It’s great to accumulate wealth by investing and saving you money, but did you know that taxes can take a large bite from your investments? Every investor, including those with 401(k)’s, IRA’s, and traditional brokerage accounts need to be aware of the impact of taxes. Here are a few tips and items to watch out for:
401(k)’s: A 401(k) can be a great way to save money for retirement as it is automatically deducted from your paycheck every time you get paid. If you are in the 25% tax bracket, every $100 you contribute saves $250 in taxes, plus savings for state taxes as well. You want to contribute as much as possible to reduce your taxes and save for retirement, especially if your employer has a matching contribution.
There is one common mistake that I do see often with 401(k) accounts and that is withdrawing money before retiring. It could be because you really need the money or you switched jobs and cashed out your account. You must resist the temptation to do this! Generally, there is a 10% early withdrawal penalty plus you will owe income taxes on the money withdrawn. This can easily add up to a third or even half of the money lost to taxes that you have withdrawn!
IRA’s: An IRA (individual retirement account) has similar tax characteristics of a 401(k). A strategy to maximize the tax-efficiency of your IRA may be to convert some or all to a Roth IRA. A Roth IRA has more favorable tax aspects as there are no taxes when you make a qualified withdrawal. Before making this decision, a thorough analysis should be done to make certain this strategy is beneficial for your situation.
Traditional Brokerage Account: A regular taxable investment account needs to be monitored closely to make sure you are not unnecessarily paying taxes. There are three straightforward ways to do this:
- Invest in tax-efficient mutual funds, ETF’s, and reduce the number of times you trade in your account. Every time stocks or bonds are sold, it may result in additional taxes
- Hold your investments for longer than one year to pay lower capital gains tax rates. This strategy compliments the first point.
- Compare the returns of tax-free municipal bonds to regular bonds to see which produces the higher overall rate of return.
Wednesday, September 7, 2011
Bad Tax Planning
Tax planning can prevent you from overpaying taxes, but it has to be done before the year is over. Good tax planning takes a proactive approach, and bad tax planning includes either not planning, breaking the law, or taking it upon yourself without using a competent tax professional.
Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients either monthly or quarterly we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.
A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more. And of course, underreporting your income is not wise either and may result in criminal prosecution.
I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.
Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients either monthly or quarterly we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.
A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more. And of course, underreporting your income is not wise either and may result in criminal prosecution.
I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.
Did You Have Damage From Hurricane Irene?
Hurricane Irene caused a lot of property damage due to intense winds and rainfall. Many areas along the East Coast lost power for days and had flooding that has not been seen before. Most importantly, I hope that you were all safe.
Due to damage incurred from the hurricane, you may be able to deduct some of the damage to your property and belongings. These are called casualty losses and the definition is as follows:
A casualty is the damage, destruction, or loss of property resulting from an identifiable event (such as a hurricane, storm, or car accident) that is sudden, unexpected, or unusual.
The rules can be complex when figuring out your deduction. Generally, you can deduct your loss by using this formula: the loss minus insurance proceeds, then subtract $100. Finally, subtract 10% of your adjusted gross income from that figure to arrive at your deductible loss. Also, you need to be an itemizer in order to deduct casualty losses.
Let’s simplify with an example: Your car originally purchased for $30,000 is now worth $15,000. It is completely destroyed by Hurricane Irene, and your insurance reimbursed you $10,000. Your loss is then $15,000 - $10,000 = $5,000. Then subtract $100 to arrive at $4,900. Finally, subtract 10% of your adjusted gross income (let’s assume it is $40,000, then multiply by 10%) of $4,000. Your deductible loss is $900.
The rules are different for business owners. You may even be able to file an amended return from the prior year to receive a refund. As you can see the rules can be complex, so do not hesitate to contact our office with any questions.
Due to damage incurred from the hurricane, you may be able to deduct some of the damage to your property and belongings. These are called casualty losses and the definition is as follows:
A casualty is the damage, destruction, or loss of property resulting from an identifiable event (such as a hurricane, storm, or car accident) that is sudden, unexpected, or unusual.
