Category: Tax and Financial News

Divorce is expensive. Aside from the emotional toll divorce takes on a family, both the process and aftermath of a divorce can be costly. Below we look at some of the steps people can take to help remove the tax sting out of an already challenging time and arrive at the best financial position.

Changes to Alimony

We ring in the new year with changes to alimony tax law. Prior to Jan. 1, 2019, alimony payments were deductible by the spouse who paid them and taxable to the spouse receiving them. Typically, this provided an overall benefit to the family unit as the alimony recipient, generally being the lower earner, paid a lower tax rate. Often referred to as the “divorce subsidy,” this situation was costly to the government. From 2019 and forward, alimony is no longer deductible by the payer or taxable to the recipient.

This might appear to be a win for the receiving spouse; but consider that the change will most likely mean less alimony for the receiving spouse. It could also cause non-working divorced spouses to lose their eligibility to make IRA/Roth IRA contributions since they won’t have a source of taxable income.

One note on timing: if you finalized your divorce in 2018, the alimony will still be treated under the old rules for tax purposes – and even if you modify your divorce agreement in the future, the alimony will retain this tax treatment.

Pre- and Post-Nuptial Agreements Could be in Trouble

If you have a pre-nuptial or post-nuptial agreement, it is advisable to have the agreement reviewed. Aside from the impact of the new tax provision on alimony, relevant changes since it was written and more recent court rulings could impact how well an agreement holds up in court. Additionally, knowing where you stand if your divorce gets confrontational will give you the knowledge to negotiate your best financial case via a settlement or in court.

Decide What Really Matters to You

It’s unlikely you’ve stopped and taken the time to parse out what you really want in the next chapter of your life after divorce. Going through your divorce with great clarity on this topic will help you focus your financial negotiations to arrive at the best outcome for you in less time and, as a result, lower professional fees.

Calculate Whether You Should or Not

Settling seems enticing instead of fighting it out, but it’s best to work with both your divorce attorney and CPA or other financial professional to understand the long-term implications of any settlement. On the other hand, if there is little at stake, a long drawn out divorce process might prove to be more expensive than it’s worth. Working with the right professionals will help provide an objective view of the financial situation and assist you in understanding if you’ll need to change your spending habits, work longer or take other actions. 

It’s the most wonderful time of the year – tax planning time. The Tax Cut and Jobs Act (TCJA) means many people will see lower tax bills this year, but that doesn’t mean you should pass on tax planning. Below, we look at moves you can make to pay less taxes.

Max Out Your Retirement Account

Who would you rather pay, yourself or the government? I’m willing to gamble that you chose yourself. If you did, then one of the easiest moves you can make is to contribute to a Traditional or Roth IRA. For 2018, taxpayers may be able to contribute up to $5,500 to an IRA or Roth IRA, with those 50 and older eligible to add another $1,000 to this amount.

Strategically Batch Your Itemized Deductions

The TCJA increased the standard deduction, almost doubling it to $12,000 for those filing single and $24,000 for those filing married. Remember that you only get to itemize your deductions if they exceed your standard deduction. As a result, many taxpayers who itemized last year will take the increased standard deduction instead this year. For those who still itemize, they can strategically batch their deductions – especially if they are near or below the threshold.

Batching you itemizable deductions simply means postponing or accelerating deductions into one tax year or the next. This way you can get more than the standard deduction one year and take the standard deduction the next year, instead of always being limited to the standard deduction or just over it. There are three itemizable deductions that have the most potential for batching: property taxes, mortgage payments and charitable deductions.

Depending on local deadlines, taxpayers can make three property tax payments in one year and one the next (instead of two every year) by playing with the timing. You pull a similar tactic with your mortgage payment by paying early one year and squeezing in 13 payments one year and then 11 in the next. For charitable deductions, consider how much you plan to donate and move are much as possible into one year and less the next. If you do this across all three items, you can substantially move the deductions to your advantage.

Qualified Charitable Distributions

Even if you don’t plan to itemize, you can still use the qualified charitable distribution strategy to save taxes. Generally, after reaching 70 ½ years of age, taxpayers are required to take Required Minimum Distributions (RMD) from their retirement accounts (Roth IRAs are an exception while the owner is still alive). If you’re subject to RMDs, you can have the distributions sent directly for the retirement account to a nonprofit.
The advantage here is if you use the RMD to replace what charitable donations you would otherwise make. By having the money sent directly from the account, you’ll never realize the distributions as taxable income, but you will still receive an itemized deduction for the full amount.

