Trump Tax Plan: What You Need To Know

Posted on December 27, 2017December 30, 2017 by ely.bangiyev

What the Trump Tax Plan Means for You?

There has been much controversy surrounding the trump tax plan. This post is designed to take an impartial and fair review of the tax deal based on fact. We have no political biases and just wanted to share with you some key updates in the bill. In addition, we go over a simple tax analysis to illustrate these changes from the current system.

Standard Deduction

For 2018 the Standard Deduction will be nearly doubled. For single the amount is $12,000 and for married individuals filing jointly it is $24,000. This is much higher than the amounts from 2017 which were $6,350 for single filers and $12,700 for joint filers. The higher standard deduction benefits taxpayers because it allows for a larger amount to be deducted from taxable income.

Personal Exemption

As you might have read, the personal exemption has been eliminated for 2018. For 2017 exemption was worth $4,050 for each person you claimed on your return. For example, if you file jointly with your spouse you would have a total of 2 personal exemptions ($8,100). The total value of the personal exemption would then be deducted from your taxable income. The loss of the personal exemption hurts taxpayers because you lose a deduction that would lower your tax bill.

Cap on State & Local Taxes

One of the most controversial aspects of the Trump tax plan is the cap on State & local taxes. The total amount taxpayers may deduct from state and local income taxes is limited to $10,000. The limit is the same for married taxpayers filing jointly. The cap applies in aggregate to all state and local levies. Simply put, you can deduct property taxes, state income taxes, local income taxes, and sales taxes, however the total deduction available is limited to $10,000. Residents in high tax states such as New York, New Jersey, Connecticut, California, and Illinois would be adversely affected because they no longer would be able to deduct all of their taxes. However for the remaining states with lower or no state income taxes, this limitation would not affect them because their total taxes would fall under the $10,000 cap.

Reduced Tax Rates Across the Board – The tax plan will reduces the tax rates across most tax brackets. Here are the Rates from Forbes:

Old Tax Rate	New Tax Rate	Single	Married Filing Jointly
10%	10%	Up to $9,525	Up to $19,050
15%	12%	$9,526 to $38,700	$19,051 to $77,400
25%	22%	$38,701 to $82,500	$77,401 to $165,000
28%	24%	$82,501 to $157,500	$165,001 to $315,000
33%	32%	$157,501 to $200,000	$315,001 to $400,000
35%	35%	$200,001 to $500,000	$400,001 to $600,000
39.6%	37%	over $500,000	over $600,000

What Does the Trump Tax Plan Mean for American Families?

Scenario: Family of 4 with 2 children under age 17, Household income $100,000

	2017	2018
Gross Income	$100,000	$100,000
Less: Standard Deduction	$12,700	$24,000
Less: Personal Exemptions	$16,200 ($4,050 x 4 people)	Eliminated
Taxable Income	$71,100	$76,000

Before you draw any conclusions we still need to apply the tax rates and the new child tax credit to see the final result. In continuation of the above example, here are the applicable tax rates and how much tax would be due in each year (before any credits):

Tax Rates
2017	2018
10% Tax on Income up to $18,650	10% Tax on Income up to $19,050
15% Tax on Income Between $18,651 – $71,100	12% Tax on Income Between $19,051 – $76,000
Total Tax Bill (Before Child Tax Credit): $9,732	Total Tax Bill (Before Child Tax Credit): $8,739

In spite of taxable income for 2017 being lower, the actual tax bill (before any credits) is still higher than 2018. This is because the reduced rate more than makes up for the fact that more income is subject to tax.

Trump Tax Plan Expands Child Tax Credit

Child Tax Credit – For all its shortfalls, the expanded Child tax credit is one of its best improvements in the Trump tax plan. Not only will more people qualify for the credit but the amount of the credit has been doubled. For 2018 the Child tax credit will be $2,000 per child instead of $1,000. This will significantly benefit taxpayers. I am sure we can all agree that $1,000/child doesn’t provide much relief with the rising costs of childcare. An additional $1,000/child would certainly go a long way to easing the burden.

