At Monotelo Advisors we work hard to free up cash flow by helping you minimize your federal tax liability, giving you more money to reinvest into your future. Welcome to Monotelo Advisors Tax expertise that delivers. CHOOSE YOUR DESTINATION SMALL BUSINESS PUBLIC SERVANTS TAX EXPERTISE Our Mission: To make a difference with meaningful and actionable financial solutions that positively impact our client's lives.

YEAR END Tax Planning With roughly 6 weeks to go until we can say goodbye to 2020, now is a great time to review your personal situation and consider any year-end adjustments to minimize your short and long-term tax liability. We have identified five year-end planning strategies you can use to minimize your tax burden. Maximize Your Retirement Account Contributions If you have a 401(k), 403(b) or 457 retirement account you can contribute up to $19,500 ($26,000 if you are over the age of 50) for 2020. Contributions to any of these plans must be made before January 1st to apply to 2020. Before you contribute to your 401(k) you should watch our 4-minute video Why 401k Plans Are Sub-Optimal . You can also contribute up to $6,000 ($7,000 if you are over the age of 50) to a traditional or Roth IRA for 2020 depending on your income. Contributions to traditional or Roth IRAs can be made up until April 15th of next year and still be applied to your 2020 contributions. If you qualify for a Health Savings Account you should max out your contributions to the HSA before making further contributions to your other retirement accounts. This is because HSAs allow for a tax deduction for your contributions, tax-free growth of the assets in your account, and tax-free distributions when used for medical expenses. With significant medical expenses almost guaranteed later in life, an HSA combines the best of both traditional and Roth retirement accounts. For more on HSAs read “Six Myths About Health Savings Accounts ” Take Advantage of Tax-Free Capital Gains If your taxable income is below $40,000 (80,000 if you file a joint return) then your long-term capital gains tax rate is 0%. If your taxable income is below these thresholds and you own stocks or other investments that have appreciated in value you can take advantage of this 0% tax rate by selling your investments with long-term capital gains and not pay any federal income taxes. If the sale of your investment pushes your taxable income above the thresholds for the 0% bracket you will pay 15% on the amounts above the threshold but will not pay taxes on the amount up to the threshold. While capital gains below these income thresholds are tax-free, the proceeds from the sales will still increase your taxable income for the calculation of certain tax credits such as the premium tax credit for health insurance. If you are currently receiving the premium tax credit, selling your investments could reduce the amount of the credit that you qualify for. Set Up a Donor Advised Fund The Tax Cuts and Jobs Act doubled the standard deduction while also limiting or removing various itemized deductions. As a result of these changes a much greater percentage of taxpayers will be taking the standard deduction between now and 2025 when the tax cuts expire. This also means that meaningful charitable donations may have little impact on your tax return. This is because a much larger portion of your charitable deduction is being used to reach the standard deduction threshold before you can realize any tax savings. One way you can work around this new limitation is to set up a donor advised fund. With a donor advised fund you can make a large contribution to the fund in one year and then make donations out of the fund to your charities of choice over the course of several years. With a donor advised fund you get a tax deduction in the year you contribute to the fund, regardless of when the fund distributes money to a charity. For example, if you typically give $5,000 each year to your church, you can choose to contribute $15,000 now to a donor advised fund and distribute $5,000 out of the fund each year for the next 3 years. Then refill the fund at the end of the 3rd year. By bunching your contributions into every 3rd year, you can prevent the bulk of your charitable donations from being absorbed by the standard deduction threshold. Consider a Roth Conversion Contributing to a traditional IRA or 401(k) provides tax savings today by pushing the tax liability into your retirement years. This strategy can make sense when you are likely to be in a lower tax bracket in retirement. However, the Tax Cuts and Jobs Act has created one of the lowest tax environments our country has seen in decades. With that in mind there is no guarantee that you will be in a lower tax bracket at retirement. And with our national debt skyrocketing, you could find yourself in a higher tax bracket when you retire, even if your income is lower than it is today. With higher tax rates likely in the future, you may want to consider converting some of your 401(k) or traditional IRA funds into a Roth IRA, paying taxes now in today's low tax environment in order to realize tax-free distributions later in retirement. With the results of the 2020 election, time could be running out to take advantage of the low tax rates. For more information on why a Roth conversion may be a limited time opportunity watch our 3-minute video Tax Efficient Retirement