Today on Tax Hacker Tuesday tax code expert Tim Berry breaks down the new tax plan. Discover what the media isn’t telling you about the new tax plan and gain a better understanding of precisely how the new tax plan will affect real estate investors and other small business owners.
Learn how you should take full advantage of five loopholes in the new tax plan the mainstream media isn’t sharing with you and could cost you a small (or large) fortune. All here on Tax Hacker Tuesday!
What You Will Learn About What the Media Isn’t Telling You About the New Tax Plan:
Who will pay more in taxes under Trump’s plan
How you can structure your financial affairs to save money
Why it pays to become an independent contractor
The benefits of starting a small business
Other perks to being your own boss
Some other ways that you can save money on taxes
How retirement plan contributions can improve your financial outlook
How the new tax plan will benefit you
Write-offs to consider under the new tax plan
The good stuff in the new tax plan that you should be excited about
More tax credits that work for real estate investors
Investment strategies that work best with the new tax plan
The types of businesses that will receive deductions
Go to TaxHacker.com to get Tim Berry’s Free Report on taking advantage of Trump’s tax plan
If you have a question for Tim Berry to address on future episodes visit TaxHacker.com/Questions
What it means to “play games” with the tax code in a smart and legal way
Why you want to be a “Tax Hacker”
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Speaker 1: This is Theriault Media.
Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%?
Now, you can. Tim Berry, attorney-at-law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.
Matt Theriault: All righty. Happy New Year, Tim.
Tim Berry: Happy New Year to you, too, Matt.
Matt: Good to hear your voice on this first day of the new year, so as our audience will be listening, it will be day two, for Tax Hacker Tuesday, but the first Tax Hacker Tuesday of the new year. And quite a year it’s going to be, and quite a shift that this show is probably going to take, based on the time when we originally discussed doing it, speaking of the new tax plan.
And I want to jump right into it because you know, I don’t watch a lot of TV. I don’t watch a lot of news, but the stuff that I am catching, like the little sound bites that I hear here and there, and the headlines that I read – you know, if you listen to the president, he says this is an absolute gift, as it cuts taxes for the majority of the people, the middle class.
But, I mean, if you listen to what the media says when it’s not Trump speaking, it sounds like it’s a terrible plan. It’s going to cause people to pay more in taxes. I just saw on social media – it says 50% of people will pay more in taxes.
I was like, “Eh, can this be true?” So, I don’t know, I just wanted to get you on the show and discuss this directly because I think it impacts everybody.
Who will actually pay more in taxes?
Tim: Oh, that’s a good question. You know, I haven’t run numbers on who’s actually going to pay more. That’s a interesting perspective to look at. Probably, the people who are going to be paying more are W2 employee people. If you’re self-employed, there’s going to be all sorts of tax breaks, tax benefits with this new plan.
But people paying more, more than likely, it’s going to be some poor schmoe making around… probably a middle class person… making W2 income, getting paid via W2. That’s my guess, is the person who’s going to be dinged with this new tax plan.
Matt: Got it. So, do they have to pay more, though?
Tim: No. Gosh, I mean, the common phrase about the tax code is it’s a voluntary tax system. What they mean by that, it’s not voluntary if you pay taxes or not, but it’s voluntary on how you structure your financial affairs.
Everyone’s talking about right now, to the extent that you can, get out of being an employee and become an independent contractor. Get into the gig economy. If you have some sway with your current employer, ask them if you can become an independent contractor with them, and if you can, you can open up the world to all sorts of tax savings at that point.
Matt: Mm-hmm (affirmative). Right, so, you know, I think one of the best tax guys that I’ve always heard of for this for a long time… You can always correct me if I’m wrong, because I pretend to be an expert when I’m all by myself, but then when I’m with you, I say everything with a grain of salt. But, starting a small business is kind of one of the first tax strategies that anyone can do to start paying less, right?
Tim: Absolutely. 100%. Start a small business and it’s not just about saving the taxes, but it’s about… and I’m going to sound a little bit corny and hokey here, but getting that personal freedom where you don’t have to work for the man, and work the nine to five job. You have that personal freedom.
Matt: Sure, yeah, there’s lots of other benefits of being your own boss, but the tax strategy thing, that’s a biggie. So, what are things that people can do to pay less, that would be, like, universal?
Tim: Gosh, one big one-
Matt: And I say universal because I know everyone’s situation’s a little bit different, but starting a small business is one of those examples. What else can they do?
Tim: Well, starting a small business… other big ones are retirement plan contributions. That’s a no-brainer. It amazes me that companies will match a certain percentage of people’s income, and those people don’t even put in that full amount for the match, and they’re throwing away money. I’ve never understood that.
