Individual Strategies

We've all heard the messages to pay yourself first, save a percentage of your income, build your nest egg, and some of us heeded the messages. Whether you’ve saved a lot or a little, we have many ways to reduce taxes in retirement, and by doing so, we maximize the power of our retirement savings. Accumulating retirement funds is step one. And there are tax-advantaged ways to save for retirement: employer plans (401(k), 403(b), 457), individual retirement accounts (IRAs), self-employed retirement plans (Keogh, SEP, SIMPLE, Solo 401(k)), and non-retirement accounts. While you’re saving, you may have accumulated multiple “buckets” of assets, some in taxable accounts, some tax-deferred, some nontaxable. Looking ahead toward retirement withdrawals/distributions (the funds you’ll need for essential and discretionary living expenses) adds tremendous value, and tax planning is a big part of the picture. Read on for more specifics and stay tuned for Part 2 with additional tips and examples.

The flurry of tax provisions, meant to alleviate the economic dislocation of the Covid plague, have made many tax practitioners sensitive to the possibility of Married Filing Separately yielding a lower tax for a couple. Back in the day, it was rare enough that many felt they could safely ignore it. Lindsay Starrett of Baker Starrett in Grinnell, Iowa, gave me an example of saving taxpayers $3,500. I am not going to try to parse the details of that or other examples. I will just refer you to Reilly’s Sixth Law of Tax Planning: Don’t do the math in your head. Have good software and code income items as taxpayer, spouse, or joint. You may need to run multiple computations moving the dependent’s around. Also be aware, the IRS may not be as cooperative as it should be in allocating estimated tax payments. One of my old friends wrote me: "In 2020, we did MFS returns for the $10,200 unemployment exclusion and learned the IRS is unable to …" Click here to continue reading.

I have always thought of separate filing as something that filers should seriously consider for the final year of marriage or in circumstances where you think your spouse has significant audit exposure that you don’t want to share. The circumstances in which two married filing separate returns would yield a lower aggregate tax than a joint return were so rare that everyone I knew entirely discounted it. Things are different in 2021 (Also in 2020, but that is water under the bridge). What is driving the phenomenon are recovery rebate credits (which many received as economic income payments) and child tax credits. Be sure and read this before sending those electronic returns before the 18th. You may just have some savings there. Click here to keep reading.

Most of the Tax Code is “gray.” No, I don’t mean the color font it is written in. Unlike a lot of rules, the Tax Code is difficult to judge what is right and wrong. Perhaps it has to be written this way because to try and define every possible money situation is unfeasible. Perhaps, the writers like it this way because as we’ve said here many times at Think Outside the Tax Box, the gray area provides opportunity for tax savings. Take for example the official Tax Code definition of taxable income. Rather than affirmatively define it, the authors chose to negatively define it. Generally, an amount is part of taxable income unless the law specifically exempts it. Certain types of income get taxed twice. If, for example, you are subject to net investment income tax, you’ll not only pay income or capital gains tax, but an additional tax, as well. The same is true for royalty income. In some instances, it is necessary to pay income tax and self-employment tax on royalty checks you receive. To take advantage of breaks we must examine what loopholes or gray areas exist for royalties, and more importantly, how can you shield it from as much tax as possible. Continue reading to learn how.

So, you bought an NFT of a unicorn riding a unicycle. That sounds nifty. Turns out, though, even though you paid $500 for it with the expectation of a tidy profit, no one actually wants to buy it from you. It’s now so worthless you can’t even give it away. Is there a way to at least deduct the loss and save a bit in tax? Let’s find out.

If you own real estate, you’re no doubt familiar with that wonderful paper loss called depreciation. But you may not be entirely aware that land cannot depreciate. Alas, you must delete part of the price you paid for your real estate land from your original purchase price to generate your tax deduction. A cost segregation study might be the answer. The study, done by an engineer, can accurately allocate the cost between building and land. This price of the allocation can be cost-justified; after all, it can save you tax. But at lower depreciation amounts, the benefits might not outweigh the cost, or, if you’re a tax pro, your client might not believe it does. You’ve still got a tax return to do. Regulation 1.167(a)-5 tells us that we have to do something: In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. It doesn't really give us much guidance. But you may have seen online or heard somewhere about the old 80/20 rule. That’s right, the tax law says 80 percent of cost gets allocated to the building with the remaining going to land. Only, hold on a second, I can’t find a citation for that one. Is it possible there is no such rule? Then again, Reilly’s 19th Law of Tax Planning says that Reilly uses sarcasm when discussing tax. For the truth about this rule, continue reading here.

I’ve been spending too much time thinking about wrapping. You might picture presents neatly wrapped under a Christmas tree, or surprise birthday gifts next to the cake, but I’m thinking of something very different: cryptocurrency token wrapping. A wrapped token is a token that represents a cryptocurrency from another blockchain or token standard. A wrapped token can be used on certain non-native blockchains and redeemed in the future for the original currency. It is typically worth the same as the original cryptocurrency, but when it isn’t, the question arises that when you exchange virtual currency for other property (including other virtual currency) is there tax due, and if so, how much? Like many areas of cryptocurrency tax, the IRS has yet to issue guidance on this topic, resulting in taxpayers having to fend for themselves. The primary question you need to answer is, “Is wrapping cryptocurrency a realization event?” The answer to this question will influence the ultimate tax treatment. Keep reading to learn more.

Question: How can my rental real estate property qualify for the 199A QBI deduction? Answer: The age-old CPA answer of “it depends” certainly applies here. To qualify for the 20 percent deduction, your enterprise has to, as a threshold, be a trade or a business. So whether a real estate rental is a trade or a business is a thing that matters like… Can analysis be worthwhile? Real estate management companies that want to distinguish themselves should be looking at IRS Notice 2019-07. That is the main lesson of today’s post, but it also applies to tax preparers and self-sufficient owners. There is something new to keep track of, and it is a lot easier if you do it as you go rather than after the fact. I’ve got something here for preparers and property managers, when acting sooner rather than later will be helpful. It’s theory is it is easier to collect information actively when it is fresh, rather than a year or more later as often happens in tax work. Click here to continue reading.