In Part 1 of this series, we took a deeper dive into IRMAA planning and minimizing tax on your Social Security benefits. You play a large role in shaping your retirement years in terms of lifestyle and financial health. Think of taking advantage of the many techniques to lower your tax during your retirement years as another aspect of self-care. By treating your financial health and well-being as carefully as you treat your mental and physical well-being, you can ensure that you have resources to attain your financial goals and support yourself in the style for which you’ve planned. In my practice, I see a wide range of client behavior surrounding retirement – from no planning to thoughtful, long-range planning. Looking ahead, whether you’re working with your tax professional and financial team or whether you’re planning on your own, pays off enormously.
Please read on for some additional tips and techniques for tax savings involving charitable giving, Roth IRA conversions, and minimizing capital gains taxes – and two more examples.
An employee handbook is usually designed to cover everything a new hire needs to know to get started at their job. Depending on the size of the company “everything a new hire needs to know” can be either a vast amount of information or a much smaller amount. Many small, closely held businesses may not have an employee handbook because they don’t feel they are large enough to warrant it or they (mistakenly) believe that necessary information is getting communicated effectively and consistently to all staff members. Often having an employee handbook isn’t something most businesses think about until it’s too late (for example, when an employee files a lawsuit for discrimination or a worker’s compensation claim). Even businesses that have an employee handbook may not give it much thought once it has been developed. But developing and maintaining a useful employee handbook is just good business. Why? The employee handbook explains a company’s culture and values and is a valuable reference tool for employees looking for information on company policies. It can save management time (and money) and can help to prevent or mitigate legal issues for the company.READ MORE
Do Your Clients Know Their Own Business Entity?
Have you been working with a partnership client or Schedule C client for a couple of years, only to find out: “Oh, by the way, we incorporated two years ago?” Or the taxpayer brings you a notice for non-filing penalties on the partnership or S corporation you didn’t know existed? When you are working with existing business clients for several years, you are not concerned about their prevailing business structure. After all, if you have been filing the wrong entity’s tax return, you would have been alerted by now. Right? As it turns out, not always. When you find out about the error, your gut reaction is that it’s your fault. Is your errors and omissions insurance (or malpractice insurance) up to date? Take a deep breath; it’s not your fault. Probably. Let's keep reading and find out.Read More
How to Withdraw Cash from Your C Corporation Tax-free
Question: I understand the concept of paying just 21 percent tax through a C corporation. This makes sense if my tax rate is higher than, say 25 percent or 35 percent. But isn’t this money taxable to me as a dividend as soon as I withdraw it from the corporation? I don’t understand; won’t that actually cost me more tax? Answer: You have identified the exact reason C corporations can be what we call “high maintenance.” You’re right. Done in the wrong way, using a C corporation can actually cost more in tax than using a pass-through entity and paying tax at your individual rate, even if that rate is, say, 35 percent. By the time you pay qualified dividends tax on any withdrawals, you can wind up paying 45 percent or even 50 percent, depending on your individual tax rate. The key is to use smart planning. Rather than simply withdrawing the funds from your C corporation as a taxable dividend, use one six ways to withdraw tax-free instead. Doing this will help you lock in the low 21 percent flat rate and permanently save you from your high individual tax brackets. Keep reading to learn more.Read More
Upgrade Your Client Experience with a New Mindset
Sponsored by Liscio You care deeply about your clients. It’s why you got into this business: to have a direct impact on your clients’ success. With this in mind, understanding where your firm falls on the spectrum of great vs. poor client experience is fundamental to your success. At its core, drop-dead easy, secure digital communication and document exchange are everything in your clients’ minds, even if they don’t say it. Beyond just taking great care of your clients, if you want to get paid premium fees, you have to deliver a premium experience. Keep reading to learn how to deliver premium level service.Read More
Should You Switch Your Work Strategy for Tax Planning Season?
