2 Tax Loopholes for 2021
According to Tom Wheelwright, author of Tax-Free Wealth, there are two simple rules when it comes to tax law.
#1: The money you earn is meant to benefit you and those closest to you.
Yes, a portion of your income goes towards taxes. You might wonder how sending money off to the government helps you. It’s simple. The government collects taxes to put those dollars towards schools, roads, military, and other important public initiatives that directly or indirectly benefit you.
#2: Although the tax code may seem complex, it’s written primarily to reduce your taxes.
Taking the time to learn the tax code can only help you. Entrepreneurs and investors are typically the people that get all of the breaks. So if you’re not on that side yet, I implore you to explore your options.
I’d like to share two tax loopholes I recently discovered and plan on implementing in 2021.
The Augusta Rule:
The PGA Masters Tournament is played in Augusta, Georgia. In the 1970s, a group of powerful individuals lobbied Congress to be able to rent out their vacation homes without having to report the income on their tax return.
The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return.
Any homeowner can use this provision to rent out their home for up to 14 days each year and pay zero taxes on that income.
If you don’t want to rent out your home to strangers on AirBnB or VRBO, no worries. There’s a workaround if you’re a business owner.
You simply rent out your personal home to your business. Your business pays you money that is considered tax-free personal income and a deduction for your business. Double-dip!
Not so fast. Pay attention to the rules:
1. Do not go over 14 days.
Otherwise you will have to claim ALL of the income on your personal tax return as vacation rental income. I personally plan on doing 1 per month. 12 total.
2. Charge your business Market Value.
Don’t rent your home out to yourself for $10,000 per day. Unless of course, you live like a king. You can find market value on sites like AirBnB and VRBO.
3. Document, Document, Document.
There should be a REASON why your business is renting out your private residence. Board Meeting? Employee Retreat? Training Day? There should also be invoices with matching receipts. Finally, there should be a brief in the form of meeting minutes or a summary of the event. Pictures always help.
Signed in 2017, The Tax Cuts and Jobs Act is viewed as one of the largest overhauls of the tax code in three decades.
One of the most significant changes to come out of the TCJA was the State and Local Tax (SALT) deduction limitation.
As a resident of New Jersey, I saw many of my friends and family negatively impacted by the SALT deduction limit of $10,000. Property Taxes alone could more than wipe out the entire deduction.
The workaround is meant for S-corporations, partnerships, and LLCs treated as partnerships for federal income tax purposes.
States like Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have all adopted entity-level taxes which offers a credit against the owners’ personal tax liability.
What does this mean? You can pay your Personal State and Local Taxes owed with your business profits and effectively realize the full deduction even if the tax liability exceeds $10,000.
Disclaimer: I’m Not a CPA
Nor do I like to play one on the internet. I am, however, looking forward to taking advantage of these loopholes in 2021 and beyond.
I encourage you to speak to your CPA about them and ask if they are comfortable signing off on your returns if you elect to go this route as well.
If they’re not… time for a new CPA. Just kidding. Kind of.