Planning. Converting your traditional IRA into a Roth IRA is an option for everyone, even if you are above the income threshold to make a normal contribution to a Roth IRA. You will also not be subject to the 10% early withdrawal penalty you would face when taking early distributions from a traditional IRA. For more information on why a Roth IRA could be the right choice watch our 4-minute video The Big Picture . Return Your Required Minimum Distributions If you are over the age of 70 ½ then you are required to withdraw a certain amount from your traditional IRA each year through Required Minimum Distributions (RMDs). These RMDs can create an unwelcome tax liability. Fortunately, as part of the CARES Act, all RMDs for 2020 have been waived. This means that if you have not yet taken your RMDs for 2020 you can choose not to take any for the year. If you already took your RMDs for the year then you have a few potential options to undo them. Option 1: Indirect Rollover When you take funds out of your IRA you have 60 days to either return the funds to the original IRA or invest them in another IRA through what is referred to as an indirect rollover. If you return the funds or reinvest them in another IRA within the 60 days you can avoid any taxes or penalties that would have otherwise been due on the distribution. You can only complete one indirect IRA rollover per year. Option 2: Coronavirus-Related Distribution If you took your RMDs earlier in the year and can no longer qualify for a 60-day rollover, you may still be able to undo your RMDs by qualifying them as a coronavirus-related distribution (CVD). With CVDs you can take up to $100,000 from your traditional IRA at any point in 2020 and you have 3 years from the date of the distribution to recontribute the funds and avoid paying income taxes. If you don’t recontribute the funds you can also choose to spread the tax liability over the next 3 years instead of paying it all on your 2020 return. To qualify a distribution as a CVD you must meet at least one of the following criteria: You are diagnosed with COVID-19 using a test approved by the CDC Your spouse or dependent is diagnosed with COVID-19 using a CDC-approved test You are experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by you due to such virus or disease, or other factors as determined by the secretary of the Treasury. As you can see, even if you do not meet either of the first two criteria, just about anyone in the United States should be able to qualify under the third criteria given that almost every state issued a shelter-in-place order earlier this year. By reclassifying your RMD as a CVD you can either avoid the taxes altogether by recontributing your distribution within the next 3 years, though we would recommend recontributing before the end of the year to keep everything simple, or spread the tax burden of the distribution over a 3-year period. Summary Now is a great time to review your financial situation and determine if there are any year-end adjustments you should make, as there should be very few income surprises between now and year-end. Taking the time to review your situation and applying some of the strategies we just shared could help you significantly reduce your short and long-term tax liabilities. Read more articles Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Details Five Planning Steps To Improve Your Retirement Years Join us as we share five simple steps you can take to reduce your tax bill and improve your retirement years: Address these critical items in your IRAs, 401(k)s and other retirement accounts Three ways to maximize your 2020 deductions and reduce your tax bill One easy step to reduce taxable income in 2020 How to take advantage of today's historically low tax rates How to proactively address the potential reduction in social security benefits in 2033 When January 25, 11:30 AM - 12:30 PM Where Prairie Lodge Cedar Room 12880 Del Webb Blvd Huntley, IL 60142 Details

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July 2019 SMALL BUSINESS TIPS Quarterly: Oct 17 Deducting the Business Use of Your Vehicle If you operate a small business and you drive regularly for that business you have two choices: you can either drive your personal vehicle and reimburse yourself for the business portion of the associated costs, or you can transfer the vehicle to the business and pay all of the associated costs directly from the business. Which of these options you choose depends on the vehicle and how you use it within the business. There are no inherent tax benefits to titling your vehicle into your business, in fact doing so limits your options in how you deduct the cost of that vehicle. However, when your vehicle is 100% business use then titling it to your company can simplify your record-keeping requirements and allow you to pay for your vehicle costs directly out of your business account. The first step to decide where you should place ownership of your vehicle is to determine which vehicle cost deduction method is more beneficial in your situation. Standard Mileage Rate vs Actual Expenses There are two primary methods for deducting the cost of using a vehicle for business purposes: The standard mileage rate method and the actual costs method. Standard Mileage With the standard mileage rate you can deduct a specific dollar amount for each business mile you drive during the year (for 2022 the standard