5 Ways a CPA can help Small Business

 

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Small Business Owners, particularly in the early stages, are doing it all.

Sometimes it can feel like an up hill battle. There is so much to do, and learn, and not enough time to do it. Financial resources can be scarce and stretched thin.

Sometimes spending a little can help you a lot. The value is apparent.

What We Do:

CPA’s do much more than crunch numbers and report on facts that have already happened in your financial statements.

CPA’s provide advice. We educate our clients and help them improve their financial business results.

Our value can often be quantified, measured, seen and/or felt by business owners.

CPA’s provide a wide variety of services.

I enjoy helping small business owners with income tax and with all the detail that includes. I understand almost no one likes tax; however, we all like to save money. For me, using IRS rules to help others is fun.

How We Help:

1.  A CPA  can help prevent “Blind Spots”:

What you don’t know can hurt you. I’m not telling you this to scare you. Rather, to educate you and provide an objective example.

Many new Small Business Owners do not know that the IRS expects them to pay tax as the money is earned and that quarterly reporting and payments are required if you expect to owe more than $1,000 annual tax to the IRS.

This means that you need to keep your accounting records current so you can determine if you need to begin quarterly reporting and payments. 

2.  A CPA can help with your Budget:

  • Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400
  • The 2015 SE tax rate on Net Earnings is 15.3: (12.4% social security tax and 2.9% Medicare tax)
  • Do you include this expense in your budget so you have cash when it is time to pay the IRS?

 

3.  A CPA can help you make Decisions:

  • Data (information) can be used to help you make cost effective decisions
  • Review Forecasted to Actual Financial results – what happened?
  • Help a business owner interpret the financial statements and offer suggestions to improve profitability, cash flow, and efficiency

 

4.  A CPA can help you Minimize your Income Tax:

  • Do you know what you can legally deduct on your tax return?
  • Do you know how to use strategy to reduce your business tax bill?
  • Tax Planning includes education, evaluation, and action

 

5.  CPA can help you improve Profitability:

  • When I told an architect that they were required to pay Self-Employment tax, they were shocked. They told me, I have to raise my prices immediately. I am not making any money.
  • We can help you determine if your pricing is profitable or if you are working for free or for not as much money as you thought you were making
  • You don’t want to wait until year-end to find out
  • As we all know, time is money and the faster we can earn it and build a financial cushion, the more comfortable we feel

 

You have 3 choices:

  1. Do it yourself – inexpensive, but can be costly
  2. Do it for me – expensive & might be seen as a luxury until the cash starts coming in – consistently
  3. Do Some of it for me: a cost effective bridge to obtain education and help on a “as needed” basis

 

Thanks for reading,

Deb

Call me about an Accounting & Tax Tip Cheatsheet  619-549-2717

 

Deborah Ann Fox, CPA helps Small Business Owners & Individuals build and protect their financial wealth. She can help by being your financial compass while you captain your ship.

Debbie offers free 30 minute no obligation consultations. We can discuss/resolve via a mix of e-mail, phone, virtual, and in-person communications.

http://www.debfoxfinancial.com

Call 619-549-2717

E-Mail me @ debfoxfinancial@gmail.com 

Twitter: @debfoxfinancial

Facebook: Deborah Ann Fox, CPA

 

Tax Tips for Independent Contactors & Sole Proprietors

 

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Tax Planning & What Money is Really Yours to Spend?

“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin

Death will only come once, while taxes linger with us year after year.

Many of us spend 2,000+ hours a year working to earn money. Doesn’t it make sense to spend a few hours to learn how to manage it, particularly, when it comes to tax, which is our most expensive lifetime expense?

This blog is offered as a tool to help Independent Contractors & Sole Proprietors avoid tax “surprises” and pro-actively plan their cash flow.

Why Read? Cash Flow – You need to know: What money is really yours to spend?

Many taxpayers were surprised earlier this year when they filed their 2015 tax returns. Why? They were not prepared for the tax affect of having earned what the IRS calls “non-employee compensation”.   For example, the 15.3% Self-Employment Tax was an unexpected hit to their cash flow.

