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.

 

Creating Freedom – in honor of the 4th of July

In honor of our 4th of July holiday, I searched for the word freedom and then discovered a new word. Ataraxic and, playfully, I decided it is a “condition” that I want to “suffer” from. What does it mean? One simple definition is “freedom from worry”.  Can you imagine?

Worry, is something nobody likes to do and most people want to avoid. We know that worrying is a waste of time & energy. We also know that it does not get it us anywhere, kind of like expecting to move forward when we rock in a rocking chair.

Ok, so maybe, we try not to worry, but at best, we are at least sometimes pre-occupied with thoughts that concern us. We think about our financial situation, our health, our families, friends, and of our longevity.

In case you are wondering how this might fit with my goal of providing “financial wellness” please read on and let me explain.

Living longer gives us more of an opportunity to enjoy life. It also creates more of a financial risk. Will our money last as long as we do?

Regardless of our age, thinking about this is important. Planning and preparing is imperative. In fact, those that are younger, have the greatest opportunity to plan and prepare. Those that are a bit older are more limited, and yet would still benefit from reviewing the following:

Benchmark how much money you need when you “retire”:

  • How much do you need to live each year?
  • Generally, it is not safe to assume you will just spend less; i.e. health care costs can increase as we age and you may travel more

How are you going to pay for it?

  • Social Security?
  • Pension or Retirement Funds?
  • Savings or Investments?
  • Working Part-Time?

How many years does your money need to last?

  • The Social Security website has a calculator that you can use to estimate your longevity

Note that woman, in particular, might want to save more money than their typical male counterparts. Why?

  •  Statistics show, that woman, on average, are paid less than a man
  • Women might leave the job market to have children and thus can earn less, over their lifetime
  •  Earning less could result in a lower Social Security benefit

Let’s suppose that you decide that you want to continue working part-time until you reach your “Full Retirement Age” or even post-pone retirement until the maximum age of 70 when you must start drawing upon your Social Security Benefit. Doing this can pay big dividends, in the form of increased monthly payments.

There is one big caveat to this plan and this, too, we can try and plan for. Generally, we must have our health to build wealth.

One of the greatest assets we have is the ability to produce an income. It has been said that our health is the new wealth. The ability to produce an income is part of our wealth.

We were all born with free will. As Americans, we have the liberty to pursuit our happiness and our freedom of choice. Planning today and saving for tomorrow creates more freedom of choice, in the long-term.

John Wayne said, “ Tomorrow hopes that we learned something from yesterday”.

I like to say, “Hope is not a good financial strategy. Plan, act, achieve and may you always have a reason to smile”.

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.

 

What you don’t know can hurt you

RiskIgnorance may be bliss, but what you don’t know, can also hurt you.

You work hard for your money. You want to enjoy it, stretch it, and protect it.  Personal Risk Management is a way to protect your money. It is a systematic process of evaluating the chance of loss and then taking steps to combat the potential risk by practicing risk avoidance, using contractual indemnification, or by purchasing insurance.

One example of risk avoidance is if a sole-proprietor choses to incorporate and thus limits their personal liability exposure.

Contractual indemnification is a common clause in many contracts. Black’s Law Dictionary defines indemnity as a ““a duty to make good any loss, damage, or liability incurred by another.” Indemnity has a general meaning of holding one harmless; that is to say, that one party holds the other harmless for some loss or damage. Indemnification protects you against personal liability.

Insurance helps to stop an insured “loss” from being a financially life-changing event.

Most people probably find insurance boring and reading insurance contracts even more so. As a CPA, with the Associate in Risk Management (ARM) designation, I enjoy looking for the “devil in the details”. It is one way I provide value to others.

The goal of this blog is to plant some seeds of thought, initiate action, and provide you some “sleep insurance” because you took the time to evaluate, know, and feel comfortable with your financial position.  Factors to consider include:

Limits and Exposure:

  • Know what you have to protect:  What is your net worth; i.e. how much could you lose?
  • What type of losses are you covered for?
  • What percentage of your net-worth is protected by insurance and what amount is left “self-insured” in the event of a loss?