So, making retirement plan contributions, starting a small business, buying real estate. That’s a no-brainer. You’re going to get the depreciation interest deductions that’s going to offset the taxable income. Many times, and this is almost embarrassing to say, I would talk to someone, who a lot of their income is based on rental income, and they don’t have a tax problem because they’re not paying taxes.
So, those are kind of some neat little universals is have the business, buying some real estate, and making retirement plan contributions.
Matt: Right, right. So that really hasn’t changed too much. Another thing I’m hearing a big negative through the media, is the healthcare requirement is no longer a tax penalty. Is that true?
Tim: Yeah, that’s true, but I mean, Matt, I mean, you’re going to have me frothing at the mouth here for about 45 minutes on this one. I am ecstatic about that. I am absolutely ecstatic about that, because healthcare for my family was a stupid dollar amount, and the thought that I was going to have to pay a penalty for not being willing to pay a stupid dollar amount, just put me over the roof.
And now, them taking that out, I think that’s a massive positive. Now, I’ll tell you who the negative’s for, and I don’t want to get too much into political stuff, but the negative is for the people who utilize a lot of healthcare, who go to the emergency room for the sniffles, and who don’t make much money.
Yeah, this is going to drive up the rates, but I hate to be so tacky. My family hardly ever goes to the doctor and we make a decent living and we pay full boat for Obamacare, so for us it’s a blessing, and for most people who are self-employed and make a decent living, taking away that healthcare requirement is going to be a big blessing, too. The penalty for not having the healthcare is going to be a blessing removing that.
Matt: Right. Okay, so by taking that away, then what people are saying about there will be some people losing healthcare because of that. Is that necessarily true? I mean, just because someone decides not to pay, does that mean it’s going to take from somebody else?
Tim: You know, let’s go back to what I said about the tax code is a voluntary tax system. It all depends on how you structure it. I made the decision in my life not to use Obamacare, and instead to use something called Short Term Plans. They cost a lot cheaper. They maybe don’t cover as much, but once again, my family’s made the conscious decision to be somewhat healthy.
Those people might lose Obamacare. Gosh, there’s still alternatives out there for them, so are they going to lose healthcare? No. And even on a worst-case scenario, let’s say they had to go absolutely bankrupt broke, and they couldn’t afford anything, then they’re going to get right back into Obamacare. So, I don’t see where anybody’s going to lose healthcare. It’s going to cost some people a little bit more, and they may make the decision not to buy the so-called Obamacare policies, but there’s a lot of other policies out there that they can utilize, and heaven forbid they can actually stay in shape and try to go about a healthy lifestyle.
Matt: Right, put their health at a priority.
Matt: I had always thought about the… and we’ll transition from this real quickly, because I don’t want to get political either, but I always just thought about when people would say, “Well, there’s 20 million people that are going to lose their health benefits, or that aren’t insured,” and I was like, “Well, you just made it unaffordable for 20 million new people when you started jacking up their rates, because ours are double now what they were before,” so I was just… I don’t know. It’s over $1,300 bucks, I think, for us now, and you know, I’ve got a lot of clients in the midwest and the south, and that’s more than what they pay for their house. That’s like they have to buy a second house.
Tim: Oh, yeah. Well we’re supposed to pay $20,000 a year. That’s my wife, myself, and two kids. $20,000 a year. That’s just stupid.
Matt: Right. Right. I agree. Okay, so let’s move on.
Let’s talk a little bit more about the negative, and then we’ll get to all the good, juicy positives. So what are these other downsides to this tax plan that the media is, or isn’t, focused on?
Tim: Well, it’s a matter of perspective. Probably the biggest downside on this for most people is the complexity. This is an absolute nightmare. I’m trying to slug through this thing, read about this, read about that, and there’s so many new definitions and circular definitions on things, too. It just makes no sense.
So, that’s kind of a negative. For me, it’s a positive, though, because, you know, I like tax complexity. People talk about a flat tax, and I think, “How stupid is that? I spent a fortune going to law school. I want this stuff as complicated as possible.”
So, I got my wish with this. This is one complicated tax code.
Matt: What other negatives on here?
Tim: You know, charities might have a rough go of it. They’ve raised the standard deduction up to $24,000 for married filing jointly, and so if somebody is making contributions to charity just for tax deductions, the charity’s going to lose a lot of money. How many people make contributions to charities just for tax deductions? I don’t know the answer to that, but I can see where charities are going to stand to lose some money.
