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Over the next 10 weeks I want to share some basic tax tips that can be used for year end planning or thinking about your taxes for next year.
Review All Articles in This Series: 10 Tax Tips
TAX TIP NUMBER 4. TAX RATE PLANNING
I love using tax rate planning when we can. Tax rate planning comes into play in two primary situations. First, when you own a company and you are beginning to do well. I call that the fat, dumb and happy rule. Whey you are doing everything you want to do but the money you are making is simply costing you taxes, then it’s time to start looking at how we can use tax rate planning to your advantage.
Most of the time companies are formed as S corporations and this is a good thing. Profits flow through to you and some of those profits will escape payroll taxes if done correctly. That’s a 15% benefit right there. However, when you begin to start making too much money, the payroll tax benefit decreases not quite to zero. Once this happens creating a new tax structure for your company can create some real advantages. Simply put, if you change the nature of your tax entity dollars up to 100,000 can be taxed at rates that are lower than you would pay on the same income if you simply included that income on your personal return.
Adding fuel to the fire, in certain cases, we can split your business into parts and allow different parts of the business to pay no state income taxes and reduce the amount of tax that is being paid.
The second type of planning involves family. Some family members may be in a lower tax bracket than other family members. Of course, this works best when we are dealing with a family business or possibly real estate. The goal in this situation is to shift income from the family member who is making higher dollars and being taxed at higher rates to family members who are in a lower tax bracket, such as the children. One has to be careful what type of income is shifted thought because the IRS has their paws everywhere. It’s called the kiddie tax and this rule was dreamed up to prevent the incredible abuse being heaped upon them. The kiddie tax is a rule that passive income going to children will in fact be taxed at the parent’s rates. So much for the income shifting. Except, if the children are actually earning money then there are some great benefits and planning that can be done. If the children are over 19, unless they are in college in which case the rule is now 24, then the kiddie tax rule no longer applies. Isn’t it amazing how a person can be declared an adult at age 18, yet still be subject to all kinds of tax rules that don’t treat them that way.
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