If you’re like most tax professionals, you’re probably working tax-prep season hyper-focused and -vigilant, refusing to hit pause except on absolute demand. You’re keeping a sharp eye on the ball, the players, and the end goal: maximizing your resources and providing impeccable service to your clients. Now, when you have lots of familiar, practiced work to do in little time, working like this can produce great results. However, tax-prep season is ending, and tax-reduction planning season is beginning. Therein, hyper-focus, hyper-vigilance, and workdays, weeks, and months without meaningful rest can backfire and steal from you the results you hope to produce. That’s because reactively responding to external demands and deadlines (set by clients and the IRS, for example), requires something different from you doing proactive designing and selling high-end tax plans. Consider this, as you shift from tax-prep to tax planning, you: ● Soften your focus on computers, numbers, and speed and sharpen your focus on talking with prospective clients about their finances, their hopes and worries about their business and family, and how you might best serve them. This requires a shift from grinding and discipline to presence and attunement. ● Soften your focus on meeting immediate deliverables and sharpen your focus on developing long-term strategies for products you offer and your business overall. This requires a shift from following rules, structures, and guidance to thinking creatively and working socially. ● Soften your focus on external deadlines and client demands and sharpen your focus on your own ambitions and drive to get things done. This requires a shift from aligning your priorities with others’ agendas to aligning your priorities with your own dreams and goals. Making shifts like these can be challenging, particularly if tax-prep season devours you and you enter tax-reduction planning season depleted and drained. However, taking time now to recharge and reset can help you pivot and produce powerful results in the end. Did Tax Season Devour and Deplete You? When it comes to personal performance in business, I like to contrast two modes of working: Depleted Mode and Resourced Mode. These modes aren’t binary; rather, they’re two ends of a continuum that we all constantly move along. Generally, when you find yourself highly distracted and distractible, pushing yourself to keep going, and working excessive hours to make up for lost time, you’re in Depleted Mode. Tax-prep season unfailingly produces this outcome for the best of tax pros. Exhaustion (or simple tiredness), frustration, and a taxed mind (pun intended) live here. When you’re drawn into your work, interested in the results you produce, and loving what you do, you’re in Resourced Mode. Enthusiasm, creativity, and connection live here. Resourced Mode offers an ideal environment to tax pros for engaging with the demands of tax planning season. You’ve probably seen yourself operate in both of these modes and along the continuum. Many tax professionals start the tax-prep season in Resourced Mode but end in Depleted Mode after months of hyper-focus and -vigilance, both of which you can only sustain in short bursts. There’s nothing wrong with Depleted Mode; most people land themselves there through hard work and commitment. (Incidentally, you can build systems and structures to reduce or avoid Depletion Mode over time, but that’s a topic for another day.) Many people produce great work in Depleted Mode, and that can trick them into thinking it’s effective for every kind of work. You can do tax prep in Depleted Mode, for example, because the work is familiar, somewhat predictable and consistent, and ultimately requires less mental engagement. However, Depleted Mode renders fewer productive results in tax-planning season because there you need deeper thought, mental space and physical energy to develop a strategy, a connection to people, and effectively sales. Ultimately, even in situations where Depleted Mode works decently, Depleted Mode can lead to: ▪ Procrastination: Being overworked and under-rested drains your mental capacity and leads to internal resistance on projects that require more mental energy. ▪ Distractibility: Quick changes of focus habituate your brain to prioritize distractions instead of focused work, so you might find yourself putting “easy” work ahead of “valuable” work. ▪ Agitation: Fast pacing can create agitation, or a constant background sense of worry, which can hinder progress when you try to settle into something that requires deeper thinking, such as tax or business strategy (which requires divergent, non-linear thinking). ▪ Lower pay for more work: procrastination, distractibility, and agitation make it difficult to approach valuable work (higher-paying, more satisfying), leaving you to do easy work instead (lower-paying, less satisfying) so you feel as if you accomplish something. ▪ Cyclical depletion: In Depleted Mode, you produce less per hour, make up for it by working more hours, and stay in Depleted Mode by overworking yourself. Still working in depleted mode? Click here to learn how to shut down the grind and turn on the productivity.Read More
Just Good Business – Curate Your Tech Stack
