News. Trends. Perspectives. October 2020

With just weeks to go before the 2020 election, Americans learned that President Trump paid only $750 in federal income tax for tax year 2016—and $0 in 10 of the previous 15 years before that. 

The average middle-income individual might wonder how that’s even possible for a person with an estimated net worth of $2.5 billion. If you’re a high-income household, then you know it’s very possible (and entirely legal) to pay virtually no federal income taxes with the right tax planning strategies.

This month, we’ll be exploring all things tax-related to help you minimize your tax liability and maximize your savings.

In this edition:

• News for Now: Minimize your income taxes with proper tax planning
• Tax Trends: What are real estate transfer taxes?
• Paul’s Perspective: Three things every freelancer needs to do before tax season

1. News for Now — Financial news that matters to you

Minimize your income taxes with proper tax planning

Wondering how to whittle down your tax bill, even if you’re earning seven figures? There are a few important tax credits and laws you can take advantage of, with the help of a trusted financial professional:

• Section 179 and bonus depreciation. These tax code provisions allow you to fully write-off an asset for federal tax purposes. For instance, if a business spent $1 million on machinery and equipment, they could write off the entire amount.
• Defined benefit retirement plans. Under a defined benefit retirement plan, a company can put away a large contribution for retirement ($250,000 or more).
• The Alternative Minimum Tax (AMT). One of the benefits of the Tax Cuts and Jobs Act was the modification of the Alternative Minimum Tax, which prior to the change affected almost every taxpayer. The new law gears the AMT for more wealthy individuals where the exemption is now higher ($72,900 for single and $113,400 for married taxpayers). But the phase-out of this tax begins at $518,000 and $1,036,800. While this tax is still targeting a large portion of the population, it is not affecting the extremely wealthy, as they will burn past the phase-out amount.

Want to learn more? I share my insights on how to handle taxes like the wealthy in this Forbes article.

2. Tax Trends — Helping you stay on track with your taxes year-round

What are real estate transfer taxes?

Anyone who’s ever sold a property knows there’s a lot of complicated taxes and fees involved. One of those costs is the real estate transfer tax — a one-time tax or fee imposed by a state or local jurisdiction upon the transfer of real property. 

This “ad valorem” tax is usually based on the price of the property transferred to the new owner. It is applied to a change of ownership for any type of property that requires a title, as stipulated by a deed or other legal document. These taxes are simply a tax on the transfer of property. 

A transfer tax may be levied from a government entity within the United States, including any city, county, or state, but most real estate transfer taxes are generated by local governments. Before you buy or sell a property anywhere, be sure to understand what type of transfer tax laws exist in that municipality.

I discuss real estate transfer taxes further in this Bankrate piece.

3. Paul’s Perspective — My take on hot financial topics

Three things every freelancer should do to make tax time easier

As a freelancer, independent contractor, or self-employed business owner, it’s important to plan ahead for your taxes. Understanding what you might owe and when, as well as keeping meticulous financial records, is the best way for self-employed professionals to stay on top of their tax obligations. Here are three things you absolutely need to do as you think ahead to next tax season:

1. Understand which taxes you are responsible for paying. The federal self-employment tax rate is 15.3% for the 2020 tax year. Each state has its own rules about income tax, so be sure to check with your accountant if you’re not sure what you might owe your home state. You should also stay on top of your estimated quarterly taxes.
2. Keep track of your income and expenses. Your accountant will need to know how much money you made (and spent) so they can advise you on your future tax payments, credits, and deductions accordingly.
3. Consult with a trusted tax professional. You’re busy running your business, and staying on top of the latest tax laws can be time consuming. Hire a professional CPA firm to save you both time and money.

Get more tax tips for freelancers on the Miller and Company blog.

Looking for professional guidance or help with your self-employment or small business accounting needs? Contact Miller and Company today to set up your free consultation.