President Trump’s new tax law was meant to eliminate breaks and complicated loopholes for the wealthy, but it instead ushered in a new set of exploits for taxpayers.
Many strategies rely on legislative provisions that provide incentives, such as a generous discount for owners of pass-through companies such as corporations, and a higher deduction rate for the property tax.
The IRS also provides guidance to clarify and provide information about the rule, so tax professionals have some leeway in interpreting the law, but there is still risk of invalidating certain transactions.
Congress is still unlikely to make any major changes to the 2017 rule, so these efforts could still be viable.
Bunch up expenses
Partnership partners, limited liability companies and other pass-throughs earned a 20% taxable income deduction. But that write-off is subject to restrictions for married couples beginning with incomes of $315,000. To get around that, this year, pass-through owners should increase their expenses to lower income and allow full deductions. For example, companies planning to buy more equipment and upgrade to their facilities could do it all this year rather than spread it over several years.
Non-grantor trusts
The $10,000 limit on so-called SALT deductions for state and local taxes was one an aspects of Trump’s tax reform that received a lot of opposition. Some tax accountants have helped clients set up special trusts in high-tax states, with each taking the $10,000 deduction, which can help to get around the limit. It can be expensive to set up the trusts, but the benefits could well justify the costs and the hassle for the top earners living in high-tax states.
Getting divorced
The tax overhaul eliminates deductions for divorce alimony payments finalized in 2019. Attaining a contract by Dec. 31 could mean tens of thousands of dollars in tax savings for many affluent couples. The wealthier you are, the more families, properties, savings, and companies you will be battling for.
If a settlement agreement, which often includes provisions for alimony, is reached by Dec. 31, several divorce lawyers said it would generally suffice to get the tax break on alimony.
IRA donation
Those who are over 70 years of age must begin to take compulsory distributions from their individual retirement accounts, which creates taxable income. Nevertheless, allowing charitable donations amounting to $100,000 from IRAs qualifies as a mandatory distribution, avoiding the taxable income.
Opportunity Zones
Opportunity Zones afford special tax breaks. These are economically disadvantaged regions where the government is trying to encourage investment. Investors may take earnings that would be subject to taxes on capital gains, like those from the selling of a company or shares, and bring them into Opportunity Zones to delay and potentially lower those taxes.
If you need professional help with the President’s new tax measures, our small business tax professionals can help guide you in the right direction. Contact us today at 818-452-2641 or fill out our contact form to schedule a free consultation.