rate is 58.5 cents per mile). The standard mileage rate is used more often since it only requires you to keep track of the miles you drive throughout the year and does not require records of any other expenses. However, the standard mileage rate can only be used for a vehicle that is in your personal name. If your vehicle is titled to your business, you are required to use the actual expense method.. Actual Expense With the actual expense method you can deduct your out of pocket costs for fuel, insurance, repairs, etc. You can also deduct the cost of the vehicle by depreciating it over its asset life (typically 5 years). The actual expense method requires much more thorough record-keeping. You need to keep track of each vehicle related expense throughout the year, and if you use the vehicle for both personal and business use then you also need to keep track of the total business and total personal miles for the year Choosing the Right Method If your vehicle title is in the name of your business you are required to use the actual expense method. However, if the title is in your personal name you can choose which method to use in the first year. You can switch methods in the following years, but there are additional restrictions to do so. It is in your best interest to take the time in the first year to determine which method will be more beneficial. The standard mileage rate method is intended to simplify record-keeping requirements while still providing for an accurate deduction for the cost of using your vehicle in your business. To that end, in many cases the standard mileage rate method should provide the same or greater tax benefits as the actual expense method. However, there are specific factors that can make the actual expense method more beneficial: Price of Car: Since you can deduct the cost of a car over several years with the actual expense method, a more expensive car increases the probability that the actual expense method will be more beneficial Fuel Efficiency: With the standard mileage rate you get the same deduction no matter how many miles you get per gallon, so a less efficient vehicle will eat away at a greater portion of your allowed deduction. Highway vs City: If you are driving primarily in a large city you are likely putting much fewer miles on your vehicle while still spending the same amount on car payments, insurance, etc. If any of these factors apply to your situation then you may receive a greater benefit through the actual expense method. It is also worth noting that under the actual expense method you will receive a greater tax benefit in the first few years while you are depreciating the cost of the vehicle. Once the vehicle is fully depreciated your deduction will drop significantly. Under the standard mileage method your deduction will be relatively consistent subject only to small changes in the standard rate each year. Summary If 100% of the use of your vehicle is for your business and you have large vehicle costs either from buying a newer car or driving mostly in the city, putting your vehicle title into your business can simplify your record-keeping requirements without sacrificing the benefits of the standard mileage rate method. If you use your vehicle for both personal and business needs or you drive an older vehicle with a low market value, you may want to keep it in your personal name to preserve the option to use the standard mileage rate. Previous Article Next Article

SMALL BUSINESS TIPS Quarterly: Oct 17 Deducting Your Business Travel If you travel as part of your business or you have employees who travel you have several options for how you deduct those travel expenses. Typically you can either track and deduct the actual cost of travel or you can use standard allowance amounts provided by the IRS to simplify the record-keeping requirements. If you choose to use standard allowance amounts to deduct your travel expenses it is important to keep up-to-date on what the allowance rates are as they are typically updated on an annual basis. Vehicle Expenses If you use your personal vehicle for business-related travel you can deduct either a portion of your actual vehicle expenses or a standard rate per mile driven. Actual vehicle expenses would include gas, insurance, repairs and depreciation on the cost of the vehicle. For 2022 the standard mileage rate is 58.5 cents per mile, up from 56 cents in 2021. For more information on the vehicle expenses deduction read Deducting the Business Use of Your Vehicle . Meal and Lodging Expenses If you travel overnight for a business-related trip you can deduct your meal and lodging expenses as well as other miscellaneous travel expenses. If you would like to deduct the actual cost of meals, hotel rooms and other miscellaneous expenses you will need to keep copies of receipts for each expense in your records as well as document the business purpose of the trip. If you would prefer not to keep track of each receipt you can instead use the IRS per diem rates to deduct a standard amount for meals and lodging expenses for each day of your trip. You will still need to document the destination, length and business purpose of your trip but will not need to maintain receipts for your expenses. The per diem rates vary depending on your travel destination. You can lookup the rates for your destination at https://www.gsa.gov/travel/plan-book/per-diem-rates . These