Interesting Facts
Average tax paid by America’s richest families
According to recent report published by the White House the richest 400 Americans paid an average 8.2% federal income tax rate which is low relative to other taxpayers. Low and middle income earners (working class) pay most of their income tax on wages earned at the job while the wealthiest Americans generate the bulk of their income from investments which if held longer than a year are taxed at a more favorable rate (top federal rate on wages is 37%, while top rate on dividends and other investment assets held for more than a year is 20%). This is where the push comes for raising long term capital gain rates to 25% to reduce (not to eliminate) the gap between wage earners and those who are lucky enough to be able to enjoy the fruits of their investments.
Real Estate
Flipping properties vs Flipping burgers
Those of you who are looking to go into business of buying, fixing, and flipping houses please be aware that income made from flips is subject to self-employment tax. If the intent is solely to fix up the property, turn around and sell it, regardless of how long you keep it in your possession, one month or five years this property is considered inventory and as such is subject to self-employment tax (15.3%) in addition to ordinary tax rates. Holding property for more than a year does NOT give you a favorable long term capital gain rate for tax purposes, unfortunately. Flipping houses is essentially the same as flipping burgers for tax purposes. If you are looking to buy and eventually flip a property, I advise you to rent the property for a couple months at least and keep the property for more than a year and then sell it. In this case income made will be subject to long term capital gains. Good acronym to remember is: Buy, Rehab, Rent, Refinance, Repeat (BRRRR).
Real Estate Professional
Just because you have a real estate license it does not mean you are a real estate professional. Real estate professionals must meet two tests to beat the passive-activity loss rules and deduct their rental losses in full. They must provide more than one-half of his or her total personal services in real property trades or business in which he or she materially participates and perform more than 750 hours of services during the tax year in real property trades or businesses.
The IRS has success in court when challenging real-estate "professional" status in most of the cases. If you have a full-time job, it is unlikely that you can be considered a real estate professional. There are some options that can used by grouping properties and combining the hours claimed by a couple. Also adjusted gross income plays a role in this complicated concept. If you would like to learn more feel free to reach out to me.
Tax Reminders
October 15th Deadline
October 15th is the deadline for taking several important actions. 2020 individual tax returns and calendar year 2020 C Corporation tax returns that are on extension are due October 15th. However, if you reside in federally declared disaster area you have till January 3, 2022, to file your 2020 personal and C Corp tax returns. Following the Hurricane Ida that begun August 26, 2021, Federal Emergency Management Agency announced that Louisiana was declared a desisted area and shortly after IRS announces that individuals and households who reside or have a business anywhere in the state of Louisiana will receive tax relief. October 15th is also a deadline for setting up a SEP IRA for your business and contributing to it for 2020.
Year End Planning
Last quarter of the year is the time for year-end tax planning. December 31st is just around the corner. If you own a business and are concerned about not knowing what you will owe at the end of the year, now is the time to discuss with your CPA options that you may have. Tax planning helps you estimate how much you are expected to owe in taxes for the year and what you can do to lower the tax liability. Business owners and self-employed individuals should be paying their taxes throughout the year by withholding out of their payroll checks and/or by making estimated tax payments.
2021 Northwest Louisiana St. Jude Classic Tennis Tournament
On September 17-19, 2021 I participated in the St. Jude fund raising tennis tournament held at Pierremont Oaks tennis center here in Shreveport. It was a great weekend with a lot of tennis and a lot of great tennis players. All the proceeds from this event went to St. Jude Children’s Hospital. This is a great evet to show support in your community and also to get your name in front of the others. Those of you who are looking to sponsor events and to get your name out there this is the great opportunity. My team (6 players, two are missing in this picture) won 9.0+ division.
It was tons of fun and hope to see some of you on the courts or on the list of supporters.