Tax-Loss Harvesting

Aside from tax planning, the year end is a great time to rethink your overall investment portfolio and strategy. As you do this, you might find it a good time to sell some of the short-term (less than one year) losers in your portfolio, allowing you to deduct up to $3,000 of short-term losses against regular income after other capital gains are offset. Anything over a net $3,000 loss you can’t take and must be carried forward to future years.
Make sure you use tax-harvesting strategies when you take your losses. Don’t buy back the same security you just sold within 30 days or the loss will be disallowed. Instead, you can consider purchasing a similar, but not identical fund, ETF or index fund; hold it for 30 days or more, and then either keep it or sell it and repurchase your old holding.

Conclusion

The holidays are a busy time full of friends, family and gatherings, but make sure you take at least a little time to see if you can apply some of these tax-saving strategies. If you’re in doubt or just want to take a detailed look at your individual situation, reach out to us to help with your year-end tax planning.

There are several major types of business entities, including S Corporations, C Corporations, Limited Liability Companies (LLCs) and being self-employed. Each type of structure has its own advantages and disadvantages when it comes to taxes, assets and liability protection.

Generally, certain types of businesses are best for certain professions from a tax perspective; however, with the tax law changes last year it may be time to reconsider. Under the current tax law, what used to be the best business entity type for certain scenarios may no longer be the same due to the pass-through deduction and corporate tax rate changes. Let’s look at the most common business entity types and see what’s best.

Self-employed

The self-employed includes everyone who is a freelancer, independent contractor and many business owners who don’t have any partners. The nice thing about being self-employed is that it’s simple; you don’t need to set up any type of legal entity. Moreover, if you qualify for the 20 percent pass-through deduction, you’ll pay even less. Being self-employed is best for simple businesses without major assets and little potential legal liability due to the lack of protection.

The self-employed are required to pay both halves of self-employment taxes on top of their regular income (if you are an employee, you pay one half and your employer pays the other) so you’ll need to take this into account.

S Corporations

Aside from taxation, asset protection is a major consideration when selecting a corporate entity. For those who have significant assets that need protection, especially if they don’t have any partners in the business, an S Corporation may be the best bet. There are restrictions on ownership structure; for example, S Corporations are limited to 100 shareholders, so this might be a limitation for some.

As a pass-through entity, an S Corporation doesn’t pay taxes on income at the corporate level; instead, it passes through to the business owners. As a result, S Corporations can benefit from the 20 percent pass-through deduction as well, though high earners may be phased out. S Corporations are generally favored by certain professions such as doctors, dentists and certain types of consultants.

C Corporations

Unlike S Corporations, there are no restrictions on ownership for C Corporations, and they provide great asset protection. Therefore, almost all public companies and those that want to go public are C Corporations, such as start-ups.

The downside of C Corporations is that they are subject to “double taxation.” The corporation is taxed on entity level profits and then shareholders are taxed again on dividend distributions. The dividend distributions are not deductible to the entity, hence the double taxation issue.

The new tax law lowered the top corporate tax rate to 21 percent, so for high earners the double taxation issue is not as much of a consideration as it used to be. Also, Section 1202 allows shareholders of start-ups to sell their stock without any taxes on the first $10 million in gain after five years.

Limited Liability Company (LLCs)

LLCs are generally the preferred entity structure for certain professionals and landlords. LLCs have flexibility as the owners can file as a partnership, S Corporation or even sole proprietor since the LLC is really a legal and not tax designation. LLCs benefit from the 20 percent pass-through deduction if the owner elects to be taxed as a pass-through, depending on the income level and nature of the business.

Many states do charge annual fees or minimum taxes on LLCs, but it’s usually insignificant. California is one of the most onerous with an $800 minimum fee per year.

Conclusion

Tax savings are often the main motivator in selecting a corporate entity, with asset protection right behind it. The new tax law’s 20 percent pass-through deduction and corporation tax rate reductions make the choice a little tougher than in the past, but generally unless a company wants to go public most businesses will either choose an LLC or S Corporation structure. Every situation is unique, so make sure to consult a professional that can help you choose the right entity type for your situation.