I’m sure right now you’ve heard about the 2018 tax changes. You’ve heard about the higher standard deduction and heard that most people are not going to itemize. What are some things you can do in 2018 to help you save some taxes over the long run? Today, I am going to talk about multi-year tax time issues.
Today we’re going to talk about multi-year tax planning. Actually, this is the best type of tax planning because it only, it doesn’t take into effect how much taxes you can save today. But it tries to look into the future and determines how much tax you can say today in next year and the year after. Obviously, these are some projections. The further out you go the harder it is to plan so I don’t recommend when you do a multi-year tax planning issues you go more than 2 years. Unless you’re doing retirement planning. That’s the only time I think you should go further than two years because nobody knows what’s going to happen next year, much less ten years from today. You all know how politics changes every time.
So, tax planning is the way, is the best way to minimize your taxes because it causes you to sit down and think about what you plan to make, what you plan to spend and when is the best time to make it or spend it where you can pay the least amount of taxes? To have a multi-year tax plan you actually need to have a budget. Because, how else are you going to be effective in planning this? Tax why is very, very helpful, because over the long run it’s the best way to minimize taxes.
The first multi-year your tax planning issues I like talk about is charitable donations. Let’s say you’re married taxpayer and you file jointly. You donate $24,000 every year. Obviously if you put the $24,000 and you have no other deduction. Then you, you still get to get the standard because that’s what your standard is, is a $24,000. So, in this case it might be better for you to put up, make a $24,000 donation in one year and donate in the next year so you get to get itemized deductions every other year which increases your deductions and decreases your tax liability. So, here’s the exact same situation here. The only difference is rather than doing $24,000 in year one in year two. They have done $48,000 in year two. So, based on that information you can see in year two their tax liability is $49,972 versus it still being, let’s say nothing changed, and you know no, no adjustment for inflation. We’re paying the $63,412. So, by doing this multi-year tax planning they’re saving $13,440.
The next multi-year part issue I like to talk about is meals and entertainment. This actually goes hand-in-hand with charitable donations. You may or may not have heard that entertainment expenses are no longer deductible. It used to be 50% of meals and entertainment where deductible. But going forward, entertainment is no longer deductible. So, for example, let’s say you take a client to a meal and afterwards go play a game of golf. The meal portion of your outing is deductible, but the Golf outing is not a deductible. So, a business owner who has $45,000 meal expenses and $10,000 entertainment expenses. Previously would have been able to deduct $27,500 but now they can only deduct $22,500.
So, here’s the multi-year tax planning issue. What if, rather than taking your client to events like golf. What if, if you took them to events sponsored by charity? That way you get to get a charitable, uh, charitable deduction and then you can use this as part of your multi-year charity deduction tax planning. Every other year you get the higher deduction. You get to support a cause you believe in. And at the same time get a tax deduction. Just keep in mind that when you go to these events that 100% of what you pay is (not) deductible. Some portion of it will be cost of your meals and things like that, which are not deductible and then the portion over that is what you can deduct. But it’s better than zero. You get to support a cause, get a tax deduction.
Plan it right. You know that year you might actually need all the deductions you need. So, this is why multitasks, multi-year tax planning is important. Because you can sit down, look at your strategy. So, you are taking your client out as part of your networking. Just figure out, OK maybe this year I do this in networking. Maybe you just take them out for meals and next year I do charity. You know that’s something to think about as you plan your marketing plan, your map, your marketing strategy for a year.
Another multi-year plan tax planning issue is retirement planning. Now, this is one I take very seriously. And why do I do so? As a sole proprietor or an S-Corp, single owner of a S-Corp. The chances of you selling your business once you’re done is very, very low. So what happens? Are you going to just depend on Social Security? We know that the amount going to get from Social Security is not going to be not sustain you. So, you really do have to have a plan. For when you’re done running your business. Either you work on making your business sellable or you work on building a good retirement nest egg.
So, here’s an example of an entrepreneur making $50,000 in wages and $150,000 in income. Without the retirement plan they’re donating the max they can which is $5,500 or both the taxpayer and spouse which $11,000. Without a deduction, they get to pay almost $20,000 in taxes. With a deduction, it goes down by $880. Not a huge savings by any means, but it’s a lot better than nothing. Well, let us take a look here at what happens over time. That $11,000, let’s say they still have 25 years till retirement, will grow up to $521,804 at retirement age. You know, if they did zero, they will have zero. And that’s after taxes.
The last multi-year tax planning issue I want to talk about is, should I make that purchase this year or next year? That’s a question I hear a lot of. Especially if it’s the end of the year. The taxpayers want to know like OK where is my greatest tax advantage? Should I just do it now and get a write off now or should I wait till next year? Well you don’t know unless you have a budget and you’re doing multi-year tax planning.
So, you can see this especially in a period of fast growth. This entrepreneur right here is looking to rapidly grow the business. Their taxable income in the prior year was $146,000. This year they expect $426,000. So, they are going to go up from a tax rate of 22% to 35%. If they have large purchases to make. What year you think they’ll have the better write off? You got it, the next year. So, if I’m a taxpayer I will wait till next year to buy it because I’m expecting lots of income. So I lots of write offs to make that income lower. So, I will wait when I have the higher tax rate so I get more of the tax savings.
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