10 Strategies to Minimize Your Client's Taxes
by Martin C. McCarthy, CPA, McCarthy & Company –
September 25, 2017
Tax professionals are always looking for ways to help clients save money on their taxes. Here are 10 tax planning strategies to consider that may not be top-of-mind:
- Conduct a marginal rate analysis — See if the difference between your client’s marginal tax rate and effective tax rate will push him into a higher tax bracket if he earns more money. If so, your client can defer income or accelerate deductions to avoid paying taxes at a higher rate.
- Shift AMT triggers to another year — If your client is subject to the Alternative Minimum Tax (AMT), see if one or more of the items causing him to be over the AMT threshold can be done in a different year to avoid paying the tax. The AMT thresholds for 2017 are: $54,300 for single filers, $84,500 for married taxpayers filing jointly, $42,250 for married taxpayers filing separately and $24,100 for trusts and estates.
- Offset capital gains with tax loss harvesting — If your client is going to realize a capital gain on a qualified investment, he can offset short-term capital gains with short-term losses and long-term gains with long-term losses. Consider if your client will have a capital loss carryforward (either short- or long-term) that could be used to shelter gains. Note that the “wash rule” prohibits a tax-deductible loss on the security if your client repurchases the same or a similar one within 30 days of the sale.
- Buy tax-exempt state and municipal bonds — The 3.8-percent Net Investment Income Tax (NIIT) is not levied on interest and dividends excluded from federal income tax. This includes interest earned on tax-exempt state and municipal bonds. Since interest and dividends are not included in modified adjusted gross income (MAGI) for NIIT, it could keep your client under the threshold of $200,000 for a single taxpayer and $250,000 for married taxpayers.
- Exchange property instead of selling — Capital gains and NIIT can be deferred if your client does a like-kind exchange (Section 1031) until the final property is sold.
- Actively participate in business ventures — Interest, dividends and royalties from a trade or business are generally considered as passive income subject to NIIT. If your client owns the business and materially participates in it, paying NIIT can be avoided. Material participation is defined as working 500 or more hours per year, performing most of the services or demonstrating a consistent work history in the business.
- Rent property to their business — Rental income is typically considered as passive income for income tax purposes and subject to NIIT. The NIIT is not, however, levied on property rented to a business your client owns. Self-rentals are generally not subject to NIIT.
- Lend money to their business — Interest on a loan a client makes to his own business is not subject to NIIT.
- Watch for the passage of healthcare reform — Many of the proposed changes to reform healthcare will have a significant impact on taxes. The NIIT was introduced in the Affordable Care Act (ACA). If ACA is repealed, the NIIT could be abolished. The 0.9-percent Medicare Hospital Insurance surtax on incomes above $250,000 could also be eliminated.
- Use the Pease limitation phaseout — The American Taxpayer Relief Act of 2012 reinstated the Pease limitation phaseout for itemized deductions. The threshold limits for adjusted gross income (AGI) for 2017 are $261,500 for a single taxpayer and $313,800 for married taxpayers filing jointly. Allowable deductions can be reduced by 3 percent of the amount exceeding these thresholds (capped at 80 percent).
There are, of course, many additional planning strategies you can use to reduce a client’s tax obligation. It will be interesting to see how the Trump Administration’s tax plan will change the tax law and how those changes will impact tax planning. Time will tell if the strategies CPAs have traditionally used to help clients save money will still make a difference or be available.
Martin C. McCarthy
Martin C. McCarthy, CPA, is the managing partner of McCarthy & Company, a leader in construction accounting.
This article appeared in the September/October 2017 issue of New Jersey CPA magazine. Read the full issue.