Bourbonnais Tax Associates LLC

𝗔𝗿𝗲 𝗬𝗼𝘂 𝗥𝗲𝗮𝗱𝘆 𝗳𝗼𝗿 𝗦𝗼𝗺𝗲 𝗙𝗼𝗼𝘁𝗯𝗮𝗹𝗹?

Next week, the greatest hype machine in American history cranks up its annual run, promising to swallow billions of hours of time and attention. No, we’re not talking about the elections, which promise to be a joyless gauntlet that makes every one of us stupider at the end than before it started. We’re talking about the NFL, which kicks off September 5th with the Baltimore Ravens traveling to Kansas City to take on last season’s Super Bowl champions. The next five months will see an endless parade of TV broadcasts, beer commercials, penalties, injuries, and former coaches and players sitting around filling airtime when there aren’t actual games to watch. It all culminates on February 9, 2025 in Super Bowl LIX in New Orleans.

NFL players collectively earn about $8.2 billion per year, with Cincinnati Bengals quarterback Joe Burrow leading the pack at $55 million/year. Of course, that’s not the same thing as taking home those billions. The IRS and various state and local tax collectors tackle the average player for close to 40% of that amount. So naturally, players and their advisors are constantly scouting out ways to pay less. Many choose to play for teams in states with no income tax, like Texas, Florida, and Nevada. But this year, one clever rookie tried—and failed—to complete what would have been a Hail Mary tax play.

The Chicago Bears nabbed quarterback Caleb Williams in the first spot in this year’s NFL draft and signed him to a four-year contract for nearly $40 million. But Williams wanted to try something new. He asked to be paid through an LLC as an independent contractor rather than individually as an employee.

Earning income through an LLC—particularly one taxed as an S corporation—potentially offered Williams huge savings. For starters, he and the Bears could together avoid nearly $1.5 million in Medicare tax by restructuring wages as K-1 distributions. An LLC could also let him deduct miscellaneous itemized deductions eliminated by the Tax Cuts and Jobs Act of 2017. These include agent fees, union dues, training and gym fees, and travel expenses. Working through his own LLC could also let him establish better benefit plans than he could get through the league.

Williams also huddled with the Bears about paying him in the form of a forgivable loan. That could have deferred any tax at all on his compensation until the loan was forgiven someday down the road.

The Bears approached the league with both the LLC and loan proposals. However, the overlords in New York sacked both ideas, citing the current collective bargaining agreement. Knowledgeable fans shouldn’t be surprised. NFL Commissioner Roger Goodell has always appeared far more interested in the overall health of the league than he is in accommodating individual players or facilitating that sort of change.

Williams still has plenty of play options for tax planning with his outside income. He’s already earned $10 million from name, image, and likeness rights. And he’s signed endorsement deals with Dr. Pepper, Nissan, Wendy’s, Beats by Dre, and Neutrogena. He’s even launched an investment firm, 888 Midas, targeting private equity, venture capital, and real estate. His father, Carl, is a real estate developer who clearly raised his son to succeed off the field as well as on.

This week’s story reminds us that when it comes to taxes, how and where you earn your income can be just as important as how much you earn. And while you probably aren’t throwing around the same numbers as Caleb Williams, you may qualify for some of the same planning strategies. You know who to call. Just don’t do it on Sunday afternoon!

https://go.4taxcpr.com/taxplan/

Happy National Dog Day!

NATIONAL DOG DAY | August 26 NATIONAL DOG DAY National Dog Day on August 26 encourages dog ownership of all breeds. While seeking a new companion, be sure to consider the mutts, mixes,

𝐅𝐫𝐨𝐦 𝐑𝐮𝐬𝐬𝐢𝐚 𝐰𝐢𝐭𝐡 . . . 𝐓𝐚𝐱𝐞𝐬

On March 29, 2023, Russia’s Federal Security Service detained a Wall Street Journal reporter named Evan Gershkovich on trumped-up charges that he was spying on a Russian tank manufacturer for the CIA. Gershkovich spent most of the next year in Moscow’s blood-soaked Lefortovo Prison, where Stalin’s secret police tortured and executed legions of dissidents. The State Department officially designated the reporter as “wrongfully detained.” Diplomats, the Journal, and even the last remnants of Russia’s own independent press called for his release. Meanwhile, a Moscow court repeatedly extended his detention. Last month, it found him guilty of espionage and sentenced him to 16 years in prison.

