Posts Tagged ‘taxes’

Investing in a Retirement Account is Like Taking Out a Loan

Traditional retirement plan contributions come with a loan attached to it with a variable rate of interest, to be determined at a later date by the tax code and your income level. #interestrate #interest #loan #IRS #taxesEver since the FIRE (financial independence/early retirement) movement hit the scene I started to question conventional financial wisdom. 

Most of the advice preached was re-purposed from generations past. A penny saved is a penny earned turned into a variety of frugal anecdotes. You can’t read Proverbs (from the Bible) and not recognize the many similarities in advice. Sound money principles have ancient roots.

For a time the FIRE community welcomed me as one of their own before I stepped back a bit to cut my own path. (No sense in another voice calling out the same message.) I’m still part of the community, but gave myself permission to question the dictums of said community. The hope was to build a bridge from where we are to a higher level.

It also became clear my net worth was near the top of the demographic. This bothered me and caused me to conclude something was wrong.  How could a backwoods farm boy with nothing more than a high school education, a few college courses and a full personal library do better than virtually all within a community so dedicated to wealth?

I don’t trust luck to carry me that far. It had to be something else.

Then I started reading what was published in the tax field and felt a great disturbance in the force. While the advice was fundamentally sound, it also lacked in effectiveness if brought to task. All too often blogs were using IRS publications as their authority. (The IRS is NOT a tax authority; they are a bill collector.) If people followed this advice and the IRS ever challenged (likely with so many people tempting fate) there was a real risk of loss. (If you go to Tax Court and say you used an IRS publication as your substantial authority you lose automatically even of you a right! IRS publications have zero authority in Tax Court.)

Sometimes the math was fuzzy. A blogger might claim a certain level of frugality when it didn’t add up. Some claimed a level of wealth that also didn’t add up. Either the rules of mathematics were suspended or someone was trying to pull the wool over their reader’s eyes.

The biggest area of concern involved retirement accounts. The mantra of filling retirement accounts to the hilt for long periods of time has some obvious issues

Some retirement account problems are less apparent. Everyone keeps saying this is the best thing since sliced bread. But is it? 

So I started running some numbers and it wasn’t as clear as most are led to believe. There was something fundamentally wrong with the advice.

 

Numbers Game

The issue is with traditional retirement accounts (IRA, 401(k), 457, 403(b), Keogh, profit-sharing and cash balance plans); Roth type retirement plans don’t have this issue.

Don't lose your retirement account to hidden taxes. Current tax savings are dwarfed by future taxes on all the gains at the highest rate allowed by law. It's your money! Don't give it to the IRS. #retirement #account #hidden #taxesRoth style retirement plans don’t get an up-front deduction, but grow tax-free. Most financial blogs consider this the best animal in the yard. I agree.

A close cousin — if you qualify for it — is the health savings account where you get a deduction and tax-free growth, to be used for qualified medical expenses. The biggest drawback of the HSA is the amount you can invest annually is relatively small. 

Roth retirement plans are limited in many cases based on income on if the employer has the option in their 401(k) . The maximum Roth IRA contribution is also relatively small. (Exact limits are excluded from this post so changes in the limit don’t distract from the evergreen content.)

The mega-backdoor Roth (a favorite of the FIRE community) allows for sizable Roth contributions with one caveat: it’s probably illegal (according to the IRS). The IRS hasn’t attacked the mega-backdoor Roth because there is no current revenue to be raised by taking such action; Roth investments are not deductible.

However, once these accounts grow in size the IRS could come back and disallow the tax-free advantage, plus interest and penalties. If the IRS has a kind heart (ahem) they could forgo the excess contribution issues which would certainly mean penalties several hundred percent of the entire investment. You decide what course you wish to take. 

The safest retirement plan route means traditional retirement plan investments after you maximized your Roth contributions. Or is it?

 

Loan Document

Traditional retirement plan contributions come with a loan attached to it with a variable rate of interest, to be determined at a later date by the tax code and your income level.

All you debt-free warriors should feel a bit nervous at this point. Just as a mortgage-free home still has loan-like obligations (property taxes, insurance, maintenance), a traditional retirement account has an unannounced interest-like expense and it is a big one.

And this is what disturbed me so much that I had to publish a post on it. 

We all know that traditional retirement accounts get a tax deduction at your ordinary tax rate up to the retirement plan contribution limits. We should also know that these accounts grow tax-deferred and that all distributions are taxed at ordinary rates.

This is a real problem if your goal is to maximize your net worth. In the early years the tax benefit makes it seem like it is the best deal on the planet. But as time passes the math tells a darker tale.

Let’s start with a simple example to get a fundamental understanding of this matter:

Joe contributes $10,000 to his t401(k). This is subtracted from his income on the W-2 and never reaches his tax return. His tax bracket is 30%.

We will disregard actual tax brackets as they change over time and we are more interested in a workable formula for determining the best course currently and for future readers as well.

The good news is Joe saved $3,000 on his taxes this year. However, in 40 years, when Joe retires, he discovers his investment in a broad-based index fund performed as index funds have over long periods in the past: around 7% per year on average. Joe is a very happy man! He now has $149,744.58. 

If Joe were to take the entire amount in one year it would be a fairly large tax. However, Joe decides to take the money out over a number of years. As a result his ordinary tax rate is only 15%. (We will disregard taxes on Social Security benefits and other similar issues to make calculations easier.)

Joe now has a tax bill of $22,462. (Numbers are rounded.) That is $19,462 more in additional tax! Call the 19 grand a tax or anything else you want, but it looks like interest on the $3,000 to this accountant.

Even though Joe saw his tax rate decline by half in retirement he still saw his tax bill increase over 700%. His interest rate would be slightly less than 5.2% annualized in this situation assuming Joe never saw his account value increase after he started taking distributions, an unlikely event.

 

Early Payments

If I approached you and said I would borrow you $20,000 at 5.2% would you take it? Unless you have bad credit that is a high interest rate, especially since it in not deductible. Worse, you can’t make early payments to get out of the deal! You can’t jump ship until you are at least 59 1/2 years old. And if you are stubborn I’ll kick you overboard at 70 1/2. 

The good news is I’m a nice guy and will not do that to you. On the other hand, Congress has passed laws the IRS carries out doing just that.

And we haven’t seen the worst part yet! Retirement plan distribution included in income can cause more of your Social Security benefits to be taxed and can also increase the premium you pay for Medicare once you reach age 65.

A small tax deduction today can do real damage in the future. This is why I say I want multiple tax benefits before I get excited about a tax deduction

All this assumes your tax bracket drops when you retire. Considering the massive government fiscal deficits during a strong economy, it seems to this accountant taxes will go up in the future. And if your income remains high in retirement your tax bracket will also be higher.

Consider this: If Joe had a 30% ordinary tax rate on his retirement plan distributions his taxes would have climbed to $44,923, a full 7% annualized rate. For people with good credit this is a massive interest rate and almost nobody is thinking about this.

 

The Cold Equations

Joe’s example is unfair. First, Joe will put a lot more into his retirement plan over his lifetime, therefore, the damage will be much larger.

Second, retirement plan distributions happen over a number of years. While this might sound like a solution to the problem, it actually makes it worse as the investments continue to grow over time.

Third, smaller account balances experience the same issue only with smaller numbers and that tax rates might be lower due to the lower income level.

Fourth, early retirement does not solve the problem. Yes, you can take a limited amount of money from a traditional retirement account before age 59 1/2 without penalty under Section 72(t). This only reduces the amount of time the money has to grow; it doesn’t resolve the issue.

No matter how you cut it, traditional retirement accounts are best viewed as loans from the government, due in retirement. If you don’t pay the piper, your beneficiaries will.

 

 

Alternatives

Your experience will differ from that of others. You can use the simple example above to determine your implied interest rate assessed as tax in the future. You may discover this isn’t an issue for you. Or, you might need a moment for reflective prayer.

We saw that greed for a current tax deduction produces a 5%+ interest rate loan from the government, payable in retirement. So, what alternatives are there?

The best comparison is doing nothing at all (investing in a non-qualified account). You still invest in the same index fund. Dividends and capital gains are taxed at the lower long-term capital gains (LTCG) tax rate (15% or less for most taxpayers) instead of ordinary rates later (up to 37% federal, plus state income taxes). 

Since the money is outside a traditional retirement account you don’t have to worry about early distributions or required minimum distributions. And if you die your beneficiaries get a step-up in basis the retirement accounts don’t get. Gains on these investments are also taxed at the lower LTCG rate. 

 

Matching

I can hear the complaint already: What if my employer matches?

A valid argument. We’ll go back to Joe again and assume his employer matched his contribution 100%.

Joe invested $10,000 of his own money and his employer matched his retirement plan contribution with another $10,000. 

Joe still gets a deduction worth $3,000 for his contribution. The employer’s match is free money and not taxed until Joe takes the money out.

In total, Joe has $20,000 invested in his retirement account. His account grows to $299,489 in 40 years. The tax on this at a 15% tax rate is: $44,923. 

The initial tax benefit to Joe is $3,000, plus $10,000 from his employer, for a total of $13,000. The implied interest rate in this situation is around 3.15%.

The lesson of this part of the story is that using your employer’s retirement plan up to the match maximum is still a good idea for most. After hitting the matching maximum you might be better served putting the rest into a non-qualified account, however.

 

Smart readers will also be quick to point out the extra tax savings means you have more to invest which mitigates any of the extra taxes owed in the future. This would be true if people actually did that.

When was the last time you invested your tax savings from a traditional retirement account investment? Where did you invest it? Uh-huh. Thought so. You spend the tax savings as most do.

