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Yahoo
15-05-2025
- Business
- Yahoo
How High-Income Earners Build Giving Into Their Tax Strategy — and How You Can, Too
If you're able to give back to charity, it can be an incredibly rewarding experience. And while charitable donations support the causes you care about, they can also benefit you in the form of a valuable tax break. Learn More: Check Out: High-income earners often include charitable giving as a key part of their tax strategy. And even if you're not in a high-income bracket, you can still take advantage of many of these same tools. Here's a look at how the wealthy incorporate giving into their tax strategy — and how you can, too. High-income earners use charitable donations and tax-advantaged accounts to reduce their taxable income. 'High-income earners can realize the tax benefit of charitable giving by contributing to qualified charities, which directly reduces their taxable income,' said Nik Agharkar, owner and managing member of Crowne Point Tax. They may also use charitable giving to avoid capital gains taxes. 'At higher income levels, gifting appreciated non-cash assets — such as publicly traded securities, private equity interests or real estate — offers dual tax benefits: a deduction for the fair market value of the gift and avoidance of embedded capital gains,' said Andrew Constantinides, CFP, investment advisor at Neil Jesani Wealth Management LLC. 'This is significantly more efficient than giving cash,' he said. 'For clients facing concentrated equity positions or large liquidity events, charitable contributions can act as a release valve to manage both income and long-term capital gains exposure.' Explore More: Many high-income earners utilize tools like donor-advised funds (DAFs) and charitable remainder trusts (CRTs), which come with unique tax advantages. DAFs allow earners to front-load charitable deductions in high-income years while maintaining flexibility over how and when grants are distributed. 'It decouples the tax event from the charitable disbursement — a useful feature for clients anticipating fluctuating income or strategic giving goals,' Constantinides said. Charitable remainder trusts are more sophisticated tools often used in legacy planning. 'By donating highly appreciated assets into a CRT, a client can defer capital gains, receive an income stream and claim an immediate charitable deduction based on the remainder interest,' Constantinides said. 'This structure can be particularly powerful when integrated into estate and retirement planning, allowing clients to convert low-yield or illiquid assets into income while ensuring a lasting philanthropic legacy.' Even if you're not a high-income earner, there are still steps you can take to incorporate philanthropy into your tax strategy — and achieve both tax savings and lasting impact. 'Individuals should bunch multiple years of donations into one year to surpass the standard deduction threshold,' said Rachel Richards, CPA and head of product at Gelt, a tax company focused on high-income earners. 'They can also use employer matching, donate appreciated assets or set up recurring gifts for both impact and efficiency. It is very important to keep records and consult a tax advisor to ensure all giving is tax-optimized.' The specific strategies that work for you can vary, but having a plan helps ensure you get the most out of your giving, for both your taxes and the causes you support. 'Regardless of income, giving can be structured intelligently,' Constantinides said. 'Philanthropy should not only be generous, but also intentional and structured. When aligned with broader portfolio and estate goals, it becomes a source of tax efficiency and enduring impact.' 5 Steps to Take if You Want To Create Generational Wealth 6 Daily Habits of Financially Secure People Proven Ways Small Business Owners Are Protecting What They've Built Beyond the 401(k): 3 Strategies To Retire Comfortably and Still Leave Money Behind Sources: Nik Agharkar, Crowne Point Tax Andrew Constantinides, Neil Jesani Wealth Management, LLC Rachel Richards, Gelt This article originally appeared on How High-Income Earners Build Giving Into Their Tax Strategy — and How You Can, Too
Yahoo
18-04-2025
- Business
- Yahoo
The basics of S corporations — and the pitfalls for small businesses
Electing to establish an S corporation could unlock the tax benefits enjoyed by millions of small business owners — as long as financial advisors and clients avoid some pitfalls. Those include the ramifications of filing for deductions on the pass-through entity's so-called qualified business income, the requirement of one single class of stock for the company's equity and the implications of the S corp holding real estate, according to Tal Binder, CEO of Gelt. Binder's firm works with high net worth clients and business owners through certified public accountants and artificial intelligence-powered tax services. For advisors and their clients, the S corp entity classification — named after Subchapter S of the Internal Revenue Code as a "Subchapter S corporation" or a "Small Business Corporation" — represents an opportunity with some tradeoffs. "Instead of thinking about it as just a tax structure, think about it as a tool — it's a tool in the toolbox when you're doing tax planning or tax strategy," Binder said in an interview. "The S corp has a lot of tax benefits. It just becomes more complicated as you dig into the specifics and the numbers." Business owners and their advisors have likely run into those challenges in any number of situations — Binder