What we didn’t know, as the court proceedings ground on, was that diplomats were also working on the most extensive prisoner swap since the Cold War. On August 1, Russia and Belarus released 16 prisoners, including Gershkovich. The U.S., Germany, Poland, Slovenia, and Norway released eight detainees and two children. (No, the children weren’t spying; their parents were. Although, hey, if 13-year-olds in China can make iPhones, they can probably tap your emails, too.) Gerskovich and two other Americans, journalist Alsu Kermasheva and corporate security executive Paul Whelan, flew to Turkey’s Ankara Esenboga Airport for the actual exchange. Then, the trio immediately flew home to Joint Base Andrews in Maryland. Odds are good that none of them will ever go near Russia again.

Gershkovich lost 16 months of his life while he was rotting in Russian prison. He missed a birthday celebration. He missed weddings, reporting trips, and travels with friends. And he missed filing his tax returns. Which brings us to this week’s story.

Sadly for Gershkovich and his fellow detainees, our 2,700-page tax code makes no allowance for taxpayers who are held hostage or wrongfully detained. The penalty for failing to file is 5% of the unpaid balance each month that a return is late, up to 25%. The penalty for failing to pay is 0.5% of the unpaid balance for each month, also up to 25%. The IRS also imposes interest, currently 8%, on those unpaid taxes and penalties.

The IRS can and routinely does waive those penalties. However, by statute, they can’t waive actual taxes or even the interest on those taxes. While the percentages may seem small, they add up fast. In 2016, Washington Post reporter Jason Rezaian came home after 544 days in Tehran’s Evin Prison to a $20,000 bill. Fortunately, in a triumph of common sense and human decency, the IRS reduced it to $6,000.

Naturally, the legislators responsible for the tax code have taken notice. Senate Majority Leader Chuck Schumer has called on the IRS to remove all fines and penalties for Gershkovich and his colleagues. And Senators Chris C***s (D-DE) and Mike Rounds (R-SD) have introduced legislation that would postpone tax deadlines for wrongfully detained persons and reimburse late fees that previous detainees have already paid. But the wheels of change grind slowly, and good ideas like protecting hostages from tax penalties often get sidetracked by the realities of partisan politics.

Gershkovich and his fellow detainees face all sorts of physical and mental challenges reassimilating into normal life. They’re often in poor health from malnutrition and lack of exercise. Psychologically, it can be hard to readjust after endless stretches of solitary confinement. Managing bills, monitoring credit scores, and mitigating taxes obviously add insult to those very real injuries.

Nobody said that life is fair. It surely won’t surprise you that it holds true for taxes as much as anything else. Fortunately, the odds are low that you’re likely to face a true injustice like Evan Gershkovich. But if you do, we’re here to help!

𝗛𝗲𝗿𝗲’𝘀 𝗮 𝗧𝗶𝗽

Right now, Americans are locked in an increasingly fierce presidential election battle. Partisans on both sides are calling it the most important election of our lives. Rhetoric is growing hotter on social media platforms like Facebook and X, or whatever Elon Musk is calling Twitter these days. Some extremists are calling for violence if their side loses, with others actually fearing we may be headed towards civil war. Joe Biden’s withdrawal last month—barely three weeks ago!-—has been just the latest shakeup. But screenwriters in charge of 2024 are full of surprises. They’re clearly making plot twists, rather than character development, the hallmark of the season.

Wouldn’t it be great if Democrat Kamala Harris and Republican Donald Trump could find at least one thing they both agree on? They have—and it has to do with a surprising slice of our increasingly bitter-tasting tax code.

