Tax season can be a stressful time for business owners and individuals alike. While many rely on their CPAs to handle the complexities of tax filing, there are numerous unique and lesser-known tax-saving strategies and deductions that can significantly reduce your tax liability.
At SWAT Advisors, we specialize in uncovering these hidden opportunities to help you keep more of your hard-earned money. In this comprehensive guide, we’ll explore some advanced tax planning strategies that go beyond the basics and provide real-world examples to illustrate their effectiveness.
Advanced Income Shifting Strategies
Income shifting involves moving income from a higher tax bracket to a lower one, typically by distributing income among family members. Here are some advanced strategies:
Hiring Your Children
Many business owners know about hiring their children, but fewer understand the full potential of this strategy. For example, if you own a business, you can pay your children for legitimate work performed. This shifts income to their lower tax bracket. Moreover, if they earn less than the standard deduction amount, they won’t owe any federal income tax. You can then invest these earnings in a custodial Roth IRA, allowing them to grow tax-free.
Example: Dr. Smith, a dentist, hired his 16-year-old daughter to manage his social media accounts, paying her $12,000 annually. This income was shifted from Dr. Smith’s high tax bracket to his daughter’s lower bracket, resulting in significant tax savings.
Family Limited Partnerships (FLPs)
An FLP allows you to transfer income-generating assets to family members while maintaining control over the assets. Income generated by the partnership is distributed to family members, potentially lowering the overall tax burden.
Example: The Johnson family created an FLP and transferred their rental property into it. The rental income was then distributed among the family members, who were in lower tax brackets, reducing the overall tax liability.
Unique Retirement Planning Strategies:
Retirement accounts offer significant tax advantages, but some lesser-known strategies can further enhance your tax savings.
Defined Benefit Plans
Unlike a defined contribution plan, a defined benefit plan allows high-income business owners to make substantial contributions. These contributions are tax-deductible, providing immediate tax relief.
Example: Mr. Brown, a high-income business owner, set up a defined benefit plan for his small business, contributing $250,000 annually. This reduced his taxable income significantly, resulting in substantial tax savings.
Cash Balance Pension Plans
This type of defined benefit plan combines features of defined benefit and defined contribution plans. It allows for higher contribution limits and provides a predictable retirement benefit.
Example: Mrs. Green, an attorney, implemented a cash balance pension plan in addition to her 401(k). This allowed her to contribute more than $100,000 annually, reducing her taxable income while securing her retirement.
Advanced Deduction Strategies
While most business owners are familiar with common deductions, there are some advanced strategies that can provide additional savings.
Section 105 Medical Expense Reimbursement Plans
This strategy allows small business owners to reimburse employees (including themselves) for medical expenses, which are tax-deductible to the business and tax-free to the employees.
Example: Mr. White, the owner of a small consulting firm, established a Section 105 plan, allowing him to deduct his family’s medical expenses as a business expense, significantly reducing his taxable income.
Cost Segregation Studies
This strategy involves breaking down the costs of commercial property into individual components, which can be depreciated over shorter periods. This accelerates depreciation deductions, providing immediate tax benefits.
Example: Ms. Black, who owns a commercial building, conducted a cost segregation study and reclassified $500,000 of the building’s costs to 5- and 7-year property. This accelerated depreciation reduced her taxable income substantially in the first few years.
Home Office Deduction
While many know about the home office deduction, few maximize its potential. To qualify, the space must be used exclusively and regularly for business. Expenses such as mortgage interest, insurance, utilities, repairs, and depreciation can be prorated and deducted.
Example: Dr. Patel, a therapist who operates her practice from home, claimed the home office deduction. She prorated her home expenses, including a portion of her mortgage interest and utilities, leading to significant tax savings.
Unique Charitable Giving Strategies:
Charitable contributions can provide tax benefits, but there are advanced strategies that can maximize these benefits.
Donor-Advised Funds (DAFs)
A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. This is especially useful in high-income years.
Example: Mr. Lee, a software engineer, contributed $100,000 to a DAF in a year with an unusually high income. He received an immediate tax deduction and distributed the funds to his favorite charities over several years.
Charitable Remainder Trusts (CRTs)
A CRT provides income to you or your beneficiaries for a specified period, after which the remaining assets go to a charity. This can provide an immediate tax deduction, reduce estate taxes, and provide income.
Example: Ms. Garcia established a CRT with appreciated stock worth $500,000. She received a charitable deduction for part of the gift, avoided capital gains tax, and received annual income from the trust.
Maximizing Depreciation Deductions
Bonus Depreciation
The Tax Cuts and Jobs Act allows for 100% bonus depreciation on new and used equipment purchased after September 27, 2017, and before January 1, 2023. This means you can immediately write off the entire cost of qualifying assets.
Example: Mr. Walker, who owns a manufacturing business, purchased $1 million worth of new equipment. He claimed 100% bonus depreciation, allowing him to deduct the full amount in the year of purchase, significantly reducing his taxable income.
Section 179 Expensing
This provision allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year, subject to limits.
Example: Ms. Nguyen, who owns a medical practice, used Section 179 to deduct the full cost of new medical equipment, reducing her taxable income and providing immediate tax relief.
Leveraging Advanced Tax Credits:
Research and Development (R&D) Tax Credit
This credit rewards businesses for investing in research and development. It can be a powerful tool for reducing tax liabilities, especially for innovative companies.
Example: Tech Innovators Inc., a startup, invested heavily in developing new software. They claimed the R&D tax credit, which significantly reduced their tax bill, freeing up funds for further investment in their projects.
Work Opportunity Tax Credit (WOTC)
This credit incentivizes businesses to hire individuals from targeted groups who face significant barriers to employment, such as veterans and long-term unemployed.
Example: Global Enterprises LLC hired several veterans and claimed the WOTC, reducing their federal income tax liability and supporting their workforce diversity initiatives.
Conclusion
These advanced tax-saving strategies and deductions go beyond the basics and can provide significant tax benefits. By using these unique opportunities, you can minimize your tax liability and maximize your financial outcomes.
At SWAT Advisors, we specialize in uncovering these hidden opportunities and developing tailored tax planning strategies for our clients. By working with a certified tax planner, you can ensure that you are taking full advantage of all available tax benefits and securing your financial future.