Now let’s see how these changes will affect this families taxes. In continuing with the above example:

2017	2018
Total Tax Bill (Before Child Tax Credit): $9,732	Total Tax Bill (Before Child Tax Credit): $8,739
Less: Child Tax Credit $2,000	Less: Child Tax Credit: $4,000
Final Tax Bill: $7,732	Final Tax Bill: $4,739

Tax Planning Can Help You Save on Your Taxes

In spite of the loss of the personal exemption, our hypothetical family of 4 with 2 children saw a significant tax cut. This is explained by the lower tax rates and the enhanced child tax credit. Specifically, the trump tax plan reduced this families final tax bill by 38.7%. Of course, your situation may be different than the above scenario. If you are interested in a custom tax analysis based on your unique situation, we can help! In addition, if you are interested in having us implement a tax reduction plan check our tax planning page. You can also contact us or use the messenger at the bottom for a quick response.

LLC VS S CORPORATION, WHICH SHOULD YOU CHOOSE?

Posted on December 25, 2017 by ely.bangiyev

LLC Vs S-Corporation?

We all know that both the corporate and LLC form provide limited liability to the owner. However, there are specific reasons to choose one entity over the other.

What Are The Advantages Of An LLC?

LLCs Have Less Filing And Compliance Costs

In general, an LLC with only one member is treated as a disregarded entity. Simply put, the LLC reports its income and activities directly on the 1040 tax return of its owner. This feature of an LLC offers a simpler structure and minimizes the need to file a separate tax return. inherently, this can save clients a lot of money in the form of tax filing fees and potential interest and penalty charges if they forget to file or file their corporate returns late. In addition, LLC’s are not required to have minutes as corporations are in making decisions or elections. In general, a corporation is a more formal business structure than an LLC with specific ongoing requirements during its lifetime.

LLCs Have No Salary Requirement for Owners

In general, an LLC is not permitted to provide a salary to its owners. An owner of an LLC therefore may receive either a draw or a guaranteed payment for his services to the LLC. In effect, an owner can save him/herself the hassle, complexity, and fees of dealing with Payroll. This is especially beneficial to owners who intend to operate a solo practice and otherwise wouldn’t need payroll to begin with.

LLCs Are The Ultimate Business Structure For Holding Rental Real Estate

A Corporation, particularly as S Corporation is required to have no more than 25% of its revenue from passive activities (US Code, Title 26, Section 1375). Doing so for a prolonged period of time can ultimately cost the S corporation to lose its status and revert to a C corporation subject to double taxation.

In addition, if rental real estate is held in a corporation, upon transfer of the property to the owner, it may be deemed to be a sale and subject to capital gains tax. This can be a nightmare scenario where taxes are required to be paid on a transfer. See Publication 542 for more information. In general, holding companies and real estate should be held in an LLC.

ADVANTAGE OF AN S-CORPORATION

S-Corporations Are Investor & Capital Friendly

A corporation is the premier entity for entrepreneurs interested in acquiring capital or taking their business public. The corporate entity has been around for a very long time which makes investors more comfortable because of the clarity and precedence the courts have provided over the years. Of course a corporation’s perpetual existence also provides for more stable operations long after the original owners have passed away. Just think about all the huge corporations that we buy products from today; most have been in business for over 100 years!

S-Corporations Provide Potential For Reduced Self Employment Taxes

In general, all non-passive income earned by an LLC is subject to FICA aka “Self-Employment” taxes. There are exceptions, particularly for “limited” or passive partners not involved in day to day operations of the LLC but in general, all non-passive income earned by an LLC subjects their owners to these taxes. However, as an owner of a Corporation, only the salary of an owner/officer is subject to these taxes. With FICA taxes being as high as 15.3%, this can be a significant savings and a strong enough reason for choosing an S Corporation. Keep in mind that the salary must be reasonable. Here is a highly simplified example:

Assume you are the full owner of an LLC that sells toys.

In 2016 you had net income of $100,000 and are ready to file your taxes.

In this highly simplified example, the $100,000 income will be subject to Self Employment taxes at a rate of 15.3%, This calls for a total Self-Employment tax bill to you of about $15,300.

Remember, this is above and beyond any regular Federal income tax that you may owe!

Now.

Lets assume you still sell toys but this time you are the sole owner of an S Corp instead of an LLC.

You figure that a comparable worker that fits your job description should earn a $50,000 salary.

Therefore, the total Self Employment or “FICA” taxes would only be about $7,650. This effectively slashes your FICA tax bill in half!

