Financial Fitness: Improving your Tax Story

2013 Tax

Our tax returns tell a story.

A Tax Return is the Story of your recent Past; it is your 2015 financial story.

The story tells the reader lots of information about you:

  • Marital Status (tax rate) Single; Head of Household; Married filing Separate; Married filing Joint; Widowed
  • How you earn your money – employee, self-employed, real-estate investments/rents; royalties
  • How you support yourself if you are not working – unemployment, retired, pension, social security, Required Minimum Distributions
  • How you spent your money: mortgage interest; children; student loans; medical bills; charitable donations
  • Did you have a good year with gambling winnings? Capital Gains?
  • Did you have financially devastating year, as many unfortunately did this year, because of so many natural U.S. catastrophes in 2015?

 

Income Tax Planning is one of the best ways to build your financial wealth.

2015:

Yes, 2015 is over and there is limited opportunity to improve that tax bill. However, depending on your circumstances, there might still be a way to reduce the amount you pay.

  • Contribute to your IRA before 4/18/16
  • If you are married, can you start and fund a Spousal IRA?
  • For 2015 and 2016, your total contributions to all of your traditional and Roth IRAs cannot be more than:

$5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit

Your Traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels.

 

Be Careful of Excess IRA Contributions:

If you exceed the 2015 IRA contribution limit, you may withdraw excess contributions from your account by the due date of your tax return (including extensions). Otherwise, you must pay a 6% tax each year on the excess amounts left in your account

Note that Employer contributions made under a SEP (Simplified Employee Pension) plan do not affect the amount you can contribute to an IRA on your own behalf.  You can both receive employer contributions to a SEP-IRA and make regular, annual contributions to a traditional or Roth IRA.

2016:

Our Financial Life is not stagnant. Like the ocean or a river, it changes all the time – it is a continuous evolving, moving, financial puzzle. New life stages & events provide us an opportunity to make new financial decisions & implement a revised plan.

The key to changing your Tax Story requires you to take action, now, in the present, and in the future.

Here are some tips to help you strengthen your Financial Fitness in this New Year:

  1. If you are an employee, review your withholding allowance on Form W-4. Is it accurate for what you anticipate in 2016? If not adjust, as soon as possible. The earlier you do this during the year, the more accurate your withholding will be.
  1. If you are Self-Employed, even part-time, do you know if you are required to make estimated quarterly payments to the IRS?  Avoid penalties & interest by ensuring that you make the required payments if they apply. Independent Contractors, Freelance workers, those that conduct Internet based sales (Etsy, eBay, Airbnb) and even Uber Drivers should review the information on the IRS website.

The IRS expects you to pay tax as the money is earned. If you operate on a calendar year, due dates are 4/15, 6/15, 9/15, and 1/15 for the previous year.

  1. If you have a High Deductible Health Insurance Plan, consider setting up a Health Savings Account (HSA). This is a tax- advantaged account to help pay for your medical expenses.

It is also an “Above the Line” deduction on your 1040 Individual tax return, which means you can use it to reduce your income, even if you do not itemize. Lower income, generally indicates, lower taxes.

  1. If you gamble, including playing the lottery, save all of your 2016 “expense” receipts. Why? If you win big, you can reduce the amount you won by the amount that you lost and only pay tax on the difference.

Gambling income includes but is not limited to winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes, such as cars and trips.

To deduct your losses, you must be able to provide receipts, tickets, statements, or other records that show the amount of both your winnings and losses

  1. Defer at least some of your income through a 401K match or similar program to reduce your taxable income for the year & to build savings for the future.
  1. If you itemize or might be able to itemize, record all of the miles you drive, by category: Charity ($0.14); Medical/Moving ($0.19) and Business ($0.54).

It can all add up, faster than you might think and may also make the difference between claiming the standard deduction and being able to itemize. The more you can legally write off, the lower your tax bill.

You can keep a paper calendar in your car & record what, where, why, & how many miles for each trip or use a Smart Phone App to help you.