(If you are one of the few who actually pull the tax savings from the family budget and invest it in a non-qualified account my hat comes off to you. You still need to run the numbers to verify the best course of action.)

 

Facts and Circumstances

You can’t read tax law for more than a few minutes before running across the words “facts and circumstances”. And this situation is no different.

The IRS has hidden interest-like charges on retirement accounts. Here is how to avoid them. #avoidtaxes #taxes #retirement #IRS #interestI gave you the tools to build a working plan based on your facts and circumstances. Use a future value calculator to determine the interest rate the tax code is forcing you to pay if you use traditional retirement accounts. 

Employer matching is a real benefit that is diminished by the tax code after very long periods of time. (I would focus on the employer match closely as real value can be found there.)

After the employer match and available Roth retirement plan contributions allowed are exhausted you might find non-qualified accounts the best course of action, for you

The important thing is that you are reading this. That means you are more likely to run your numbers for the best options, for you

There are a lot of factors at play. Index funds still kick out dividends and some capital gains which are currently taxed. This slightly reduced the implied interest rate of the traditional retirement plan if you are prone to investing tax savings. It also assumes you keep your fingers off the pile until retirement. 

The one thing to remember is that deferred taxes frequently come with an implied interest rate paid as a higher future tax.

This is the kind of stuff I think about in the dark of the night. It might also be the prime reason I top the net worth list at Rockstar Finance.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Why You Should Rent to Your Business

One of the most powerful tax strategies a small business owner has is the S corporation. Under most circumstances when a small business has grown beyond $30,000 to $50,000 of annual profits it is time to consider organizing as an S corporation or LLC electing to be treated as an S corporation for tax purposes. 

The tax savings can be significant. A sole proprietorship is taxed at ordinary rates, plus self-employment tax. For 2019 the SE tax is 15.3% of the first $132,900 of partnership and/or sole proprietorship profits. (If you have wages from other sources this is included in the $132,900. Once you exceed that limit from all these sources combined the SE tax declines to 2.9%.) Partnerships pass profits to the owners where they pay the SE tax along with income tax. For partnerships, guaranteed payments to partners and profits are both subject to the SE tax. 

An S corporation does not pay income tax. Instead, all the profits are passed-through to the owners of the entity and taxed as ordinary income only; SE tax does not apply to profits passed to owners of an S corporation. Owners of an S corporation are required to be paid reasonable compensation. The remaining profits avoid payroll taxes (FICA and FUTA) and SE tax. 

Small business owners usually want some legal protections as well. The corporate or LLC structure is available to accomplish these goals. The LLC is more flexible with additional legal advantages than straight corporate entities.

Once organized, the LLC can then elect to take on the characteristics of other types of entities for tax purposes. The LLC does NOT have a tax form at the IRS. The LLC either defaults to a disregarded entity (sole proprietorship or partnership if more than one owner) or elects to be treated as a corporation. The LLC can elect S status if they inform the IRS they want to be treated as a corporation. These are two separate elections: electing to be treated as a corporation (Form 8832) and then electing to be treated as an S corporation (Form 2553).

I discussed these advantages in greater detail in the past.

 

Proper Allocation of Assets

If you had an attorney handle your LLC set-up and a qualified tax professional handle the structuring of assets inside and outside of the business you already know the S corporation rarely, if ever, has real estate inside it. 

The proper structure of a business where the owners also control the real estate is to organize the business LLC, treated as an S corporation, to hold the business only and a separate LLC, defaulting to a disregarded entity, for the real estate. The business LLC then pays rent to the LLC holding the real estate. 

Recently a reader on this blog asked why this is important:

Comment from Hobo Millionaire:

Keith, would you mind explaining the benefit of you renting to your business vs your business buying the building and paying a note over time. Is there a tax issue with the depreciation? You can depreciate/offset your taxes and the business can’t? A specific post on this setup, showing actual numbers, would be great.

We will discuss why you never want to own real estate inside an S corporation or an LLC treated as such. 

Most of the time it is a mild inconvenience only. Then there are instances where the legal and tax problems are significant and serious.

Every issue surrounding separating the business entity from the real estate holding entity are easily remedied. 

 

Legal Problems

There is no law requiring you to separate the business from the real estate. However, the LLC is a legal structure designed to protect the LLC owners. If the real estate and business are held within one LLC, the real estate is at risk if the business gets sued. Depending on the industry, this can be a serious issue or a low-risk probability.

Separating business from real estate also makes it easier to sell fractional ownership of each easier. If the real estate is held inside the business LLC it is impossible to sell the real estate (or business) without selling the same fraction of the other at the same time. 

Example: If you sell 10% of the business LLC and the real estate is held within that LLC, you have sold 10% of the business and real estate. 

Held separately you can sell all or a fraction of either the business or real estate in any fraction you want. You can also add another member (or have fewer members) to the real estate investment without also including the individual in the business side of the equation. 

Once real estate is inside an S corporation there is no easy solution to removing it. Tax issues of holding real estate with a business inside the same LLC can be significant. 

Removing real estate from an LLC is deemed a sale of the real estate for tax purposes. This means all the gains and recapture of depreciation are currently reported and taxed accordingly. Even if you are a 100% owner of the LLC and remove the real estate from the LLC to your name only (ownership really hasn’t changed, now has it?) you will be taxed on the gains! 

Therefore, if you have real estate inside an S corporation it might be better to keep it there even though it isn’t an ideal situation. You should consult a qualified attorney and/or tax professional with experience in this area of practice to avoid making a bad situation worse.

 

Serious Tax Issues

S corporations are not taxed except in a few situations. In each situation where an S corporation does pay tax the S corporation was a C corporation first for a period of time. (Electing S status at the time the corporation is organized means there was no time when the company functioned as a regular (C) corporation.) 

Holding real estate inside an S corporation with accumulated earning and profits (AE&P) from when it was a C corporation has tax consequences. 

S corporations are subject to tax on Excess Net Passive Income (ENPI) when :

  1. The S corporation’s passive investment income is more than 25% of gross receipts, and
  2. At the end of the year the S corporation has AE&P from when it was a regular corporation.

The ENPI tax rate is 35%! Lets look at an example of where an S corporation might pay the ENPI tax.

XYZ Corp elects to be an S corporation with AE&P. XYZ has $100,000 of gross receipts this year. Of the $100,000 of gross receipts, $40,000 is passive investment income (dividends, interest, rents, royalties and annuities). Directly connected expenses to the production of the passive investment income  is $10,000.

The net passive income is: $40,000 – $10,000 = $30,000

25% of gross receipts are: $100,000 x 25% = $25,000

The amount by which passive investment income exceeds 25% of gross receipts is $15,000 ($40,000 net passive income – $25,000 25% of gross receipts).

ENPI calculation: $15,000 / $40,000 x $30,000 = $11,250.

XYZ as an S corporation with AE&P pays a passive investment income tax of $3,938 ($11,250 x 35%)

 

Easy Tax Problems to Fix

The good news is that all deductions related to real estate ownership remain intact even when you separate the business entity from the real estate entity. You can still borrow against the building and deduct the interest on the real estate holding LLC tax return, as well as, depreciation and other expenses paid and related to the property. 

You can still have a triple-net lease between the real estate LLC and the business LLC. This means the business LLC can still pay and deduct insurance costs, repairs and maintenance, property taxes, utilities and so forth. Only the interest and depreciation goes with the real estate LLC. Rent is paid by the business LLC and deducted; the rent is claimed as income by the real estate LLC. 

There are times where the real estate LLC might show a large loss due to a cost segregation study or some other tax strategy. This means your business might be earning a large profit while the real estate LLC gets a special tax benefit that allows a massive deduction which causes that LLC to show a loss.

Passive activity rules tell us we are limited in some instances, especially when our income climbs above $100,000. This is easily solved with a simple election on the individual’s tax return. (The LLCs don’t make the election. It is taken on the personal tax return level.) Having a large loss on the real estate LLC if you are a high earner would be a problem if there were no outs. 

The good news, again, is you can group the activities. By grouping the real estate LLC and business LLC activities you are allowed all the deductions as if they were one entity on the personal tax return. This resolved the passive activity rule issues.

 

Final Notes

There are no drawbacks to separating the real estate and business into separate LLCs that I’m aware of. Every attorney I’ve ever spoken with agrees with me on this. Real estate should never be held inside an S corporation or LLC treated as such. Any tax negatives are easily resolved with elections.

The issues involved with combining real estate and a business under a single S corporation are many. Legally you limit your options and put assets unnecessarily at risk. The tax problems are hard or impossible to resolve without inflicting additional tax pain.

Structured properly your business and assets can enjoy legal protections while basking in the light of lower taxes.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Hiring a World Class Tax Professional

It's your money. Finding the right tax professional to serve your needs is important. It's not just about adding a few numbers to a return; it's about helping you pay less in taxes and build your nest egg for retirement. Your family is counting on you. Make sure you have the right accountant on your team.What is the largest expense you’ll have in your life?

Some will say it’s the purchase of their home or their college education. Others, thinking about it a while, feel transportation expenses lead the list of lifetime expenses. You would be justified in thinking medical costs, including medical insurance, are the biggest expense you will face in life.

Yet none of these expenses are close to what you will pay in taxes over a lifetime. 

Taxes will consume over half of what the average American earns over a lifetime. This means no other expense can possibly be larger.

The list of taxes in nearly inexhaustible: federal income taxes, state income taxes, sales taxes, excise taxes, payroll taxes, property taxes and now tariffs are being added to the costs of many goods you buy.