Back in June, Trump was having dinner at his hotel in Las Vegas, a town where tips drive the economy. As he tells it, his server came up to him to make small talk. Then, she complained, “The government’s after me all the time on tips, tips, tips.” Trump said, “Let me just ask you a question, would you be happy if you had no tax on tips?” To nobody’s surprise, she said yes, and a campaign promise was born.

More recently, Kamala Harris copied Trump’s pledge. On August 10, she told a crowd of 12,000 at the University of Nevada Las Vegas, “It is my promise to everyone here: When I am President, we will continue our fight for working families, including to raise the minimum wage and eliminate taxes on tips for service and hospitality workers.”

How, exactly, would that work? Code section 61, which defines gross income, says, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.” That pretty clearly includes tips earned at a bougie Vegas steakhouse. But it shouldn’t be too hard to pass a bill (https://youtu.be/OgVKvqTItto?feature=shared) exempting tips from that general rule. In fact, Senator Ted Cruz has already introduced it.

Of course, as with all things tax, the devil is in the details. Eliminating income tax on tips won’t help low-income tipped workers who don’t pay them to begin with. Eliminating payroll tax would be a bigger deal for most—but would also cost Social Security benefits. And who, exactly, should benefit? Wait staff, bartenders, and baristas seem like obvious candidates. But what about hair stylists, nail technicians, and bellhops? Valet parkers, movers, and scuba instructors? Congress will have to define “tips” very carefully. Otherwise, you can expect lawyers, lobbyists, and even tax planners to expect tips as part of their compensation. (Surely you’d be happy to duke us 15% of whatever we save you—right?!?)

What sort of effect would the proposal have on the broader economy? According to the Pew Research Center, about 47% of Americans have worked a job where they earn tips, and 4.3 million do so now. The Congressional Budget Committee estimates that exempting tips from income and payroll taxes could cost the Treasury $150 to $250 billion in revenue over the next 10 years.

These days, it’s hard to get politicians on both sides to agree to something as basic as “ice cream tastes good.” Eliminating tax on tips may not be a genius policy, but the proposal is a rare point of agreement in what promises to be an unusually ugly election. And we’ll be here to help you make sense of it all. We’re here all week and beyond, folks. Try the veal. And tip your servers!

https://go.4taxcpr.com/taxplan/

𝐈𝐑𝐒 𝐫𝐞𝐥𝐢𝐞𝐟 𝐧𝐨𝐰 𝐚𝐯𝐚𝐢𝐥𝐚𝐛𝐥𝐞 𝐭𝐨 𝐇𝐮𝐫𝐫𝐢𝐜𝐚𝐧𝐞 𝐃𝐞𝐛𝐛𝐲 𝐯𝐢𝐜𝐭𝐢𝐦𝐬 𝐢𝐧 𝐚𝐥𝐥 𝐨𝐟 𝐒𝐨𝐮𝐭𝐡 𝐂𝐚𝐫𝐨𝐥𝐢𝐧𝐚, 𝐦𝐨𝐬𝐭 𝐨𝐟 𝐅𝐥𝐨𝐫𝐢𝐝𝐚 𝐚𝐧𝐝 𝐍𝐨𝐫𝐭𝐡 𝐂𝐚𝐫𝐨𝐥𝐢𝐧𝐚, 𝐩𝐚𝐫𝐭 𝐨𝐟 𝐆𝐞𝐨𝐫𝐠𝐢𝐚; 𝐯𝐚𝐫𝐢𝐨𝐮𝐬 𝐝𝐞𝐚𝐝𝐥𝐢𝐧𝐞𝐬 𝐩𝐨𝐬𝐭𝐩𝐨𝐧𝐞𝐝 𝐭𝐨 𝐅𝐞𝐛. 𝟑, 𝟐𝟎𝟐𝟓

The Internal Revenue Service today announced tax relief for individuals and businesses in four states affected by Hurricane Debby.

