Business Times of Edmond, Oklahoma January 2020 - Page 24

BUSINESS MATTERS JIM DENTON L edger L ines W 10 Tax-Saving Ideas for the New Year orking with successful clients for many years has been a highlight of my professional experience. One habit that successful business people have is setting goals and accomplishing them. January is the beginning of goal- setting season. What better time could you find to set some goals to improve your financial position in the coming year? Minimizing your tax bill is a great place to start! The great clients that I have the privilege to work with have one thing in common. They plan. These clients are intentional about their results and create their ultimate success. Those who have the most success with their tax situation are vigilant about taxes year around. They have a habit of talking about what they can do to save taxes every time we get together. These great clients are obsessed with reducing their tax liability and thereby increasing their family’s wealth. I’ve put a list together of some great strategies that have a potentially high impact on a client’s net worth. I’ve refrained from listing strategies that produce short-term or merely timing differences. Lastly, I’ve ranked them according to my view their long-term potential impact along with a brief description of what is involved. 1. Converting to a Roth IRA when your tax rates are low — Roth IRAs are an amazing gift that Congress gave taxpayers way back in the 1990s. The great thing about the Roth IRA is that earnings and withdrawals from the Roth account are tax-free. To create a Roth IRA, 24 January 2020 | The Business Times the Roth account owner must pay tax on the amounts that are contributed. Many people desire to convert their Traditional IRA to a Roth IRA but must pay regular income tax at their current tax rate to accomplish it. Usually, the lesser expensive way would be to strategically convert to the Roth IRA after retirement utilizing the lower tax brackets over a period of several years. If a Roth account can be passed to the next generation creating tax-free wealth for children and grandchildren, by establishing, funding, investing, converting and withdrawing only as a last resort, you’ve essentially created a dynasty! 2. Taking advantage of Sec. 1031 — The tax law looks favorably upon like-kind exchanges of real property. So much that if you and another person trade similar properties without exchanging any money, you and your new-found friend can escape any capital gains tax. If one of you receives money or gets relieved of debt, then a gain is realized only to the extent of the value received. These days, you don’t even have to find someone with which to trade. You can go to a 1031 intermediary who will facilitate the trade — with time restrictions and naturally, for a fee. With a like-kind exchange, your cost basis in the old property becomes your cost basis in the new property. If you hold qualifying Sec. 1031 property until you die, the next generation will get a stepped-up basis to fair value at the date of death. 3. Taking advantage of the 20 percent pass-through deduction — Also known as the Qualified Business Income Deduction (QBID), owners of qualified pass-through businesses (not C-Corporations) can take a deduction equal to the lesser of 20% of their pass-through income or 20% of their taxable income. Be aware that many businesses do not qualify for the deduction because of the professional nature of their services. 4. Deferring realized gains — Investments in high quality securities are a great way to build wealth. Such wealth can accumulate over time without affecting your tax bill by merely holding the security and not selling. If you sell the security within a year of purchasing it, your sale will be taxed at your highest short-term, ordinary income rates. If you wait and sell after one year, you will still pay tax but at the lower long-term rate. 5. Taking advantage of stepped-up basis in property — When the owner of property dies, the tax basis in their physical property is “stepped-up” to the fair value of that property at the date of death, but no more than the value reported to the IRS upon filing their estate tax return. This is strategic when contemplating the transfer business or investment property to the next generation. 6. Analyzing investment results on an after-tax basis — Returns on stocks, mutual funds and other investments are not required to be published on an after-tax basis. Russell Investments notes that the average tax-drag on average of U.S. equity mutual funds is 2%. Accordingly, a fund that boasts averages of 10% is likely netting you 8% after you account for the taxes you