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Tax preparation and planning for:
Tax Planning
In order to get the most favorable tax results, it is important to consider the tax consequences before undertaking a financial transaction. Please contact me when facing major life events or contemplating significant financial transactions, such as the following:
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Let's consider some common situations to see how proper tax planning can make a difference. Please note that everyone's situation is different so we need to consider the specific facts of your situation to make the best recommendation that is most appropriate for you.
Short on cash
When it came time to file his taxes, Leonard didn't have enough money to pay for them so he decided to put off filing for awhile.
Result: In addition to penalties and interest for late payment, Leonard had to pay big penalties for late filing of his returns. If Leonard had filed on time (or filed an extension) he would have avoided the late filing penalties. We could have set up an installment agreement so Leonard could have paid off his tax liabilities over time.
Divorce
When Maria got divorced, she didn't consult a tax pro.
Result: When it was time to do her taxes, Maria discovered that her payments to her ex-spouse didn't meet the strict Internal Revenue Code definition of alimony and so her payments were not deductible. When she sold some of the property she received under the divorce agreement she had a large capital gain tax. When dividing their property during the divorce, she and her ex considered the current value of the property but not its "tax basis" so she ended up with a large taxable gain on the sale of the property she received but he did not. Proper planning could have avoided these problems or more equitably balanced their effects.
Job change
When Herb left his job he cashed out his 401(k).
Result: Herb had to pay not only regular tax on the distribution, but also a 10% federal and 2-1/2% California penalty. Plus, the distribution pushed him into a higher tax bracket so he was taxed at a higher rate. If he had rolled the 401(k) into his new employer's plan or an IRA he would have avoided the tax and penalties, and had more money for his retirement.
Starting a new business
When Allison started her new business, she went online and found a website that promised to save her money by setting up her LLC in Nevada, which she did.
Result: Since Allison is a California resident and does business in California but not Nevada, she still had to register her LLC in California. Instead of saving her money, she wasted the money it cost her to set up the Nevada LLC.
Home purchase
April found a nice new home so she sold her current one to purchase the new one.
Result: April had a large capital gain tax on the sale that she could have avoided. She owned her current home for one year eleven months when she sold it. If she had waited another month she would have owned and lived in her home for 2 years and thus would have qualified to exclude up to $250,000 of gain on the sale (married couples can exclude up to $500,000).
Estate planning
Barry wanted to avoid probate so he made his daughter Lorna a joint tenant in his residence.
Result: Lorna had a large capital gain tax when she sold the property that could have been avoided. If Lorna had simply inherited the property (without previously having been on the title) she would have received a "step-up in basis" so her gain or loss would have been calculated based on the property's value when Barry passed away instead of on what Barry paid for it. Also, Barry could have avoided probate by setting up a living trust.
Sale of investment property
Lynnette sold her rental property and purchased another one.
Result: Lynnette had a large capital gain tax that she could have avoided had she done what is known as a Section 1031 exchange. Tax on gains from business or investment properties can be deferred your whole life by doing a series of 1031 exchanges, but the deals must be properly structured to meet the requirements.
Short on cash
When it came time to file his taxes, Leonard didn't have enough money to pay for them so he decided to put off filing for awhile.
Result: In addition to penalties and interest for late payment, Leonard had to pay big penalties for late filing of his returns. If Leonard had filed on time (or filed an extension) he would have avoided the late filing penalties. We could have set up an installment agreement so Leonard could have paid off his tax liabilities over time.
Divorce
When Maria got divorced, she didn't consult a tax pro.
Result: When it was time to do her taxes, Maria discovered that her payments to her ex-spouse didn't meet the strict Internal Revenue Code definition of alimony and so her payments were not deductible. When she sold some of the property she received under the divorce agreement she had a large capital gain tax. When dividing their property during the divorce, she and her ex considered the current value of the property but not its "tax basis" so she ended up with a large taxable gain on the sale of the property she received but he did not. Proper planning could have avoided these problems or more equitably balanced their effects.
Job change
When Herb left his job he cashed out his 401(k).
Result: Herb had to pay not only regular tax on the distribution, but also a 10% federal and 2-1/2% California penalty. Plus, the distribution pushed him into a higher tax bracket so he was taxed at a higher rate. If he had rolled the 401(k) into his new employer's plan or an IRA he would have avoided the tax and penalties, and had more money for his retirement.
Starting a new business
When Allison started her new business, she went online and found a website that promised to save her money by setting up her LLC in Nevada, which she did.
Result: Since Allison is a California resident and does business in California but not Nevada, she still had to register her LLC in California. Instead of saving her money, she wasted the money it cost her to set up the Nevada LLC.
Home purchase
April found a nice new home so she sold her current one to purchase the new one.
Result: April had a large capital gain tax on the sale that she could have avoided. She owned her current home for one year eleven months when she sold it. If she had waited another month she would have owned and lived in her home for 2 years and thus would have qualified to exclude up to $250,000 of gain on the sale (married couples can exclude up to $500,000).
Estate planning
Barry wanted to avoid probate so he made his daughter Lorna a joint tenant in his residence.
Result: Lorna had a large capital gain tax when she sold the property that could have been avoided. If Lorna had simply inherited the property (without previously having been on the title) she would have received a "step-up in basis" so her gain or loss would have been calculated based on the property's value when Barry passed away instead of on what Barry paid for it. Also, Barry could have avoided probate by setting up a living trust.
Sale of investment property
Lynnette sold her rental property and purchased another one.
Result: Lynnette had a large capital gain tax that she could have avoided had she done what is known as a Section 1031 exchange. Tax on gains from business or investment properties can be deferred your whole life by doing a series of 1031 exchanges, but the deals must be properly structured to meet the requirements.