rates are typically updated every October. The current rates will be effective until September 30, 2022. If you choose to use per diem rates to deduct your business travel, do not have your business directly pay the cost of meals, lodging, etc. Instead, pay for these costs personally and then submit an expense report to your business using the per diem rates and reimburse yourself. If your business is structured as a sole proprietorship, you do not need to reimburse yourself through an expense report. Instead you can simply use the per diem rates to claim a business travel deduction on your tax return at the end of the year. Please note that if your business is a sole proprietorship you can only use the per diem rates for meal expenses, not lodging. Summary Traveling can be expensive. But if you know how to maximize the tax benefits of your business-related travel you can reduce some of that cost. Using the standard mileage and per diem rates can simplify your record-keeping requirements and in many cases can provide a greater tax benefit than deducting your actual costs. To maximize your business-travel deductions read How to Deduct Your Vacation Travel as a Business Expense . Schedule Your Tax-Planning Call Previous Article

Have you taken the proper steps to ensure your loved ones receive your property after you pass away? Save as PDF Read more articles Share 1 2 WILL VS TRUST: WHICH IS RIGHT FOR YOU? Have you ever thought about who you would like to give your money, real-estate, or that special family heirloom to after you pass away? Most of us have, but have you taken the necessary steps to ensure that your belongings are received by that person or persons? The two most common methods of transferring your assets to your loved ones after your death are a will or a living revocable trust . What is the difference between them, and which one is right for you? WILL A will is a written document that allows you to establish how you would like your personal assets to be distributed amongst your family and friends after you have passed away. You can also dictate, within reason, how you would like your assets to be used by their recipient. A will can be changed at any time throughout your life but becomes irrevocable at the time of your death. A will also allows you to designate a guardian for any minor children you may have. Without such guidance in your will, it will be up to a judge to appoint a guardian as they see fit. Advantages Easier to set up. A will is generally easier and cheaper to set up than a trust as it does not need to be actively managed or funded. Can be used to designate a guardian for your minor children Disadvantages More restrictive. A will does not provide as much freedom as a trust to control the distribution of your assets after your death. Court intervention. Transferring your property through a will requires the beneficiaries to go through probate court, which can be a time-consuming process and makes your financial affairs part of the public record. LIVING REVOCABLE TRUST A living revocable trust is a legal entity that you set up in order to manage your assets while you are alive and transfer them to your beneficiaries after your death. Unlike a will, there is no court intervention required to transfer property to your beneficiaries. One of the major differences between a will and a trust is that a trust must be funded in order to be valid. A trust can only be used to transfer property that was placed in it before your death. Advantages Greater control. A trust allows you to dictate how and when a minor child will receive any money left to them. It can also be used to set up specific funds such as for a child’s education. Avoid court. Transferring your property through a trust allows you to bypass the time-consuming process of probate court and allows for your financial affairs to remain private. Any assets placed in a trust can be transferred immediately to your beneficiaries after your death. Disadvantages More costly to set up. Trusts are more expensive than wills because they require continued management after the initial setup and they can only control assets that have been placed into them. Cannot be used to designate a guardian for your minor children. Summary You should consider the unique circumstances in your life to determine if a will or a trust would be more beneficial. In some circumstances it may make sense to have a trust but to supplement it with a will. For example, if you have one or more minor children you may consider setting up a trust so that you can establish college funds or hold money for them until they reach a certain age, and then you may want to supplement that trust with a will to designate a legal guardian for your children if you pass away before they reach adulthood. Read more articles Share Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