noted that professional services firms such as a small wealth management company usually make the best candidates to be S corporations. The entity classifications of registered investment advisory firms affect industry M&A deals, and S corporations come in handy for clients who, for example, may be elite college athletes seeking tax savings on their "name, image and likeness" payments. Most service-based businesses do elect to be S corporations, according to Miklos Ringbauer, the founder of Los Angeles-based tax firm MiklosCPA. However, state tax rules can alter the equation significantly, he noted, citing how California charges a flat annual duty of $800 per year for limited liability partnerships regardless of their profit, compared with a 1.5% rate on the net income generated by S corporations. "You have to understand the state rules first — before you look at tax structure," Ringbauer said in an interview. "Where we shine as tax professionals is providing that value, that guidance to the taxpayers, the investors to make the right choices, to help them to decide what is the best, optimized tax structure for their operation." READ MORE: 24 tax tips for self-employed clients And tax pros have been doing so for decades. Almost 70 years ago, small business owners gained the exemption from double taxation on corporate income flowing to their personal returns to the IRS, so long as they are domestic corporations, maintain a limited number and type of shareholders and have one class of stock. Today, there are about 5 million S corporations, according to the S Corporation Association, a business association and advocacy group. Before a recommendation by President Dwight Eisenhower's Republican administration passed through Congress with the support of Harry Byrd, a Democrat from Virginia who was chairman of the Senate Finance Committee, small business owners faced "an oppressive level of tax," a history on the group's website stated. "How significant was the creation of subchapter S?" it asked. "Consider that in 1958, the top income tax rate was 52% for corporations and 91% for individuals. That means dividends paid by a C-corporation to a high-income shareholder faced an effective tax rate of 96% Even a shareholder with median family income faced an effective federal tax of more than 60%." READ MORE: Business entities affect taxes and M&A — how RIAs weigh the choice The savings to the owners of S corporations add up in the right circumstances, but laws and individual tax implications could call for a sole proprietorship, partnership, limited liability company or a C corporation as a better fit. In the case of a pass-through business tapping into the deduction for qualified business income that started with the Tax Cuts and Jobs Act in 2017, the S corporation could be a limiting factor based on the fact that the owner's direct W-2 salary is likely to be lower in that situation, Binder noted. For some businesses that have a 401(k) or profit-sharing plan, the S corporation owners' maximum tax-advantaged contribution can only rise to the level of their personal salary. As another caveat to the S corporation, certain RIAs launch when advisors team up, but one of the advisors may bring a much more substantial base of clients to the business. That would suggest that one of the owners should have more control of the firm than the other, even if they each own half of the RIA, Binder said. They couldn't set up the business that way as an S corporation that can only have one class of stock, though. "It doesn't make sense, because you started it and built it for many, many years," he said. "That might disqualify the S corp, so it's not best in those cases." He brought up the additional problematic use of the structure with the idea of an S corporation RIA holding the building housing the business in the same entity, which is "the right approach" from the perspective of the general tax savings for real estate assets but "in the vast majority of cases not beneficial to you," Binder said. The real estate could bring higher payments to Uncle Sam for an S corporation, based on the rules for tax basis and mortgage financing. An LLC or LLP structure also provides more flexibility than an S corporation for transferring the real estate asset out of the business and into the client's personal holdings without generating a taxable event, Ringbauer noted. From the perspective of a startup company that must take out heavy loans for capital expenses while incurring business losses in the first few years after launch, the S corporation could further cap the level of deductions — far below the amount available to an LLC or LLP, he said. READ MORE: 25 tax tips for RIA M&A deals and other small business sales Unfortunately, many business owners attempt to choose their entity based on a simple online search or even a question to a public chatbot, according to Ringbauer. "There's a lot of incorrect information out there, which would result in incorrect guidance on how to treat stuff," he said. "It's a personal preference, but if it is properly guided, then the individuals who are starting the business will be able to make the right choice." In that vein, advisors who might otherwise avoid any mention of tax-related topics that fall outside their expertise should engage a local certified public accountant or enrolled agent "just to make sure that everything is correct" before the client fills out IRS Form 2553 electing to be treated as an S corporation, Binder said. "I'd highly recommend the wealth manager to partner with a competent tax professional or CPA firm," he said.
