Among some of the many changes that we have experienced in this time of pandemic was the new president-elect, Joe Biden, and his introduction to the new tax code.
In this opportunity, it’s going to be all about the tax code, what we need to learn, what we need to be aware about, and how we can take advantage of some of the credits that the new tax code has to offer in our investing journey, whether it’s in real estate, or the stock market, or anything that you have planned in the future.
We know that the tax code might be changing. However, there are still opportunities for you, not only to take advantage of some right now but also in future years.
At a personal level, one of the biggest of big credits is the $15,000 first-time homebuyer, which you can get once you purchase your first house or people who are actually trying to invest in real estate. That could be one of the major tax credits that you will get getting $15,000 when you’re buying your first property. That can also be used for real estate investment.
You could buy a duplex. A two-family home, where you can reside on one side, and your tenant can be on the other side. You can take advantage of the $15,000 credit that this code has to offer you.
The earned income credit
Most taxpayers get a $2500 earned income credit for each child that you have that is less than 17 years old. If you have a child that is six years old, or a daughter that is 13 years old, you will be getting $5,000 earned income credit. The beauty about the earned income credit is that it’s actually reimbursable. It’s not just a credit, that means that it’s money.
It’s real money that even if you’re not paying taxes, you get that money back. You get the refund back, and now that’s increasing to instead of being $2,500 it’s increasing to $3,000. It’s increasing $500 more per child.
New Tax Code: Benefits for renters
The new proposal includes a 30% renters tax credit that you actually can take in your taxes. These days, the only ones who can take a benefit for owning a house are the people who own a house because they can get the interest mortgage deduction, and also the real estate taxes.
What about those who are single and just simply renting?
We all as employees pay what is called the Social Security Tax. In reality, it’s a tax supposedly, partially, it’s for your retirement where you get your pension. However, it is still a tax.
However, once you start earning $400,000 and up, it kicks back in. That means you’re going to have to pay the Social Security tax, once you reach again, $400,000 and up.
If you’re a regular corporation and you’re being taxed as an employee. Now, you have the option to actually change your structure from C Corp to S corp.
This kind of information that sadly was not being made available or was made available but not widely distributed.
Let’s say that you’re a real estate investor and you have a vehicle. You use your vehicle a lot because you drive to visit your clients. First, just the fact that you have a vehicle, you can deduct it.
However, let’s talk about renewable energy credits, in this case, electrical cars. At this moment there’s a credit. There’s a credit of $5,400 that you get for buying an electrical car. Also, that means that you’re getting a credit for using a vehicle that is electrical.
Let’s say that you bought the car for $60,000, but now you’re getting a credit for $5,400. The truth is, the car didn’t cost you 60,000, it cost you $55,000. Why?
- You’re paying less.
- Now you’re able to not only help yourself by paying less taxes.
Not only you’re getting the $5,000 credit, plus you also can depreciate the vehicle. You’re helping the planet, you’re helping your pockets, you’re helping everybody.
How about solar panels? How does that apply for either homeowners or real estate investors who are looking to maybe partner up with solar panel businesses and want to build up new homes, flip new homes that are more energy-efficient? How does that work for them?
Not only will you be getting a deduction, the same thing as the car, you’re getting the same type of credit, but also you’re increasing the value of your property. You get double whammy.
You get the credit for buying electrical panels in your house, you’re making it more efficient, and at the same time, you’re increasing the value of your property. It’s like getting a double whammy because you get the credit for investing in an electrical panel for your home, at the same time it provides more value.
What kind of credits can we apply to our business? – Biden’s Tax Code
We can apply for a retirement plan. You can deduct 100% of any retirement plan that you put in practice, either for yourself or for your employees. The new proposal now is going to additionally give you incentives and credits so you can actually create and put new retirement plans for your employees.
Not only you’re helping employees stay with you or helping your company, so these employees actually get inspired, they get motivated to stay with the company because you’re providing them with a retirement plan, but you’re also actually helping your company in paying less taxes because you’re getting all these credits. It’s a win-win.
There’s also another credit that’s out there that’s going to incentivize or motivate more businesses to create jobs in America. American companies are doing business everywhere. What happens is that all these companies take American jobs abroad. That means all that productivity, it’s gone.
Therefore the new proposal is that American companies that are doing business outside, they’re going to get credit for bringing the jobs back. Definitely, they’re going to get a 10% credit, up to 21% credit for just bringing those jobs back to the United States. They will be creating new jobs and creating a better economy.
If you decide to take your jobs outside the United States, you’re going to be heavily penalized for continuing to take your jobs outside the United States.
1031 helps you build your real estate portfolio tax rate. There’s noise that it might be repelled, that it might change or might be totally taken away, that big tax incentive.
An example, a regular corporation pays its own taxes based on the profits, a pass-through entity could be a corporation, could be a partnership. It could be any other entity that’s not required to pay taxes. They have to file taxes, but they don’t pay taxes. Pass-through means profits or losses pass directly to the owners.
Tax preparation and tax planning – Tax Code
Tax preparation is about preparing your taxes. Tax planning is about planning in advance of the outcome you want. Usually, most people say, “I have to pay a lot of taxes, but my accountant didn’t help me.” That’s the biggest problem in the United States.
Tax preparation is for compliance, tax planning is so you can actually reduce your tax liability. There are so many strategies that you can use to reduce your taxes on a legal, ethical, and moral way, but you have to know, you have to plan it, you have to have a map, a blueprint that will help you reduce your taxes.
Plan ahead, know what you have, know what options you have, know what you can do to implement in your business so your tax liability is going to be less, and the beauty is that you know in advance how much taxes you are going to be paying as long as you have designed tax strategies that it’s going to help you reduce and put more money back into your pocket.
A tax preparer, it’s an after-the-fact thing. You come in with your W-2 and have that ready. For some people, that’s great, but if you have assets, if you have business, you can’t just show up to your accountant and ask him to fix your taxes for you to be able to apply for tax credits.
In the USA, everything has to be in writing, so it has to be set in stone. That’s how you work out the preparation so you can carry out ways to save taxes and see where those tax credits that are available can fit into what you’re trying to do. Maybe you can even apply all of them, you just simply don’t know it. A tax preparer will certainly not know something like that because they’re focused on the day-to-day, on the operations, just making things happen.
When you have a tax plan, it’s a mastermind. You have to think about all the steps and see how the pieces tie in together. These are just some of the changes that will be implemented on the new tax code.
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