December is the most popular month of the year to do tax planning. Small business owners and landlords who have had a strong year or years may be looking to shelter extra profits from taxation by putting new business assets into production or replacing old ones with section 179 expensing expiring in 2011. If investors or retirees have had an investment windfall they could be looking at the tax planning benefits of gifting to charity and family members. And, this is typically the type of tax planning tips that writers look to write about this time of year
After taking care of any year end moves to make for 2011, the smartest small business owners, investors, landlords and retirees are planning out their taxes for 2012. They understand that tax planning is like farming. What you plant the year before is the crop you will live off of throughout the next year. You may think of the harvest as dividends.
Recently I was interviewed by expert real estate investor and mentor Laura Al Amery about tax planning for real estate investors, property flippers and landlords. Listen along below as Laura asks and I answer her following questions:
- What types of records should real estate investors keep if they either wholesale properties, or buy and hold?
- When should an investor use an LLC vs. a corporation?
- Does it make a difference if a real estate investor is taxed as a sole proprietor?
- When can a real estate investor pay capital gains taxes vs. income taxes?
- Can 1040 Wealth Designs, LLC work with real estate investors in all 50 states?
World stock markets have continued on their 2011 roller coaster ride. Stock markets seem to be pre-occupied with the Euro zone melt down, and for good reason. It is center stage on nightly newscasts and every financial news channel in the cable universe. So much of tax planning has to do with capital gains tax planning, but unfortunately over the course of the last decade it has had more to do with capital loss tax planning. This year seems to be handing out more in the latter category than the previous.
I mentioned to a client in the spring that I thought the stock market was over valued and due for a correction. He agreed with me that it would be better to sell and buy back at a lower price than to hold his stocks through another market downturn. Unfortunately for him, he did not act on this advice.
So on the week-a-versary of the U.S. Credit Rating Downgrade by Standard & Poor’s, it looks like investors are acting even more irrationally then before the downgrade. The yield on 3-month U.S. Treasury Bills is 0.01%. The 12 month T-Bill is a whopping 0.10%. This is the exact opposite of what many had predicted while arguing about raising the debt ceiling. However, gold has easily added another $100 an ounce in value as expected from a US credit downgrade. Silver, which had been on a parabolic rise earlier in the year and then sold off, has not had any appreciable move up or down.
The stock market as measured by the Standard & Poor’s 500 index or Dow Jones Industrial Average has sold off as expected and looks even more precarious than before. This is not a big shock and is the obvious source of why US treasuries are yielding next to nothing. Combined with the fact that the European Union is coming apart at the seems, it is no surprise that investors are seeking safety. Unfortunately, the one asset investors have historically turned to for safety in times of panic has been downgraded.
So, as the debt limit negotiations turn inside the beltway known as Washington D.C., taxes seem to be an even hotter topic than usual. Will President Obama and the Democrats get their way and force even more onerous taxes on the wealthy? (They already pay ninety percent of the nation’s tax bill.) Or, will Speaker Boehner be forced by the tea party presence inside the Republican party to hold the line on personal income tax rates? Only time and a fake default will tell. Either way, it keeps the job of tax planning alive with possibilities.
One of the more attention grabbing plans touted over the course of the last week came from Senator Tom Coburn, Oklahoma Republican. The plan he proposes would cut $9 trillion from the Federal Budget over the next ten years. Now, that is some savings, but I think I might have a problem with how some of those savings may be achieved.
Sometime around May 16 the Federal government will hit its debt ceiling. I say hitting the debt ceiling and not raising it could be the best possible thing that could ever happen to this country. It is the most rational step that could possibly be taken towards fixing Washington DC.
Most politicians and their so called experts say this would be something akin to suicide. The government would lose its “AAA” credit rating. Who are they kidding? Nothing could be further from the truth. The U.S. having a “AAA” credit rating is a scam.
Weiss Research has already given U.S. debt a “C” rating. Sure, Standard & Poor’s, Moody’s and AM Best still give the U.S. their top credit rating. Of course, they also were giving mortgage backed bonds, CDO’s, CDS’s and so on “AAA” credit ratings up until the day they started being defaulted on.
It’s March Madness, and the NCAA Men’s Basketball Tournament is in full gear. It seems like half of America has joined a pool, whether they play it safe with #1 seeds or try to guess the upsets. Even President Obama has joined the fun. In fact, he’s doing pretty well, going 10 for 16 on Sweet Sixteen picks, ranking at the 99%th percentile on ESPN.com, and leading a pool of lawmakers collected by online reporters at TheHill.com.