Let’s take a look at the taxes a typical American pays:

  1. Federal income taxes: 20% (yes, you get deductions and credits, but many pay 20% or more after these tax reductions)
  2. State income taxes: 5% (some states are higher while some have no income tax)
  3. Sales taxes: 5% of spending (some items are not subject to sales tax however)
  4. Property taxes: 5% of income, but is levied against the value of the property so it can be a larger (or smaller) slice of your income
  5. Payroll taxes: 15.3% (half paid by employee, half by employer)
  6. Excise taxes: What isn’t taxed? From alcohol to fuel to tobacco to vehicle registration and so on.
  7. Import taxes: Tariffs are a tax paid by consumers of the country levying the tariff and that is going up in the U.S.
  8. Other taxes: As a consumer you pay the taxes of businesses in the form of higher prices. Taxes are built into virtually every product and service. Medical expenses are usually exempt from sales taxes, but the taxes on the system are passed on to consumers. If they didn’t they would go broke meaning the survivors do pass on the cost of their taxes.

No one tax seems insidious by itself, but added together they take a massive chunk of your wealth unless you take actions to lower your tax liability.

Some taxes are difficult to reduce. If you buy gasoline you will pay the excise tax, for example. 

You can avoid many taxes by refusing to consume. That is easier said than done after a certain point. Frugality can save a lot of money, but go too far and you cross the line into being cheap. And there is still something to be said about quality of life.

Reducing consumption doesn’t avoid all taxes. Less consumption means less sales tax, but your wages still get hit with payroll and incomes taxes. 

The good news is you can use the tax code to reduce taxes beyond the mere consumption taxes (sales and excise). The United States has a progressive tax system which means your tax bite increases with your level of income. The first $24,000 of income on a joint return is tax-free because that is the standard deduction. Earn several hundred thousand and your top dollar earned can be taxed at over 30%. And that is just federal taxes. The state you live in wants a chunk too.

 

Investing in Tax Avoidance

Tax avoidance can be a dirty word in the tax profession since it is often the words we use when illegal activities are involved to avoid taxes. However, tax avoidance can be 100% legal!

There are two type of tax avoidance you need to consider: tax deferred and tax-free.

Tax deferred strategies push the tax into the future when you pay them with deflated dollars and potentially a lower tax bracket. Tax-free strategies avoid income taxes completely.

Is your tax professional Wealthy Accountant Certified? The right accountant can  reduce your taxes, help you accumulate wealth and achieve your financial goals.The Tax Code is massive and changing all the time. At the risk of sounding self-serving, you need a qualified tax professional if you are serious about reducing your tax liability. The Tax Code is too complex to navigate effectively without experienced help.

I could go into several tax reducing strategies today, but this isn’t a post on specific strategies. Besides, your facts and circumstances will probably dictate a slightly to radically different approach to meet your needs.

This is where you might think I would recommend my office for your needs. Except that isn’t going to happen.

I closed my office to new clients six months ago until June 1st (which is fast approaching). Unfortunately, a few factors will not make that a good choice for you after June 1st.

First, my regular clients filled May and June to the hilt so in reality July is the earliest I can get a new client in for a consultation.

Second, I decided (with my team) to focus more on local clients. (I owe my community my services. They breathed lifeblood into my firm and spreading myself too thin is very problematic.)

Third, my health had deteriorated significantly.

Before we continue onto solutions you can use I will take short detour into my health issues.

 

Learning to Breathe

When I was 18 or 19 years old I entered a silo with silo gas. Like a good worker I toughed it out to finish the work. Unfortunately, silo gas damages the lungs.

The best accountants do more than prepare taxes; they advise their clients for maximum wealth. You work hard for your money. Keep as much as legally possible while growing your net worth.I’ve since had short bouts of difficult breathing. These bouts are accompanied with persistent coughing. Cold weather makes it worse.

This past winter started early and lasted long. It isn’t hard to say we had a good six months of winter in the Northwoods of Wisconsin this year. 

I started out good this winter, but didn’t travel south for a short respite from the cold this year.

Around mid-February I started losing my voice (some might actually think that is a good thing). The cough soon followed. With tax season in full swing I was never granted a reprieve. The cough got seriously worse.

Here it is mid-May and the cough is still running strong; three months of hell and still going. The doctor said there is nothing she can do and recommended extended rest. (Well, that doesn’t work well with me.) 

I hurt. A lot. Nothing I do or take seems to work. Summer heat can’t come soon enough.

The cough has sapped my strength to the point I nearly faint when coughing spells hit which is often (like 5-10 times an hour).

To top it off my voice is gone. It has started to come back a bit, but the last days of tax season were so bad I couldn’t talk and breathe at the same time. It was difficult breathing at all! I still find it hard to breathe often. (And I never smoked, in case you’re wondering.)

 

Finding an Ace Tax Professional

No one person can be the go-to guy of the industry. I might be good, but pushed my body too hard and now the price is being paid. 

My openings available this year will be limited so I can produce two courses you will find valuable and to make Camp Accountant a reality. If my health does not improve I will take no additional clients this year.

But that doesn’t mean I’ve been sitting around twiddling my thumbs! I am fully aware of my limitations and have taken steps to provide more qualified choices for you.

Hopefully you have noticed the Finding a Local Tax Pro link at the top of most pages of this blog. The list of tax professionals is still small, but growing.

Not all areas of the U.S. are covered. If you are a tax professional who follows my philosophy, consider adding your name to the list. If you know of a tax professional who does outstanding work, consider nominating them for inclusion on the list. I will contact them before adding them to the list. (They have to want to be a part of this.)

 

Certified Wealthy Accountant Tax Professionals

And that brings up a good point. What level of quality do the tax pros on the list have?

The question recently arrived via email. A reader wanted to know what I thought of one of the tax pros on the list. In that instance I confessed I did not know the tax pro mentioned and could not vouch for their level of competence.

However, those on the list had to take action to get there. They either read this blog or follow my work as I post it around social media. I would be surprised if they were below average. (Let me know your experience. Too many bad marks and they will be off the list. The good news is I have received no bad comments on any tax pros on the list! Fingers crossed that continues.)

Still, it is not good enough to just put names on a list without vetting them. Over the next year I will take steps to “certify” tax pros on the list as Wealthy Accountant Approved. (They can be still be on the list if not “certified”, but I think people visiting this blog will steer toward the “certified” names.) It might eventually roll out to a national designation showing tax professionals who not only are competent, but can add value to their clients by consulting and providing actionable tax strategies to increase wealth (like maxing out retirement plans, maximizing tax credits, et cetera).

Tax professionals who attend Camp Accountant will be offered the “certified” designation. Tax professionals I have worked with personally and trust their work will also gain the designation. 

Rather than simple testing, I plan an in-depth vetting process to include the best of the best tax professionals on this blog’s list with the Wealthy Accountant Approved designation.

This is a valuable resource for you and the tax pro. You know the tax pro meets a high standard and the tax pro can charge more for their exceptional level of professionalism. (Smart people are never afraid to pay more for quality. It is the high price for mediocre quality that irritates.)

 

Putting a Good Tax Pro to Work

Top-notch tax professionals are always busy. The good news is you don’t have to settle for one tax pro!

As the tax pro list grows you will have more opportunities to find a Wealthy Accountant tax pro locally. Until then you can keep your current accountant while gaining the full benefit of using a Wealthy Accountant tax pro.

You work hard for your money. The right accountant can help reduce your tax burden while helping you build your retirement accounts. Save for your future; have more time with friends and family; travel the world. It all starts with the right accountant on your team.Tax season is not the time you save money tax planning. Tax season is triage in ALL tax offices! The options for saving taxes on the return being filed is massively limited (y’all want an IRA deduction with that, is about all we can do).

Reducing your taxes happens now, outside tax season. A few hours of consulting can pay off with a massive return. It is not uncommon for my clients to save 10 times or more than my fee in taxes. This is a 1,000% return! Some clients save even more. In some cases I don’t reduce their taxes but help them understand their tax and financial situation better so they can maximize wealth creation even if taxes are not reduced.

It is rare for a client consultation to end with tax reductions less than my fee. In those cases the value is usually increased wealth from other sources or fixing a tax issue that is sure to bite the client in the future.

I encourage you to use this resource: the Finding a Local Tax Pro list. I do NOT charge anyone to be on this list! This is for you, kind readers. There is no financial benefit to me. You get the value and I get the warm fuzzy feeling more of you are getting the service you deserve and that I can no longer provide. Yes, Camp Accountant has a fee, but that is to cover the costs of the Camp. I want Wealthy Accountant Certified to mean something everyone can trust. I want a day to come when everyone demands their tax professional be Wealthy Accountant Certified whether on this list or not.

 

As much as I want to help the world, I am one man who has pushed his body too far. I have to think smarter if I am to help every one of you kind readers. Just because I can help someone doesn’t mean I should. Too much work can break the horses back. Well, this horse is struggling with health issues as a result. 

I’m never one to shy away from work. I love what I do, even when it hurts. But if I go down no one is helped. I owe it to you, every one of you, to act and think smarter. The audience is too large for one small office in the backwoods of Nowhere, Wisconsin to handle. 

I need a team and one is being built. I will give all I have because you deserve only the best. When I push too far it is impossible to give the best. 

With the expanding team of tax professionals around the nation we can serve you at the highest level possible.

Don’t be afraid to hire a tax pro from the list. Ask the right questions before hiring. I published two posts on this in the past: 7 Questions Rich People Ask Their Accountant and Finding a Good Accountant.

Ask questions to verify the tax pro can serve your needs. Many tax professionals specialize. As long as you’re going to pay for the service you may as well get the best one possible.

