Month: October 2024

You can exclude up to $500K of gain from the sale of your personal home if the home was the primary residence for you and your spouse and you lived in the home for 2 out of the 5 years before the sale.  We often see taxpayers move out of their primary residence and then rent the home for several years before deciding to sell.  If the taxpayer wants to take advantage of this $500K gain exclusion, then it is important to sell the home within 3 years of moving out so that the taxpayer doesn’t violate the “2 out of 5 years” rule.  So, the usual advice is to move out, rent the home for 2.5 years, and then sell the home within 3 years of moving out unless you want to keep the rental for a very long time (and don’t mind converting tax-free appreciation into taxable appreciation).

We routinely are asked to file tax returns for recently-deceased family members.  Often, the executor (normally the brother or sister of the decedent) can’t find all of the W-2s, 1099s, or other tax documents that we need or they might not even have a copy of the previous-year’s tax return for the decedent.  Our normal process is to have the executor sign a power of attorney so that we can ask the IRS for the decedent’s W-2s and 1099s and have the IRS provide us with a copy of the previous-year’s tax return.  This ensures that we “know what the IRS knows” and then can build upon that in order to make a complete tax filing for the decedent.

A provision of the tax code allows owners of small businesses to avoid paying tax on 20% of their small business profits.  This provision is called the Qualified Business Income Deduction (“QBID”).  This deduction is limited if the small business is a Specialized Services Trade or Business (“SSTB”).  An SSTB is a business in the fields of health, law, accounting, performing arts, consulting, athletics, financial services, brokerage services, or investing.  We often see service-based businesses erroneously classified as “consulting” businesses by other CPA firms.  This classification limits this valuable deduction.  The definition of “consulting” is not very broad and normally doesn’t describe the client’s business operations so we often amend the client’s tax returns to claim this valuable deduction.  If you think your QBID deduction is being limited because you were classified as a consulting SSTB (confusing…I know), then reach out to us so we can have a look.

We are often asked about Social Security claiming strategies. When should I claim Social Security? Should I wait? Should one spouse claim before the other? How does a pension affect Social Security?  This subject is deceivingly complex and we are not experts.  We will usually refer you to http://socialsecurityadvisors.com/appointment where you can make an appointment with advisors, we trust who focus on this one topic.

As we have posted, if a child works for your business then you should pay them as follows:

If under age 18, then pay the child from your Schedule C business (don’t pay them directly from your S Corp)

If age 18, then pay them directly from your S Corp or Schedule C (doesn’t matter which)

If age 19, then pay them from either your S Corp or Schedule C business, but see if you can get very cheap subsidized health insurance for them on healthcare.gov.  If the child earns more than 138% of the federal poverty level, and they are not your dependent, then you can take them off of your family health insurance plan and the child can get their own health insurance.  Since they don’t have much income, their health insurance will likely be better than yours and be almost completely subsidized by the Federal government.  Repeat each year until they graduate college and get a job.

As you likely know, an Indiana taxpayer can take advantage of the provision to get a 20% credit for funding an Indiana 529 plan.  The max credit per tax return is $1,500 on a $7,500 contribution.  If college is going to cost, say, $37,500/year, then you can withdraw that amount from your 529 each year without any consequence.  If you contribute $7,500 to the plan, you save $1,500 in tax.  If you give $7,500 to Grandpa and tell him to put that money in the 529 plan, then Grandpa gets $1,500 off of his Indiana taxes (and then you tell Grandpa to gift you the $1,500 of tax savings).  Repeat across every Indiana-taxpaying family member until you have contributed $3,7500 for the year (so 5 family members times $7,500).  You will receive 5 times $1,500 of tax credits.  We know this is an extreme example, but you get the point.

If you want to start a new business and only have money in your IRA/401K to fund it, then you might be tempted to use a “ROBS” strategy whereby you can use your IRA/401K funds to start the business.  The result of this decision is that your new business is “trapped” in a C Corp inside a 401K “forever”.  This results in the least-efficient form of taxation trapped a vehicle that forever produces income taxed at your highest tax rates for the life of your business.  Please see us before making this decision.  We can show you how to tax-efficiently avoid using this strategy so that you can end up with your business in a more-tax-efficient S Corp where you can take advantage of all of the tax advantages of an S Corporation:  shareholder wage, QBID, PTET, long-term capital gains rates on sale, no double taxation.