3 Awesome Tax Strategies That You've (Probably) Never Heard Of!

A tax focused read from the unique mind of Justin Hodges.

The Augusta Rule, the HSA (Health Savings Account), & the layered principal residence sale over multiple years.

Most likely your largest expense in life, every year over many years, are taxes! These appear at the Federal & sometimes state level, based on your principal residence. These days, EVERYONE wants tax planning & it seems that not many are offering this type of service yet. Heck, your CPA just files for you and your financial advisor only oversees your investment accounts but wouldn’t it be nice to have a hybrid model that does both for you because ultimately, it all aligns! Plus who wants to setup another appointment and meet another person for another service….

The old model is as follows: Wait until you receive your W2s/1099s/ etc and then slam your CPA or accountant/preparer with all of your documents around February/March then reactively get everything done as soon as possible before the typical April filing deadline…..oh and also the other hundreds of clients that your preparer serves are doing this as well! Think it’s possible you missed a few deductions along the way?

A new breed of tax PLANNERS, not just preparers, are evolving as the client demands a more proactive approach to taxes that takes into account your current reduction goals as well as plans for the middle and future years of your tax strategy…..then they provide you with a deliverable that includes these numbers! If I as a tax planner charge you a premium for tax planning, say $200/mo for $2400/yr then I am already a bit “pricey” to some folks who are used to the old school approach….little do they know that they will possibly pay the IRS much more money then they ever will pay me by a very outdated & tax inefficient system.

Anyways, to the meat of those 3 awesome strategies mentioned in the title….

1. The Augusta Rule

The Augusta Rule, known to the IRS as Section 280A, allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return.

Originally created to protect residents of Augusta, Georgia who would rent out their homes to attendees of the annual Masters golf tournament, the Augusta Rule applies to any taxpayer who owns a home in the United States, provided that your home is not your primary place of business.

How Does it Work for the Homeowner?

So long as the home you own is not your primary place of business, you can rent it out for up to 14 days and not report that income on your individual tax return. The rent you charge must be reasonable and in-line with what the rental market supports; charging $1000 per night when comparable houses rent for $200 per night is not considered reasonable!

Homeowners can rent their house to individuals looking for vacation opportunities or they can rent their house to a business owner who intends to use it for business purposes. So for math, let’s say you charge $200/ day using this rule over a 14 day period each year then you’ll net a cool tax free $2,800 of income for the year. This just covered my tax planning fee for the year, then everything else we do is technically your tax savings…..no excuses start tax planning! If you typically take a 14 day vacation each year anyways, then focus on utilizing this strategy while you’re away!

2. HSA (Health Savings Account)

Triple tax advantaged! You may contribute to an HSA (if eligible of course, this is on you to make sure) up to the annual max, & deduct this on taxes without any phaseouts for making too much money! In fact, you don’t need to show any income at all to still contribute. You may then invest your contributions (like you would an IRA) & the growth you receive over the years is tax deferred. Then, & this is very important, you may withdraw your funds at ANY time for qualified medical expenses, tax free!

Qualified medical expenses is a large bucket of items but a few fun ones include reimbursing yourself for any future medical costs paid out of pocket over your life, just keep receipts to reimburse yourself. It is also your future medicare premiums or everyday items like feminine hygiene products, guide dogs, chiropractor, contact lenses, co-pays, birth control, or even vaccines! There is a ton to unpack in how to maximize an HSA for taxes but essentially you contribute the max ($3,500/yr current for an individual in 2021, deductible), invest it (assume your own growth rate), and then comes out tax free for qualified medical expenses or reimbursements. If you are in the 22% federal tax bracket right now and deduct this contribution, then for simple math, this saves you $770 each year on your taxes. Multiple this until age 65 when you can no longer contribute & that is your tax planning savings! Too much money in an HSA to use later in life….no problem you can still take it out & use it on whatever you desire, however it will be taxed like a traditional IRA would at that point. Keep in mind, not everyone is eligible for an HSA as one of the downsides is that you must have high-deductible major medical coverage & be under age 65 to contribute.

3. Leveraging down real estate holdings via the principal residence sale exemption.

Another tactic that can be used to reduce taxes on the sale of property is to establish this as your principal residence from the get go and/or re-establish a rental as a primary home & then sell, multiple times until you are down to just a primary residence to live out your glory years.

When you sell a home as a homeowner, the tax liabilities are much less substantial than selling a rental property for profit. This means that it can be beneficial to convert a rental property into a primary residence before you sell. IRS Section 121 states that you can exclude up to $250,000 from the profit of a primary residence sale if you are single, and $500,000 if you are married and have owned the property for at least 5 years. To qualify, you must have lived in the residence for a minimum of 2 years. The amount you can deduct will depend on how long you’ve owned the property, and how long you’ve used it as your primary residence. If you bought a house for $200,000 and rented it out for 3 years before living in it for 2 years, for example, you could deduct 40% of the capital gains tax incurred on the profit of the house sold for $300,000, for example, this means you would be liable to pay capital gains tax on $60,000 rather than $100,000. Then you can do your own math from there on how much actual capital gains tax you’ll pay on that amount, but it will either be 0%, 15%, or 20% based on your incomes in totality.

This one requires some leg work to accomplish of course, meaning moving & living in a certain property as your primary for 2 years at least but if you put in the work you can reduce your taxes to our favorite Uncle just a tad! Keep in mind you must own the home and have used it as a primary residence in at least 2 of the 5 years preceding the sale, you did not acquire the home through a like-kind exchange in the past 5 years such as a 1031, and you did not exclude the gain from the sale of another home two years prior to the sale of the home.

Ready to start tax planning yet?

Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.

Justin Hodges

Justin@TheWealthTenders.com

www.TheWealthTenders.com

www.TheTaxTender.com

530-415-7959

Investment advisory services offered through The WealthTenders, a Member of Advisory Services Network, LLC. Tax services offered through The TaxTenders. Advisory Services Network, LLC and The TaxTenders are not affiliated.