 

In parting, do not worry about your favorite accountant. I thought the end of tax season would give me a breather (pun intended), but so far the cough and breathing issues have not improved. Warmer weather and time off (tax season really doesn’t end until June or so as extensions and questions come in rapid-fire until then) should allow me to heal. I am a bit worried this has lasted so long and so strong.

I’ll survive, no matter how much it hurts. I always do. I am fully aware of your presence and need, kind readers. I will find a way to get every one of you served to the level you deserve and more.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

The Once-in-a-Lifetime IRA Transfer to an HSA

Take a once-in-a-lifetime distribution tax-free from your traditional IRA. Maximize your tax savings.The Tax Code is riddled with esoteric deductions even many tax professionals are unaware of. So rare is the topic of today’s discussion that I never once in my career had a client use what I am about to point out.

Before you get too excited, know that just because you can do something doesn’t mean you should. Only under a unique set of circumstances would using this tax strategy be beneficial so read carefully. You only get one shot at this strategy because it is only allowed once in your lifetime. 

It’s called a Qualified HSA Funding Distribution (QHFD). In short, a QHFD allows you to fund your HSA with pre-tax monies in a traditional or Roth IRA or inactive SEPs and SIMPLEs. 

Let’s dig into the details before we discuss when it is appropriate to use your once-in-a-lifetime election and when it isn’t. 

 

Characteristics

  1. You must still qualify for an HSA contribution when using an QHFD. This means you must have an HSA qualified health insurance plan with applicable high deductibles.
  2. You must remain eligible for an HSA for 12 months or longer after making a QHFD. If you are not HSA compliant for at least 12 months after the QHFD you must include the distribution in  your income along with any penalty if under age 59 1/2.
  3. You must use a trustee-to-trustee transfer. You are not allowed to take the money out and then put it in the HSA. (Well, actually, you can, but the IRA distribution would be included in income — along with penalties if under age 59 1/2. But you would get the HSA deduction, offsetting the IRA distribution included in income.)
  4. A QHFD does not increase the amount you can put in an HSA for that year. Contribution limits still apply.
  5. You also do not get an HSA deduction for funds transferred from an IRA; the money is already pre-tax.
  6. An inherited IRA can be used for a QHFD.
  7. The QHFD lowers your RMD by the amount transferred for the year of the transfer.
  8. There is no 10% early distribution penalty with a QHFD as long as you follow the 12 month rule and qualify for an HSA.
  9. This strategy can only be used once-in-a-lifetime per taxpayer.

 

Why Would Anyone Do This?

Learn how to use your once-in-a-lifetime tax election to transfer money tax-free from a traditional IRA to an HSA.When you think about this for awhile it might seem a counter-productive tax move. (We will discuss instances where the QHFD is advantageous later.) You are not allowed a larger contribution to the HSA with this strategy and you get no additional deduction either.

Roth IRAs are a non-starter. rIRAs are already growing tax-free so moving money from a rIRA to an HSA provides no additional advantage with the added restrictions, such as the 12 month requirement listed above and a QHFD is limited to pre-tax dollars.

SEPs and SIMPLEs must be inactive to employ this strategy. This means contributions are no longer added to the account. The IRS is silent on how long an account must go without contributions to be considered inactive or if the SEP or SIMPLE can become active in the future.

There are a number of situations where the QHFD is superior to just funding the HSA and getting an additional deduction:

  1. You don’t have the money to fully fund your HSA this year. Since you would not fund your HSA anyway you end up with additional cash in the HSA that now grows tax-free instead of tax-deferred (I assume throughout this post that you use a QHFD from a tIRA to an HSA.) 
  2. If your tIRA is large and significant RMDs loom, any tax-free distribution from the tIRA is advantageous. It also lowers the RMD by the amount of the QHFD for that year.
  3. This strategy is better than taking an IRA distribution and paying the penalty (if under age 59 1/2) and then contributing to the HSA.
  4. You want (or your facts and circumstances dictate) to turn tax-deferred growth into tax-free growth. Remember, a tIRA grows without tax until withdrawn; an HSA grows tax-deferred and if used for qualified medical expenses and/or Medicare premiums the money comes out tax-free at any age.
  5. High medical bills make it difficult to fund the HSA and access to HSA funds are needed for uncovered medical expenses.

There are other reasons to use a QHFD, based on facts and circumstances and personal preference. Personally, I think people with large IRAs might want to employ this tax strategy and these that lower their future RMDs

 

Gaming the System

For 2019 you can contribute $3,500 for individual health plans and $7,000 for family plans into an HSA. (Those 55 and older can add another $1,000 to their HSA as part of the catch-up provision.)

There is a little-known tax strategy that allows you to transfer money from your traditional IRA to an HSA tax-free and penalty-free. Learn how this tax strategy affects you.In The Wealthy Accountant private group on Facebook a member asked about this tax strategy. Since the issue never arose in my office I wanted to dig a bit before answering and then couldn’t find the original post on Facebook (fingers crossed the person who asked finds this post.)

His question was about gaming the QHFD to double the tax benefit by transferring two years of contributions by making the contribution in the cross-over months (up to April 15th of the following year without consideration for extensions). He wanted to know if he could make, say, a $14,000 family plan contribution: half for last year and half for this year.

He did his research and found the IRS and all other sources silent on the issue. I found the same thing.

However, after I thought about it for awhile I realized this would NOT work. The once-in-a-lifetime QHFD would have to go on two tax returns if you doubled the transfer during the cross-over months which would make the second election disqualified. Sorry. But I like the way you think.

 

Round Up

The concept is rather simple. The benefits are fairly small, but worth it if your situation dictates. Those facing large RMDs and those seeking to turn a small portion of their tax-deferred tIRA into tax-free growth in an HSA will find the most value.

Now I need to make a confession. When I first saw the question in the private Facebook group I thought the person posting was smoking something. I never heard of such a tax strategy (or it went in this ear and out the other.) I had to look it up to believe.

If you plan on using this strategy don’t get mad at your tax professional if they never heard of this. Just tell them to go to their software’s Special Situations tab on the 1099-R screen. All they need to do is add one simple number (the amount transferred to the HSA up to the contribution limit).

If you run across a tax strategy you never heard of before be sure to leave a comment. If possible I will leave a short answer. And, as in this situation, I may flesh it out a bit more in a post. 

Many of these strategies provide only a small tax benefit. Added together with several other small tax strategies can accumulate to serious tax savings. 

Hope this one works for you or at least gets you thinking about another tax saving strategy that improves your financial situation.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Challenges of Running a Successful Blog

Learn how successful bloggers grow their business.

Blogging can be fun, but takes a lot of work.

Blogging is a business. Sometimes it’s hard to believe, but it is true. Along with podcasting, speaking and every other form of training and education, blogging is a business. Sometimes a really big business. And businesses take work to manage and grow.

It is easy to forget that those friendly bloggers you communicate with work some serious hours to bring you information and perhaps a laugh or two. Most people don’t realize bloggers are sweating it out at the keyboard in the wee hours of the morning to get a post out on schedule. 

And then there is the invisible work. It seems like blogging is about the cheapest hobby going until you realize that every part of the platform demands a fee and usually loads of time. And that is where this blogger enters.

I originally planned a detailed post of the coming collapse of China when the IRS released another 249 pages of regulations on Section 199A. The ink wasn’t dry before the calls flooded in for a brief post on the IRS release. The good news is we finally have a definition for a trade or business as it applies to 199A. The bad news is those 249 pages contained a lot of material and one simple post wasn’t going to cut it. A series was in process before the next hammer fell.

 

Time to Get Social

If I’m going to put in all this work I may as well bust tail to acquire a few readers. You see, people don’t magically find my glistening prose. (Yeah, I know. Surprises the heck outta me too.) I’ve done all the obligatory stuff: auto-posting, email list, attend conferences, remind everyone I see I have a blog. And traffic has been good for a tax blog with heavy doses of personal finance mixed in. 

But more is always better, I heard, so I purchased a few courses to hone my skills. First I attended a course on Pinterest and saw my Pinterest traffic go from nothing to several hundred page views per day and still climbing.

Then I cracked open my wallet for a very in depth Facebook marketing course called Moolah. (Hint: Rachel is one awesome lady when it comes to Facebook. She knows her stuff.) Here is an example of some of the free stuff she offers from her course, banned words on Facebook, for example. The free Facebook group alone will send your traffic higher

Increase your blogs ad revenue with tricks used by the most successful bloggers today.

Automate the hardest part of blogging.

The Moolah course is an intense 10 week program. (You have access to the videos and other materials for at least a year afterwards and there is a special Facebook group for graduates to keep pushing their traffic and sales to the moon.) While in the course I was informed I wasn’t handling ads correctly. I used Google ads, of course, and another platform called IMS. It was a small, yet steady stream of income to cover blog costs. With my traffic levels I was informed I needed to move to a more robust platform like Mediavine. So I took the plunge.

As this was happening another serious request came into the Facebook private group. (Y’all are invited to join our august group and The Wealthy Accountant business page. It is a great place to meet like-minded people and learn how to cut your taxes and manage your money for greater returns.) A reader asked about stock options, the kind granted by an employer, and that wasn’t a simple answer.

So, the China post was on hold even though this reporter has inside information about China that will shock most readers. I will post on this soon due to the serious financial consequences. The 199A post is also delayed due to the imminent incentive stock option issue. 

And now all those posts are on hold as I just spent 30 hours of my weekend before the approaching tax season ripping code from this blog. Why? It seems Mediavine is a vibrant platform requiring all old code removed before they go live. Well, once the process was started my other ad revenue was reduced to zero as the transfer took place. What was supposed to be a quick flick of the switch turned into a detailed review of all 454 published posts to pull out rouge ad code and other issues from the early days of the blog. This became priority if I wanted this blog to stay viable.