Who should read? : (Independent Contractors including Direct Sellers, Freelancers, Airbnb Hosts, Uber & Lyft Drivers, Internet Sellers)

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, Profit or Loss from the business
  • Self-Employment tax is required if your annual net-earnings is more than $400
  • Net Earnings is determined by tracking both the revenue earned and the corresponding acceptable business expense

What to Do:

Self-Employment requires both basic accounting and additional tax reporting

Accounting:

Maintain a Basic Profit & Loss Statement to determine Net Earnings per Quarter

  • A Profit & Loss statement is needed to determine if you owe income tax and self employment tax
  • If expenses are less than income, the difference is Net Profit
  • If expenses are more than income, the difference is Net Loss
  • Losses may be limited on your tax return
  • Expense definition may differ for “books” and “tax”
  • Tax requires that certain expenses “be capitalized” and expensed over a period of time

Income includes:

IRS Form 1099-Miscellaneous (1099-M)- Income

The Gig Economy is also known as the 1099 Economy because Independent Contractors should receive this form from anyone that has paid them $600 or more during a tax year. The form is sent to both to you and to the IRS. This means, that yes, you need to report the income – even if you did not receive your 1099-M form or if you were paid less than $600 from a single source.

IRS Form 1099-K- shows Income you received through payment processing platforms

  • PayPal and other merchants that process payments for your business will issue this form to you & yes, the IRS
  • The form is issued in settlement of third-party payment network transactions above the minimum reporting thresholds of $20K in transactions and 200 transactions
  • The income reported is the Gross amount of all reportable transactions
  • The Gross amount does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts
  • The dollar amount of each transaction is determined on the date of the transaction
  • The 1099K only shows income paid to you; it does not include charge backs to your account or fees you paid
  • You are responsible for tracking your “income” – you certainly don’t want to pay tax on more than you actually received

Be aware that possible “double reporting” could occur – Reconcile to avoid  “overlap”:

  • Your clients could issue you a 1099-M and send a copy to the IRS
  • PayPal or another vendor could, theoretically, include this same income when they send you a 1099-K
  • Although it is not required, it is a good idea to at least review, if not reconcile, what is being reported as “income to you”
  • Consider creating a spreadsheet to Cross –Reference payments, for a 1099-M and 1099-K comparison

Business Expense:

1099 Income can be reduced by the related “ordinary and necessary” expense

  • Receipts and mileage logs must be maintained to support the deduction expense you claim on your tax forms
  • Mileage logs should include beginning and ending mileage, where you went, who you saw, and why you went (business purpose)
  • Receipts fade. Add notes in ink and then scan to preserve
  • Ordinary expense = Common or accepted in your trade or business
  • Necessary expense= Helpful or appropriate for your trade or business
  • The IRS code provides for allowable deductible expenses and the IRS can take the deductions away if records are not maintained

When: Tax Tips for Filing Requirements:

Federal, State, & Local Tax may need to be paid each Quarter

  • 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
  • Quarterly estimated tax payments should be paid if you expect to owe more than $1,000 in federal taxes
  • Use 1040ES- Individual Estimated Payments
  • Reconcile payments on your annual Year End tax return
  • File your federal return on Form 1040 and Schedule C- Profit or Loss from Business (Sole Proprietor)
  • Check to see what tax reporting is required by your state tax board and local municipality

Schedule C:

  • If you drive for Uber and also sell items on ETSY, a separate Schedule C is required for each source of business income.

Self-Employment tax of 15.30% is required on all Annual Net Earnings of more than $400

  • Sole Proprietors & Independent Contractors must pay both the employer and the employee side of Social Security and Medicare taxes; this is called Self-Employment tax
  • The 2015 SE tax rate on Net Earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).
  • The Self-Employment tax rate is 15.3% of the first $118,500 of income and 2.9% of everything above that amount
  • If you also work as an employee, be careful that you do not overpay your Social Security tax. The $118,500 applies to your combined wages, tips, and net earnings
  • 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

Tips for Financial Success:

  • Don’t Co-Mingle Personal & Business Money – keep separate accounts
  • Maintaining separate accounts helps to show your business intent of making a profit
  • Use tax planning for better cash flow management
  • Profitability is the goal for most small business and one great tool to get there is to use the tax laws that are designed to help your success

Action Steps:

  • Fine tune your DIY process and use the above information as a guide – schedule time to review financials and calendar dates for payments
  • If you want some help or prefer a “Do it for Me” process, contact me for an introductory special

Your Success matters to me.

