replied 3 years ago.
Sorry, just saw this (I understand completely, about your being called away, I was just checking back in this afternoon)
let me try to address your questions as you have listed...
1) "In this scenario, are there any other tax breaks?"
OK, first lets deal with tax deductions for individuals:
DO Maximize that 401(K); For the 2013 tax year you will be able to contribute $17,500 as your basic limit, which is up another $500 from 2012 AND IF YOU'RE OVER 50 there's an additional $5,500 making the total deduction $23,500.
And, I don't know your age ... , but your practice really ought to look at a cross-tested defined benefit plan. Those CAN allow you to really sock it away (tax deductibly) at a rate higher than 401(k) plans, depending on time left to retirement and salary levels.
You CAN deduct interest on a SECOND home (everyone gets two). Here's the IRS guidance:
And finally, here's the most exhaustive list I've seen on the various tax deductions for individuals:
2) I do like your idea of 529 education fund and would like more info on how that works.
The immediate tax benefit of s 529 plan is the STATE income tax deduction: All Georgia taxpayers, regardless of income, may deduct up to $2,000 in contributions per year, per beneficiary. So from the STATE TAX perspective, it's tax free all the way around; grows tax free and no tax es when you pull it out.
In terms of federal taxes, the contributions(something people don't typically think about until it's too late) reduce the taxable value of your estate - it provides for Federal Estate and Gift tax purposes. ... an annual federal gift tax exclusion of $14,000 per donor ($28,000 for married contributors), per beneficiary.
Then at the Federal INCOME TAX level (although there's no immediate deduction for the contribution), distributions from a Sec. 529 plan are not included in the income of the donor or the designated beneficiary, as long as the distributions do not exceed the beneficiary's qualified higher education expenses (Code Sec. 529(c)(3)(B)). So the money grows tax free and then if used for qualified higher education expense (college or vocational school) its a tax free distribution.
Two last things on the 529 plan. (1) You have to use GA's plan to get the state tax deduction, and (2) It's one of the best plans out there in terms of return AND costs. Investments are provided by TIAA-CREF.
3) How many tax deductions can I take before I am at risk for an audit?
If the deductions are legitimate, the number of them won't make any difference. IRS's audits return randomly, and deduction that aren't clearly deductible catch their eye, but if you're one of those who has planned carefully, and uses everything they can (for legitimate reasons - such as the business we'll discuss below, not being something created JUST for the tax deduction, but rather something you're trying to succeed at) and you have enough LEGITIMATE deductions to completely eliminate your taxable income (and then some Net Operating Losses to carry forward for the next 20 years as well) then it is what it is.
Look back at that exhaustive list link and then think about having a business (a real business that will make a profit in a few years) generating losses as well. BUT remember what I said before about not letting the tax tail wag the dog ... once the business is profitable SO WHAT, you give some of it to uncle Sam and keep the rest.
Another scenario, my partner & I want to start our own business which is separate from my main income. She feels a S corporation would be good and provide us with a tax break. This is a legit business, not created just for a tax break. How would this work? What deductions can I take and how do I keep it separate from my main income? What happens when there are losses? I am told that it may take 4-5 years before the new business may break even or profit...depending on initial investment and overhead.
OK, first if you do use either (1) an S-Corp, (2) a partnership or (3) an LLC, these business entities are tax pass-throughs. They have their own income statements, but any profits or losses generated on that business income statement flows through to line 12 on your personal 1040 on line 12 (Business income or loss).
Th only reason an S-Corp is preferable purely from a tax perspective (raising capital, adding shareholders, and separating business assets from personal assets are also S-Corp benefits) relates to self-employment income. Again all three of the entities above will let you carry business losses to your personal tax return to offset personal income (again, line 12 on the front of your 1040), but because with the S-Corp you pay yourself wages, you will save on self employment taxes.
My own recommendation would be to use an LLC at first, when it's just the two of you and the business is still at a loss (maybe the first two or three years). The LLC gives you the separation and protection of a corporation, the simplicity of a partnership (no quarterly S-Corp returns, etc) and is still a pass through that will allow as much loss as the other two to flow through to your 1040.
In terms of your question about deductions? Any reasonable business expenses for the business you're in are deductions, because they contribute to that loss that passes through on line 12 of your personal tax return. If your business, in the first year, has revenues of say, 15,000, and expenses of 35,000, then your business had a loss of 20,000. If you and your partner and you own the business 50/50, then you each carry a 10,000 loss to line 12 and it is deducted from your AGI, hence taxable income.
Then, as I mentioned before about the carry-forward (and actually, you carry it back two years and forward 20, unless you make a special election) if you had enough personal deductions that year, that the 10,000 would take you BELOW your taxable income, you get to carry it back and/or forward against past and/or forward years' income - depending on whether you want to go to the trouble of going back and amending past year returns for a refund if applicable.
Here's an excellent article on NOL carryback and forward:
As you can see this is fairly complicated stuff, but spend a little time with my overview and the linked articles/sites/documentation and I believe you'll be able to make some informed decisions about where to go next.
Hope this helps
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