Today is Part 2 of tax strategies for your personal return. Normally, I talk about tax strategies for business owners and real estate investors. There is plenty of good news for business owners and real estate investors. For some people without businesses or investments, taxes will go down. For some people, taxes will go up. Without a doubt, this was a tax act written to benefit business owners and real estate investors. Here are five things you can do to prepare for your personal return.
#1: The Itemized Deduction/Standard Deduction Switch.
For as long as I can remember, people justified spending money on big houses (and once upon a time, big cars, too) because it was a “write off”. So were medical expenses, alimony, moving expenses, property tax and charitable donations.
For the W-2 worker, it was the only way to adjust their taxable income for tax purposes.
Everything changes in 2018. First, most of your itemized deductions are either limited or gone entirely. And on the other hand, the standard deduction has gone way up. That means that you may start claiming the standard deduction. So what about the mortgage interest, property tax and charitable donations? Do you just lose those?
In a bit, we’ll talk about a strategy to get at least part of them back, but meanwhile one idea is to do what we call the “Switch.” With this strategy, you control the expenses you can (timing on the state income tax and property tax and charitable donations) so that you maximize these every other year. On the off years, you plan to take the standard deduction. For the “on” years, you make sure you maximize so you benefit from the entire $10K of property tax, state income tax and charitable donations.
#2: IRA Deductions.
As an employee, one of the things you can do is make IRA deductions. You may be limited if you have maximized your pension contributions at work, so check with a qualified tax advisor first. But right now, if you can, this may be the best thing you can do to reduce your taxable income, and hence, your tax.
#3: Start a Business.
The 2016 Tax Cuts and Job Act is not pro-rich. It’s pro-business, and to a lesser case, pro-real estate investments.
Want to get tax breaks? Start a business. It could be part-time, a side business, a weekend-business, a ramped-up hobby, but whatever it is – start a business!
Once you do, you’ll find there are legal ways to turn some of those lost personal deductions into legitimate business deductions.
Make sure you start a business that will qualify as a business in the eyes of the IRS. Luckily, they’ve told us exactly what that means. More on that in a later blog.
#4: Establish a Home office.
Since so many of the itemized deductions that you’ve lost have to do your home, if you have a business and have a space set aside that is regularly and exclusively used for the business, you have home office. And that means you can take a percentage of the entire home costs and completely deduct direct home office costs.
#5: Find Your Hidden Business Deductions.
One of the exercises I do with my clients is to have them go through a questionnaire regarding where they spend their personal money. Where does your money go?
And then we look at each of those expenses. What could be a legitimate business expenses? What expense can be proven to meet the IRS standard of “ordinary and necessary to the production of income”?
What do you spend a lot of your money on now that is not deductible? Now how can you legally turn that into a business deduction?
The biggest change that needs to occur with your tax plan, post 2018 tax act, is with you. You will pay more tax if you don’t change a few things. And that all comes back to you. What will you change to keep more of your hard-earned money?