Whatever you do, ensure you keep good records. If you are audited & can’t prove the deduction, the deduction can be denied and you could owe a penalty and interest for the underpayment.

  1. If you have a business and operate on a cash basis, it is imperative that you keep great records for both cash coming in & cash going out. This recent article highlights the reason why you need to do this: http://smallbiztrends.com/2015/12/recent-irs-case-highlights-need-sophisticated-small-business-management.html

 

  1. Think like a Tax Professional: Know your “Income” Types & their Tax Rates:

Taxable “Income”:

  • Ordinary Income is income earned from providing services or the sales of goods
  • Capital gains are usually associated with the sale or exchange of property characterized as capital assets
  • Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
  • Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
  • Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.

Tax Deferred Investment Income includes:

Withdrawals from Traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)

Tax Free Investment Income: Roth IRA

  • Tax Free Income as long as the account has been open for at least 5 years
  • Provides flexibility in the timing of future income – you decide
  • Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
  • Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed. Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax

 

  1. Manage your Tax Bracket:
  • Try to keep your Ordinary Income in the lower tax brackets
  • “Fill up” each bracket, where possible
  • Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
  • If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income – Plan

 

  1. Your income tax bill is perhaps the biggest bill you will pay over your lifetime. Learn, Plan, Act to reduce and keep more of your money in your pocket, not Theirs (The IRS).

Yes,  to be in compliance, we need to file & pay.  The IRS rules are there for us to use. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each Tax Story is unique.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Have fun leaning, planning, and saving.

Cheers to a happier, healthier, & wealthier 2016!

Thanks for reading,

Deb

 

 

Deborah Ann Fox, CPA is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

“Money on the Table”- 2015 Year-End Tax Saving Strategies

Leaving “Money on the Table” is an idiom, which means not getting as much money as you could.

You can do this in a lot of different ways such as salary negotiations, selling low when you bought high, or by not using the IRS tax rules and planning opportunities and then leave your hard earned money “on the table”.

The IRS, literally, spells “theirs”. The money is theirs if you just wait until the tax- filing season comes, complete & submit your 1040 tax form and then pay the amount owed or get a refund.

As a CPA – Tax Advisor, I love learning the rules and then sharing information to help other people reduce their tax bills. It is my way to help empower other people and hopefully, make a small difference in their quality of life. Nobody likes paying taxes; almost all of us like to save money.

Yes, we need to pay our share, but we don’t need to pay more than we need to. The IRS also does not want us to pay more than we should. The rules are in place to help us pay less. It is our responsibility and our choice to use them or not. The IRS is not going to tell you, you could have paid less, if you had just (xxx). There are a lot of possible ways to “fill in the blank”. Each tax story is unique.

As an advocate for “not leaving money on the table”, I offer you some practical, actionable, steps to take now to see if you can reduce your 2015 tax bill, now, before it is too late.

Step One: Estimate your 2015 Income & IRS Withholding

If you want to want to make sure your money is more in “your pocket” than theirs:
• Determine how much you have earned this year
• Determine what you have paid toward your 2015 tax bill
• Then increase each of these amounts to estimate the year-end amounts

Step Two: Compare this year to last year:

Now that you have a glimpse of your 2015 tax situation, compare those numbers to those on your 2014 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.

For example, did you get a refund last year? If so, consider this:

Last year, Kiplinger’s had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:
• More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
• Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
• Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these tools
• File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Step Three: Review 2015 & determine actionable steps

Shift “Income” to this year or to next year?

Consider if you can shift your income to decrease the amount of tax owed.

If you think your income will decrease next year and your tax rate would be lower, can you:
1. Defer a year-end bonus to January 2016?
2. Postpone a sale that will trigger a gain to next year?
3. Delay exercising stock options?

Alternatively, it may make sense to move income to this year:
1. Covert a traditional IRA into a Roth IRA and recognize the conversion income this year?
2. Take IRA distributions this year?