Beware of Hedge Fund Managers Bearing Gifts Quarterly: Oct 17 "Do not trust the horse, Trojans. Whatever it is, I fear the Greeks even when they bring gifts." According to Greek mythology, the Greeks had struggled for nearly a decade to penetrate and conquer the city of Troy. In an act of trickery, they constructed a huge wooden horse, hid men inside it and pretended to sail away from the city. Ignoring wise counsel, the Trojans opened the gates and unknowingly opened the door for the Greek army to enter their city. Shortly after the Trojans brought the horse into the formerly impenetrable area, the Greek army sailed back under the cover of night and stationed their men to attack. Once the Greek army was in place, the men crept out of the horse and opened the gates for the rest of the army to enter and destroy the city of Troy. The term "Trojan Horse" has metaphorically come to mean any trick or strategy that causes a target to invite a foe into a securely protected area. We correlate this story to the appeal of hedge funds and private equity to a high net worth investor and the economic reality that is likely to follow. Diverging from our normal lines of discussion, we are going to explore the implications of the Tax Cuts and Jobs Act (the new tax code) on alternative investment income. The tax implications on alternative investment income are staggering. The new US tax code raises the bar so high that most alternative investments will fail to pass the test for the average high-net-worth investor. The term “high-net-worth investor” is a relative term. After all, nobody wants to be the one millionaire on an island of billionaires! Rather than defining high-net-worth by the size of someone’s balance sheet, we are going to define it as anyone with an annual income above $400,000, the beginning of the 35% tax bracket for married couples filing a joint tax return here in the United States ($200,000 is the beginning of the 35% bracket for a single filer). For today’s discussion we are going to use the 37% tax bracket to define high net worth, so technically this would be a married couple with a taxable income above $600,000 or an individual with a taxable income above $300,000. A brief history lesson on our tax code and investment management fees: The “two and twenty” fee structure (2% management fee and 20% performance or carried interest fee) charged by hedge fund and private equity managers has always been a challenging hurdle for alternative investment managers to overcome. Prior to 2018, however, the US tax code took some of that sting out of the bite by allowing investors to deduct their investment management fees once they surpassed 2% of adjusted gross income. In other words, a tax payer with $1 million dollars in adjusted gross income could deduct the investment management fees that surpassed the $20,000 mark (the 2% hurdle). The new tax code however, has removed investment management fees from the list of itemizable deductions. The colossal impact of this change comes down to the fact that 100% of your investment income flows through to your personal tax return and your investment management fees no longer offset that income. It’s like the opposite of a tax-free municipal bond. Instead of receiving income on which the government will not tax you, you are required to pay tax on income you will never receive. Let’s take the example of a married couple making $700,000 per year from their employer plus another $150,000 of income from their alternative investments. To keep things simple, we will make the following assumptions: The couple earns $700,000 in wage income from their employer The alternative investment is custodied in a traditional taxable account (ie. non-retirement account) The alternative investment generates $150,000 of investment income on $1,000,000 of invested capital Half of the investment income is taxed at the investor's ordinary income tax rate and half is taxed at the long-term capital gains rate The investment manager is paid $20,000 from the 2% management fee and $26,000 from the 20% performance fee Description $150,000 Of Investment Income ($20,000) 2% Management Fee ($26,000) 20% Performance fee $104,000 Net to Investor Before Tax Tax Liability +$42,750 (Federal Income Tax) +$3,885 (Net Investment Income Tax) Cannot be deducted on Schedule A Cannot be deducted on Schedule A $46,635 Additional Tax Liability The investor receives $57,365 after investment management fees and federal income tax, and still has a state income tax bill to pay. This 5.7% return is a long way from the 15% gross return generated by the hedge fund manager. Keep in mind, we are just looking at the tax implications of alternative investment fee structures. Considering the fact that the HFRI Equity Hedge Index only returned 3.38% over the last five years (according to Hedge Fund Research, Inc. – 2/28/19), we haven’t even begun to address the impact of performance fees on net returns to investors. Potential Solution: Asset Location One potential way to address this problem is to put investments with high management fees into tax-deferred retirement accounts instead of traditional taxable accounts. The challenge with this option is that it puts the investor at risk of being subject to UBIT issues (unrelated business income tax). Because of the potential UBIT and ERISA issues, some managers and many custodians will not accept retirement assets in alternative funds. This asset location issue is a critical piece of the wealth preservation and accumulation puzzle. Unfortunately, this mission-critical issue is often missed by the wealth management community due to a lack of knowledge about our tax code. Conclusion The Tax Cuts and Jobs Act creates a very challenging hurdle for many alternative investments to overcome. Investors should be careful to analyze the net after-tax return on their investments and make sure they are being fairly compensated for putting their capital at risk.