The good news is I did it. It is Sunday night as I type and I think I got all the problems fixed. I’ll find out tomorrow morning (probably as you read this). If you don’t see an ad anywhere on the blog you will know I’m still toast. Now I have to sweat it out as Mediavine is an automated system; I have no idea how they will display ads. I demand it is tasteful and useful to my readers. Time will tell.

 

Writing Shtick

The best news is that publishing posts from now on will be faster and easier. This weekend opened more of my time in the future with the improvements. (As long as I live long enough to reach the time break point.) 

But publishing a post is not the most time sensitive part of the process: research is. Tax issues take time to unravel. Answering a client question is faster because I only deal with one facet of the issue facing the client. When writing I must take into consideration all other possibilities a reader might encounter. This is more challenging than it sounds.

The China post requires a modest amount of research. I already have the links built. However, I need to pull from multiple sources, including a source inside China, to complete the post. Still, there wasn’t enough time to do it justice.

The 199A issues are so massive and time consuming I don’t know when I’ll be able to tackle the issue for the blog, but I am committed to a short series before tax season gets too far along. This is important for readers! The weekend workload just didn’t offer anywhere near the time I needed to get a quality post out on 199A.

The same applies to the incentive stock option post.

So, if time didn’t cooperate, offering me the chance to write a detailed financial or tax post, what was I to do? Well, you’re reading it. A post outlining some of the back office headaches of running a blog is easy to write because I can just tell the story of my weekend. Other bloggers should find value in this post while non-bloggers will gain a greater understanding of what it takes to keep a web page up and vibrant.

 

Whether You Believe it or Not

And if all the stuff above isn’t enough, we get some wonderful Wisconsin weather. The forecast has a foot of snow in it for this evening with plenty of blowing to make it as miserable as possible. Then temperatures will dip colder than -20 F. Wednesday’s high is forecast at -12 F. Yes, that is the high for the day. Welcome to the backwoods of Wisconsin.

None of this is meant as whining. I should have known better things wouldn’t transfer to Mediavine as smoothly as predicted. It’s still an excellent learning experience which should increase ad revenue by a significant margin and save time posting from now on. 

As for the weather, there was a hint the weekend would end with snow so I brought plenty of work home with me Friday. Technology today allows me to work from home and it’s as if I’m sitting at my desk. The bad news is I don’t know if any employee will make it in tomorrow. Everything is closed tomorrow: every school, program and every business I checked. 

Write viral blog posts, increasing traffic, revenue and sales. Write something meaningful for your readers. Provide value. Killer titles meant to go viral.

Write something meaningful for your readers. The rest will take care of itself.

And good thing. I can’t get the tractor running tonight so I need to get up early if I’m going to get snow moved so I can get out my driveway. Ah, when it rains, but it pours. Snows, I mean

Actually, I had a great and productive time last week and this weekend I killed it. Things were looking ugly for a while when I found some crazy code from the legacy platform when this blog was set up. But I broke through to the other side. It looks like the code is clean now.

Technology also bails me out. Twenty years ago a snowstorm would devastate my schedule. Today I log in from the living room couch and get more work done than if I was at work because there are no interruptions. 

By noon or so things should be clearing out as the plows get the roads open. I’ll break down and wander into the office if possible. 

I just wanted you, kind readers, to understand why I didn’t provide a tax post as tax season bares down on us. There is plenty of powerful stuff in the queue, but those golden nuggets take work to produce. Frequently it is required I call experts to dig deeper into issues these days. It’s almost like journalism for advanced tax strategies. 

Before I sign out I want to whet your appetite with a few more items from the queue: investing in conservation easements for massive tax deductions (special handling required to avoid problems), Medicare complaint annuities (the one annuity members of the community I run in will want to own), the wealth gap, income inequality, Form 3115 (for cost segregation studies), and more. My guess is I’ll need to live to 135 to get all these things published. 

One thing is certain; I enjoy tackling the difficult issues. And for good reason. The stuff regurgitated ad nauseam in the traditional press doesn’t really help you. I want to provide the power tools you need to control your taxes and financial life. It’s a lot of work and worth every bit of effort. 

Before I sign out, can I ask a favor? I busted tail this weekend (and a lot more) working on this blog. The upgrades make it easier and more user friendly to share posts on social media. Would you be so kind as to help out an old wayward accountant by sharing a post or three on Facebook, Twitter, Pinterest and other social media. I need the ego boost. Thanks.

Now I need to get back to the tractor. The snow isn’t going to move itself.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Deducting Gambling Losses with the New Tax Bill

All gambling wins are reportable income. Avoid unnecessary taxes by deducting losses without itemizing using gambling sessions. Sessions also allow you to avoid state taxes, too.

All gambling wins are reportable income. Avoid unnecessary taxes by deducting losses without itemizing using gambling sessions.

The Tax Code doesn’t treat casual gamblers very well. On the one hand the odds are stacked against you winning (those fancy casinos were built on losers, not winners). And on the other hand winning can be worse than losing when the taxman gets a hold on you.

Recent tax law changes turned a bad situation worse. The higher standard deduction means fewer people will benefit from deducting gambling losses since you need enough itemized deductions to exceed the standard deduction before the gambling losses reduce your tax liability.

Then we have issues with state tax returns. If the federal tax return doesn’t treat casual gamblers with respect, state tax returns can be down right rude. Wisconsin, for example, doesn’t allow any gambling losses against wins as an itemized deduction: if you lose, you lose; if you win, you lose.

Before we explore strategies for deducting gambling losses we need to review the rules as they stand.

 

Gambling Wins and Losses on a Tax Return

Gambling wins are reported on the front page of Form 1040 for tax years 2017 and prior. Gambling wins are reported on Schedule 1, Line 21 for tax year 2018.

All gambling wins are required to be reported even if the casino doesn’t report the win to the IRS. Gambling wins are reported on a W-2G for:

  • bingo or slot wins of $1,200 or more (not reduced by the wager),
  • $1,500 or more (reduced by the wager) for Keno, or
  • $5,000 or more (reduced by the wager or buy-in) for poker,

There are certain instances where a W-2G is issued for other gambling winnings of $600 or more.

Losses are allowed as an itemized deduction dollar for dollar against the gain. Gambling losses cannot be greater than gambling wins for the tax year.

Example: John wins $23,500 during the year playing slots and other casino games. His gambling losses are $37,900. John reports his $23,500 of wins on Schedule 1 and $23,500 as an itemized deduction on Schedule A. The additional losses are not deductible. If John doesn’t have any other itemized deductions and is married he is better off taking the $24,000 standard deduction. He derives no additional benefit from the gambling losses while he pays tax on the wins.

When it comes to state taxes some states do not allow any gambling losses, even against gambling wins. This creates a unique situation. In Wisconsin, for example, you can win a million dollar jackpot and go on a gambling spree losing it all and end up with a huge state income tax bill because none of the losses can offset the win. For federal you would report the income and deduct the losses on Schedule A; very little additional tax, if any, would result on the federal tax return.

Gambling wins reported on Form 1040 can cause other serious tax issues even if you can deduct losses on Schedule A. Many credits are affected by adjusted gross income. Losses are deducted further down the return so gambling wins can reduce or eliminate:

  • Education credits,
  • the Earned Income Credit, and
  • the Premium Tax Credit

In addition to lost credits, gambling wins can reduce or eliminate:

  • IRA deductions or Roth contributions allowed
  • Passive Activity losses, and
  • affect the Alternative Minimum Tax

And if this isn’t enough, your Social Security benefits could be taxed more and Medicare premiums pushed higher.

The above lists are not inclusive either! The tax issues from a gambling win can hurt you in many more ways.

But there is a solution to all the tax pain.

Gambling Sessions

When you consider the tax implications of a casino win you might want to think twice about gambling. While I’m not a fan of gambling, since it isn’t conducive to financial independence, I still understand some people enjoy casino games as a form of entertainment. A certain accountant once tried his hand at card counting to reasonable success. 

I’m not here to judge. If you gamble I want to assure you have the best information to reduce your taxes on wins.

Gambling wins can cause other taxes to go up and reduce or eliminate other deductions. Learn how gambling sessions allow you to deduct losses before they add to your tax bill.

Gambling wins can cause other taxes to go up and reduce or eliminate other deductions. Learn how gambling sessions allow you to deduct losses before they add to your tax bill.

The basic tax rules above (report all gains and itemize losses to the extent of gains) are valid, but there is a better way. Enter gambling sessions.

The IRS in 2008, and later clarified in 2015, created rules for deducting gambling losses called gambling sessions.

The idea was a gambling win wasn’t really a true win until the session was completed. The Tax Court ruled it is impractical to record each and every wager (pull of the lever, deal of the cards or throw of the dice) and therefore wins and losses can be tabulated for each gambling session versus each hand of cards played, et cetera.

gambling session starts when you make your first wager of the day for a specific type of game and ends when the last wager of the day is made on the same type of game.

Gamblers need to take extra caution not to mix different types of wagers when calculating sessions. Slot machines are different from blackjack, blackjack different from poker, and poker different from craps.

Example: You play slots in the morning and take a break for lunch and return to the one-armed bandit. This is still the same session.

Example: You play slots for an hour and then move to craps. The slots and craps wagers are different sessions. If you later return to slots the same day you are still on that day’s slots session.

Tax Tip: IRS guidance says a gambling session ends when the clock strikes midnight. This is somewhat true. Playing late into the evening could cause two separate sessions in the same sitting. You can choose to use a calendar day or any 24 hour period as long as it is consistent. Consistency is the key. You can call a day from noon to noon the next day or 5 p.m. to 5 p.m. the next day. Your day should be consistent for the entire year for all gambling sessions.