Real estate, high-end real estate, eh. It might drop a little bit, too, because there’s limits on what you can write off for the interest. There’s limits on what you can write off for the property taxes, so I can see where some of the higher-end real estate might drop a little bit, too.
Those are the main negatives that come to mind… Oh, gambling and entertainment losses. You can’t write off your entertainment expenses, so maybe there would be a drop-off on restaurant income and bars, I don’t know, corporate seats at events – maybe that’ll be a drop-off. Gambling, you can’t write off as much for your gambling losses.
So, you’re going to have some slight little nuances there, but those shouldn’t be major things.
Matt: Oh, wow, you can write off gambling losses? I didn’t even know we could do this before.
Tim: Yeah, most definitely. Yeah.
Matt: How far can I go back and carry that forward?
Tim: [crosstalk 00:10:30] answer that one, Matt.
Matt: All right. Well, let’s take a look at the good stuff, because there’s a lot of good stuff that the media seems to not be sharing with the public, and that’s what I really wanted to talk to you about today. I guess we touched on this a little bit. My next questions was, what are some actions anyone can take to mitigate their tax liability in 2018?
So we started. We talked about a small business, more retirement contributions, and then purchase of real estate. So, that hasn’t really changed too much, because that’s kind of always been the case.
I think the big headline is we’re just hearing a lot about the 20% tax deduction to businesses. Explain to me – like, what is that, like I’m a five year old? Because sometimes I feel like a five year old when I start talking about this stuff. But what was it before, and why is this different, and how is it better?
Tim: Gosh, you want to talk about the five year old. I feel like a five year old trying to explain this, because it’s so complicated and nuanced and everything.
At its most simplistic, if you have a business that is something called a pass-through in-state, which means that the income for the business shows up on your personal return, in theory, you’re going to get a 20% deduction off of the profits from that business.
So, quick example, let’s say that you’ve got a business, a pass-through business, that makes $100,000 a year. In the past, you had to pay taxes on the $100,000. Now, with this deduction, you’re going to get a deduction of $20,000. So, in theory, you’re paying taxes on $80,000 instead of $100,000. And I threw in the “in theory” because there’s some nuances on this tax deduction. The tax deduction occurs on the back of your 1040 form, which has some pretty big implications for the Obamacare subsidies, for student aid, for phase-out of deductions, so there’s some things the deduction doesn’t do anything for, but at the end of the day, you’re getting a deduction of $20,000 whenever it comes time to pay your taxes.
So, that’s kind of neat.
Matt: That’s where there wasn’t a deduction before, right? This is a brand new – an addition to?
Tim: Totally brand new animal. Totally brand new.
Another neat thing is lower tax brackets. You can make more money and pay less taxes even without that deduction. There’s going to be a higher tax credit for children. They’ve pretty much doubled that tax credit for children.
They’ve also give a tax credit now if you’re taking care of your parents, whereas before you couldn’t get a tax credit there. You know, I live in an area that’s heavily Mormon. A lot of those people are going to get some massive tax credits, you know, if they have a lot of kids and everything.
The standard deduction, it’s gone to $25,000. That’s kind of a neutral thing, because in the past you could do either a standard deduction and then you add in some personal exemptions, so that’s kind of neutral, but realistically, somebody could make $60,000, $70,000 a year and there is a chance they’re not going to pay any taxes on that between the child tax credits and the standard deduction.
Matt: That’s a biggie.
Tim: Oh, it’s a really big. I mean, there are other things, too. For senior citizens, you don’t even have to file a tax return if your taxable income’s less than $24,000, so if you’re living off of social security and you’ve got some, you know, side income coming in, good chance you’re not even going to have to file a tax deduction. That’s probably, I mean, this would be a good time to sell short Liberty Tax Services, Hewitt, and H&R Block, because they’re going to have a lot less tax returns to be filing on that.
Matt: So, that’s good. That’s helping out the people that need it, right?
Tim: Oh, yeah. Certainly. Certainly.
Matt: Okay. Cool. So, on the 20% tax deduction business entity, there’s lots of different entities. You’ve got LLCs and S Corps and C Corps. We’ve got even, I guess, sole proprietorship. I don’t know if you call that an entity or not, but what type of businesses get the 20% tax deduction, or is it any business all across the board?
Tim: It’s going to be pretty much any business except for the C Corporation. For an LLC, and it’s a pass-through, a partnership, you’ll get the deduction. If it’s an S Corporation, you’ll get the deduction. If it’s a limited partnership, you’ll get the deduction.