Shift Payments?
If you itemize, would you benefit if you changed the timing of some of your payments?
If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:
• Prepay property taxes?
• Make your January mortgage payment this year?
• If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
• Consider the timing of medical expenses so you can benefit from the deduction?
• Sell some or all of your loss stocks?
• If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable

Defer Deductions to 2016
If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2016:
• Postpone year-end charitable contributions, property tax payments, and medical & dental expense payments, to the extent you might get a deduction for such payments
• Postpone the sale of any loss-generating property

Step Four: Can you do anything else?
For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.

On a Federal Individual 1040 tax form, the basic formula is:
Income minus “Above the Line” deductions = Adjusted Gross Income.

These deductions include paying monies to:
• Establish an IRA for you or your spouse?
• If qualified, set up a Health Savings Account?
• If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?

While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your 2015 next tax bill.

A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointments. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com

Tips for Tax- Efficient Financial Planning

For Tax-Efficient Financial Planning, it is important to consider your:

  • “Income” sources
  • How each source is taxed
  • Your Tax Bracket

Income Sources:

Visualize a pie and then divide your sources of income in to 3 general categories: Taxable, Tax Deferred, and Tax Free.

How does it look?

  • All taxable? This is an excellent opportunity to reduce your tax bill and keep more of your money. Your recent filed tax return can be a good road map to provide clues for tax savings opportunities
  • Taxable and Tax-Deferred? Good for you; you have some balance
  • All 3? Even better. This provides flexibility on how you draw down your assets later, which could save tax dollars and money

Tax Rates:

Taxable “Income”:

  • Ordinary Income is income earned from providing services or the sales of goods
  • Capital gains are usually associated with the sale or exchange of property characterized as capital assets
  • Short Term Capital Gains are taxed at your Ordinary Income tax rate (10 % to 39.6%)
  • Long Term Capital-Gains tax rates vary by your income tax bracket and the type asset sold
  • Generally, if you’re in the 10% or 15% tax bracket, you’ll pay 0% on those gains. Most other taxpayers pay 15%; however, the rate can also be 20, 25, or 28% for certain asset classes and/or income levels.

Tax Deferred Investment Income includes:

Withdrawals from traditional IRAs and your 401K, which are, taxed as ordinary income (10% to 39.6%)

Tax Free Investment Income: Roth IRA

  • Tax Free Income as long as the account has been open for at least 5 years
  • Provides flexibility in the timing of future income – you decide
  • Required Minimum Distributions do not apply to Roth accounts as are required by Traditional IRA plans
  • Roth IRA distributions are not considered as income when determining how your Social Security payments are taxed
  • Qualified Roth distributions are not included in either net investment income or in the modified adjusted gross income calculation for assessing the 3.8% net investment income tax

Tax-Brackets:

To determine your tax-bracket, you, generally, need to know your annual taxable income and your tax status as of the end of the year.

As you have already seen or already knew, Ordinary Income is taxed at the highest rate.

Managing your tax-brackets means:

  • Try to keep your Ordinary Income in the lower tax brackets
  • “Fill up” each bracket, where possible
  • Be aware of tax consequences before making decisions that push you into the next highest rate bracket; i.e. can you defer a bonus or sale to new year if it means you will be taxed 10% less?
  • If you itemize, group deductions where possible; i.e. elective medical or dental procedures; charitable contributions to reduce your taxable income

Takeaways for Tax-Efficient Decisions:

  • Know your tax bracket
  • Estimate your current annual taxable income
  • Use the 2015 IRS Tax Bracket Schedules to determine “how much room you have to move, before moving to the next highest tax bracket
  • You could use this “room to move” as the potential amount to convert the specific amount of money from a Traditional IRA to a Roth IRA
  • A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA. The conversion is reported on Form 8606, Nondeductible IRAs. See  Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), for more information.
  • Determine the tax consequence before you convert and ensure you have the cash to pay the tax for converting

The IRS is spelled just like that: “Theirs”. However, tax laws were put in to place to help save you money. The IRS is not going to tell you that you could have paid less when you submit your tax return. It is your job and I am here to help, which is why I share information – so you can.

