anyone can call themselves an expert in. However, working with a qualified expert who’s fully knowledgeable on the new tax climate could set you up for some major wins in the long run. Ultimately, there are two designations you need to look for in anyone you hire to help you with taxes. The first is the title of an Enrolled Agent (or EA), which is a federally authorized tax advisor by the IRS. The second is a Certified Public Accountant (or CPA) who has met all state licensing requirements to provide accounting services to public. Like attorneys, both of these professionals have unlimited practice rights and can represent any taxpayer before the IRS. So if you’re going to hire someone for tax preparation it only makes sense it be someone who’s also capable of dealing with the IRS on your behalf. Additionally, it’s important to work with someone skilled in financial planning who can help you strategize for the upcoming year based on your individual circumstances.
Invest Time & Energy Into Starting A Business
Without much surprise many of the changes that took place in last year’s tax laws were the most favorable to businesses. In fact, the U.S. tax laws have long been set up in a way that seems to reward businesses and entrepreneurs over traditional 9 to 5 employees. Of the key changes that have transpired over the past year, one of the most notable is the decrease from a 35% tax rate to a 21% tax rate for companies classified as a C-Corporations. Just to add additional context, there are now seven different tax brackets available to individual taxpayers. And of those seven brackets, five have a tax rate that’s higher than the new corporate rate. Furthermore, even if you own a business that isn’t classified as a corporation, there are still numerous tax breaks you can potentially benefit from. For example, other business types, commonly called pass-through entities, may potentially qualify for a tax deduction of 20% of their income. Of course this all depends on whether you can meet the IRS definition of a qualified trade or business, and it’s also subject to some pretty complex rules on Qualified Business Income (QBI). The best way to take advantage of these intricacies is to work with a knowledgeable accountant to make sure your business is set up and operating in the most tax-favorable way possible.
Use Real Estate As An Investment Vehicle
Most of the tax breaks for owning real estate existed well before the new tax reform came into play. However, some have been modified or even replaced by tax laws that are less favorable to residential property owners. For example, interest on a home equity loan is no longer deductible and interest on a primary mortgage could potentially be off limits thanks to the newly increased standard deduction. However, one loophole that hasn’t changed for qualified homeowners is the ability to receive up to $250,000 from the sale of your home completely tax-free ($500,000 for joint filers). There are even more tax shelters available for those who use real-estate as an investment vehicle, including the 14-Day/10% Rule and the 1031 Exchange Rule. These and many other areas of the tax code continue to make real estate one of the most sought after asset-classes to defer or avoid taxes altogether.
While no area of the tax code is particularly easy to understand, there are ways it can still be beneficial to you. However, that requires not only knowing about these available opportunities but working with someone who can properly position you to take advantage of them. Above all just make sure you are showing 100% honesty and integrity when it comes to your filings with the IRS. In the long run the costs of not doing so will far outweigh any supposed benefits you happen to see.