Extra Gambling Deductions

Let’s use a live example to illustrate the valuable deductions allowed with sessions and an extra deduction for losses not allowed by sessions.

John’s gambling sessions log.

The above sessions log is for a casual gambler who had four sessions throughout 2017. For calculating a session you can use your starting “money in” and netting your “money out” at the end of the session to determine your gain or loss for the session. Inside each session large wins could exist. For example, on February 2nd John may have won a $12,000 jackpot and received a W-2G, but by the end of the session he had only $700 left for a net $200 sessions gain.

John will report $900 of gains on his tax return regardless the gains inside a single session. Losses are not allowed against gains for between sessions.

The $900 gain will end up on Schedule 1 (Form 1040) and will be subject to tax and may affect other deductions and credits on the return. You can also deduct $900 of the additional losses on Schedule A if you itemize! (The $900 sessions gains on Form 1040 can be still be deducted from other losses on Schedule A.) The sessions will always break even (unlikely) or net out as a gain because losses are not allowed between sessions. But unused losses from sessions can be deducted on Schedule A against session gains.

Reporting Sessions Without Getting Audited

Reporting gambling sessions can cause a problem with the IRS computers and cause an unwanted envelope arriving in your mailbox.

Remember when we said you could have a gambling session with a $200 gain (February 2nd above)? Well, inside that small gain could exist a large gain with a W-2G issued. If you only report a $200 gain when the IRS has W-2Gs showing thousands in wins you will get a bill for the difference.

Don't let a gambling win turn up a tax joker. Don't lose all your gambling wins to taxes. Use the trick professionals use to deduct all gambling losses. Deduct your gambling losses without itemizing.

Don’t let a gambling win turn up a tax joker. Deduct your gambling losses without itemizing.

Yes, in the above example only $900 of gains are reportable. But you need to tell the IRS computer what it wants to hear. You could always attach a statement to the return, but the IRS computer may not pick it up before a nasty gram goes out or a full audit triggered.

The best way to handle this is by modifying your sessions reporting on the tax return. Let’s assume the February 2nd session above contained a $10,000 win. Your log will read exactly as above if those are your “money in” and “money out” numbers. But you will report the February 2nd W-2G gain of $10,000 and $9800 of “money in” called gambling losses on the return for a net of $200 again.

Let me see if I can make this clearer.

When I prepare a tax return I enter all the W-2Gs first. This tells the IRS computer I didn’t miss any gambling wins. Then I go the the client’s log and net the difference to arrive at the correct answer.

I still attach the log to the return. This nips an audit before it begins. The attached log allows an auditor to reconcile your sessions without opening a full audit, saving you time and aggravation.

The thing to remember is that your gambling sessions bottom line must be accurate. Adjustments sometimes need to be made so the IRS computers don’t start smoking.

From the above example you can combine all sessions when reporting on the tax return. (Still attach your sessions log to verify the reported sessions gains.)

Let’s assume for our final example that John started with $500 on February 2nd, won a $10,000 jackpot and kept playing until he had only $700 left. The other sessions had no W-2G wins.

Here is how I’d report John’s sessions on his tax return:

  • Gambling Income: $10,000
  • Gambling Sessions Losses: $9,100

The tax return only needs this one simple combined sessions reporting to arrive at the correct $900 of gambling gains. Remember to deduct the excess allowed on Schedule A (losses up to total gains not reduced by sessions losses).

 

Gambling can be exciting and fun. Winning is best of all. Just make sure you don’t pay a penny more in tax than you have to. The deck is already stacked against you by the IRS and casino. Don’t throw your winnings away, too.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

Opportunity Funds: Deferred and Tax-Free Gains

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money. #wealthyaccountant #capitalgains #taxes #investments #opportunityfunds
Jump for joy! You get to keep more of your money. Reduce or eliminate capital gains taxes with an Opportunity Fund. #wealthyaccountant #taxes #capitalgains #profits #opportunityfunds

Jump for joy! You get to keep more of your money.

The Tax Cuts and Jobs Act of 2017 brought several new opportunities to reduce your tax burden. A few previous options have been reduced or eliminated. First the bad news.

Like-kind exchanges are now limited to real estate. Capital gains in real estate can be deferred into a replacement property if complicated tax rules are followed. The same cannot be said for business property any more.

The good news comes to us in what is known as §1400Z-2 and §1016(a)(38) as added or modified by the Act. This might sound like a mouthful, but once you understand the implications your mouth is sure to start salivating. In a language normal people understand this means ALL capital gains can be deferred with some gains even tax-free at some point. It also means future gains (for a limited time only as we’ll discuss shortly) can be completely tax-free!

Your favorite accountant has received multiple requests to cover these new Opportunity Funds and Zones in detail due to the conflicting and limited information published elsewhere. In this post we will dig deep into the subject, unveiling the nuances you can use to take a serious bite from your tax liability.

We will also use multiple examples to illustrate available options in utilizing Opportunity Funds.

The Basics

Opportunity Funds were created by the Act to encourage investment in economically disadvantaged areas of the country. To encourage investment in these areas Congress provided for zones that would have special tax advantages.

There are two major advantages when investing in Qualified Opportunity Funds:

  1. Tax deferral: Taxes on capital gains invested in a Qualified Opportunity Funds are deferred while the funds are invested in the Fund.
  2. Partial tax-free capital gains: Some of the capital gains deferred become tax-free in some instances (discussed later).
  3. Tax-free growth: Capital gains on investments in a Qualified Opportunity Fund become tax-free if held for 10 or more years.

Point 3 above comes with caveats we’ll discuss below. Deferred gains of the investment used to fund the Qualified Opportunity Fund need to be recognized on December 31, 2026 (or when the investment is sold, whichever comes first) even while the gains from the Fund investment continue deferring to the 10 year anniversary where they become effectively tax-free. Examples below should clarify.

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money. #wealthyaccountant #capitalgains #taxes #investments #opportunityfunds

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money.

You are allowed one temporary election to defer gain. In other words, you can use a portion or all of a gain to invest in a Qualified Opportunity Fund, deferring the gain, and the remainder is reported as gain with applicable taxes paid in the year realized.

You self-elect. Revenue may produce a new form to report this election which is attached to your tax return when you file. You have 180 days to invest the gains into a Qualified Opportunity Fund. The act of investing these gains into a Qualified Opportunity Fund within the 180 day window is your effective election.  You will probably have a simple election button to click on your tax software to report the deferral instead of an additional form to fill out. Be sure to track your Fund investments manually if you change accountants or switch tax software.

The 180 day window to invest includes weekends and holidays. The Act is unclear on this issue, but it seems to indicate 180 calendar days rather than 180 business days, even if the 180th day falls on a holiday or weekend. There is no extension of the 180 window to the next business day.

Only gains are involved. Like-kind exchanges use a complicated formula to determine the amount required to be invested in the replacement property. With Qualified Opportunity Funds only the gains need to invested.

Example: You buy a piece of land for $100,000 and sell it in 2018 for $250,000. Only $150,000 of the sale is required to be invested in a Qualified Opportunity Fund to defer taxation on the gain.

 

Issues

Before we dig down into the details you should note there are several issues with the Tax Cuts and Jobs Act. In at least one section of the Code there is a reference to another section which makes no sense. We are left to assume what Congress meant if a reconciliation bill doesn’t correct the errors. The IRS will eventually write regulations on the ambiguous issues with the Tax Court determining the actual nature of the issues in question.

Another issues involves the IRS. Revenue promised clarification by late summer. As of this writing the IRS has not provided the form for self-certifying for those wishing to start their own Fund or additional guidance on how to handle many of these issues. The tax profession is left to determine the procedures with the risk regulations and/or the Tax Court may later determine differently.

I will note where the ambiguous issues reside as we review examples below. Taxes by nature have similar issues. Using Qualified Opportunity Funds to defer capital gains is something to consider. Just understand some details may change in the near future. Of course, the Tax Code can be modified at any time so stay tuned for updates.

Tax Benefits

The tax benefits from investing in a Qualified Opportunity Fund are significant with a bonus benefit.

  • Any capital gains invested in a Qualified Opportunity Fund within 180 days of a realized capital gain is deferred until the investment is divested or December 31, 2026, whichever comes first. There is no limit on how much can be deferred. Caution!  While the 10 year rule is still in effect, the tax deferral benefit ends December 31, 2026 and the original capital gain will be reported as income minus the basis adjustment discussed next. You are still required to hold the Qualified Opportunity Fund investment 10 years to receive tax-free status on the Opportunity Fund investment.
  • Investments held in a Qualified Opportunity Fund for 5 years receives a 10% basis adjustment and a 15% basis adjustment for capital gains deferred into a Qualified Opportunity Fund for 7 years. Example: The wording of this tax benefit can be confusing. If you have an income property held for decades with the entire basis (except land) depreciated, the basis is rather low or even zero. However, for this adjustment we use the basis of the deferred capital gain. If $1 million of capital gain is deferred, $100,000 is added to basis after 5 years and $150,000 after 7 years, thereby reducing the deferred capital gain by 10 or 15 percent.
  • There is a 10 year rule when investing in a Qualified Opportunity Fund to receive tax-free treatment of the capital gains from the Fund. Do not confuse this with the original deferred capital gains. Example: Using the above example, assume an $800,000 capital gain while invested in the Qualified Opportunity Fund over a 10 year period. The original capital gain is reduced by the 15% basis adjustment and reported (if held 7 or more years) when divested or on the 2026 tax return for calendar year taxpayers. The additional $800,000 capital gain from the 10 years invested in the Fund become tax-free.
  • While the beauty of investing in Qualified Opportunity Funds involves the deferral of capital gains, there is nothing precluding someone from investing non-capital gains funds for 10 years to receive tax-free capital gains from the Fund. (Jake Drum, a reader, suggested the following edit: You will be able to contribute non-capital gain dollars to the Fund, but only the capital gains contributed will receive tax benefits. See his comment below with my response.)