Affected taxpayers in South Carolina, North Carolina, Florida and Georgia now have until Feb. 3, 2025, to file various federal individual and business tax returns and make tax payments.

All 46 South Carolina counties, 61 counties in Florida, 55 counties in Georgia, and 66 counties in North Carolina are eligible for this relief.

The tax relief postpones various tax filing and payment deadlines that occurred beginning on Aug. 1, 2024, in Florida, Aug. 4, 2024, in Georgia and South Carolina, and Aug.5, 2024, in North Carolina. The relief period continues through Feb. 3, 2025 (postponement period), in all four states. As a result, affected individuals and businesses will have until Feb. 3, 2025, to file returns and pay any taxes that were originally due during this period.

Visit the IRS website at https://www.irs.gov for more information or contact our office.

🕵️‍♂️ Coca-Cola's secret recipe isn't the only mystery! The IRS hit them with a $6 billion tax bill. 💸

Learn about the "double Irish Dutch sandwich" and other tax strategies in our latest blog: "Have a Coke and a S̶m̶i̶l̶e̶ Tax".

Discover more: 🔗 https://bit.ly/bourbonnaistax

𝐅𝐚𝐬𝐭𝐞𝐫, 𝐇𝐢𝐠𝐡𝐞𝐫, 𝐒𝐭𝐫𝐨𝐧𝐠𝐞𝐫 – 𝐓𝐨𝐠𝐞𝐭𝐡𝐞𝐫

U.S. Olympians who medal in Paris will also bring home cash, specifically, $37,500 for gold, $22,500 for silver, and $15,000 for bronze. And here’s an extra patriotic bonus—in 2016, Washington passed a law that says Olympians and Paralympians don’t have to pay tax on any of those winnings!

But, as always, there are limits on the tax-free cash. Read on to find out.

Click here: https://bit.ly/bta-faster-higher-stronger

🎬 Film Producer Produces Drama with the IRS 🎬

Paul Cromar, a freelance film producer, was convicted of tax evasion and forcibly retaking property that had been seized by the government to pay his tax debt.

From 1999 to 2005, Cromar filed no tax returns and paid no tax. The IRS did an audit in 2007 and ordered him to pay $703,266.96 in taxes, interest, and penalties. Failing to pay any of the money due, the IRS moved to foreclose on his home.

Cromar tried to stop the sale by submitting bogus documents and harassing IRS employees. Just before the court-ordered sale, Cromar broke into the home and reclaimed it, fortifying it with weapons, sandbags, and bomb-making materials. He even invited an armed militia to help protect the property, causing a SWAT team to show up.

Cromar caused a total tax loss of $1,174,201.91 to the IRS. He faces up to seven years in prison and has asked the courts for leniency, describing his 99 days in jail as “really painful and harrowing.”

🚨 Tax Preparer Steals Millions, Gambles it Away, Gets 57 Months! 🚨

Omar Khater, a New Jersey tax preparer, was sentenced to 57 months in prison for filing false tax returns.

Khater and a relative stole identities to file false tax returns, claiming millions in gambling and lottery winnings. The IRS issued $4.49 million in refunds, which Khater and others diverted to their accounts.

In addition to the prison sentence, Khater was ordered to pay $4.49 million in restitution.

🔒 Protect yourself from identity theft! Check out the IRS "Taxpayer Guide to Identity Theft": irs.gov/newsroom/taxpayer-guide-to-identity-theft

𝐇𝐢 𝐁𝐨𝐛!

Summer is usually full of lazy days and slow news weeks. That’s not the case in the sweltering 2024, though. For once, that “Breaking News” alert that crawls across the bottom of your cable news feed really means something. Millions of Americans across the political spectrum are learning just why the ancient Chinese considered it a curse to live in interesting times. I’m not even going to bother summarizing what’s happened so far, simply because in the time between when I write these words and you read them, there will be more.

As usual, though, those news feeds include reports of celebrity passings. Surely, there are people who have seen that Richard Simmons is dead, realized that Keith Richards is still alive, and rethought their commitment to exercise and a healthy diet. But comedian Bob Newhart’s death last week at age 94 hit many Boomers especially hard.