Roth vs Traditional IRA Which One Is Right For You In our last article, Year-End Tax Planning Strategies , we briefly discussed the potential benefits of a Roth IRA over a Traditional IRA. This article will dive deeper into the differences between these two retirement planning options and provide some guidance on when one makes more sense than the other. Contribution Limits You can make 2019 contributions to a Traditional IRA or a Roth IRA until April 15 of 2020. The maximum amount you can contribute in 2019 is $6,000. If you are over the age of 50 then you can contribute an additional $1,000 to either one. Additional limitations apply differently to Roth and Traditional accounts based on your income level and whether or not you are covered by a retirement plan through your employer. These additional limitations are complicated so we won't get into them now. If you want more information on these limitations you can read "Income Limitations" at the end of the article. Which Account Is Right For You? The primary distinction between a Traditional and Roth IRA is when you pay taxes on the money in the account. With a Traditional IRA you deduct your contributions from your taxable income and do not pay any tax on that money until you withdraw it in the future. With a Roth IRA you pay the tax now but can withdraw the funds tax-free in retirement. One clear advantage the Roth has over the Traditional IRA is the earnings of the account can be withdrawn tax-free after age 59 1/2. With the Traditional IRA you pay taxes on the earning as well as your original contributions when you withdraw them. So what is the advantage of the Traditional IRA if it requires you to pay taxes on your earnings? In the past, the argument in favor of Traditional IRAs was that you were likely to be in a lower tax bracket when you retire so it made more sense to defer taxes today so that you could pay them later at a lower rate. However, with the Tax Cuts and Jobs Act we are currently in one of the lowest tax environments our country has seen in decades. And with the national debt growing at an accelerating pace there is an increasing chance of significant tax hikes in the future. If tax rates rise significantly in the future you could find yourself in a higher tax bracket in retirement, even if your income decreases. With that possibility, deferring taxes now to pay them in retirement may not be the best decision. Summary The decision between a Traditional or Roth IRA comes down to your expectations for your tax bracket in retirement compared to your tax bracket today and the length of time before you retire. If retirement is still 20 or 30 years away, you may be better off investing in a Roth IRA to take advantage of tax-free growth for all of those years. If you are planning to retire in the near future, the benefit of a tax deduction today may outweigh the potential increase in taxes a few years from now, if your income drops significantly when you retire. For a deeper discussion on which account makes more sense for your personal situation, please reach out to us. Income Limitations Roth IRA: To contribute the full amount to a Roth IRA in 2019 your Modified Adjusted Gross Income (MAGI) needs to be less than $122,000 if you file single or head of household and it must be less than $193,000 if you file a joint return with your spouse. If your MAGI is between $122,000 and $137,000 ($193,000 and $203,000 if filing a joint return) then you can make a partial contribution. Once your MAGI exceeds $137,000 ($203,000 if filing a joint return) then you are no longer eligible to contribute to a Roth IRA. Traditional IRA: If neither you nor your spouse are covered by a retirement plan at work then there is no income limit to your Traditional IRA contributions. If you are covered by a retirement plan at work and file single or head of household, your Traditional IRA contribution begins to be reduced once your MAGI reaches $64,000 and is eliminated once your MAGI reaches $74,000. The rules become even more complicated if you file a joint return and either spouse is covered by a retirement plan at work. If you are covered by a retirement plan at work, your contribution begins to be reduced once your MAGI reaches $103,000 and is eliminated once your MAGI reaches $123,000. If you are not covered by a retirement plan but your spouse is then your contribution begins to be reduced once your MAGI reaches $193,000 and is eliminated once your MAGI reaches $203,000. Failing to order your affairs to minimize your tax burden could cost you significant money - so don't wait to take action. If you have additional questions or need some planning help, please reach out to us.