Deborah Ann Fox, CPA studies tax laws so you don’t have to. She enjoys making a difference in peoples lives, hearts, and wallets as she helps them on the road to financial freedom.

Deb provides free 30-minute consultations. More information is available at www.debfoxfinancial.com.

Thanks for reading!

Smart Personal Tax Planning –What to do before Year-End

2013 TaxTaxes take a big bite out of the income we earn. We may pay: federal (IRS) income tax, state income tax, payroll tax (social security/medicare), sales tax, and property tax. Most of these taxes offer limited options to control how much we pay. However, our golden opportunity comes with income tax because there are a ways to reduce our expense. Today, I offer some of these for you to consider:

The Why & The How

If you want to want to make sure your money is more in “your pocket” than in theirs (The IRS), now is the time to act. Estimating your 2014 tax bill keeps you from being surprised next year. More importantly, it provides you the opportunity to perhaps decrease the amount of tax you pay by planning and acting strategically before the end of this year.

To start:

  • Determine how much you have earned this year
  • Determine what you have paid toward your 2014 tax bill
  • Then increase each of these amounts to estimate the year-end amounts

Now that you have a glimpse of your 2014 tax situation, compare those numbers to those on your 2013 tax return. A filed return can be used as a sort of “road map” to see if there are options to reduce your tax bill now or in the future.

For example, did you get a refund last year? If so, consider this:

Kiplinger’s recently had a great article titled, “Safeguard your Refund by shrinking it”. The article includes the following:

  • More than 75% of Americans get an IRS tax refund each year which is the equivalent of giving the IRS an interest free loan
  • Identity Theft is on the rise and thieves file fraudulent returns to collect refunds. Avoid this risk by limiting the amount of refund you receive
  • Use on –line tax calculators to see if your estimated tax withholding is correct; the IRS and Kiplinger’s both provide these
  • File a revised W-4 with your employer this year to change your tax withholdings; remember the goal is to break even

Shift Income?

Then consider if you can shift income to decrease the amount of tax owed:

If you think your income will decrease next year and your tax rate would be lower, can you:

  1. Defer a year-end bonus to January 2015?
  2. Postpone a sale that will trigger a gain to next year?
  3. Delay exercising stock options?

Alternatively, it may make sense to move income to this year:

  1. Covert a traditional IRA into a Roth IRA and recognize the conversion income this year
  2. Take IRA distributions this year?

Shift Payments?

If you itemize, would you benefit if you changed the timing of some of your payments?

If you expect your income to decrease next year, then you might want to move some payments/deductions to the current year to offset your higher income this year. Can you:

  • Prepay property taxes?
  • Make your January mortgage payment this year?
  • If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
  • Consider the timing of medical expenses so you can benefit from the deduction?
  • Sell some or all of your loss stocks?
  • If you qualify for a health savings account, consider setting one up and making the maximum contribution allowable

Defer Deductions into 2015

If you expect tax rates to increase next year, or if you anticipate a substantial increase in taxable income, you may want to explore waiting to take deductions until 2015:

  • Postpone year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent you might get a deduction for such payments
  • Postpone the sale of any loss-generating property

Can you do anything else?

For those that would like to take it a step further, consider if there is anything you can do to increase your “Above the Line Deductions”.

On a Federal Individual1040 tax form, the basic formula is:

Income minus “Above the Line” deductions = Adjusted Gross Income.

These deductions include paying monies to:

  • Establish an IRA for you or your spouse?
  • If qualified, set up a Health Savings Account?
  • If self-employed, would you benefit from having health insurance or a Qualified Pension Plan?

While this is not an exhaustive list, I hope it gives you enough information to initiate your plan, act this year, and save money on your next tax bill.

A dollar saved is a dollar you don’t need to earn. Keep marching towards financial freedom. Happy planning!