And did you know that he was an accountant before he launched his career in comedy?

Newhart was born in Chicago in 1929. He graduated from Loyola University with a degree in business management before getting drafted and serving here in the States as a clerk during the Korean War. From there, he went to United States Gypsum to work as an accountant. And if he had succeeded, we might never have heard of him! Sadly, his motto, “That‘s close enough," didn't work for his employers. Nor did his habit of balancing petty cash out of his own pocket.

Two years later, Newhart released his first album, “The Button-Down Mind of Bob Newhart.” It became the first comedy album to hit #1 on the Billboard chart, and the only accounting Newhart worried about after that was his own.

But let’s take a look at that motto of his: “That’s close enough.” Was it really so disqualifying?

Years ago, 𝑴𝒐𝒏𝒆𝒚 magazine used to run an annual exercise exposing how complicated taxes can be. They would give a set of client files to 50 different accountants and ask them to prepare a 1040 for that client. Every year, they would get back 50 different results. And none of those results matched the numbers 𝑴𝒐𝒏𝒆𝒚’s own accountant calculated.

Of course, all of those accountants worked in good faith to show off their skills to 𝑴𝒐𝒏𝒆𝒚’s readers. None of them had any reason to do less than their best work or dismiss it as “close enough.” So why did they come up with 50 different answers? And what broader lessons does that leave for us?

The main lesson, of course, is that if 50 different trained professionals can come up with 50 different bottom-line tax bills, there’s something wrong with our system. And what would have happened if the IRS had taken a closer look at those numbers? Do you think that 50 different auditors would have done any better? Probably not! The taxpayers submitting those returns may have had to pony up some extra money, or some might have even gotten a refund. None would have been charged with fraud or any other sort of offense. And in the end, they would have been . . . (say it with me) 𝙘𝙡𝙤𝙨𝙚 𝙚𝙣𝙤𝙪𝙜𝙝.

The irony here is that the real action happens long before an accountant sits down to prepare a tax return. The real action happens with the 𝒑𝒍𝒂𝒏𝒏𝒊𝒏𝒈—or lack thereof. What business entity or entities do you have? How are you drawing cash out of the business? Are you maximizing deductible benefits and taking advantage of the right retirement savings vehicle? (Don’t assume a traditional qualified plan is always the best option!) That’s where our planning service comes in—so that no matter how much you actually pay, it’s 𝒍𝒆𝒔𝒔.

𝐖𝐡𝐚𝐭 𝐈 𝐃𝐢𝐝 𝐨𝐧 𝐒𝐮𝐦𝐦𝐞𝐫 𝐕𝐚𝐜𝐚𝐭𝐢𝐨𝐧

“Federal Income Taxation” is the foundational tax class in any accounting or law school program. Contrary to what you may think, it doesn’t involve diving into thickets of dense, impenetrable tax forms or long, intimidating columns of numbers. The final exam doesn’t challenge students to fill out a 1040. Instead, the class focuses on introducing students to basic concepts that apply throughout the tax world. What, exactly, is “income”? When is it “realized” or “recognized”? What are “deductions,” and when are taxpayers entitled to them? What are “depreciation” and “amortization”? What’s the best remedy for serious tax headaches, and why is it alcohol?

Over the last month, we’ve discussed several videos circulating on social media purporting to help you save money on taxes. Today, we’re going to see how one would-be influencer mishandles the basic concept of “substance over form.”

Summer is here, and that means vacation travel. Unfortunately, vacations are pricey. Wouldn’t it be great if you could get a deduction for those beach nirvana expenses? Never fear, Anna from Instagram is here to show you the way: “Here’s how you’re actually gonna be able to write off travel with any of your family members!”

The answer, it turns out, is to put them on your company’s board of directors. “That way,” she says, “when you travel, and you want to make that a business deduction, because you’re talking about quarter one goals or you’re having a retreat to mastermind on the what the future of the business is, guess what? Your husband is on there, so now his plane tickets, the entire hotel, the meals can be written off for everybody.”