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If your taxable income is between $315,000 and $415,000, you could be paying a higher tax rate than any other taxpayer. July 2018 MONOTELO QUARTERLY Quarterly: Oct 17 STAYING OUT OF THE "DANGER ZONE" OF THE NEW SMALL-BUSINESS DEDUCTION The Tax Cuts and Jobs Act introduced a 20% deduction for small business owners. You can read our overview of this deduction in our last quarterly article. The gist of this new deduction is it will allow small-business owners to deduct 20% of their business income from their taxable income on their personal return. While this new deduction provides some welcome relief for small-business owners, there are restrictions on the deduction that highlight how critical proper tax planning is in 2018. If your business qualifies as a “specified service trade or business ” then your deduction will start to be phased out at taxable income of $157,500 ($315,000 if married filing a joint return) and entirely eliminated at taxable income of $207,500 ($415,000 if married filing a joint return). While this means any service business owner with taxable income above $415,000 will receive no benefit from the deduction, the toll is heaviest for any business owner who lands in the middle of the phaseout range. Example: John and Mary own a small consulting business and have taxable income of $315,000. Since they are right at the lower phaseout threshold they will receive the full deduction and their taxable income will be $252,000 ($315,000 x 80%). The tax they will pay on this income is $49,059. Now if their taxable income increases by $100,000 they will be completely phased out of the deduction and their taxable income will jump from $252,000 to $415,000, increasing their tax bill to $96,629. That is $47,500 in federal taxes alone on $100,000 of income. With what is effectively a marginal tax rate of 48%, small-business owners with taxable income between $315,000 and $415,000 are paying a higher tax rate than any other taxpayer! To avoid this heavy tax burden, proper tax planning is critical to reduce your taxable income and stay out of this “danger zone” of high taxes. Strategies to Reduce Your Taxable Income Contribute to a retirement plan. As a small-business owner, you have several options to save for retirement while simultaneously avoiding the heavy tax burden of this phaseout range. By setting up a SEP IRA you can contribute up to $55,000 per year (subject to earned income limitations). A SEP IRA is a simple way to defer significant income for retirement and works best when you are the sole employee. If you have other employees in your business, be aware that you will need to contribute an equal percentage of wages for each eligible employee. Make the most of your medical expenses Take advantage of the deduction for self-employed health insurance premiums . Unless you or your spouse are eligible to receive subsidized health insurance through your employer, you can reduce your taxable income by paying your health insurance premiums through your business. Set up a Health Savings Account . If you have a High-Deductible Health Plan then you can contribute up to $6,900 per year to save for future medical costs. Your contributions will lower your taxable income in the year they are made, and as long as your distributions are for qualified medical expenses they will be tax-free. Increase your charitable donations. If you find yourself in the middle of this phaseout range after an exceptionally successful business year, then you may already be considering increased charitable donations. With the large tax burden you could be facing in this phaseout range, the tax deduction from your donations will be more valuable than ever. These are just a few of the options available to you to lower your taxable income and avoid this danger zone of high taxes. Even if you don’t expect your income to reach the phaseout level for the new deduction, you can still realize significant tax savings by taking advantage of these strategies to lower your taxable income. Previous Article Next Article

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