Yahoo
14-04-2025
- Business
- Yahoo
6 Common Tax Pitfalls To Avoid Amid Shifting Policies
Tax season can be stressful. It's so nerve-wracking for some taxpayers that it makes 30% of them want to cry, according to a recent report from Intuit Credit Karma. Not only does preparing for taxes often take hours to do, but the dreaded task of finding receipts and gathering important documents is a headache. Plus, tax rules can change every year, adding a layer of anxiety for many. Read Next: Learn More: While it's hard to keep track of shifting policy changes, it's in your best interest to do so because you could be missing valuable deductions and selling yourself short when it comes to refunds. Although Tax Day is around the corner, it's not too late to maximize your savings. Here are six common tax pitfalls to avoid amid changing policies. Also see how to prepare for tax season year-round. You could be leaving money on the table by brushing off new or expiring tax credits. Get the biggest refund you can by staying up to date on policy changes. 'Tax rules change more often than you may realize, and some credits — like those for education or clean energy — can quietly appear or disappear. If you're not paying attention, you could miss out on real savings,' according to Rachel Richards, CPA, head of tax at Gelt. Find Out: To avoid an unexpected high tax payment, try not to make big financial choices before understanding the tax implications. 'Decisions like selling your home, cashing out investments or converting retirement accounts can come with big tax surprises,' Richards said. 'A little planning ahead of time can save you a lot of regret (and money!) later.' Other financial experts also recommend not making big financial moves without consulting someone, especially when it comes to retirement accounts. 'Taking a traditional IRA and rolling it over to a Roth without the knowledge of the tax penalty, now you've got a huge surprise come April,' said Steven Kibbel, financial planner, entrepreneur and chief editorial advisor of Gold IRA Companies. Kibbel shared how it happened to clients he counseled after the fact. 'They felt they were doing something smart in terms of tax-free growth. Nobody explained to them the upfront tax expense. It came as a huge shock to them,' he said. With tax rules often changing, you can't assume what worked for you last year will apply the following tax season. 'Your financial situation changes, just like the tax laws,' Richards said. 'What saved you money last year might not work this time around, and could even cost you if you're not careful.' Greg Stoller, master lecturer in innovation and strategy at Boston University's Questrom School of Business, agreed. 'Policies are shifting every year and certainly the policies of 2024 are affecting the filing in 2025,' he said. 'Several people I know pay taxes through W-2 jobs and their accountant told them that they still owed additional payments at either the federal or the state level. This is due to shifting tax rates and prior deductions, which might no longer be available.' Another error Richards sees taxpayers make is believing things on social media that aren't always accurate. This can include thinking proposed changes are current law. 'Just because a tax proposal is in the news or on your feed doesn't mean it's actually in effect,' she explained. 'Acting on something too soon can lead to unnecessary stress, paperwork or complications in your tax situation.' Many taxpayers spend countless hours poring over credit card statements trying to find itemized deductions, but unless they're significant, it could be more beneficial to take the standard deduction. However, consulting a tax professional is advisable. 'Unless your deductions meet an ever increasing threshold, it will be very difficult to make itemized deductions,' Stoller said. Tax season is just a few months out of the year, but it's something to think about all year, per Richards. 'Tax season shouldn't be the only time you think about taxes,' she said. 'Some of the best opportunities to save happen before you file, not when you're rushing to meet a deadline. Keeping your tax plan top of mind is the only true way to stay ahead of the legislation and life changes that can impact your tax situation.' To find out the latest tax changes, you can visit the IRS website, but according to Stoller, here are some to take note of. The maximum Additional Child Tax Credit (ACTC) amount has increased. The standard deduction amount has increased whether you're filing individually, as head of household or jointly. The IRA contribution amount has increased. The 1099-K reporting requirements/threshold has been reduced. The EITC (earned income tax credit) and Adoption Credit were updated. Probably most importantly, tax bracket thresholds increased. Getting prepared for tax season is more than getting paperwork in order. It's asking the right questions to your tax professional and taking your time. 'I always advise people, it does not cost you anything to slow down,' Kibbel said. 'Hurrying through a change in policy without inquiring into specifics? That is where the harm is committed.' More From GoBankingRates6 Reasons Your Tax Refund Will Be Higher in 2025 7 Tax Loopholes the Rich Use To Pay Less and Build More Wealth 25 Places To Buy a Home If You Want It To Gain Value This article originally appeared on 6 Common Tax Pitfalls To Avoid Amid Shifting Policies Sign in to access your portfolio