My intent is to use my blog to educate and empower others by teaching tax rules to save you money.        Thanks for reading!

You either master money, or on some level, money Masters you” – Scot Alan Turner

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health. Her mission is to be an affordable & accessible resource to help answer money questions for individuals and small business. She can help by being your compass while you captain your ship. 

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

 

 

Starting Over – A Happy Tax Story

 

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Zig Ziglar said, “We cannot start over, but we can begin now and make a new ending”.

The Problem:

A few years back, I had a contact call me in a panic after she had finished her initial attempt at preparing her own tax return. She owed almost $5,000 and was shocked that she owed that much money.   It was scary because she didn’t have the money to pay that kind of tax bill. She called me for help and advice.

The Beginning:

To put this into perspective, this was her 1st year to file Single.

Previously, her husband of almost 25 years had handled their tax returns. They had filed Married Filing Joint and had dependent children. At work, her tax withholding was based upon her previous situation, not her present circumstance.

Originally, she thought filing a tax return would be simple and at first, it seemed as if it was. TurboTax asked her questions and she completed the answers the best that she could.

The Middle:

After receiving her call, we agreed to meet and I reviewed what she had completed, but had not yet filed. After a good interview process, we had a game plan and she began to collect tax related documents that could be used to determine the feasibility of itemizing rather than to use the standard deduction.

The End:

After several weeks of back and forth questions and answers, I had the documentation that I needed to help her complete a revised return. This resulted in about a $3,900 savings and she thankfully, filed her federal and state tax returns.

The Zig Ziglar quote is great, but it did not fully apply in this situation. She could “start over” and could also make a new ending.

Since that time, we work together every year. We don’t just wait until the tax season to talk. We use tax planning and action during the year to manage her annual tax bill and to keep it as low as possible. Frequently she knows her current tax situation before 12/31. We don’t know the exact number, but she does have the comfort of “No Surprises” when the tax season officially arrives.

The Lessons:

  • Sometimes, a 2nd look can make a big difference
  • If the tax filing process is new to you, having someone help you, may prove to be beneficial
  • If you ask someone to help,  try to find someone that will take the time to educate you about the process.
  • It is empowering to learn and apply the tax rules; it saves you money 

Thanks for reading!

Deborah Ann Fox, CPA is working to make a difference in peoples lives and wallets, by helping them build and protect their financial health.

Debbie offers free 30 minute no obligation consultations and is available for appointments – including remote. More information is available at http://www.debfoxfinancial.com. Questions or comments can be sent to debfoxfinancial@gmail.com 

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!

Money Spent, Wisdom Gained, & 20 Helpful Tips

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Many of us have said, “I wish I had known then what I do now; I would have done things differently”.

This is particularly true when it comes to money & our financial situations. Money trouble or challenges occur for a variety of reasons:

We spend when we shouldn’t or we spend without understanding the true cost:

As a student, perhaps we used some of our student loan to go shopping. Maybe, we bought things we knew we couldn’t afford because we wanted or deserved it, or signed contracts without reading or fully understanding them.

We spend because we lose our job & spent our financial safety net to survive

Sometimes we end up in money trouble just because of unexpected life events. This has happened a lot since 2008 when people suddenly found themselves with a “pink slip” & not able to get another well paying job. Even if you had the now outdated 3-6 months livings expense safety cushion, it wasn’t enough. Debt piled up.

We spend because we don’t have any other choice; it is a revolving circle:

When debt piles up, we may play the “rob Peter to pay Paul” tactic & move debt from one card to another.

We pay the bills for the services that are the most important to us – housing, electric, phone, gas, & food and hope we can pay the rest of the bills -soon. We hope something will change and actively seek solutions.

We spend to pay high service fees: Fringe Banking, Unbanked, & Under -banked:

The movie “Spent: Looking for Change”, is about hardworking Americans who do not have access to traditional banking services. The film tells us that there are nearly 70 million Americans that are unbanked & financially underserved. They use check cashers, pawns shops, payday lenders, & money order services. These alternative financial services are expensive & those that least can afford it spend more than traditional bank users to cash their payroll checks & to pay their bills.