Property:

  • Do you know that if you do not buy the correct property insurance limit that you could be held financially responsible, for a portion of the loss? This is called the co-insurance requirement; read your policy
  • What does your insurance cover you for?
  • Do you have a property “named peril” or an “all-risk” policy? A Named Peril policy only provides coverage for the peril specifically named. An All Risk policy provides coverage for all losses not specifically excluded from coverage
  • If you do not have an All Risk policy, your fire policy might include “extended coverage”. Rev Shaw is an easy acronym to see what might be covered other than loss caused by a fire. R=Riot, E=explosion, V=Vehicle; S=smoke; H=hail; A=aircraft; W=Wind

Liability:

  • How do you determine the policy limit that you buy on your auto, homeowners, or Business Owners Policy? Do you buy the minimum limit or do you also have an Umbrella policy that responds in the event that a loss exceeds your primary limit?
  • In a Money magazine 2/5/14 article, Ed Charlebois of Travelers Insurance said “More than 80% of umbrella losses are auto-related,” If you remodel, does your general contractor make sure that the subcontractors are covered for worker’s compensation and general liability? Do you own a swimming pool, hot tub, or boat that increases your risk/exposure for a loss?
  • If you are a business owner, do your contracts require you to name others as an Additional Insured on your policy? Do you know that this means you are sharing your policy limit (s) with others? Is your defense coverage included in your policy limit?

Your insurance agent can help you review the type of coverage you buy. From a risk management perspective, insurance agents/brokers generally will not tell you how much insurance to buy; this increases their liability.  Likewise, I would not suggest limits either. I could, however, help you determine your exposed net worth and help you review how well you are covered from a property/casualty (liability) perspective.

Warren Buffet said, “Risk comes from not knowing what you are doing”.  Take the time to know and sleep well tonight.

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 protect their financial health and is available for side –by- side, remote, or mobile appointments.

Website: www.debfoxfinancial.com

E-mail: debfoxfinancial@gmail.com

Twitter: @debfoxfinancial

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/

2013 Federal Tax Filing

tax2• Tax returns are due 4/15/14 – about 3 weeks from now
• You can extend the dead-line if you apply for an extension
• You cannot extend the time to pay the tax that you owe; this means you must estimate the amount owed to ensure you have paid in the correct amount, on time, to avoid interest and a possible penalty
• A penalty may be imposed if:

1. If the amount owed is at least $1,000 and it is more than 10% of the tax shown on your tax return
2. You did not pay enough estimated tax by any of the due dates. This is true even if you are owed a refund
3. There are exceptions; it is safer not to count on them or you can read about them in the Instructions for 1040


Filing Options:

• Do it yourselfers, with Adjusted Gross Income less than $58,000 can, generally, use the IRS Free File Program
• Hire A Professional – Someone that is educated, experienced, licensed (or in California, this includes being registered with CTEC –California Tax Education Council)

Food for thought:
• Typically, the Income Tax is the single biggest bill in an U.S. household. Understanding, planning, and using tax breaks, by year, can reduce your lifetime tax burden
• If you like to file your own taxes, sometimes it provides comfort to have a professional review your taxes to ensure accuracy or to use your tax return as a “road map” to see if there are options to lessen your tax bill – now or in the future
• From an IRS audit perspective, history has shown that Self-Employed people underestimate their income and overstate their deductions. Watch for these IRS audit redflags: http://www.Kiplinger.com/links/auditredflags

Things to think about for Same-Sex Married Couples:
• Same-Sex Married (SSM) couples can file their federal taxes together this year for the 1st time
• If it would benefit you, you can chose to amend any/all previous returns
• Dead-lines to amend previous returns are:
1. 4/15/14 to amend 2010
2. 4/15/15 to amend 2011
3. 4/15/16 to amend 2012

An investment in knowledge pays the best interest – Benjamin Franklin.
http://www.debfoxfinancial.com

12 Financial Wellness Lifestyle Tips

12 Financial Wellness Lifestyle Tips

January is Financial Wellness month. It is a new year and many of us have resolved to be better this year – physically or financially. We all know from experience, that change does not happen all at once. It takes time. It takes dedication. It takes work. And the results can be so worth it.  With this in mind, I offer you some of my favorite financial wellness lifestyle tips:

  • Freedom of choice, financially, is wonderful & liberating. Plan for it
  • Buy Carefully: The value of most “assets” depreciates as soon as you buy them. Spend as little as possible on these items
  • Invest: Put your money in assets that can appreciate. Diversify
  • Value people first. Looks fade. Money can go away. Heart remains. Choose heart
  • Life is more about relationships and experiences. Build & grow your relationships. Live life fully. Volunteer. Be Uncomfortable. Give
  • “Pay “your self first” and then live well within your means. This will not always work, but do it as much as possible
  • Live debt free – this provides you freedom. Don’t get stuck living in a “paycheck to paycheck” world or in a job you might not like, simply because you have to pay the bills
  • Stay out of debt (other than a mortgage and if necessary for a car and student loans)
  • Plan financially – know your tax bracket and try to defer some of your income by investing in a 401K, IRA, etc. Build for tomorrow. Get the maximum company match. Don’t leave money on the table
  • Learn to “stretch your dollars”. Be creative. Living simple can be as much fun as living expensive. Find bargains. Use restaurant.com, Living Social. Trade services. Be a part of the “Sharing Economy”. Have fun. Value Simplicity
  • Be grateful for what you have. Share with those that have less. Celebrate your “XX” birthday with friends by packing an equal amount of “XX” lunches & deliver them to the homeless as a group – on the streets, downtown, near the bridges. Take toiletries, extra jackets, or new socks as additional gifts. Think about giving and not getting. You’ll receive more than you give
  • Learn to delay short-term wants to meet long -term goals. Less instant gratification today pays big dividends. In addition to financial rewards, we dream, wish, and work to get what we want. We prioritize by importance. Do I want this today or do I need/want something different for tomorrow? We build self- esteem. We become more who we were created to be.  We grow. We become a good role model for our kids & our community.

Life is meant to be good. Not easy but good.  Remember:

Good Better Best
Never Let it Rest
Until Your Good Gets Better and
Your Better Gets Best
– author unknown

2013 Year End Federal Tax Planning – Individual

 


If you want to want to make sure your money is more in “your pocket” than Theirs (The IRS), now is the time to act. Estimating your 2013 tax bill keeps you from being surprised next year. More importantly, it provides the opportunity to perhaps decrease your actual tax amount 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 2013 Federal tax bill
  • Then increase each of these amounts to estimate the year-end amounts

Keep these amounts in mind as you consider the following simplified tax form

Income
– Above the Line Deductions
= Adjusted Gross Income
– Standard Deduction or Itemized Deductions
– Exemptions
= Taxable Income
– Tax Credits
– Tax Paid
= Tax Owed or Refunded

With the visual in mind, you might find it easier to review each major section to see if there is action that you can take now to reduce your tax bill:

1. Income:

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

  • Defer a year-end bonus to January 2014?
  • Postpone a sale that will trigger a gain to next year?
  • Delay exercising stock options?

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

  • Covert a traditional IRA or a SEP IRA into a Roth IRA and recognize the conversion income this year?
  • Take IRA distributions this year?

2. Above The Line Deductions:

  • Above the Line Deductions include:

1.   Health Savings Accounts
2.   IRA Deduction

  • Establish an IRA for yourself
  • Establish a Spousal IRA

3.   Qualified Student Loan Interest
4.   Self-employed health insurance or qualified pension plans

  • Establish a Defined Benefit Plan

3. Estimate what is going to save you the most money:

The Standard Deduction or the Itemized Deduction?

The 2013 Standard Deductions are:

$ 12,200 Married, Filing Joint
$ 8,950 Head of Household
$ 6,100 Single or Married, Filing Separate

There is an additional Standard Deduction amount of $1200 for those over the age of 65, blind, or both.

It is important to note that there is a reduction for Personal Exemptions and Itemized Deductions for taxpayers with Adjusted Gross Income over:

$250,000 Single
$300,000 Married, Filing Joint
$275,000 Head of Household
$150,000 Married, Filing Separate

  • This will have the effect of increasing taxes on affected taxpayers

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:

  • Prepay property taxes
  • Make your January mortgage payment
  • If you owe state income taxes, consider making up any shortfall rather than waiting until your return is due
  • Medical Expenses are deductible only to the extent they exceed 10 percent (7.5 percent if you or your spouse are 65 before the end of the year) of your adjusted gross income (AGI).
  • 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 2014

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 2014:

  • 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

State and Local Sales Tax Deduction

The option to deduct state and local sales taxes in lieu of state and local income taxes is scheduled to expire at the end of this year. If you are thinking of purchasing an expensive item that will generate a larger deduction than the state and local income tax deduction, buying the item this year may be beneficial.