 

Observations and Examples

The concept is simple in theory, but nothing in the Tax Cuts and Jobs Act is as simple as it seems. (A true statement of the entire tax code.) The details are important when such a long-term investment is required to receive tax benefits. Details of your personal situation can color the benefits of the program.

  • Only one election can be made per sale or exchange. However, a temporary election can be made and a permanent election made later. The temporary election is the one made from gains invested in a Qualified Opportunity Fund where gains are temporarily deferred and the permanent election is made when you the sell an investment in a Qualified Opportunity Fund.
  • Revenue will need to clarify the temporary and permanent election issues. It seems the one election limit prevents reinvestment of gains from the sale of a Qualified Opportunity Fund into another Fund.
  • It is possible the gains from an installment sale would be limited to one temporary election only. This would limit the value of an installment agreement if deferral is desired.
  • Section 1400Z-2(a)(1)(A) of the Code appears to be in error as it references the wrong section of the Code. There is a similar error in §1400Z-2(b)(1)
  • If your investment in the Qualified Opportunity Fund declines the FMV is used to compute the gain after the deferral period ends, allowing for a reduction in the reporting of the deferred gain on your tax return. This effectively reduces your original capital gain.

Example: You defer $100,000 of gain by investing the gain in a Qualified Opportunity Fund. The investment declines by $10,000 at the time of sale. The reported original gain is now $90,000 ($100,000 deferred gain minus the $10,000 loss in the Fund).

  • While nothing precludes an investment in a Qualified Opportunity Fund from non-gain sources, the basis of your investment in the Fund is zero with some exceptions. If the Fund is sold prior to the 10 year period all the sale price is considered gain. If you are considering an investment of non-gain funds you must be certain you will remain invested the entire 10 year period or your original investment will be taxed as well as the Fund investment profit.
  • The only adjustments to basis is a 10% addition to basis after holding the Fund investment for 5 years and 15% after 7 years.

Example: A deferred gain (or non-deferred gain if you choose to do so) is given basis at the 5 and 7 year mark. If you invest $100,000 in a Qualified Opportunity Fund the basis is zero during the first 5 years, less a day. At 5 years the basis would be adjusted to $10,000, and $15,000 at 7 years. It also appears this only applies to deferred gains when the temporary deferral period ends December 31, 2026 and recognition of gain is required. An actual sale of your Fund investment would cause a circular computation negating the basis gains.

  • If you invest gains and non-gains into a Qualified Opportunity Fund it is treated as two separate investments: deferred gains as one and other than gains invested as the other.

Example: You sell an asset with a $100,000 gain. You elect to defer $80,000 immediately by investing in a Qualified Opportunity Fund. Later you decide to invest the remaining $20,000 of the gain. Unfortunately, the one-election limit doesn’t allow deferral of the $20,000 portion on the Fund investment. The $20,000 does not qualify for deferral and must be included in income the year the gain was realized.

Example: Let’s go the other direction. You once again have a $100,000 gain. You instead invest $125,000 into a Fund. Only the $100,000 gain is deferred and considered one investment (the temporary election) and the additional $25,000 as another investment. This is true even if the investment was made in one combined sum.

  • Once again, the temporary deferral period will be different from the permanent exclusion period. Deferred gains (if held to December 31, 2026) are reported on your 2026 tax return while the exclusion period of the Fund gain will continue for 10 years which means most deferred gain will be reported as income prior to the exclusion gains becoming effective due to the 10 year investment requirement.

 

Risks

Qualified Opportunity Funds are new and must invest at least 90% of Fund assets in Qualified Zone property. Qualified Zone property is located in low-income areas of the U.S. These untested investments could suffer significant losses in an economic downturn. There is also the risk new Funds are operated by unseasoned professionals.

Serious levels of due diligence is required before and investment is made in any Qualified Opportunity Fund.

Investment Choices

Several Qualified Opportunity Funds have opened to date. Still, the choices available are lower than in many other asset classes. You can use a search engine to find Funds to invest in. The Fundrise Opportunity Fund is one such example of a Qualified Opportunity Fund.

Fundrise is not an affiliate nor affiliated with this blog, nor have I reviewed their portfolio. I make no claims as to the suitability of investing in Fundrise. It is advised you begin your search for a suitable Qualified Opportunity Fund as soon as possible. The 180 day investment window provides adequate time for in-depth review of Fund choices if you start early.

 

Starting Your Own Qualified Opportunity Fund

You can also start your own Fund to manage your deferred gains.

An Opportunity Fund could be a better choice over a like-kind exchange when it comes to how much money you keep after taxes. Learn the details here to keep more of your money. #wealthyaccountant #taxes #capitalgains #investments #oppoertunityfunds

An Opportunity Fund could be a better choice over a like-kind exchange when it comes to how much money you keep after taxes.

A Qualified Opportunity Fund must be a corporation or a partnership. (An LLC electing to be treated as such for tax purposes should pose no problem as it isn’t specified or excluded in the Code. An S corporation is not an option; only a regular corporation or partnership can be a Fund.)

 

Observation: A Fund can’t be organized for the purpose of investing in other Qualified Opportunity Funds. The IRS may provide future regs modifying this situation. As of this writing a Fund should not invest in another Fund.

 

Here is the best part of starting your own Qualified Opportunity Fund: you self-certify. Do you like that? The IRS will have a form by late summer (not yet available as of this writing) which you fill out and attach to your corporate or partnership return. It’s as simple as that.

 

Observation: Here is a map of the U.S. with all the Qualified Opportunity Zones listed. Starting your own Fund gives you some control over how your money is invested. However, you can only make investments in Qualified Opportunity Zones.  You will need to zoom in to see the actual Zones.

 

What can your Fund invest in? Investments must be tangible property used in trade or business of the taxpayer and meet these three requirements:

  1. The property was acquired after December 31, 2017 in a Qualified Opportunity Zone.
  2. Use begins with the Fund or the Fund substantially improves the property. Substantial improvements are defined as additions to basis for the property after acquisition during a 30-month period where the basis is increased by an amount greater than basis at the beginning of the 30-month period. Example: Property has a $100,000 basis at the beginning of the 30-month period. Substantial improvements would require additions to basis of greater than $100,000 by the end of the 30-month period.
  3. Substantially all the use of the property must be within a Qualified Opportunity Zone.

Intangible property is not a qualified investment for a Qualified Opportunity Fund; only tangible property counts.

If you are running your own Fund you cannot make an acquisition for your Fund from a related party. There also appears to be errors in the Code in regards to related party purchases by a Fund. These errors will not negate the related party prohibition.

Some investments within a Zone are also prohibited: golf courses, massage parlors, hot tub facilities, country clubs, suntan facilities, racetracks and other gambling business and liquor stores.

One final consideration if you plan on starting your own Qualified Opportunity Fund. There are penalties if the Fund has less than 90% of assets  invested in Qualified Opportunity Zones.

 

Final Comments

The IRS has answered some questions on the topic at hand. Keep in mind the IRS is not the final arbiter in these matters: the Tax Court is. You cannot use advise from the IRS as substantial authority. That is only gained from an enrolled agent, CPA, attorney, the Tax Code, Tax Court rulings and other qualified sources.

Turn capital gains taxes into a powerful tax-free income generating income machine. The ultimate in passive income: the Opportunity Fund! Stop paying taxes on gains today. Read more here. #wealthyaccountant #passiveincome #taxes #taxfree #tax #taxes #investments

Turn capital gains taxes into a powerful tax-free income generating income machine.

Deferring capital gains is easier than ever. While the like-kind exchange has been limited to real estate now, investing in a Qualified Opportunity Fund might be the best remaining option.

There is an argument where the like-kind exchange even for real estate might not always be the best choice. Investing gains in a Fund has more flexibility and liquidity in many cases. Coupled with the increases in basis and potential (if held for 10 years) of excluding all the gains from the Fund investment, a like-kind exchange is no longer an automatic choice for deferring gains.

This is a difficult topic with an easy to understand framework (invest capital gains in a Qualified Opportunity Fund for 10 years and defer 85-90% of the temporary gains until 2026 and the the remainder of the gains are excluded from income permanently.)

The details is where the tire meets the pavement. It would be a good idea to either print out this page or bookmark it for future reference. Unless your gains are a simple transaction the details will motivate your decision process.

 

I know this got technical. Regular readers normally expect a bit lighter reading. However, this has to be published. Too many people need the information as the traditional press is glossing over the subject and many tax professionals are still struggling with the implications of all the nuances of the Tax Cuts and Jobs Act. I have one more in-depth tax issue to address before we lighten the reading material for a family audience. Until then, take car, kind readers. May this lighten your tax burden at least a bit.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

My Tax Plan If I Were President

Taxes laws are a mess. I have solutions to simplify taxes and lower rates. Using humor, I share tax tips for deductions for individuals and small businesses. I also address the politics behind such required changes. #wealthyaccountant #taxhumor #taxdeductions #taxtips #smallbusiness #funny #politics #presidentIf you’re reading this the day it’s published it means this is the due date for extensions for partnerships and corporations. If you work in a tax office and things are quiet you might want to consider another job. (This is an inside joke directed at a former employee who struck out on her own. If you need bookkeeping in Vegas I know a qualified person to handle that. Seriously.)