Deb Fox is working to make a difference in peoples lives, hearts, and wallets by helping others protect their financial health and is available for side-by-side, remote, or mobile appointment. More information is available at www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com. Thanks for reading

Milestones & Mountains – the LGBT “Financial Playing” Field

In Honor of the 40th anniversary of the San Diego Pride Festival this weekend, I offer an update about “Financial Equality” for the LGBT community, with whom I celebrate the financial victories that have been achieved since we celebrated this festival last year. 

Last year, we had 2 huge U.S. Supreme Court 6/26/13 decisions to celebrate:

  1. The Defense of Marriage Act (DOMA), section 3, was declared unconstitutional
  2. Proposition 8 defenders lacked “standing” which cleared the way for Legal Gay Marriage in CA

We also celebrated because Same-Sex Marriages (SSM) had just been allowed to resume again after a long break between 11/5/2008 through 6/27/2013.

This year, we have many reasons to celebrate, let’s call them “milestones achieved”.

We still have some mountains left to climb before the SSM “playing field” matches the “playing field “ of married opposite-sex couples.

Perspective:

The right to SSM is important for many reasons. For example, Wells Fargo issued a study in June 2014, in which the top 3 rights and benefits were listed for those surveyed:

  • Healthcare decision making rights 61%
  • Insurance and healthcare coverage 58%
  • Inheritance rights 56%

Health care decision-making can affect the quality of life. Insurance, healthcare coverage, and inheritance rights, all have a significant effect on the “financial equality” of life.

These rights and many others are becoming available to those that can legally marry their same-sex partner.  T

Today, SSM rights and benefits look more like a patch-work quilt across the United States as compared to those enjoyed by opposite –sex married couples who begin to enjoy their benefits, often as soon as they say, “I do”.

There has been tremendous progress and numerous changes since we celebrated San Diego Pride last year. Milestones to celebrate now include:

Same-Sex Marriage is fast becoming a reality for more people:

  • 19 states & the District of Columbia have Legal Same-Sex Marriage and 31 states have Same-Sex Marriage Bans
  • 12 states have had gay marriage bans overturned and appeals are in progress
  • 8/29/13 All Legal Same- Sex Marriages will be recognized for federal tax purposes as per the U.S. Department of Treasury
  • 9/16/13 effective date for Revenue Ruling 2013-17 which reads: “that for federal tax purposes, the Service adopts a general rule recognizing a marriage for same-sex individuals that was validly entered into a in a state whose laws authorize the marriage of two individuals of the same-sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages.”
  1. This opened the door to file original returns, amended returns, and claims for credit or refund for any overpayment of tax, provided that the applicable limitations period was still open under section 6511
  2. Couples can “pick and chose”, by year, which return, if any, they chose to amend, as long as the window is still open. Big return? Amend. Owe? Skip it.
  3. The window to amend the 2010 return, generally, expired on 4/15/14
  4. The 2011 1040 return can be amended until 4/15/15
  5. The 2012 1040 return can be amended until 4/15/16

Earlier this week, I attended an IRS DOMA seminar, which was introduced to about 300 tax professionals as “DOMA is about money, it has nothing to do with sex”.

SSM, is partially about money. The Windsor  (DOMA) case was about inheritance rights between spouses.

  • Federal tax law allows a deceased spouse to leave their assets, including a home, to the other spouse, without incurring estate tax. The Estate Tax Rate is 40%.
  •  The DOMA ruling resulted in Windsor being owed an IRS refund of $363,053 for the estate tax she had paid

The Estate Tax is a tax on your right to transfer property at your death.

  • Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse
  • 6/20/14, the Social Security Administration issued guidelines on eligibility for spouse-based retirement and survivor benefits, Medicare, and SSI benefits
  • 7/16/2014, the Connecticut Supreme Court rules that a Lesbian Widow has legal rights that predate Marriage Equality in the state.