If you win your local pool, and pocket a nice prize for your picks, you might find yourself with an unexpected partner in success. That’s right, the IRS will certainly want their share. But what happens if you lose? Will Uncle Sam be there to ease the sting?
Taking advantage of the Domestic Production Activity Deduction (DPAD) is smart tax planning. However, it is a very complex calculation and business accounting systems are not usually set up to track Domestic Production Gross Receipts and Domestic Production Activity Income. This post is provided as a starting point for the business owner(s) to help discern whether their business may qualify for this valuable deduction.
If your business produces Qualified Production Property then it is quite possible your business can qualify to claim the deduction. Qualified Production Property is manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the United States. It is tangible personal property, computer software, sound and film or video recordings that do not contain sexually explicit conduct.
I am truly saddened by the senseless murder of the citizens of Arizona being killed alongside the shooting of Arizona Congresswoman Gabrielle Giffords. The actions of some mentally disturbed individual should never be a reason for government or the press to limit it’s citizens god given freedoms.
To do so would work to only empower more such acts of violence by the same.
This blog post is going to be more of a commentary on the economic outlook than it is about tax planning. Tax planning is after all about the smart use of your money, a primary business asset, and how best to deploy it to grow your business. Sometimes that business might be the asset you, the business owner, would like to sell in order to retire someday. But most of us know we cannot work forever, so we more than likely are saving and investing for retirement. No matter your situation, it is always better to sell when there is a good economy.
In assessing the economic outlook for the next year to two years, I am going to focus on three recent headline phenomena. First is the complaint from politicians and their Keynesian economic brethren that corporations are holding too much cash on their balance sheets. Second is the rise in raw commodity prices ranging from cotton to gold. And last is the recent data that is pouring in about holiday consumer spending and retail sales.
Truly no one likes to lay off or fire employees. If an employee has been working for you for a long time it is even harder. If they are new and just not working out it’s not so bad. You might even be doing them a favor if they are young. Not everyone is meant for sales or marketing or tax planning or well, you get the point.
Over the last couple of years the scenario of down sizing has been faced by too many small business owners because of the weak economy. They have had to let go long-time, trusted and productive employees. So it is not hard to see why it was easy for a small business owner in Florida to gain a lot of press for laying herself off from her business when she had to let go several employees after having lost a large client.
I think this video from YouTube is a great follow up to my previous blog post about quantitative easing.
Am I insane for talking about the Alternative Minimum Tax when there is so much debate about extending the Bush tax cuts? Well, the tax cut drama will probably play itself out this year or next and I believe President Obama will get something in return for extending the tax cuts whether it occurs this year or next.
So let’s talk about the AMT and what it represents. When tax planning is done it is done with the AMT in mind. Actually it can be argued that tax planning is alternative minimum tax planning, and yet most taxpayers don’t even know what it is. I reviewed a small business owner’s tax return this year and he was completely unaware that he had been paying AMT.
Last Wednesday, Nov. 3, the Federal Reserve announced it would be implementing a new round of quantitative easing to the tune of $600 billion. Most people do not even understand what quantitive easing is, much less what it will do to their purchasing power, retirement savings or job security.
Quantitative easing means “the printing of money” and it always causes inflation. No amount of tax planning can keep a taxpayer from paying this bill. Inflation is a hidden tax. It is the most regressive of all taxes since those who earn a limited income do not have the means to hedge themselves against inflation.
Why is Ben Bernanke and his Federal board members doing this then? Frustration is the word that most comes to mind. Economics is a theoretical science that is really more akin to psychology than mathematics. Unfortunately for everyone involved, there doesn’t seem to be a grown up involved who knows this.
Why do business owners and retirees both hate paying taxes so much? Both groups of taxpayers have to write the check to pay their taxes to the IRS and State.
Have you been working your whole life and saving for retirement just so you could pay taxes? Did you start your business just so you could pay taxes? Did you feel excited when you earned your very first paycheck at your very first job and got to see how much you got to pay towards taxes? Of Course Not!
Good for you! You are truly a red blooded patriot from the USA. There is really only one common feeling that binds us as Americans and that is the common loathing of paying taxes. It is why the founding fathers declared independence. The income tax being the most hated tax of them all.
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