I thought today would be the perfect day for me to announce my candidacy for president with a few tax policies I’ll sign into law via executive order if elected. Some of you might be darn excited about this unwelcome event as you think I’m a Democrat. Other might be excited because they think I’m a Republican. The truth is I’m neither. I prefer to waffle between both side of the aisle or as the police call it: walking in a drunken stupor.

As much fun as I’m going to have writing this, I am also dead serious. What follows are tax policies I would like to see instituted. Some things will sound very liberal and some things will sound downright conservative. Basically, I should tick off just about everyone in the room with something.

Welcome to politics.

Ground Rules

Before we start I want to point out some things I plan as president are not completely tax related. For example, I will deal with the minimum wage, but connect it to tax policy. The same with welfare of every kind. Along the way I’ll fix the health care issues of the United States by default and solve trade issues and immigration policy in a way everyone will love until I’m elected. Then a third will love me and two-thirds will hate me until we approach the next election. Then the population polarizes and it ends up a dead heat until I’m assassinated re-elected.

Tax policy controls everything. Al Capone gets away with murder until they called in the Treasury Department. (It worked!) Welfare once required a trip to Social Services. Now it’s handled at the tax preparer’s office. Corporate welfare is even worse.

Trade disputes sometimes result in tariffs, an excellent way to tax your own people while convincing them it punishes the other country. (Don’t underestimate the ignorance of voters.) Once again important issues of national importance end up in a tax bill.

So, let’s get down to business. I’m confident I’ll win your vote.

Simple and Basic

With the exception of my own profession, everyone should love the basic framework of my tax plan. Republicans lowered tax rates to the lowest level since taxes were collected in this country. And I think they’re still too high!

For individuals and families: I propose to raise the standard deduction to $100,000 for joint returns; $75,000 for head of household returns; and $50,000 for single taxpayers. That means a married couple filing jointly can enjoy their first $100,000 of income tax free! (I know! It makes me giddy too.) Exemptions were eliminated with H.R. 1 and I don’t want to rock the boat so all you guys get is a huge standard deduction. In fact, itemizing is gone! If a hundred grand tax-free isn’t enough to stay solvent there isn’t a thing any politician can do to help you.

7 ways your taxes should be lowered. Tax humor might be funny, but also illustrates how taxes must be lowered. Find tax tips and deduction for individuals, the self-employed and small businesses. #wealthyaccountant #politics #president #taxplan #taxhumor #deductions #smallbusinessAs for tax brackets, people like the idea of a flat tax. I propose two brackets so my peers at least have an outside chance of staying in business: 20% and 50%. After the standard deduction, the next $400,000 is taxed at a flat 20%. All income above this level is nailed at a 50% rate with nary a deduction available to reduce the tax.

I hear the howls of protest, my tax obsessed readers. You think President Accountant will bankrupt the nation with such a plan. Au contraire. To pay for this simple tax plan all the welfare tax credits are nixed. The Earned Income Credit: gone. The Child Tax Credit: gone. Savers Credit: nope. Education credits: huh? No, no, and no. No more handouts on the tax return. Let’s turn the tax office back into a tax office and not an unpaid extension of the welfare department of the government.

Also, all income is taxed at the same rate. No more special rate for qualified dividends or long-term capital gains.

Poor people need not complain. The Earned Income Credit was designed to compensate low income workers with a kickback of their FICA taxes. In my tax plan every worker gets the first $20,000 FICA tax free. If you work you get an instant EIC on your paycheck.

HOWEVER. . .

Social Security taxes now are like the Medicare portion of FICA: paid all the way to the sky. And FICA applies to ALL income: dividends, interest, capital gains (long- and short-term) and more. A sports star gets a $20 million bonus. Good for everybody! A CEO of a public company enjoys a windfall of stock options? Good for everybody. The Social Security and Medicare financial problems are solved.

If you think about it (I have) the reduction in tax credits more than offsets the massive standard deduction increase. We may have to institute another round of tax cuts or risk paying off the national debt.

I see fear in the eyes of business owners. Don’t worry. I thought about you guys, too.

Business Taxes

This crazy new tax deduction for qualified business income is insane. All it does is increase complexity in the tax code, lining the pockets of tax professionals and attorneys practicing in tax law. In my plan the QBI is gone.

WAIT!

Don’t shoot! I propose a better solution. Businesses will enjoy their own standard deduction of $1 million. That’s right, my Republican friends, every small business owners will enjoy their first million tax-free on top of their generous standard deduction.

Big business is sweating right now, worried I’ll fill the Treasury at their expense. No way! As a gift for funding my political campaign you get the same $1 million standard deduction, plus a flat tax rate of 15%. You heard that right. The Republican plan of 21% is still waaaaay too high to compete internationally. We will start at 15% and reduce the rate 1% per year until it hits 12%.

Oh, don’t be sad, my liberal friends. To pay for this tax cut we will cut corporate welfare the way we did for individuals. If you think welfare to people is costing taxpayers, you haven’t added up how many handouts are lining the pockets of super-rich corporate executives. Those handouts will be eliminated completely.

To prevent small businesses and the big guys from gaming the system, all businesses controlled by a group only get one $1 million dollar business standard deduction only. In other words, you only get one million dollar deduction per investor. (And you guys thought I didn’t give this adequate thought.)

Tax System

The U.S. is one of only a few remaining nations taxing on a worldwide system. My plan brings us in line with the world by switching to a territorial tax system, where only profits from inside the U.S. are taxed. The tax rate for profits outside the U.S. is 0%, giving a major competitive advantage to American companies operating abroad, something they have to dance around now to compete with other nations. That alone could resolve half the trade deficit.

Americans working abroad would not be taxed unless they earned the money in the U.S. The Foreign Income Exclusion would be obsolete with President Accountant.

To prevent games, corporations could not shift profits outside the country. Strong measures will be in place to avoid such a practice with a 10,000% penalty for offenders. (You’re getting an awesome deal. Don’t get greedy!)

Foreign companies that want to sell in the U.S. would also pay U.S. taxes for their profits earned in the U.S. (Where ya gonna get a fairer deal than that?)

Trade Wars

This is just plain stupid. Tariffs are a tax on your own people! I would open the door to trade with all tariffs eliminated. If other countries don’t follow suit, fine. They can tax their own people more. All the better for our economy.

Looking for a fair tax plan? Then I know the perfect guy to vote for! Taxes are a mess is desperate need of organization. #wealthyaccountant #taxplan #tax #taxes #taxhumor #funny #deductions #creditsThe U.S. and its businesses whine endlessly about free markets. Well, trade wars and tariffs are the exact opposite. Compete or go broke. Under President Accountant we will allow markets to decide the winners and losers.

The one issue we have a right to complain about is the theft of intellectual property. (I’m pointing at you, China.) Our current president has a point on trade issues with China and a few other countries. Policies that strip intellectual property from U.S businesses will be dealt with harshly. If it is determined (China is the worst offender here) that theft has taken place, the government of the country where the offending company resides must compensate for losses and prevent such theft. If the government of said country can’t regulate their own people that country is barred from selling any goods or services in the U.S. until they govern responsibly. No more stealing our stuff and using it to sell against our own hard-working business owners.

The details are more than I can publish right now, but trust me. It’ll be great! The best trade plan this country has ever seen.

Health Care

It is repugnant that the wealthiest nation on the planet can’t provide basic medical care for all its people when other nations do just that. Therefore, I will sign an executive order my first day in office expanding Medicare to cover all U.S. citizens from Day 1 to Day End. No more Medical Premium mandate needed. If you want more than basic coverage; buy additional coverage. There is no additional deduction and businesses are not allowed to provide more health coverage to employees. Businesses are out of the health care business from now on (unless they are a medical business).

To pay for this basic benefit the Medicare portion of FICA will be increased 2%; half paid by the employee and half by the employer. All income, including dividends, capital gains and interest, will pay the additional FICA tax. And remember the FICA exemption above. Nobody gets hurt.

I hear my conservative friends complaining already. “We need to keep government out of our conversations with out doctor,” you say. I agree. Let’s keep your employer out of it, too. I for one am sick to death of telling my employees what kind of medical care they can get. Unless I’m a doctor or hospital, I’m out of the health care business and devoting all my time to my business, which is what I’m good at and the reason I started my business.

Minimum Wage

Is that grumbling I hear at the back of the room? No worries, my liberal friends. Under President Accountant the minimum wage will be abolished! You heard me right. Now holster your weapons.

The reason I’ll eliminate the minimum wage is because if we have a minimum wage to increase the number of jobs, then it stands to reason we must have a maximum wage to create more jobs. Don’t hear that argument too often, do you?

Eliminating the minimum wage will not put you at risk. Your favorite president will guarantee you see $15 per hour minimum on your paycheck each and every week. Rather than force companies to pay a minimum wage, there is a special tax for every hour any employee earn less than $15 an hour. That special tax is 20 times the amount your employee paid under $15 per hour.

I bet there will be no companies paying less the $15 an hour right quick.

Yes, businesses will be encouraged to automate with higher wages. But when has increased productivity been bad for a society? You get more for less. And with the new standard deduction and Medicare-for-all programs you will have a secure safety net.

There will be slightly fewer jobs, but they will pay better. Do I have your vote yet?

Under Cover

There is a lot to love by both sides of the aisle with my plans. Unless you are a tax professional you probably like my proposals.

It is unlikely I’ll actually be elected. Rumor has it a stark-raving mad crowd of accountants are approaching the Accountant farm as I write. With such a simple tax code with no loopholes, tax professionals are out of business. But then again, what did we produce? We manipulated a system created by man with no logical connection to reality. Very unproductive.

HUH!?

Was that gunfire?

 

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