Keep in mind your regular Federal Income tax bill remains the same in both scenarios.

S-Corporations Allow For Free Transfer of Shares

As a Corporation, an owner has the free right to transfer your shares to any new or existing Qualified Shareholder.

As an LLC, if there is a transfer of more than a 50% ownership interest in an LLC, it may cause the entity to be terminated. Refer to US Code, Title 26, Section 708 for more information.

An owner of an S Corp has more flexibility when it comes to selling their business. They may sell the assets of the corporation or they may simply transfer their shares in the corporation. An LLC may not have such an option and therefore it may subject other members to taxes upon its sale or termination.

Final Thoughts

Both LLCs and S Corporations are widely used entities to run a business. Your unique situation may not have been addressed by this blog and you may still have questions. We can help. Please feel free to fill out the contact us page and one of our team members would be happy to answer all your questions. Alternatively, you can give us a call or visit our office in person, Monday – Friday from 10:00 am – 6:00 pm.

Get Cash Out Of Your C-corporation And Avoid Double Taxation

Posted on December 23, 2017December 24, 2017 by ely.bangiyev

What You Should Know About Avoiding Double Taxation

There are many benefits to incorporating. For most people the liability protection alone is well worth it. Traditional C corporations are the premier entity for limited liability, raising capital, and attracting investors. However, with these benefits comes the pitfall of double taxation. This article is specifically written for owners of a C corporation looking to get cash out of their business without incurring double taxation. Luckily, there are many ways to do this and actually save on taxes.

Pay a Bonus or Increase your W-2 salary

Salaries, whether for you or your employees, provide a write off to your business. They are a great way for you to avoid double taxation. Since the money is paid to you as a salary it is written off before the corporation pays its taxes. With the current corporate income tax rate at 21% this is the 1^st half of double taxation savings. Next, since the salary is already paid directly to you there is no need to take a dividend distribution from the corporation. This avoids the 2^nd half of double taxation which are qualified dividends typically taxed at between 0-23.8%. See the chart below for the tax rate on qualified dividends.

The chart below shows the 2018 qualified dividend tax rates:

Tax Rate	Single	Married Filing Jointly
0%	Up to $38,600	Up to $77,200
15%*	$38,601 to $425,800	$77,201 to $479,000
20%*	Over $425,800	Over $479,000

*Does not include additional 3.8% Net Investment Income Tax. Net Investment Income Tax affect singles with incomes over $200,000 and Married Joint filers with income over $250,000.

Of course, the extra income on the W-2 will be reported on your personal 1040 income tax return but this is only one level of taxation and is typically less than incurring double taxation. See below:

The chart below shows the 2018 personal income tax rates:

Tax Rate	Single	Married Filing Jointly
10%	Up to $9,525	Up to $19,050
12%	$9,526 to $38,700	$19,051 to $77,400
22%	$38,701 to $82,500	$77,401 to $165,000
24%	$82,501 to $157,500	$165,001 to $315,000
32%	$157,501 to $200,000	$315,001 to $400,000
35%	$200,001 to $500,000	$400,001 to $600,000
37%	over $500,000	over $600,000

Avoid Double Taxation by Establishing a 401(k) or SEP-IRA

By setting up these type of retirement plan you are able to reduce your tax bill by saving for your future – not a bad deal! If you are the only employee then setting up a SEP-IRA could be a great option. There are minimal compliance requirements and all contributions to the plan come from the corporation. Because all contributions come from the corporation they don’t need to be paid out as wages to you first. This saves you additional Social Security & Medicare taxes which would occur if you used a 401(k). By law, the corporation can contribute up to 25% of your W-2 wages into the plan.

In contrast, if you do have employees then a SEP-IRA would require you to give each employee a contribution into their accounts equal to the same percentage of their salaries as you chose for yourself. This could get awfully expensive. For this reason, companies with employees may be better off with a 401(k) plan. This is because the plan can be designed so that the corporation does not contribute to the plan. Using this strategy, the owners would pay themselves a higher salary and contribute to the 401(k) as employees. Unlike the SEP-IRA which only has contributions from the corporation, the additional salary would be subject to additional Social Security & Medicare taxes. This isn’t all that bad considering that you will get a larger Social Security benefit when you retire. For this reason, many owners may not mind the added taxes on a 401(k) as opposed to a SEP-IRA.