If it’s a C Corporation, you don’t get the deduction, but the good news for C Corporations is the maximum tax bracket for the C Corporation is 21%, so there’s going to be all sorts of fun and games of allocating income over to C Corporations whenever you’re in a higher than 21% tax bracket.
Personally, just start allocating that income over to a C Corporation. It’s only taxed at 21%, and you’re saving some taxes that way.
Matt: Okay, so I always had, like, a rule of thumb for when it makes sense to get the S Corp, and this was pre this new plan, was you kind of needed to make right around $30,000, $35,000. That was like the breakeven point for when the self-employment tax started to become a savings for you. Is that accurate, before I go to my full question?
Tim: Let’s say, “Yes,” right now. On a simplistic level, yeah, that makes sense.
Matt: Okay, so to go to the C Corp, is there, like, kind of a number there annually where you might want to switch from an S Corp to a C Corp, or add that C Corp to your S Corp structure?
Tim: Married filing jointly, everything up to $77,000, is going to be taxed under 21%. Once you start making over $77,000 a year, then you’re going to be taxed at 22%, so it’s probably going to make sense to have that structure with a C Corp kick in once you’re making more than $77,000 a year.
Matt: Okay, so that’s kind of the number. All right.
Tim: Let me throw something else out there, too, Matt. Going back to the number you have on your tax return on the front page of your tax return. Once again, that comes into play for all sorts of things, and being a broken record, Obamacare. If you make over $100,000 a year, you don’t get any subsidies on Obamacare medicine stuff, and that’s a big deal for some people.
Student aid, I’ve got a buddy, who, gosh, he’s a good Catholic. He’s got 10 kids, and he makes a good living. He makes about $250,000, $300,000, but with 10 kids, and a lot of them are going to college, you know, he’s kind of out of luck.
Well, he shows a high income on his tax return, but in reality, he’s not living a high lifestyle. If now people can start allocating income over to these C Corporations, and the number on their personal tax return is, let’s say, $50,000, $40,000, and yet the money’s going over to the C Corporation, off to the side, that’s going to be a big benefit for a lot of people on those programs that take a look at their adjusted gross income.
Matt: Mm-hmm (affirmative). I get it. You know, you talk about the front page of the tax return a lot, and I just nod my head to look smart, like I know what you’re talking about, but what’s the big difference – and you kind of make this as a really big deal, so what’s the difference between this deduction being on the front page, and not on the front page?
Tim: Well, the front page, the bottom of the front page, that’s… The fancy phrase for that is your adjusted gross income, and like I said, there’s all sorts of things. Whenever the government wants to penalize people, or phase out certain benefits, they always base it upon your adjusted gross income. So, if you’re getting this partnership 20% deduction on the back page, your adjusted gross income in that example I gave of the partnership making $100,000, your adjusted gross income’s $100,000.
So all the phase-outs and limitations, etc., so forth, are going to apply on the $100,000, and then you flip over the back page, and it says, “Oh, is this a past-due entity? If so, take another $20,000 off.” Then I take it off, so in reality, my income was $80,000, but that figure that’s used for all the various programs determining if you qualify for programs, is still $100,000.
Does that kind of make sense, or I confused that too much?
Matt: I don’t know. My mind was wandering while you were explaining it. I was trying to figure it into my life. It’s got to be even.
I think this is good, kind of what you said. It’s so complicated that you know, I’m glad I have you on my team.
Tim: It is complicated. I mean, this stuff has given me [inaudible 00:19:05] just looking at it. It’s just incredibly complicated.
Matt: Right. All right, so we’ll talk about what people can do about that in a second, but a self-serving question. I did an episode yesterday on the show about selling a property via seller financing, and historically, one of the downsides of this strategy is that income from a note is taxed higher than income from rents. With this new tax plan, is that still the case?
Tim: Yes, that hasn’t affected it whatsoever. The blessing in that, though, is going to be the corporation. You probably want to start doing the seller financing inside of a corporation moving forward.
Matt: Like a C Corp or an S Corp?
Tim: Oh, I’m sorry. Yeah, inside of a C Corp. More than likely, you probably want to do that inside of a C Corp.
Matt: Got it. Got it. And that will save how?
Tim: Well, it’s going to save… and I’m making the assumption that somebody’s making some money, who’s doing this. They’re doing quite a few of these, and making some good money, and it’s going to save because it’s going be taxed at a flat 21% as opposed to the individual’s tax brackets, and if they’re making good money, those tax brackets can go as high as 31%, maybe even 41% under certain circumstances on how they’re doing the business.
Matt: Got it. Got it. Okay, so that’s where that makes sense. Perfect.
