Loopholes Archives - Page 2 of 2 - Think Outside the Tax Box

Loopholes

By Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL

Video Interview with Michael Kitces: Opening the Back Door to the ROTH IRA

Back in the spring of 2021 Editor-in-Chief, Dominique Molina, sat down with Michael Kitces from Kitces.com to discuss creative ways to use the ROTH IRA when developing tax planning strategies. This exclusive video interview is jam-packed with a variety of recommendations and suggestions highlighting the flexibility you gain in your planning when including the ROTH IRA as a tool! Sit back, relax, and enjoy the show!

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How to Get More Tax Write-offs for Your Rental Property

Question: Do I need to have my LLC hold the title to my rental property to get the tax benefits? Answer: If you’re like most investors, you probably purchased your rental property in your own name. While this doesn’t keep you from accessing all the special tax breaks available with owning real estate, it does expose you to some risky liabilities. Insurance can cover a lot of predictable liabilities like slip and falls, theft, and vandalism, but there are many other things that can happen putting not only the property at risk but also your personal assets. One way to protect against this risk is by using an LLC to hold your property. Most LLCs act like a corporation in providing limited liability protection against creditors for your personal assets and your other non-real estate business activities. Like most things in law, changing the deed can lead to a whole set of problems. So be sure to think twice before changing your deed. There are two key problems this action can cause you as the property’s owner. Keep reading to learn how to overcome them.

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Conservation Easements – Is This Winning?

Looking for lucrative deductions to reduce your taxable income? Many people are turning to Conservation Land Easements (CE), and the tax authorities are doing their best to deny these deductions. When a property meets the IRS criteria for a conservation easement, the owner may qualify to deduct thousands of dollars simply by acquiring the right kind of land an LLC holds. Often, these deductions are worth much more than the actual cost of getting the LLC interest. Sounds appealing doesn’t it? Under a conservation easement, a property’s owner gives up the right to make certain changes to that property to preserve it for future generations. Such an easement usually limits the usefulness of the property and lowers its value. But the tax deduction is not based just on the property’s reduction in value. The magnitude of the deduction comes into play when the deduction’s value is calculated by taking the difference between the appraised “highest and best use” of the property and its new reduced value. These best use appraisals often make assumptions about the property’s potential creating massive tax deductions, which, of course, leave taxpayers lining up to claim. But be careful! The IRS is cracking down on what it calls an “abusive tax deduction”; even going so far as to list the strategy on its Dirty Dozen list of tax scams. Yet even after spending billions of dollars, the service is not having much success. In fact, it’s losing key arguments on the strategy. Continue reading to learn how to participate safely.

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How to Do a Backdoor Roth IRA (Safely) and Avoid the IRA Aggregation Rule and Step Transaction Doctrine

The basic concept of the “backdoor Roth IRA contribution” is relatively straightforward. Contributing directly to a Roth IRA is restricted for higher-income individuals; once a married couple has an AGI in excess of $193,000 (or $131,000 for an individual), the maximum contribution limit to a Roth IRA reduces to zero. However, anyone with earned income can contribute to an IRA, regardless of how high their income is; at worst, higher income levels may limit the deductibility of that IRA contribution (for those who are an active participant in an employer retirement plan), but not the ability to make the IRA contribution. In addition, under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), there have been no income limits on Roth conversions of traditional IRAs since 2010. As a result, anyone who has funds in a traditional IRA, whether originally deductible or not, is eligible to do a Roth conversion. In other words, while income limits remain on Roth contributions, there are no income limits for a Roth conversion.

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Avoiding Passive Loss Limitations Through Short-term and Alternative Rentals

Short-term rentals like AirBnb are becoming increasingly popular with taxpayers who invest in real estate. For many taxpayers, the appeal of these properties is the flexibility and cash flow potential. However, there may be an overlooked third tax benefit. In many situations these short-term rentals may not qualify as a rental activity to the IRS, and that may offer a big tax break. While many rental activities generate losses, this can leave taxpayers facing the frustrations of not always getting to deduct those losses right away due to the passive activity limitations.

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