Posted by Abundant Wealth Planning LLC

What Are the Tax Deferral Strategies?

What Are the Tax Deferral Strategies?

Tax deferral involves taking a deduction and moving it to a previous year or deferring part of your income to a later year. You are not reducing your overall taxes but getting a benefit upfront. By applying these tax deferral strategies year after year and paying less tax upfront, you can get more returns on your money over time. This implies that your dollars are more valuable today than in the future because they can be invested to gain interest and generate more than a dollar in the future.

This only works if you save that money, of course! This tax planning approach can be a great way to save money and save tax dollars in the long run, which will help you end up in a better place. Here are six possible tax deferral techniques to use.


Retirement plans

If you have a retirement program at work, like a 401(k), you should take advantage of it. For the 2018 fiscal year, you will be able to put $18,500 in employer-sponsored 401(k) plans. If you are aged 50 or older, you can contribute up to $24,500. We had an additional increase of $500 in 2018. If you have 403(b), the numbers will be the same, $18,500 or $24,500.

Your employer may have a SIMPLE IRA though you can't contribute much in a simple IRA ($12,500 is the contribution limit or $15,500 if you're over 50), but it is worth trying out.

Entrepreneurs may want to consider setting up a 401(k). If you have employees, it must be either a 401(k) Safe Harbor or a regular 401(k). However, if you're the only employee or it's just you and your spouse, you can only go for a Solo 401 (k) or owner-only 401(k). This option is very economical. It is a great way to go, but if you have employees, the regular 401(k) is a bit expensive, so that's where you might want to think of going with a SIMPLE IRA.

For entrepreneurs who have high profits, we recommend that you consider a defined benefit plan. With this method, contributions are not limited to $24,500. Defined benefit plans are so-called because they are based on desired future benefits. The higher it is, the more money you will have to put into this account to obtain the desired retirement benefit by the time you retire.


Deferral of revenue, acceleration of expenses

This is a popular tax deferral technique for business owners. At the end of the year, look back at how the year was. If you had a successful year, move your upcoming January spending into the current year and pay in advance. The other part is trying to generate as much income as possible from December to January.

Do not send invoices in mid-December; wait until January to receive the money. You can therefore defer your income and optimize your expenses.


Low turnover investments

This is an overlooked tax deferral plan. Index funds, exchange-traded funds (ETFs), mutual funds and have what is called the "turnover ratio."

When it comes to turnover, less is even better; from a simple standpoint, if the turnover rate is high, it means that they buy and sell stocks more often. This means that your investment will likely be more profitable. If these investments are in your taxable accounts, you will have to pay more tax on this income, even if you didn't receive the money. To have a more effective tax management plan, you should look for a low turnover inventory.

Another, also little considered, is that of funds that pay high dividends compared to funds that pay lower dividends. Which do you think is the most tax-efficient? It is the low dividend fund because a low dividend fund just means these companies keep their profits and, in essence, the share price goes up.

With companies that pay dividends, you get that money, so even if you reinvest, you have to pay taxes if they're in your brokerage or other taxable accounts, and this amount reduces the stock price. From a tax viewpoint, it is preferable to have a stock or fund that pays small dividends, so you don't have to pay taxes when you don't want to.

 

Cost segregation study

This tax deferral strategy is aimed at all real estate investors. This is really a big deal that not many people know of. The IRS said you could take future year's depreciation and speed it up even more than normal depreciation schedules by just getting a cost segregation study. 

Personal property is depreciated over a five year period, and land improvements are depreciated over 15 years.

The depreciation of a normal building is 27½ years for rental buildings and 39 years for commercial buildings. If you get a cost segregation study, you will get less in the end, but you will get a lot more depreciation upfront.

The IRS also says that if you do a cost segregation study after you buy the property, say three years later say that additional depreciation you might have made in the first, second, and third-year can all be taken in the year you do the cost segregation study. This is an exceptional way to get a good deduction.

Having experienced this tax deferral technique, many real estate investors choose one or two properties and do a one-year cost segregation study. Then choose another pair of properties for one-year cost segregation studies, continually saving taxes.


1031 Exchanges

Another income tax deferral technique for real estate investors is the 1031 exchange. It is a way to buy and sell a rental property without paying taxes. After you have sold a property, you have 45 days to identify up to three target properties to buy. Therefore, you have 180 days from the close of escrow to purchase any of these three properties. There are numerous ways to do this, but this is the most common method.

Note: A 1031 exchange must be for a similar property, which means you cannot sell a ship and buy a real estate property. It has to be a ship for a ship or a rental property for rental property, but the like-kind is quite generous.

You also cannot receive any money from the sale of the original property; you must use a qualified broker. If you receive the proceeds of the sale for one minute, it becomes a taxable transaction. The funds from the sale stays with the broker, so once the other property is purchased, the money goes directly from the broker to the seller of the new property.

It is important that the qualified broker you choose is reliable and bonded.

 

Charitable remainder trust 

The charity remainder trust fund is probably one of the best tax deferral strategies there is. This works well for people who have valuable assets outside of retirement plans, like real estate.

An example would be if you received a large amount of stock in a business from an employer, you are holding it outside of retirement, it has increased in value and you don't want to sell it because you would have to shell out big capital gains.

In fact, you can put the property or the shares into a charitable remainder fund. The charity remainder trust can then sell the asset, and no taxes are paid in return, as it is a tax-free trust fund.


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