The rules can be complex when figuring out your deduction. Generally, you can deduct your loss by using this formula: the loss minus insurance proceeds, then subtract $100. Finally, subtract 10% of your adjusted gross income from that figure to arrive at your deductible loss. Also, you need to be an itemizer in order to deduct casualty losses.
Let’s simplify with an example: Your car originally purchased for $30,000 is now worth $15,000. It is completely destroyed by Hurricane Irene, and your insurance reimbursed you $10,000. Your loss is then $15,000 - $10,000 = $5,000. Then subtract $100 to arrive at $4,900. Finally, subtract 10% of your adjusted gross income (let’s assume it is $40,000, then multiply by 10%) of $4,000. Your deductible loss is $900.
The rules are different for business owners. You may even be able to file an amended return from the prior year to receive a refund. As you can see the rules can be complex, so do not hesitate to contact our office with any questions.
Wednesday, August 17, 2011
Taxable or Non-Taxable?
Which items do you think are taxable and which are not? The answers are below.
1. Workers compensation
2. Educational assistance
3. Cancelled debt
4. Expense reimbursements
5. Fringe benefits
6. Bartering
7. Hosting a party and receiving payment (such as a candle party)
8. Life insurance proceeds
9. Unemployment benefits
10. Federal income tax refund
Taxable: cancelled debt, fringe benefits, bartering, hosting a party, and unemployment benefits
Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund
There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.
1. Workers compensation
2. Educational assistance
3. Cancelled debt
4. Expense reimbursements
5. Fringe benefits
6. Bartering
7. Hosting a party and receiving payment (such as a candle party)
8. Life insurance proceeds
9. Unemployment benefits
10. Federal income tax refund
Taxable: cancelled debt, fringe benefits, bartering, hosting a party, and unemployment benefits
Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund
There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.
Thursday, July 28, 2011
Save Taxes by Taking the Home Office Deduction
The IRS allows business owners and employees to deduct expenses for using part of their home for business purposes. This can help to save income taxes as well as self-employment taxes. For every $1,000 of additional deductions, a self-employed person may save around $500! Here are the rules:
The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.
The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.
If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.
What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.
Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.
The first rule is that the area you use for business must be used exclusively and regularly for business. This means that the guest room that you use as an office cannot be used for even a single night to host your guests.
The second is that your home must be your principal place of business. To determine if your home is your principal place of business you must use it for administrative or management activities such as billing customers and recordkeeping.
If you are an employee there are other criteria that must be met as well. You must use your home for the convenience of your employer and you must not rent any part of your home to your employer.
What can be deducted exactly? You can deduct items such as mortgage interest, property taxes, insurance, utilities, repairs and maintenance, and depreciation of your house. Even if you itemize and deduct mortgage interest and property taxes on your tax return, it is more advantageous to someone who is self-employed to deduct a portion of these expenses as business expenses. The reason is to save self-employment taxes.
Although some believe the home office deduction will increase your chance of an audit, this should not discourage taxpayers from taking this valuable deduction. As long as you follow the rules and keep good records, you should not be concerned. Keeping good records and adhering to the rules applies to all other deductions as well.
Thursday, July 21, 2011
Do You Watch Shark Tank?
You have probably heard of the show Shark Tank, which airs on ABC on Friday nights. The show is about entrepreneurs who pitch their products and ideas to a group of wealthy investors who are referred to as “sharks.” Hopefully, the sharks will bite and offer to invest some of their money in the fledgling businesses.
Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.
Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?
Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?
Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.
Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.
Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”
Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.
Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?
Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?
Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.
Lack of Experience: When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.
Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”
Friday, June 3, 2011
Did You Get a Surprise After Filing Your Return?
Everyone loves to receive a much larger than anticipated tax refund, but what if you unexpectedly had to pay? There could be several reasons why, but it’s not too late to fix it for 2011.
Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2010, each exemption decreased your taxable income by $3,650.
Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.
Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond $100,000 many tax credits, such as the child tax credit, are reduced. Real estate losses may also become reduced as well.
To prevent a negative surprise for 2011’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.
Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2010, each exemption decreased your taxable income by $3,650.
Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.
Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond $100,000 many tax credits, such as the child tax credit, are reduced. Real estate losses may also become reduced as well.
To prevent a negative surprise for 2011’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.
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