Deduction for Eligible Teacher Expenses

This is the last year that eligible educators (teachers) can deduct $250 of qualified expenses paid during the year.

  • If you itemize and you have not reached the limit, take advantage of it by buying next years supplies now

4. Exemption Amount is $3900 (phase-outs apply)

5. Use your numbers to estimate your 2013 Taxable Income

Income
– Above the Line Deductions
= Adjusted Gross Income
– Standard Deduction or Itemized Deductions
– Exemptions
= Taxable Income
– Tax Credits
– Tax Paid
= Tax Owed or Refunded

6. Use this Chart to estimate the amount of tax owed

Tax rate Single filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
10% Up to $8,925 Up to $17,850 Up to $8,925 Up to $12,750
15% $8,926 – $36,250 $17,851 – $72,500 $8,926- $36,250 $12,751 – $48,600
25% $36,251 – $87,850 $72,501 – $146,400 $36,251 – $73,200 $48,601 – $125,450
28% $87,851 – $183,250 $146,401 – $223,050 $73,201 – $111,525 $125,451 – $203,150
33% $183,251 – $398,350 $223,051 – $398,350 $111,526 – $199,175 $203,151 – $398,350
35% $398,351 – $400,000 $398,351 – $450,000 $199,176 – $225,000 $398,351 – $425,000
39.6% $400,001 or more $450,001 or more $225,001 or more $425,001 or more

Rev. Procedure 2013-15 can provide additional information

7. Apply Tax credits, including these that will expire this year

Expiring Energy-Related Tax Credits

  • Residential Energy Credit: If you are considering energy improvements to your home, you may want to make the improvements this year. The credit is 10 percent of the amount paid or incurred for qualified energy efficiency improvements installed during the tax year and the amount of residential energy property expenditures paid or incurred during the tax year, up to a maximum credit of $500.
  • Qualified two- or three-wheeled plug-in electric vehicles: The credit is equal to the lesser of 10 percent of the cost of such a vehicle or $2,500.

In summary, yes, this involves some work and at a time of year where most of us are busier as we approach year-end and the holidays. If it saves you some money, isn’t it worth it?

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

Financial Literacy – No App for That, but…

Over the past few years, we have heard or said “there is an App for that” and indeed, from a financial literacy perspective, there are applications for:

  • Mobile Banking
  • Budgeting
  • Cash Flow Management
  • Investing Loan Calculators

These are helpful but currently can only help us so much.  There are resources to help fill in the gaps such as:

  • The American Institute of Certified Public Accountants (AICPA) has a free community service program titled 360 Degrees of Financial Literacy.  http://www.360financialliteracy.org . The goal is to help people make smart financial decisions at every stage of life.  Information is included for both personal finance and for small business owners.
  • Feed the Pig: www.feedthepig.org was designed to encourage 25-34 year olds to take control of their personal finances.

Poverty-Action.org has a paper titled Keeping it Simple: Financial Literacy and Rules of Thumb http://personal.lse.ac.uk/fischerg/Assets/KIS-DFS-March2013.pdf .  The research suggests that reducing complexity can improve effectiveness. Rather than teach double-entry accounting, working capital management, and investment decisions to some business owners, Rules of Thumb could be used. Most of us use some of these in our personal life, but as a country we do not do a very good job in practice.

The Council for Economic Education: Survey of the States 2011: The State of Economic and Personal Finance Education in our Nation’s Schools http://www.councilforeconed.org/news-information/survey-of-the-states/ includes a lot of information that is important for our kids, ourselves, and our economic future.

We are all busy and we usually only seek information when we need it; i.e. “just in time education”.  Some people like to learn on their own and for you, I have provided some on- line resources. Others like to learn with someone and for you, perhaps, I can be your partner. As Benjamin Franklin said, “an investment in knowledge pays the best interest”. Please let me know if I can help.

Email: debfoxfinancial@gmail.com

I hope this information helps to empower you to navigate life’s uncertain financial seas. Life is meant to be good; enjoy.