Mountains:

  • SSM couples are unable to receive Social Security Spousal Benefits if they were married in one of the states that allow same-sex marriage but live in a restrictive state (reference Bankrate Retirement Blog 7/1/14)
  • Veterans benefits also are restricted for those living in states that do not allow same sex marriage (same reference as above)
  • The right to inherit pension benefits could fall under the “it depends” category. A recent 6/2/14 article about the Bayer Corporation provides some insight
  • Family Medical Leave Act does not cover same-sex spouses. Some employers grant this right to their employees and kudos to them.
  • Nationwide, there is not a federal law against LGBT workplace discrimination. A bill to accomplish that goal, the Employment Non-Discrimination Act, passed the Senate last year but has not yet been taken up by the House

In closing, as an American, I believe that all American’s should have the same rights and protections, under federal law.  The financial “playing field” should be the same regardless of whom you love and where you live in the United States.

Discrimination should be something all citizens do not have to fear or endure.

My name is Deb Fox and I am the proud sister of two gay brothers and multiple LGBT friends. I am an advocate and an ally. I believe in equality and am trying to do my part to make a difference, here now, today, and tomorrow.

Deb Fox is working to make a difference in peoples lives, hearts, and wallets. Although she earned her CPA in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others protect their financial health and is available for side-by-side, remote, or mobile appointments.

 

Where is “The Help?”

We have a need. We have a want. Where is The Help?

Where is the help if we want to talk to an affordable professional about our money?

The Need:

Many of us worry about our money situation because of consumer debt, student debt, limited savings, or the ability to retire.

We might worry, but talking about our money is not something we like to do. A recent survey by the National Foundation for Credit Counseling (NFCC) showed that we would rather tell people how much we weigh than the amount of our credit card debit or our FICO score. Many of us are embarrassed.

We might not want to talk about our money situation, but we also know that we could benefit if we did. We know what we don’t know or understand.  We might be comfortable not thinking about it, but this only allows anxiety to grow and does not change anything. A comfort zone can be a beautiful place to be, but nothing ever grows there.

The Want:

We all need and want financial stability.

We might know what to do with our money and just not do it. We know that we need to spend less than we make, but doing that is hard. It can also be hard to save and not spend. We have heard, pay your self first, but do we? We leave money on the table by not getting the full company match for our 401k plans at work.

Most of us were not taught how to manage our finances when we were in school.  We learned the hard way: through trial and error and through the “school of hard knocks”.

Increasingly, we want financial literacy taught in our schools. Students need to learn how to balance their bank account, manage debt, credit, and avoid financial traps.  In short, we want our children or the youth of our community to be better prepared than we were.

The Help:

Clearly, we have a need and a want. Where can we go for affordable help?

Historically, formal financial planning services were designed for and enjoyed by those who had large sums of money to protect. Comprehensive Financial Plans are expensive and time consuming to prepare. Financial Planning service firms may have provided this service at a nominal cost and made their money by selling insurance or investment products or by providing investment management services.  This works well for people who have plenty of money and the need for a comprehensive plan.

Where is the help for those that have less money?

Where is the help for those that do not yet need comprehensive financial plans, but have questions about their money?

Where is The Help for the:

  • Young Adult?
  • Young Career?
  • Young Family?
  • Families living paycheck to paycheck?
  • Working Poor?
  • Shrinking Middle Class?

Over the last few years, service providers have started to pop up. The marketplace had a void and some are stating to fill it, including me. I want to make financial planning, understanding, and capability more accessible for this underserved market for both individuals and small business owners.

For personal finance, maybe you would like to:

  • Talk about your money situation, evaluate, prioritize, act, and build confidence about your economic future?
  • Learn to use a systematic approach to evaluate a financial decision?
  • Have a mentor/friend to help empower you to become more accountable?

For the entrepreneur or small business owner, would you benefit by learning new business skills about:

  • Pro-Forma financials for your business plan?
  • Budgets and cash flow?
  • Tax planning?

For those that like to read and learn on your own, there are a lot of good resources out there to help you.  I have resources listed on my website at www.debfoxfinancial.com. I also blog, post frequently on my Facebook page and share information on Twitter.