But what if you get tired of your husband’s business advice? What if he watches Anna’s video and says, “It can’t possibly be that easy”? No problem, says Anna: “You can also remove people if they make you mad!”

Here’s the problem. The IRS has very specific rules (https://www.irs.gov/government-entities/federal-state-local-governments/spousal-travel) governing how much of your travel expenses you can deduct, depending on whether you’re truly traveling to make money or just casually discussing business on the beach. If you’re traveling inside the US, you have to spend more than 50% of your trip on business to deduct 100% of your transportation costs. If that number drops below 50%, your deduction drops to zero. Lodging and meals are deductible for business days but not personal days. And as for spouses and other dependents, there’s no deduction at all unless their presence has a bona fide business purpose.

Tax Court archives are full of cases where taxpayers lost deductions for bogus “business” travel. They didn’t keep adequate records. They didn’t show a profit motive for the trip. Or the scattered business discussions were merely “incidental” to the real purpose of the trip, which was fun and games.

Beyond the specific travel rules, deducting your husband’s travel because you’ve made him a “director” triggers a basic question involving “substance over form.” The IRS doesn’t just look at the legal form of a transaction. They look for actual substance. Throwing your husband on your board may look good on paper. But, serving on a board is an important legal commitment with specific responsibilities and liabilities. And if you kick your husband off your board just because he “makes you mad,” you can actually lose the legal protection you formed your corporation to secure in the first place!

We sat through the “Federal Income Taxation” class so you wouldn’t have to. Take advantage of it! If you’re traveling for business this summer and you want to take your spouse, call us. Some legitimate tax planning may well save you enough to pay for the trip without playing “board of director” shell games!

https://bit.ly/BeatTheIRSLegally

The sky is blue.
Almost everyone in the world: True
Real tax strategists: It depends.

𝗖𝗼𝘂𝗹𝗱 𝗶𝘁 𝗵𝗮𝗽𝗽𝗲𝗻 𝗵𝗲𝗿𝗲?

✨ Our latest blog dives into the potential parallels between historical tax protests and today's political climate. Read on to find out more and share your thoughts!



https://www.bourbonnaistax.com/blog/could-it-happen-here/

"Can I deduct my cat's expenses on my taxes? 🤔 The answer might surprise you! 🐾 Dive into the fascinating world of tax deductions with Bill Bourbonnais' article, 'Can I Deduct the Cat?'

Bill shares an interesting court case that could mean your foster cat expenses might be deductible. 📜🐈 But remember, it's all about having the right situation and documentation.

Curious to learn more? Comment 'Meow' below, and I'll send you the full article! 🐾💼

𝗕𝗲𝘁𝘄𝗲𝗲𝗻 𝗮 𝗥𝗼𝗰𝗸 𝗮𝗻𝗱 𝗮 𝗛𝗮𝗿𝗱 𝗣𝗹𝗮𝗰𝗲

The Fourth of July and other holidays are a great time to get together with family and friends, enjoy fun, laughter and good company, and chat… about taxes?

Of course, on Independence Day, we celebrate our country’s declaration of independence – primarily because of the issue of taxation without representation (though it’s been said taxation WITH representation hasn’t been so great either 😉 ). But on a tax-related holiday, we had a question that came from two different people and is a relatively well-documented Red Light that often puts business owners AND workers between a rock and a hard place.

In this case, the question was what determines whether a worker for a company is an EMPLOYEE or a CONTRACTOR. Many years ago, IRS used a 20-Factor test for Independent Contractors. The criteria are now more broad and nebulous, but the impact from losing a worker classification audit is still severe.

Read more: https://www.bourbonnaistax.com/blog/between-a-rock-and-a-hard-place/

What do you think? Is this a good time for real estate?

