When a Good Tax Strategy Goes Bad

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Early on in 2018, I met with a client and we talked about a new strategy. They needed one for sure!

Here’s all the things that were wrong with their tax strategy now:
Taking care of an elderly parent with high medical bills
California income taxes,
Real estate taxes,
A new primary residence with high debt,
Adult dependent child,
High income service business

What did that all translate to?

Since exemptions are gone, replaced by the child tax credit, the additional expense of caring for a dependent adult child and elderly parent no longer had any tax advantage. No exemptions. The child tax credit for the adults would be just $500, but at their high income it was gone anyway.

The deduction for California income taxes and real estate taxes is now limited to $10,000 in total.

Half of the mortgage interest isn’t deductible.

The service business label and high taxable income meant that there would be no 20% income deduction.

We came up with a strategy to help.

A C Corporation.

With that, we could move income to a flat tax rate of 21% and employ the adult child so that his expenses would be his own. He’d have a salary that was taxable, but at a much lower tax rate. The salary paid was also a deduction for the C Corp.

The elderly parent could also be employed. She was still active, just not able to live on her own and with high medical expenses.

The C Corp could set up a MERP (medical expense reimbursement plan) and cover all medical expenses for employees, which now include the elderly parent and adult child.

I gave the list of what was needed and asked that the family attorney would follow it.

Everything was fine, they said. It was set up, we were getting ready to employ the family members and get the MERP in place.

Then someone said, “Oh, we heard that an LLC was better than a C Corp so that’s what we did.”

At first I thought they meant that they had an LLC that would elect to be taxed as a C Corp, because that is actually better than a straight C Corp. You can get better asset protection in most cases with that strategy.

But, nope. They actually were going to use an LLC with a default tax treatment. It was a single member LLC and so it would be taxed like a Schedule C. The business owner couldn’t be part of the MERP. Not only that, but the income would all be subject to self-employment tax.

Talk about jumping from the frying pan into the fire! By changing the strategy for what might seem like a minor issue, they had made their tax situation WORSE.

Luckily, this is a client and it wasn’t year end yet, so we could fix it.

But if we’d waited until next year or even worse, if they weren’t a client and just a consultation client who walked away with a tax strategy, they would have had to pay more tax!

And then, they’re going to think the strategy was wrong.

It wasn’t.

The strategy was right. The implementation was wrong.

There are three parts to a successful tax strategy: strategy, implementation and compliance (reporting).

If you miss any one of those things, you will not get the optimal result. And that’s why I’m making a big change to the way I work with new clients.

Effective January 1, 2019, I will no longer sell tax strategy service to people who don’t join or aren’t already tax clients of our firm. Clients only.

These are powerful strategies, but in the wrong hands, can also be dangerous. If you’re our client, we’ll make sure they are implemented and reported in line with the strategy.

If you really, really want just a strategy, you have until the end of 2018 to purchase one. Effective 1/1/2019, I’m only going to work with those people and clients.

To find out more about a consultation, please call Richard at 888-592-4769.

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