Lease assets to your corporation to Save on taxes

Why own property or equipment in a corporation when you can own them in your own name and lease them to your business? Doing so allows your business to write off the expense of the lease and reduce the corporation’s taxable income. Of course, you will report the lease income on your personal tax return but you can offset this with depreciation, repairs, and maintenance costs. Best of all, since the asset isn’t owned by the corporation you are free to do whatever you want with it. If you haven’t noticed it already, leasing assets to your corporation is a great way to draw money from your corporation without paying payroll taxes.

Take Advantage of Health Insurance Benefits & Avoid Double Taxation

The Traditional C Corporation is the ultimate business structure for tax free fringe benefits. No other entity comes close. One of the most popular types of tax free fringe benefits is employer provided health insurance. The point here is that fringe benefits for shareholder/employees of C-Corporations are fully deductible by the corporation, while most fringe benefits paid for owner/employees of S-Corporations and partnerships are, for all practical purposes, nondeductible. Thus, deducting shareholder/employee fringe benefits is a significant advantage of the C-Corporation. This provides a great way of pulling money out of your corporation to purchase health insurance.

Final Thoughts

Of course, this list is not all encompassing. There are numerous other ways to legally save on corporate income taxes. Strategies like these are a core service that our firm offers. To implement these strategies or discuss other ways to avoid double taxation just fill out the contact us form and we would be happy to assist you. For more information on tax planning please visit our tax planning page.

What Your Tax Preparer Doesn’t Want You To Know

Posted on December 22, 2017December 24, 2017 by ely.bangiyev

What You Should Know About Your Tax Preparer

It may come as a surprise to many of our readers, clients, and even families, but preparing a tax return does not require any formal training or continuing education! This means that unless your tax preparer is either an Enrolled Agent, CPA, or Attorney, he or she has likely not kept up with the changes in the tax code. Anyone can hang out a shingle that says they are a tax preparer – but that doesn’t mean they know what they’re doing.

There’s just no minimum standard for who can prepare taxes!

Category	Testing Required	Continuing Education	Practice Rights
Enrolled Agent	Yes	Yes	Unlimited
CPA	Yes	Yes	Unlimited
Attorney	Yes	Yes	Unlimited
Tax Preparer	No	No	Limited

It Matters Who You Hire To Do Your Taxes

You would be hard pressed to know that the majority of tax preparers at the big chains are unskilled seasonal workers. There is no formal exam or minimum level of competence required to prepare taxes. The majority of these big chains provide basic tax preparer training of up to 75 hours before they are allowed to work on your taxes. The tax code is awfully complex; I’m sure we can all agree that 75 hours just doesn’t cut it. Furthermore, the seasonal nature of these large chains makes it impossible for you to reach them when you receive a notice from the IRS. That’s why a lot of the returns prepared by these chains, loaded with errors, end up in our firm.

As a consumer, you have a choice. Let’s review them.

Enrolled Agents – While not all CPA’s specialize in taxes, the only thing EA’s focus on is taxes, many even specialize in tax resolution. In addition to IRS testing, enrolled agents must complete at least 72 hours of continuing education every three years.

Exam Requirements: The EA exam consists of 3 parts and all are related to tax.

Individual Taxation
Business Taxation
Representation before the IRS

Because of their narrow focus, Enrolled Agent are your best bet when you need help with complicated tax matters or resolving your tax problems. The only exception is if you are dealing with a criminal tax matter. In this case, it is highly advisable to work with a tax attorney.

Where You Can Find the Right Tax Professional?

Now that you know your options, the next question is how you can find the right professional. Of course, you can use Yelp, Google, Bing, etc. but did you know that the IRS began a directory for tax preparers? The IRS updates its systems regularly, usually every 30 days.

Credentials aside, you want a firm that is easy to work with and is available year round. In addition, the technology used by the firm is a key indicator of how easy it will be to work with them. At NY Tax Doctors we are constantly improving the client experience. All our services are performed in the cloud so we can easily collaborate with you on anything from Bookkeeping, Payroll, Tax Returns, and more. In addition, by working in the cloud we ensure that you have access to all your documents on the web 24/7 – Never play phone tag with your tax preparer again!