What You Missed January 2012 General Meeting
by Rob Earhart
Who Gets Your Money-You or Uncle Sam?
January 3, 2012
At this meeting, we were apprised of the general tax burdens and methods of handling them by two of our Vendor Tax Experts, Ms. Dory Dyess and Mr. Jerry Davies.
Dory Dyess, CPA of Dyess, Jones and Associates, Inc. introduced us to the structural setups available for your business. Ms. Dyess produced a handout providing a description of how businesses are set up now.
“Tax savings is the main topic that people want to investigate.” Ms. Dyess continued, “from there they want more info on how to handle audit and asset exposure.” Introducing a situational sample, she described the layout of a general real estate deal. “With an $81,900 profit, one has to decide how to handle the income: i.e., ordinary income; long-term holding asset acquisition; or long-term holds, but sold early to cover expenses.”
Holding for long term but selling off early is a gray area that could save you a lot of money. If you treated it as ordinary income you would have a tax burden of $19,350. But if you intended to hold it for the long term but had to sell to pay off some debt, the short-term capital gains would be $8,646. If you purchased and sold it through a “C” corporation, the total taxes would be reduced to $6,684.
The first example would increase audit exposure, but the C Corporation would be less of a problem. If you are a buy-and-hold investor, you could argue that this is a normal transaction.
“The method by which you set up your business could save you thousands of dollars each year, so choose wisely,” advised Ms. Dyess.
The next speaker was Mr. Jerry Davies of Davies and Kerr Consulting, Inc. He provided us with information on several ways to save money on your taxes.
“If you make over a certain amount, you will be hit with AMT, alternative minimum tax,” professed Mr. Davies. The tax is not adjusted for inflation, but a fixed amount of income will trigger it. He thought the income level was about $48,000 for an individual and $74,000 for couples before it would affect you.
Mr. Davies took some questions from the audience. “Can you pay your kids?” “Yes, if they are under 18 years old you can pay them well with no tax consequences to them and with a deduction to you. In addition there are many other deductions: day care, adoption, shifting income, etc. Keep a work log and you should be able to pay them $5,000 each year with no problems.”
“Can we deduct educational expenses?” “Yes, the government bends over backward to provide education to children. You can deduct student loan interest, up to a certain income level, and then it is phased out.”
“Homeowner strategies are good”, explained Mr. Davies. “There is a million dollar limit to mortgage interest deduction and property taxes are deductible also. You can still sell your primary residence every two years and get tax-free money, up to $500,000 for a couple. You must be on the title for two years to qualify.”
“There are many other ways to save on taxes: i.e., home energy incentives, insulation, roofs, doors, windows, appliances, a/c’s., etc.”
Capital gains are a max of 15%, and if you are in less than a 15% tax rate you can have zero capital gains. If you have gains and losses, you can net them, but you are limited to a $3,000 loss in any one year, but can carry them forward for up to 5 years. You can deduct up to $25,000 in passive losses in one year and, for greater amounts, carry them back two years, or forward for up to 20 years.
“What about retirement plans?” “My favorite is a retirement plan in which you can put up to $22,000 each year, but you have to have earned income to do it,” explained Jerry, “and you can get a 401 IRA to act like a Roth.”
“Do you have to issue 1099’s to all subcontractors?” Both Ms. Dyess and Mr. Davies were in agreement, that “yes,” if over $600 and if it does not have Inc. or Corp. after their business or name, you are required to file a 1099.
Many thanks to Ms. Dyess and Mr. Davies, premier vendors for SREIA, for providing valuable information on tax savings strategies. All appreciated the responses to questions asked.