Perhaps, you learn best by working “one on one” and would benefit by having the opportunity to ask financial questions and then work together, as a team, to learn, grow, and achieve your financial goals.

I believe that the scope of financial services should be broader than is currently available and want to use my expertise and experience to help others.  We could work together on one project, many projects, or perhaps, I can just be a resource for financial information?

Execution matters. I can help. It is important that you know that I would not tell you what to do.  I can be a financial compass and help you sort through choices and evaluate the potential costs and the benefits of the available options. You decide what is best for you.

I am a financial literacy advocate and want to provide affordable financial solutions by providing meaningful, actionable, advice. If you can afford a personal fitness trainer; you could afford “one on one” help from me.

Takeaways:

  • Decisions made today affect the options available to you in the future
  • What you do today with “Your Present Self” has a direct impact on “Your Future Self”
  • An investment in you today can result in a financially stronger you tomorrow
  • Financial strength brings more freedom of choice

“Tell me and I’ll forget. Teach me & I may remember. Involve me & I learn” – Benjamin Franklin

Deb Fox is working to “make a difference in peoples lives, hearts, and wallets”. Although she earned her CPA designation in 1997, she is not currently practicing as a CPA. She does use her knowledge to help others. She does not give investment advice; this is outside her areas of expertise. She can help with financial planning, tax, accounting, and commercial property and casualty insurance questions.

Website: www.debfoxfinancial.com

E-mail: debfoxfinancial@gmail.com

Twitter: @debfoxfinancial

 

Have you reviewed your legal business structure for tax savings and/or liability?

Tax Time is a great time to review your business financial life and determine if there are changes you can make to help you keep more of the money your earn in your pocket. One way to do this is to see if your legal business structure provides you the best opportunity for tax savings and/ or more limited liability.

In the U.S., there are four major legal choices to chose from when deciding how to operate your business: sole proprietorship, partnership, corporation, and the limited liability company. There are also variations within these categories, such as the S-corporation.

Making this decision is complicated and both an attorney and an accountant should be consulted to provide information to help you decide which form may be best for your business. Factors to consider include:

  • Legal Liability
  • Tax implications
  • Cost of formation and record keeping
  • Flexibility
  • Future needs

As someone with both an accounting and risk management background, I look at choices from both perspectives. The number side of me wants to find out if there is a way to save money. The risk management part of me wants to make sure we are protecting the money we have. The following business entity review focuses upon these two aspects.

Liability can arise from negligence, statutory law, and assumption by contract. The risk of potential liability varies by business entity form.

Sole Proprietor: Flying Solo

  • Taxpayer is the owner; the business is not separate
  • Unlimited exposure to liability
  • All debts or claims against the business can be filed against the owners’ personal property
  • If the owner is sued, insurance is the only form of protection
  • The business itself is not taxed separately; The IRS calls this “pass-through” taxation, because the business Profit and Loss passes through the business to be taxed on your personal tax return
  • Tax is based on your personal income level and is taxed at graduated rates
  • File your personal income tax on Federal Form 1040 and all business information on Schedule C or Schedule F, Profit or Loss from the business
  • Sole Proprietors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • The self-employment tax rate for 2014 is 15.3% of the first $117,000 of income and 2.9% of everything above that amount
  • Self-Employment taxes are reported on Federal Form Schedule SE
  • Sole Proprietors can deduct ½ of this cost on 1040-Line 27, the deductible part of self-employment tax 

Partnership: Two or More

  • General Partnerships: Partners are exposed to unlimited liability for business expenses
  • Limited Partnerships: General Partner is personally liable; Limited Partners have limited liability unless they are participating in management
  • Depending on the form, Partners may lose their investment and/or personal assets as well
  • Partners are not employees and should not be issued a W-2
  • Partnerships file an annual information return on Federal Form 1065; Schedule K1 form is used for the individual member’s profit and loss allocations
  • Individual Partners file their personal tax information on Federal Form 1040 and Schedule E, Supplemental Income and Loss
  • Taxable at the personal income level and at the graduated rates
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

