Investing in Your 20s & 30s For Dummies. Eric Tyson
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Название: Investing in Your 20s & 30s For Dummies

Автор: Eric Tyson

Издательство: John Wiley & Sons Limited

Жанр: Личные финансы

Серия:

isbn: 9781119805427

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СКАЧАТЬ was increased to $2,000 per child, and up to $1,400 of that will be refundable for taxpayers not otherwise owing federal income tax. Also, the incomes at which this credit starts phasing out rises from $110,000 for married couples to $400,000, and from $75,000 for non-married filers to $200,000.

       State and local taxes deduction capped at $10,000: This also includes property taxes on your home. For homeowners in high cost of living areas with high state income taxes (for example, metro areas such as San Francisco, Los Angeles, New York, Washington D.C.), this cap poses a modest or even significant negative change. Because state and local taxes are itemized deductions, only being able to take up to $10,000 (previously unlimited) for them may cause some taxpayers to no longer be able to itemize. Also, by reducing the tax benefits of home ownership (see also the next item), this change effectively raises the cost of home ownership, especially in high-cost and highly taxed areas.

       Mortgage-interest deduction for both primary and second homes capped at $750,000 borrowed: This represents a modest reduction from the previous $1,000,000 limit on mortgage indebtedness deductibility.

      The Tax Cuts and Jobs Act slashed the corporate income tax rate to 21 percent, which represented a 40 percent reduction. At 35 percent, the U.S. previously had one of the highest corporate income tax rates in the world before 2018.

      

Changes to small business tax rules were also established. First, it’s important to note that the vast majority of small businesses are not operated as traditional so-called C-corps (more on those in a moment). Most small business owners operate as sole proprietorships (filing Schedule C), LLCs, partnerships, or S-corporations. In those cases, the business owner’s profits from the business generally flow or pass through to the owner’s personal income tax return and that income is taxed at personal income tax rates.

      You will note that at higher levels of income, the individual income tax rates begin to exceed the 21 percent corporate tax rate. Seeing this can help you to better understand the next point as to why pass-through entities are being granted a special tax deduction on their profits.

      In redesigning the tax code, Congress rightfully realized that the many small businesses that operate as so-called pass-through entities would be subjected to higher federal income tax rates compared with the newer 21 percent corporate income tax rate. To address this concern, Congress provided a 20 percent deduction for those businesses. So, for example, if your sole proprietorship netted you $70,000 in 2021 as a single taxpayer, that would push you into the 22 percent federal income tax bracket. But you get to deduct 20 percent of that $70,000 of income (or $14,000), so you would only owe federal income tax on the remaining $56,000 ($70,000 – $14,000).

      Another way to look at this is that the business would only pay taxes on 80 percent of their profits and would be in the 22 percent federal income tax bracket. This deduction effectively reduces the 22 percent tax bracket to 17.6 percent.

      This is a major change, which not surprisingly, has made small business owners exceedingly optimistic about being able to grow their businesses. In fact, in a 2018 survey of small business owners conducted by the nonprofit National Federation of Independent Business just after the tax bill was passed and signed into law, a record percentage of those surveyed (covering the survey’s 45-year history) expressed optimism about it being a good time to expand their businesses.

      This 20 percent pass-through deduction gets phased out for service business owners (such as lawyers, doctors, real estate agents, consultants, and so forth) at single taxpayer incomes above $157,500 (up to $207,500) and for married couples filing jointly incomes over $315,000 (up to $415,000). For other types of businesses above these income thresholds, this deduction may be limited, so consult with a tax advisor.

      Devising tax-reduction strategies

      Use these strategies to reduce the taxes you pay on investments that are exposed to taxation:

       Make use of retirement accounts and health savings accounts. Most contributions to retirement accounts gain you an immediate tax break, and once they’re inside the account, investment returns are sheltered from taxation, generally until withdrawal. Think of these as tax reduction accounts that can help you work toward achieving financial independence. See Chapter 2 for details on using retirement accounts when investing.Similar to retirement accounts are health savings accounts (HSAs). With HSAs, you get a tax break on your contributions upfront; investment earnings compound without taxation over time; and there’s no tax on withdrawal so long as the money is used to pay for health-related expenses (which enjoy a fairly broad list as delineated by the IRS).

       Consider tax-free money market funds and tax-free bond funds. Tax-free investments yield less than comparable investments that produce taxable earnings, but because of the tax differences, the earnings from tax-free investments can end up being greater than what taxable investments leave you with. If you’re in a high-enough tax bracket, you may find that you come out ahead with tax-free investments. For a proper comparison, subtract what you’ll pay in federal and state income taxes from the taxable investment income to see which investment nets you more.

       Invest in tax-friendly stock funds. Mutual funds and exchange-traded funds that tend to trade less tend to produce lower capital gains distributions. For funds held outside tax-sheltered retirement accounts, this reduced trading effectively increases an investor’s total rate of return. Index funds invest in a relatively static portfolio of securities, such as stocks and bonds. They don’t attempt to beat the market; rather, they invest in the securities to mirror or match the performance of an underlying index. Although index funds can’t beat the market, the typical actively managed fund usually doesn’t, either, and index funds have several advantages over actively managed funds. See Chapter 10 to find out more about tax-friendly stock mutual funds, including some non-index funds and exchange-traded funds.

       Invest in small business and real estate. The growth in value of business and real estate assets isn’t taxed until you sell the asset. Even then, with investment real estate, you often can roll over the gain into another property as long as you comply with tax laws. Increases in value in small businesses can qualify for the more favorable longer-term capital gains tax rate and potentially for other tax breaks. However, the current income that small business and real estate assets produce is taxed as ordinary income.

      

Short-term capital gains (investments held one year or less) are taxed at your ordinary income tax rate. This fact is another reason why you shouldn’t trade your investments quickly (within 12 months).

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