We spend because we want our tax refund now:

Low to moderate income tax payers pay extremely high interest rates & fees to get some or part of their tax refund now rather than wait a couple of weeks and avoid these needless high expense charges.

The National Consumer Law Center’s website provides the following description:

  • Refund anticipation checks (RACs) – RACs are a financial product used to deliver refunds and to pay for tax preparation fees by deducting them from the consumer’s tax refund.
  •  RALs from non-bank lenders – A few payday and other non-bank lenders are offering RALs. These loans could be more expensive and riskier than bank RALs.

Since the 2008 recession, many people have permanently changed the way they spend their money.

Following are 20 tips to help you make your money go further. This, then will provide you the opportunity to either pay down debt, build a safety cushion, or invest in your future.

Money Management & Spending Tips:

  1. Some “assets” appreciate and can go up in value; spending money here makes sense
  1. Other “assets” depreciate as soon as you buy them – cars, furniture; consider buying used or refurbished
  1. Accountants use a term called “Sunk Costs” which means a cost that has already been incurred & cannot be recovered; limit your sunk costs
  1. Opportunity Costs: the value of something that must be given up to achieve something else; limit how much you spend on a things that you want; you might need the money later for a need
  1. Good debt provides you an opportunity to get ahead; there can be a return on your investment; i.e. a mortgage on a home
  1. Bad debt includes high interest rates on unpaid credit card balances
  1. Borrowing on credit is expensive; debt makes you a slave to payments; you’re a hostage with limited life choices & flexibility
  1. Building & Maintaining a good credit score means it will cost you less to borrow money
  1. Forgo bad debt & instead, build toward your dreams
  1. When you want to spend instead of save, think about your long-term goals. Is going out to eat, buying coffee at Starbucks, going shopping because you feel depressed or want something new worth adding more debt or forgoing savings?
  1. Read your contracts & plan for both the best & the worse scenario- can you afford both?
  1. Know that managing money is becoming more simple and that there are is a lot of free help
  1. Use the internet to learn more about personal finance- Coursera offers free classes
  1. Use on line tools to help you determine your best money moves; I have several on my website, on the resources page
  1. Hire someone to help you understand & determine your best possible alternatives
  1. Avoid “problem pile-ups”- it is too hard to solve almost anything that way. Choose one thing to work on, resolve, choose another
  1. Don’t beat yourself up if you made what you consider a “money mistake”. Ideally, we all learn as we grow. This is a normal part of life & it is fully possible to recover & regroup
  1. Don’t assume you know the answer, because you think “it is true” or someone told you. Look for the answer yourself or try to get your answers in writing from an objective source
  1. If you are a parent, be careful that you are not unintentionally teaching your children poor money habits by saying things like, “I am not answering the phone, it is another bill collector”
  1. Sometimes we learned poor money habits as a kid and carried them with us in to adulthood without realizing it. This has become so common that there is a new field of study & help: Behavioral Finance. Learn about this is if it applies to you

Deborah Fox, CPA is working to make financial information affordable & accessible. She helps others improve or protect their personal or business financial health by answering specific money questions. She provides information while building knowledge & practical skill levels for her clients. She is available for local or remote appointments. Thanks for reading.

Website: www.debfoxfinancial.com

e-mail: debfoxfinancial@gmail.com

Phone: 619-549-2717

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

Self-Directed IRA’s – Are these for you?

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Many of us are familiar with the Traditional IRA’s and the investment opportunities they provide. Less commonly known is the Self- Directed IRA, which offers a greater choice of investment options, including real estate.

I am not a financial advisor selling investments.

I am a CPA who just finished reading a book titled, ‘Leverage Your IRA, Maximize Your Profits with Real Estate’. One of the authors is a CPA and a Certified Financial Planner. I read this book for personal reasons and to learn the tax aspects so that I could be an informed resource for others. I found the information beneficial and hope you will as well.

Investment Opportunities:

There are two types of Individual Retirement Accounts (IRA’s):

  • Traditional: IRA’S: Most retirement plans are tax deferred and are funded with pre-tax dollars. Traditional IRA’s, SEP IRA’S, SIMPLE IRA’S, and 401 (K) plans are in this category; tax is deferred and paid at a future event such as a withdrawal /distribution
  • Roth IRA’s and Roth 401k’s are tax-free because they are funded with after -tax dollars

Traditional IRA’s allow funds to be invested with banks, brokerage firms, mutual fund companies, and insurance companies.