A recent Gallup news article reports "Americans continue to rank real estate as the best investment for the long term among six options. Thirty-six percent choose real estate, followed by stocks or mutual funds (22%), gold (18%), and savings accounts or CDs (13%). Relatively few Americans believe bonds (4%) or cryptocurrency (3%) are the best long-term investments."

According to Pew Research, the Census Bureau in its 2018 Rental Housing Finance Survey, reports that out of nearly 20 million rental properties, nearly 14.3 million (71.6%) were owned by individual investors where for-profit business ventures owned about 18.8% (3.7 million properties.)

Real estate can offer some attractive tax benefits and strategies. Comment below if you'd like to learn more, or visit https://bit.ly/BeatTheIRSLegally

𝑴𝒐𝒓𝒆 𝑺𝒐𝒄𝒊𝒂𝒍 𝑴𝒆𝒅𝒊𝒂 𝑺𝒆𝒄𝒓𝒆𝒕𝒔 𝑹𝒆𝒗𝒆𝒂𝒍𝒆𝒅

Last week, we looked at the Venn diagram with unlikely circles representing "social media influencers" and "sound tax advice." If you missed it, you’ll be shocked, shocked to discover very little overlap. In most cases, narrators start with a valid concept, like hiring your kids, the Augusta Rule, or depreciating your truck. They hype it like they’re ripping the lid off the Illuminati Vault of Tax Secrets. They whet your appetite with salacious headlines like, "write off 100% of the cost of your SUV!" Then they leave out important details like, "but only if you use it 100% for business," and "you’ll have to pay back some of that benefit when you re-sell it down the road."

But just in case you thought it was safe to open TikTok again, here’s another example of a too-good-to-be-true social media tax claim that turns out to be, well, too good to be true.

Specifically, there’s a video floating around that promises, "How to avoid 100% of your income taxes every year." It’s called the "paper loss" strategy, and of course, to use it every year, you have to know the rules. Does avoiding 100% of your taxes every year sound good? Heck yeah! Here’s the "secret":

1. Buy an investment property – it can be an Airbnb or a long-term rental.

2. As soon as you buy it, write off everything on the inside – appliances, tubs, cabinets, etc. This is a called a "cost segregation study," and breaking those assets out really does give you bigger up-front deductions because they depreciate over 5 years, rather than the usual 27.5 for residential real estate.

3. This creates a big enough loss to offset income from your W-2, your 1099s, your stocks, and your crypto.

Genius, right? Well, not so fast.

If your adjusted gross income is under $100,000, you can deduct up to $25,000 in rental real estate losses. As your AGI grows past $100,000, it starts phasing out until it disappears entirely at $150,000. Beyond that, you can’t deduct real estate losses against ordinary income at all, unless you qualify under special rules as a "real estate professional." Which you probably won’t. Thousands of high-income W-2 employees and business owners buy real estate every year "for the tax breaks," then discover they can’t take them!

Even if you can deduct your real estate losses, you’re going to need to buy a lot of property to offset your other income. Let’s say your taxable income is $200,000 per year. Ordinarily, your first-year depreciation on rental real estate is about 1.8% of your depreciable basis in the property, which doesn’t include land. A proactive cost segregation study might bump that up to, say, 5%. That means, to create $200,000 of deductible paper losses, you’ll need to buy $4 million of depreciable property – plus land value. Can you even do that on $200,000 of income? Are you sure you want to do it, to save probably $40-50,000 per year in tax?

(Having said all that, the passive loss rule doesn’t apply to property taxed as a business – i.e., an Airbnb. Of course, that’s even more work than a plain old rental.)

So, does the "paper loss" strategy really avoid 100% of your taxes every year? Magic Eight Ball says, "My response is no." It’s perfectly legal. It just doesn’t deliver what the influencer says it will. It’s one of those things like communism, or The Matrix sequels, that work in theory, but not in the real world.

Once again, have fun with the tax videos that pop up on your social media feed. But understand that most of them are more sizzle than steak. Happy scrolling, and let us know when you're ready to save some REAL tax dollars!

https://bit.ly/BeatTheIRSLegally