We’ve all done it. And most other business owners are doing it, too. What is “it”? Succumbing to the promise of “there’s an app for that” and registering for technology of all kinds – and then not using them. You should review and curate your tech stack at least once a year. Why? Because in business, plans often change. Priorities change, new challenges arise, and new opportunities appear. Curating your tech stack annually is just good business. Curating isn’t simply about getting rid of products and services that aren’t meeting your needs it’s also about mindfully adding technology that will help your business to grow (if that’s your goal), help you provide better customer service, and help you manage your business in a way that, one hopes, frees up your time for other activities whether those activities are business- or life-related. Nevertheless, it’s often necessary to clear bandwidth-sucking technological clutter before shifting our focus to identifying problems that tech can solve. Too much tech clutter (like too much physical clutter) can prevent you from seeing problems (and potential solutions) clearly. Additionally, this is an activity that can cut unnecessary expenses from your bottom line and improve upon technological advances. It is possible since the time you first subscribed to an application that there are better, cheaper alternatives. Here’s what to consider step-by-step to grow your take home pay and improve your business practice.Read More
Don’t Let Estate Taxes Force Your Family Business into Liquidation
My mom knew she was going to die. And she knew it would be sooner rather than later. Unfortunately, it was much sooner than she expected. She had time to put her personal affairs in order but ran out of time for figuring out succession planning for her business. Transitioning her sole-shareholder S-corporation shares over to me upon her death should have been straightforward. It wasn’t. But that’s a subject for another article. Transitioning a family business upon the death of an owner or a significant stakeholder (partner or shareholder) is never easy. Having to grapple with how to pay estate taxes on a closely held business can add complexity and stress to an already fraught process. With proper planning, however, family and other closely held businesses can avoid having to liquidate assets or sell shares or partnership interests to pay estate taxes. Insurance arrangements, operating agreements that include buy-sell provisions, and gifting strategies can all help to ensure a family business remains in the family and can pay any associated estate taxes. But what happens in the absence of proper planning? What happens when beneficiaries inherit a business they would like to keep family owned or closely held, but which is not liquid enough to pay the associated estate taxes within the required nine months? IRC Section 6166 can come to the rescue. Continue reading to learn more.Read More
Last-minute Tax Fix for PTET Businesses That Missed the 12/31 Deadline
Question: My client is just now paying the PTET for California with a timely filed election. Can they deduct the tax payment if they are an accrual basis taxpayer? Answer: Based on face value, unfortunately, the answer is no. Both cash and accrual basis passthrough entities would need to pay the tax by 12/31/21 (assuming calendar year-end) to get the deduction on the 2021 tax return. This answer is based on IRS Notice 2020-75, stating that an entity could take a deduction in the year paid. While the guidance did not specify cash or accrual in the definition, unless the IRS comes out with any other guidance stating otherwise, it is a federal deduction so it works the same as accrued state taxes, which the taxpayer must pay by the end of the tax year to deduct the amount following the economic performance rules. However, what if your client is an accrual basis taxpayer? While Notice 2020-75 does not specifically distinguish or reference method of accounting, there may be a way to fix your 2021 state tax deductions if you missed the 12/31 deadline. Click here to keep reading.Read More
Avoiding Self-Employment Tax with a Limited Partner Interest
The best tax planning will often be found where both the form and substance of a transaction align in the client’s interest. One such planning activity focuses on reducing self-employment tax, and while the attempt is admirable, the substance of the transaction might be stronger than its form. Generally, if you’re a partner in a partnership, your distributive share of income is subject to Self Employment Contributions Act (SECA) tax, also known as self-employment tax. This can be up to an additional 15.3 percent on your earnings, unless an exception applies. Many tax pros attempt to mitigate this tax by simply making the spouse of the main business partner a limited partner in the entity. The thought is that an exclusion applies for SECA tax when there is a “limited partner’s” share of partnership income. But be careful! When the underlying substance overrides the form of a transaction, the taxpayer generally will lose. The IRS recently highlighted such a problem with form in its draft partnership tax instructions by saying “For purposes of self-employment tax, however, status as a limited partner is determined under Section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative.” Simply calling a partner “limited” is not enough. The limited partner exception from self-employment tax creates a significant benefit when applied, but rulings focused on the substance of the partner’s interest have narrowed this exception. Let’s review how to properly qualify as a limited partner in light of the IRS’s recent emphasis in this area. In the process, we will also look at the specifics of how particular forms should still win the day by avoiding SE tax. Keep reading for more.Read More