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tax saving tips

Tax planning tips that can save you money.

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Now that we are approaching our second year under the The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) we have some money saving tips.

Tip # 1 – Take Advantage of the 20% Real Estate “Trade or Business” Deduction

There is a 20% tax deduction for all business owners and in particular those who invest in real estate. Real estate investors can conform their activity with their investment properties to become a “rental real estate trade or business” and take advantage of a tax deduction of up to 20% of “net profits.” The best part of this deduction is that it is exempt from the “phase-out provisions”. 1

To qualify, you must keep daily detailed records for each “rental real estate activity”. 2 There are two caveats: 1) You cannot use any rental as your own residence for even one day, and; 2) You cannot use a “triple net” lease.

Tip # 2 – Determine the Best Entity for your Trade or Business

In our last Newsletter, C Corporations (“C Corps”) were awarded the 1st Place Medal for benefiting the most from the new Tax Act. But what about the shareholders of C Corps? How did shareholders of C Corps fare?

After the shareholder of a C Corp pays income tax on their wages and other distributions they fall behind owners of “pass-through” entities because the income is subject to a second tax at the shareholder level. In contrast, “pass-through” entities pay no income taxes. The income is only taxed once at the shareholder level.

Conclusion: Use S Corps or LLCs as your entity of choice for your “trade or business”.

1.“Pass-through” entitles including S Corporations, partners, and sole proprietors qualify for a deduction of up to 20% of “Qualified Business Income” or the “operating profits” of a Trade or Business. IRC Section 199A contains all the complicated rules governing this deduction including income limits for the phasing out of the deduction for certain Specified Service Businesses including most professional service providers. This reduces the effective tax rate for “pass-through” entities from 39.6% to 29.6%. Real estate rental services can be performed by the taxpayer or their employees, agents or by their independent contractors to include the following services: advertising, tenant info verification, collecting rent, negotiating leases, managing, purchasing materials, and supervision of employees and independent contractors. Excluded are services such as financing or investment management activities or time commuting to and from the property.

2. Including time reports, logs, or similar documents, regarding the following (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which services were performed and (iv) who performed such services.  Such records are to be made available for inspection at the request of the Service. Starting in 2023, you will need to be averaging 20 hours a week in “rental real estate activity” to claim the deduction.

We hope these tax tips are helpful!

Photo by JESHOOTS.COM on Unsplash

The New Trump “Tax Cut” is here!

The Trump Tax Cut is Here

The New Trump “Tax Cut” Act is here and it’s tax time! Who are the winners, and who are the losers?1

“They giveth with the large print and they taketh away with the small.”

– Tom Waits

Let’s examine how individuals fared under the New Act.

Consider Mr. & Mrs. X, a typical married couple filing jointly. They make $200,000 per year2. What “tax cut” can they expect under the the Tax Cuts and Jobs Act?

Their tax rate will go down from 28% to 24% which will save them $8,000. This is roughly the average tax cut for individuals. However, if they made slightly over $400,000 their tax rate would increase from 33% to 35%.

They get another benefit as well because the Standard Deduction was increased from $12,000 to $24,000.

There are also hidden “tax increases” for Mr. & Mrs. X: Read more

The New Act

The "Big Winners" of The New Act
The “Big Winners” of The New Act

The “Big Winners.”

We are one month away from the end of the first year under The Tax Cuts and Jobs Act of 2017 (the “New Act”). In prior articles we discussed that the tax rate for C-Corporations was reduced from 35% to 21% clearly making all 1.7 million of the C-Corporations strong contenders for the “Big Winners” First Place Award 1. We also discussed the Impact on the 141.2 million Individual Taxpayers whose tax rate was reduced from 39.6% to 37% 2. Individuals also saw their state and local tax deduction limited to $10,000. Read more

Estate Planning Seminar Announcement

Estate Planning Seminar

Wednesday, January 30, 2019

5:30 to 7:00 pm

Canterwood Country Club in Gig Harbor, WA

For those interested in Estate Planning and Wealth Management I am privileged to be able to extend this Invitation in association with RBC Wealth Management. The date is Wednesday January 30, 2019 from 5:30 to 7:00 pm at Canterwood Country Club. Come and obtain some meaningful information and have some fun! Complimentary gourmet meal immediately after the seminar. There are no costs of any kind and no obligation. Space is limited. You can RSVP to (253) 274-4363.

Are sexual harassment settlement payments tax deductible?

As we look closer at Trump’s new Tax Cuts and Jobs Act of 2017 we ask; Are sexual harassment settlement payments tax deductible? Are inventors’ tax rates going up while composers and musicians continue to get a break?

Changes for Corporations – A Summary

Denial of Deduction for Settlements Subject to a Nondisclosure Agreement Paid in Connection with Sexual Harassment or Sexual Abuse – Effective for amounts paid or incurred after the date of the Act’s enactment, no deduction for any settlement, payout, or attorney fees stemming from a sexual harassment or sexual abuse matter if the payments are subject to a nondisclosure agreement of any kind. Interestingly, all payments made prior to 1/1/18 are still tax deductible and going forward, the denial of the deduction only applies to those payments made in connection with a nondisclosure agreement. Read more

tax cuts and reform

The Tax Cuts and Jobs Act of 2017 is now the “law of the land” starting in 2018

Tax laws have significantly changed with the passage of The Tax Cuts and Jobs Act of 2017. Our focus in this article is on the impact of this new law on individuals. Future newsletters will address the impact on Corporations, Pass-Through Entities, Trusts & Estates and Exempt Organizations.

