Transcription
Have you ever thought, "Do I really need tax planning?" And honestly, what even is tax planning? We know that we all want to pay as little as legally possible and then everyone, well, maybe everyone except me then wants to stop thinking about tax, right?
Well, today I'm walking you through two real case studies, okay, that show exactly what can happen when you think there's nothing to plan for. So, you end up paying hundreds of thousands or millions more in tax without a clue that it could have very easily been different. And the second case study that we're going over is the most common mistake I see when it comes to real estate. And if you don't know me, I'm Jasmine Deluchcci. I'm a tax attorney, CPN, enrolled agent. I got my first tax license as an enrolled agent in high school. My day-to-day is actually running my CPA firm and tax law firm. But I started posting on social media because real tax help with actual tax law should just be accessible to everyone and because I love talking about tax law.
Here's the first one. Okay. A potential client came to us for tax planning and tax returns, but he decided to wait into the next year to think about signing up for them, and then he decided to just move forward on the tax return preparation since he figured, hey, I don't have enough going on here yet to tax plan for here anyways, right? And he could have been right. But here's what happened. He exercised incentive stock options at year end on his own, but he did not cash out the stock because he thought he was tax planning by waiting two years from exercise to get capital gains treatment. And if you do social media research online, you would think that if you don't receive the cash, then you don't have a taxable event. But if that were correct, I wouldn't be telling this story. Okay?
When you exercise incentive stock options, you trigger an AMT adjustment. That's right. You don't hear about AMT adjustments on social media because they aren't that sexy. I bet you can't find me one tax guru explaining how to tax plan around AMT adjustments. But here's why you want to do that. This client triggered a $3 million AMT adjustment. This created $1 million in federal income tax on stock he hadn't even yet sold. Okay? And by the time he showed up for his return and learned about the tax due, the stock had dropped to half its original value. So now he's holding stock that's worth 50% less and still owes a million dollar in tax based on the fair market value at the time of exercise. No deduction, no doover, just a devastating outcome that standard tax planning could have prevented.
So what went wrong here? Okay, to state the obvious, he didn't tax plan, which means no one was proactively looking at his situation from a tax perspective during the time when he could have done something about it. We could have reviewed the exercise timing, whether selling the stock sooner in a disqualifying disposition was smarter, and most importantly, how to avoid AMT or offset it with additional tax planning. But by assuming his situation was simple, he paid tax on $3 million of phantom income and now doesn't even have the original value of the assets that were taxed.
Now, here's a second case study, and this is by far the most common mistake that I see with real estate, even when you have a CPA. Okay, this client had a self- rental, meaning they owned a building personally, and rented it to their own business. Their accountant suggested a cost segregation study, which is a great savings tool in the right situations because it accelerates depreciation. But here's the issue, okay? The accountant filed the return without the grouping election and treated the self- rental as a passive activity. Okay, all of the losses resulting from the accelerated depreciation in the cost segregation were suspended basically indefinitely until the client eventually finds a way to generate passive income or disposes of the property. And you can't amend a return to make the grouping election if you didn't originally treat the activities as grouped in one economic unit. So what does this mean? It means the client lost over $200,000 in immediate tax savings. That is what it means. And even more so than the first case study, this one is such an easy fix with a catastrophic tax impact.
Here's what I want you to walk away with, okay? Tax planning is not just based on common sense. Small things that appear to not be significant or taxable events can be catastrophic. Tax planning isn't a luxury. It's foundational. Okay, which is why someone should be reviewing your situation from a tax perspective. And I provide a ton of free tax resources in the free community so that there is literally no barrier to entry on this stuff because it is so critical to every business owner and individual. And for actual tax strategy from a tax attorney, subscribe so that we can continue to help more people with real tax law planning and prevent them from listening to madeup social media garbage.