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!

SBW2015: Showing Gratitude for all Small Business Owners

Risk

America is celebrating National Small Business Week all over the country & special events will be held May 4 – May 8, 2015 in cities across the United States & via the web. It is a time that we as consumers can show our appreciation for local business by shopping locally & promoting them by sharing their information with others.

As a small business owner myself, I also thought it would be fun to share a few financial tips that may be helpful to other small business owners. It is another small way to say thank you & show support to my community.

Take Time to Work On Your Business & Not Just In It:
• Financial Statements & Tax Returns both tell a financial story & can be used as a road map or a compass to help guide profitability
• On at least a quarterly basis, Compare your Budgeted/Forecasted Amounts to Actual Results to identity differences (variance)
• Try to determine why there was a difference, if any, & adjust as necessary
• Also compare Year to Year Actual Results – where is your value being created & lost?

Watch The Bottom Line by Protecting your Assets & Managing your Risk:
• On 10/1/15, the financial responsibility (liability) starts to shift for fraudulent transactions to U.S. merchants if they have not upgraded their payment systems to accept EMV Chip Payment Cards. This is true if the card issuing company has added the chip to their card & you have not upgraded your POS system. Rules vary by issuing card companies & products sold. More information can be found from http://www.darkreading.com at : http://t.co/1OqiwTLY0P
• Know your Net Worth & make a conscious decision about how much of it you want to protect by buying insurance & how much you want to “self-insure”

Try Not to Leave Money on the Table:
• Avoid financial pitfalls, fines, & penalties by knowing & applying FLSA laws correctly including classifying Exempt, Non-Exempt, & Independent Contractors & treat them & pay them correctly
• Use the tax laws to strategically plan your business operations to minimize tax expense & keep more money “in your pocket”

Deborah Ann Fox, CPA helps individuals & small business owners build & protect their financial wealth. She is available for in-person, or remote appointments. See http://www.debfoxfinancial.com for more information.

Part 2: Financial Success : Our Kids: Money, Its Value & Values

piggy

Teaching kids about money, its value, & values can be frequently connected to each other.

Kids learn when they are young that money is something we trade for something else.

Teaching kids “value” is also something we can introduce to them when they are young.

How many times as parents, have we heard, “Mom/Dad, will you buy this for me?” We tell them, no, but you can spend your own money to buy it and then they decide they don’t want it. As the parent, you might think, I sure am glad I did not spend my money on something they don’t really want. I know I did & was glad that I had responded the way that I had.

Yes, the kids thought they wanted “it” & they did, when they did not have to pay for it. The “value” changed when they needed to spend their own money. Kids begin to learn that “value is what we think something is worth”. If we buy it, they don’t have to think about it. If they buy it, the value or the cost becomes a reality. Kids can become “pretty tight fisted” when it comes to spending their own money & that is a good thing.

Indirectly, they are also learning “relative value”. Yes, I want that, but I want something else more. Slowly, they begin to learn delayed gratification, priorities, & the need to save their money for what they want or think they need.

Kids often think that they need a certain brand of clothes or perhaps shoes & there are a lot of reasons for them to think this way. As parents, we can choose to re-enforce this belief or use it as a springboard for education. Yes, they might need a new pair of jeans or shoes, but you could set a dollar limit on what they can spend. If you want to spend $60 for that item & they want something more expensive, tell them they can earn the difference & you will give them the $60 when they have enough money to pay for it, Until then, they wait or can have the $60 item.

Teach your kids to count & also teach them what counts
• Tell your kids that advertisements are designed to try to get people to buy things
• Educate them that retailers place “impulse items” at the check out in the hope that you will decide to buy it while you were waiting in line
• Teach them to comparison shop: buy the store brand or the name brand? What is the difference in cost? Let them know that sometimes you can taste the difference, but most of the time you cannot. Why spend more money on something you can’t even taste?

Perspective on our possessions can help us learn about value as we develop our values:
• When my son, Jason, was in 9th grade he tutored Hispanic children in the Colonia’s outside of McAllen, TX. Most of the children’s parents only spoke Spanish & lacked education to help their children with their homework. Jason tutored one day a week for the school year & grew to be more thankful for what he had. After his 1st visit, he told me he was glad to even have a pair of shoes. Serving others that had so much less, made his heart more sensitive to other people – less judgmental, more caring. Of course a boy is not going to tell you that, but I could see it in his actions. For example, when he was older, he & a friend bought pizzas & served them to the homeless, who were living under the bridges in Houston.
• Learning to appreciate what we have helps us value our possessions; it subtly teaches perspective & gratitude

Build their self-esteem. Become an advocate & a role model to show them “who you are is more important than what you own”
• Share good examples of living “beneath your means” – tell them Warren Buffet is one of the richest people in the world & he is well known for being “frugal” with his money
• Tell them that even though Warren is worth billions, he still lives in the same house he bought before he had very much money
• Let them know there is a big difference between what you make, what you have, & what you keep
• To have money, we need to learn how to earn it, how to spend it, how to keep it, and how we try to make more money by saving & investing

    Marty Rubin said, “A scale can tell what a body weighs, but not its value.” Like wise, our value comes from within – not outside of ourselves.

Thanks for reading,
Deb

Deborah Ann Fox, CPA uses her “money” knowledge to help families & small business with budgeting, homeownership/debt, tax planning (saving), cash management, etc. She is available for side-by-side, local, & remote appointments. She offers free 30-minute consultations.

http://www.debfoxfinancial.com