Self-Directed IRA’s allow the Account Holder many more investment options. For example, Self-Directed IRA retirement account funds can be invested in mortgages without having to “cash out” to make the investment. Investments are made inside this type IRA and funds can be rolled over from traditional accounts without a penalty.

Self-Directed IRA’s can invest in just about anything except:

  • Collectibles
  • Life Insurance contracts
  • Subchapter S Corporation stock (S-Corps cannot have an IRA as a stock holder)

Your Self-Directed IRA can purchase rental properties, commercial properties, tax liens, foreign real estate, buy mortgage notes, loan money earning interest, and more. Assets need to be handled as investments and cannot be used personally by you or any disqualified person. Your IRA owns the investment, not you. Investment possibilities may include:

  • Buying real estate from an unrelated party with cash
  • Buying property with a down payment and obtaining an “unsecured loan”
  • Co-investing with other parties

Income and capital gains can flow back to IRA’s tax-deferred (Traditional) or tax-free (Roth), if the IRA does not have a related real estate loan.

Real Estate Loans are possible and are “Unsecured”; your IRA funds cannot be used as collateral as security and there is no recourse against the Account Holder. In the event of default, the lender can only look to the property or the leases for repayment.

Non-Secured Loan Qualification is underwritten similar to a commercial real estate property loan. Criteria includes:

  • The Property – the lender needs to be satisfied with the value, marketability, and the condition of the property
  • Cash Flow – does the property cover the mortgage and the expenses?
  • IRA Funds – are the funds sufficient to cover the down payment, closing costs, pre-paid costs for taxes and insurance, and reserves for repairs or vacancies?

Down payment requirements vary by the lender and the property type. One such lender that provides Unsecured IRA Loans is North American Savings Bank (www.nasb.com)

Safeguards – how to protect your investment

Transactions need to be handled by a Specialized Custodian or Administrator. If you handle the transactions, the transaction could become taxable and the value of your money is at risk. Always follow the rules and keep your IRA funds and you safe.

While the Self-Directed IRA’s offer greater investment choices, there are also specific IRS rules that must be followed to protect your IRA. For example, “Self-Dealing” and “Prohibited Transactions” must be avoided.

The Exclusive Benefit Rule applies to all IRA’s. This means only the IRA can benefit from the transaction and that the IRA owner nor any other “disqualified person” may receive a personal benefit as a result of a transaction by their IRA; i.e. your IRA cannot buy your vacation home.

IRS Publication 590 (2013), Individual Retirement Arrangements (IRAs) includes the following about Prohibited Transactions:

Generally, a prohibited transaction is any improper use of your traditional IRA account or annuity by you, your beneficiary, or any disqualified person.

Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of a lineal descendant).

The following are some examples of prohibited transactions with a traditional IRA. ***

  • Borrowing money from it
  • Selling property to it
  • Using it as security for a loan
  • Buying property for personal use (present or future) with IRA funds.

With any investment, Due Diligence is always important. Knowledge is power. As Benjamin Franklin said, “An investment in knowledge pays the best interest”.

I encourage you to take the time to become an educated investor prior to considering using any portion of your retirement funds in a Self Directed IRA. Additional information can be found at:

  • Retirement Industry Trust Association (RITA) is a non-profit trade association formed in 1987which represents Trust Companies, banks, attorneys, accountants and other service providers in the self-directed retirement plan industry. http://www.self-directed-retirement.org/investor-resources/
  • Review “Self-Directed IRA Custodian” websites
  • For more in-depth information on Prohibited Transactions, you may wish to read IRC 4975
  • Discuss with your CPA, Tax Attorney, or other experienced investors about their Self-Directed IRA

The information provided in this post is intended to be a good basic primer about Self Directed IRA’s. A comprehensive review is beyond the scope of this blog post.

Please let me know if you have any questions or if you would like me to post a more technical blog about UDFI (Unrelated Debt-Financed Income) and UBIT (Unrelated Business Income Tax), which can apply if an IRA real-estate loan is part of the IRA transaction.

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.

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.