Tax Knowledge_1

Even my major purpose is to gain knowledge on individual tax, I was intrigued by learning this corporate tax reform. Previously, US companies were taxed twice for products/goods they sold out of America. For example, Apples’ revenue in Europe will be taxed locally, then the revenue will again be taxed by US government. Upon that, corporate can choose to keep the money abroad, which most of them do so, as a result, US not only are not able to collect taxes, but also lose companies, because they would move their headquarter to other countries to avoid this double tax. Therefore, now this tax rule is abolished by Trump administration since their mission is to keep jobs for American people.

Good news for big corporation, and certainly no one would forget that the huge tax cut from 35% to 21%, benefiting companies and pushing up stock market all time high.

Then those S-corporation and LLC owners feel they are unfairly treated, just because they are small, they should not be left behind, excluded from big companies’ league. so there is this 199A act, per which, 20% net profit tax can be deducted. For example, if an attorney’s law firm made $150k this year, part of the $150k can be allocated as salary, the rest is corporate profit, under this new tax cut rule, the attorney will be incentivized to squeeze salary to the lowest, while maximize the profit, which has 20% tax deduction. Another new act is that for doctors, attorneys, if you consider to buy machines, the cost of which is allowed to amortize through 30 years. Now they should consider to make the purchase, because tax deduction based on this one-off cost can be absolved from amortizing 30 years.

Just reviewing these a few rules, I realize how vitally important it is to have a smart accountant to help manage your business operation.

For every individual, especially the so-called middle class, main contributor to the American government budget, the new tax seems to be not that favoring.

First and foremost importantly, property tax. It has been always tax favored item to encourage people to save money purchasing a house, but the Trump new regime imposed certain changes that worsened status.

If the house is not for renting but residential, property tax deduction amount is capped at $10K. In east and coast area, many families’ property tax easily go up to $20K to $30K, if they are at the 25% tax bucket, that means, they lose $2500 to $5000 right away. However if the house is used for renting, generating income, then there is no such capping. On the other hand of interest deduction, the new rule set a $750K limit too, meaning the interest on less or equal to $750K is deductible, but any amount above that will not, so if you take out a loan of $1M, the $250K * 4% (assume 4% mortgage rate) = $10K is not deductible, that means $10K*0.25= $2500 tax loss.

Middle class, or upper middle class is quite screwed under this tax rule. But for small or lower middle class live under those capping or limits, the very purpose of giving you tax deduction on mortgage still holds, so practically, loaners lower down their actual interest rate fair significantly (like from 4% to actual 3% after tax deduction), while people who take cash deals on real estate don’t gain this benefit. In a booming environment where there are plenty of investment opportunities to return you greater than 4% each year, I think take out or keep the loan is wise.

With regard to property tax, it’s also worth noting that if you sell the house, which is primary residential house, you won’t be taxed for profit lower than $250K, for couple it is $500K. So those who plan to divorce should get the property sold to maximize tax benefit. Or, the one who gets the property after splitting will take a lower threshold $250K rather than the more lenient $500K if he/she sells.

Another interesting tax knowledge is for parents who plan to pass down their property to the children. The question is when and how. The intricacy here is not about gift or endowment tax, which in America it is super high, in the vicinity of around $20M, so most people won’t hit that at all. The problem most people will encounter is the capital gain of the property. Because the cost base usually is much lower than the sellable price at the time of passing down. Savvy accountant recommends to take full advantage of choosing the right time points to give – the time when parent passed away. That way, the property’s cost base will be revalued at deceased time, so if the children sell the house right away, there is barely any capital gain, hence no tax to be paid. Another smart trick is that the parent utilize “tax deferring” rule by selling small property, and subsequently buying a larger property, under this rule, the capital gain can be deferred, so on and so forth, until the day the parent ceased and transferred to children, no single penny of tax is levied even if the children sell it and cash out.

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