All right. We agreed when we started to do this episode, this weekly episode, we’re going to keep it kind of short, because their… really, brains could explode if we talk about it too much at one time.
So, you put together a report, “How to Take Advantage of Five Loopholes in Trump’s New Tax Plan the Mainstream Media Isn’t Sharing With You and Could Cost You a Small (or a Large) Fortune.” So, I know you’ve got that report together. It’s still kind of in its rough state, but all the data is there and you’re giving that away for free. So that’s over at taxhacker.com. You can go to taxhacker.com to get that from Tim, and then there’s also an option, should you choose, if you need some help navigating this new tax plan for yourself, as it is ultra-complicated, Tim is more than happy. As you heard, he’s more than happy to help you through it, and he’ll go ahead and have that initial conversation with you at no charge, just because you’re a listener of the show. So, if you want to get the free report, go to taxhacker.com.
And then, we put up a fancy new page to sort of view directly. If you have a question for the show, or question for Tim that you’d like answered specifically, you go to taxhacker.com/questions. That’s plural, questions. Taxhacker.com/questions.
Tim, anything that I forgot to ask that I should’ve asked?
Tim: You know, I can’t think of anything right now, but there’s going to be a lot more information coming out on the plan with the nuances and everything shortly. So, hey, we’ve got other Tuesdays, Tax Hacker Tuesdays, we can talk about this stuff.
Matt: I’m sure there’ll be no shortage of information, I think, this year.
Oh, one softball question that you fed to me that I was supposed to fade back to you, and I think it’s a good question.
So, how can I make $50,000 a year and not pay taxes at all?
Tim: Well, you know, this one’s the no-brainer to me that it isn’t out there with more people, but little-known fact, a married couple, so long as their income’s below $70,000 bucks, capital gains and dividend income’s free to them. There’s no taxes on that. So, that’s just a really simple way on how you can make that money. If you can structure your financial affairs so that your income comes in as long term capital gains, and/or dividend income, they could be taxed at 0% whenever it comes into your pocket.
So that’s just a really neat one, and let me go a little bit further with that, too. A lot of people are freaking out, saying, “Oh, if you allocate money to a C Corporation, it’s going to be double-taxed whenever you take it out as a dividend.” No, it’s not. We can play games. Once again, so long as the taxable income is below $70,000 for a married couple, that dividend income comes out tax-free. It’s a wonderful thing.
Matt: You know, Tim, when you say, “We can play games,” I like the way that sounds, but we’re saying that publicly. I mean, we only have a few listeners, but they’re hearing it. When you say, “play games,” we’re playing well within the confines of the law, right?
Tim: Well, goodness gracious, yes we are. I mean, Congress is writing these laws, and it’s not like these laws were not made to be gamed. The higher among us, you know, the rich people, higher among us, get the code specifically written for them. It’s custom-tailored for them. We just have to deal with off-the-shelf tax code, but we’re still going to custom-tailor it for the people as much as we can, and that’s what I mean by “play games,” is we’re looking at the tax code and we’re seeing, “Okay, if I make the investment inside of an S Corp, it’s going to be this way. If I invest it inside of a C Corp, it’s this way.”
This stuff is all above board. It’s all black and white, the letter of the law, and we’re just choosing the right way to do it to save ourselves a few thousand dollars in taxes. That’s all.
Matt: Right. We’re hacking it.
Tim: We’re tax hackers, yeah.
Matt: I love it. So, the report, “How to Take Advantage of Five Loopholes,” these are the games you’re speaking of, then.
Matt: Perfect. All right, so to get you a copy of Tim’s free report, you can to to taxhacker.com. “How to Take Advantage of Five Loopholes in Trump’s New Tax Plan the Mainstream Media Isn’t Sharing With You and Could Cost You a Small (or a Large) Fortune.”
Next time, Tim, I want you to come up with a much shorter title for that.
Tim: Sorry about that, Matt.
Matt: That was good. So, taxhacker.com, you can get that and if you have a question for Tim, and the show, we’ll read it live right here every Tuesday. We’re not going to read your question every Tuesday, but we’ll read your questions on Tuesdays.
Go to taxhacker.com/questions. Submit your question there, and we’ll answer it right here, live, for you.
All righty? Well, thanks, Tim. I’ll let you get back to your New Year’s festivities and enjoying the last day off of this long vacation. I don’t know. You’re always on vacation, so…
Tim: All right. Thanks a lot, Matt. Appreciate it.
Matt: All right. Take care, Tim. Bye-bye.
Speaker 1: That’s it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.