C-Corporation: Double-Taxation applies

  • Separate legal entity that exists, separately and is distinct from its owners
  • Owners’ personal assets are protected from claims against the corporation
  • Generally, the owners of a corporation cannot lose any more than they have invested in the corporation
  • The corporation is taxed and can be held legally liable for its actions
  • Double-Taxation applies: the profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends
  • Owners do not pay tax on corporate earnings unless they receive money as compensation for services or as dividends
  • The corporation pays taxes on the annual net earnings and files Federal Form 1120
  • Corporate owners, who want to leave some profit in the business, may benefit from lower corporate rates
  • For example, 2013 corporate tax rates are 15% for taxable income below $50K, plus 25% for taxable income between $50K-$75K; perhaps, lower than individual rates
  • Corporate taxation is more complicated than the pass-through taxation
  • Self-Employment tax does not apply; FICA payroll taxes are shared 50/50 between the corporation and the employee

Limited Liability Company (LLC) – Single Member

  • An LLC is an entity created by state statute
  • LLCs are state entities, so the level of legal protection given to a company’s owners depends upon the rules of the state in which the LLC was formed
  • Tax reporting depends on the status of the LLC
  • Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return; i.e. a disregarded entity
  • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes unless it files Form 8832 and elects to be treated as a corporation
  • If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return on Federal Form 1040 and Schedule C, Schedule E, or Schedule F
  • An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship
  • A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Federal Form 8832 and elects to be treated as a corporation
  • All income, gain, loss, and deduction flow through to members unless the LLC is taxed as C-Corp
  • No double taxation unless the LLC choses to file as a corporation
  • Taxable at the personal income level and at the graduated rates
  • Self-Employment Tax applies except if the LLC operates as C-Corp
  • File Self-Employment tax on Schedule SE; see Sole Proprietor for additional information

Subchapter S-Corporation (S-Corp): Double Taxation does not apply

  • Separate legal entity
  • Limited liability for shareholders, officers, and directors
  • Generally, a corporation’s shareholders are not personally liable for the corporations debts just because they have ownership in the business; the same is true for the members of an LLC
  • S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes
  • Generally, the S-Corp does not pay Income Tax at the Corporate level; they can be responsible for tax on certain built-in gains and passive income at the entity level
  • Self-Employment tax does not apply
  • Many small business owners use S-Corps because they can save a business owner Social Security and Medicare taxes
  • Owners receive a salary and normal payroll taxes apply
  • As an owner-employee, the corporation pays ½ of the payroll tax which can be a substantial tax savings to the owner-employee
  • An S corporation must pay reasonable employee compensation to a shareholder-employee in return for the services the employee provides before a distribution
  • File S-Corp informational return on Federal Form 1120-S
  • Income, gain, loss, and deduction is passed through to share holders
  • Shareholder-employees will receive two tax documents from the S-Corporation: a W-2 wage statement and a Schedule K-1 statement
  • Shareholders report the flow-through of income and losses on their personal tax returns; taxed are based upon the individual income tax rates
  • Double-Taxation does not apply
  • Shareholder-employees are taxed on their salary income and on any profits distributed by the S-Corporation
  • Profit distribution is not subject to FICA payroll taxes; salaries paid must be reasonable for services provided
  • Shareholder-Employees file Federal Form 1040 and Schedule E – Supplemental Income and Loss
  • Under California law, the S corporation is subject to a 1.5 percent tax on its net income
  • See if special tax rules apply in your state

Understandably, reading about tax implications and legal liability might seem a bit boring. Most would agree. Think about it this way:

  • Money saved is money you do not need to earn
  • Knowing you are protected is a good form of “sleep insurance”

Chinese Proverb: To open a shop is easy; to keep it open is an art.

Deb Fox can be reached via twitter @ debfoxfinancial or via e-mail @ debfoxfinancial@gmail.com.

http://www.debfoxfinancial.com/