Changes for Individuals – A Summary

  • Capital Gains rates remain at 20%
  • The Obamacare surtax of 3.8% on net investment income remains
  • The Medicare .9% surtax on wages and other ordinary income remains
  • The “Kiddie Tax” is new. It taxes minors like they are a trust. Rates start at 37% on unearned income over $12,500 annually
  • No more retroactive re-characterization of contributions to IRAs, as traditional or as Roth, or visa-versa
  • Personal exemptions were merged into the doubled Standard Deduction
  • The “Teacher Deduction” was doubled from $250 per year to $500 per year maximum deduction for classroom supplies
  • The Mortgage Interest deduction remains available on loans up to $1,000,000, but for homes acquired after 1/1/18, the mortgage amount is reduced to $750,000 and the deduction of HELOC interest has been eliminated
  • No more miscellaneous deductions or deductions for tax preparation fees
  • No more moving expense deduction except for Armed Forces members forced to move under military order

If you have any questions or would like to schedule a free consultation, please contact us at:

Port Orchard Office: (360) 876-6425

Seattle Office: (360) 509-4329

We hope these tax tips are helpful. Wishing all of our clients and friends a Prosperous New Year! From the Law Offices of Seward and Associates, Attorneys at Law

The Tax Cuts and Jobs Act of 2017. Key year-end tax planning tips.

Tax law changes are coming so we have some key year-end tax planning tips and summaries of The Tax Cuts and Jobs Act of 2017.

Our focus in this article is this proposed law and the potential major changes to both the income tax laws and the estate and gift tax laws that we can likely expect. See our planning tips below.

Changes to Income Tax Laws – A Summary

  • Corporate rates – corporate tax rates are reduced to a flat 20% rate which is 2.5% below the average marginal rate for corporations worldwide. The intention is to make US corporations more competitive in the global marketplace. To partially pay for this, Congress increased the tax rate for C Corporations with taxable income up to $50,000 a year from 15% to 20%, but for most, rates will go down. If your income tax rates will be decreasing, then accelerate income to the current year to take advantage of the lower tax rates while you can.
  • The Section 179 expense – This deduction allows expensing the full cost of assets used in a trade or business. It will be increased from a current maximum deduction of $500,000 to a maximum deduction of $5,000,000 through 2022 with a 50% bonus for new property (except for depreciable real property). So, you can buy that jet or a fleet of bulldozers now.
  • Section 1031 “like kind” real estate exchanges – If you are contemplating a Section 1031 “like kind” exchange – Complete the transaction as soon as possible as there will be severe limits to the benefits of this section going forward.

Read more

New tax cuts are “pending” and investment diversification as an asset protection strategy is more important than ever.

Have you considered diversifying your investments from the stock market to income-producing real estate?

We are seeing increased investment in income producing real estate such as apartments. The investment vehicle of choice for protection of business and personal assets and preferred tax treatment is the single member limited liability company (“LLC”) [1].

Single member LLCs – This entity is disregarded by the IRS for income tax purposes so all the tax benefits flow through to the member/investor on his or her 1040 personal tax return. The LLC files no tax return. Tax benefits include depreciation and interest deductions to offset the taxable rental income. Depreciation is a valuable non-cash deduction and it is based on the full purchase price excluding the land. The deduction is based on the premise that the improvements have a limited useful life so the investment is returned pro-rata over the useful life of the asset through depreciation deductions. This also lowers the tax payer’s basis in the property which increases the taxable gain on sale. That is where the magic of IRS Section 1031 comes into play.

IRS Section 1031 Like-Kind Exchanges – 1031 exchange tax deferral is available on sale if the net proceeds are reinvested in a qualifying “like kind” replacement property generally within 6 months of the sale. [2]The theory of tax deferral is that it is more of a theoretical gain if the investment continues in similar replacement property. This theory ignores the “step-up” in basis that is gained when the investor dies, and the “gain” avoids tax entirely. With the pending “tax cuts” this tax benefit may well be the first “offset” to go away.

Positive Leverage – With 75% positive leverage, a typical investment example follows:

A Typical Transaction:

A $1,000,000 purchase price, determined at a .06 capitalization rate, would look like this at the closing:

1) $250,000 cash down (this can be bifurcated into 5 LLC’s investing $50,000 each) and;

2) $750,000 in debt at a 4% interest rate, secured by the Property.

In this example, there is positive leverage on the $750,000 in debt of 2%. This is possible in the early years if interest rates stay at these historically low levels.

We are available to answer any questions you may have and we offer free consultations for anyone interested in discussing these investment diversification options. Call us at (360) 876-6425.

1. The 2003 Ashley Albright, Debtor, Case No. 01-11367 in the United States Bankruptcy Court for the District of Colorado made it more difficult for single-member LLCs where the member is in Chapter 7 to protect the business assets of the LLC from the trustee. Protection still exists from most creditors and personal assets continue to be protected from creditors of the LLC.

2. Property held for investment or for use in a trade or business qualify and the “like kind” requirements are very broad in terms of the kinds of real estate that qualifies. For example, an easement can be sold and reinvested in a fee interest.

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