Read More
Hopefully you and your accountant didn’t miss these important Tax Tips!! Here’s a review of a few key items you want to take advantage of next year if they were missed:
First-time homebuyers: If you bought a new home in 2008, and you have not previously owned a home in the last 3 years, you are entitled to receive a $7,500 refundable “credit” on your tax return. This “credit” is in fact a loan that needs to be repaid over 15 years, interest free, beginning in 2010.
However, if you were fortunate enough to have bought, or plan on buying in 2009, you get $8,000 no questions asked. This does not need to be paid back and you don’t have to wait until April 2010 to get the credit! Just amend your 2008 tax return and claim it today.
Tax Strategy: If you are engaged to someone who does not qualify as a first-time home buyer, amend your 2008 return before you tie the knot.
Kiddie tax extended: If you are planning on having children to shift income to lower tax rates, you should be aware that the rules have changed. For children under 19, or under 24 and a full-time student, any unearned income over $1,800 will be taxed at the parent’s tax rates. This is a change from 2007 where children under 18 with unearned income over $1,700 were taxed at their parent’s tax rates. (Prior to 2007, the emancipation age was 14!)
Tax Strategy: If your child earns more than 50% of their upkeep, even while being a full time student, they could file on their own for the lower tax rates (not as a dependent on your tax return).
Education Credit: One can obtain a tax credit (a credit is when the IRS gives you a reduction of your tax liability dollar for dollar) on the money spent for their own, or their child’s, college education. However, one must claim the child on their tax return in order to be eligible. This credit is subject to income limitations.
Claiming a child after divorce: Too often after a divorce occurs, the important detail of claiming a child is neglected. A typical arrangement is to can claim the children on the tax return every other year- should be documented in the divorce agreement. The loss of this deduction due to failure to fulfill financial obligations should also be included in the divorce agreement.
Hire an accountant:
You could attempt to calculate your liabilities owed to each of the respective jurisdictions on your own. A better choice would be to hire a professional so you don’t miss out on taking all of the appropriate deductions that you are entitled to. It would help to choose an accountant that specializes in your line of business, since they would be able to provide you with a benchmark for your industry. They will also help ensure that your silent partners don’t get more than they deserve!
Don’t try this at home:
Tax returns should definitely not be a Do It Yourself (DIY) activity. Sure, anyone can type numbers into a tax return. But, not everyone knows how to apply correctly for earned income credits, education credits, and teacher deductions to name just a few. And there are no clear instructions for when to apply kiddie tax rates, or what the kiddie tax even is, for that matter! The average taxpayer would also not know when to claim head of household filing status and gain a more favorable tax bracket.
They also may not know what job related out of pocket expenses are deductible, when moving expenses are deductible, or when an IRA distribution is not subject to penalties. This is just the tip of the iceberg of our mammoth tax code, and not knowing the rules can result in thousands of tax dollars being overpaid to the government, and not staying in your pocket! So, unless you’re a single person over the age of 24 who is renting with no dependents and not in school, please seek out a tax professional to prepare your tax return.
For those DIYs choosing to ignore this tip, I will list some other tax tips to consider when preparing your tax return.
Don’t miss out on home expenses
Now that you’re self-employed and your only office is your apartment or a portion of your house, you are entitled to a business deduction for a portion of the expenses paid to maintain your workspace.
Financial tip: Keep track of all money spent maintaining your home, including, but not limited to, utilities, maintenance, and rent.
Don’t run out and incorporate
If you’re newly self-employed, don’t jump to the conclusion that forming a corporation is the way to go. If you work in New Jersey, for example, and your business receives over a million dollars in revenue, as a corporation you would owe $2,000 to the state. (If your business made nothing, you would still owe the state $500!). In addition, you would be required to set yourself up as an employee, where you would pay approximately $1,500 into an unemployment fund that you would never be eligible to collect from. Different states have different minimums—know these costs before you take the leap and form a corporation.
Financial tip: Consult an attorney to help determine if it would be best to incorporate or form a Limited Liability Company.
This week: Basic Bookkeeping Principles
Set up a separate bank account for your business
Don’t mix your business income and expenses with your personal accounts. You want to make it as easy as possible to track what’s going on in your business, and you don’t want to open up your personal assets to government review.
Financial tip: Get pre-printed checks that interface with Quickbooks software. This enables you to automatically record your bills paid in Quickbooks, which saves time…and time is money.
Develop a system to track business expenses paid in cash
Otherwise, you could end up overpaying your tax obligations. If you lose paper receipts and forget to record cash spent, you risk not accounting for all of your business deductions.
Financial tip: Create a folder that you put your cash receipts in. At least once a month, prepare an expense report summarizing your cash payments. If you’re not sure how to set it up, you can buy pre-printed forms at an office supply store. Then write a check (using Quickbooks) for the total amount spent, and record each expense appropriately.
2 #TaxTips for the self-employed this week as we head towards 4/15/10!
2. You’re an adult now
When you work as an employee, the company for which you work withholds all required taxes due, and remits them to the appropriate government agency on your behalf. Now that you’re self-employed, you are required to make these payments quarterly on your own. This is where you see first-hand what it means to truly pay taxes in this country!
3. Get organized
Though acting as a bookkeeper can be quite stifling to your right brain creativity, if you don’t accurately track your business income and expenses properly, you may not be able to feed your creative side. Not to mention, your silent partners from #1 (IRS) like proof that they are getting their fair share
Tax Tip #1
You can’t keep every dime you make
The biggest mistake that a self-employed person can make is to forget that you have some interested, silent partners. These partners consist of the IRS, the state government where you live, the state government where you earn your income, and possibly the local town and/or county that you work and/or reside in, as well. All of these municipalities have a vested interest in your business. Until all your expenses are calculated it’s hard to figure how much you owe. As a rule of thumb for someone starting out assume a federal tax rate of 20%, about 13% for social security taxes (both are paid with your 1040 return) and 7% for state and local taxes. If you don’t share your profits with these interested partners, they won’t stay silent for long!
Financial tip: Put 40% of every dollar you earn into a separate bank account, which you will need to pay your taxes. This will help you to keep your silent partners silent!
Sam is a businessman who built his enterprise the right way. He found a product that consumers needed. He identified and located his business in a prime location. He was among the first to fill this consumer need and his business flourished growing in revenues, employees and accumulating wealth. He reinvested his profits by expanding to more locations which in turn created more jobs, more wealth.
Having been raised by Depression era parents he abhorred debt, his expansion came from profits. The last thing he wanted to do was borrow money to grow his business because should he be wrong, he would have the burden and pressure about repaying a loan while his business struggled.
This conservative fiscal approach slowed his business’s growth. He couldn’t open a new location until he had accumulated enough cash but that was ok as he wanted to be sure that if that location failed he wouldn’t owe anyone and he could walk away.
Soon, Sam had competition as they also discovered the opportunities to have a thriving business as well. He understood and accepted that and continued to focus his energies on servicing his customers. His competition took a different path to growth. Not wanting to wait for their profits to expand, they found bankers willing to lend them the funds for expansion.
Back when I was in college and going through career selection, it was a known fact that those who could not teach gym, went into banking. You see in banking, bankers rush in to lend when the money has already been made and become risk adverse only after they discover their loans have turn to dust.
Now it is bad enough that bankers lack the basic business acumen of a toad, but what compounds and magnifies their impact on the economy is the money spigot that the Federal Reserve sits on. If each bank did not have the Federal Reserve and in turn the American taxpayer to bail out their failures they would be more cautious in their lending decisions.
But that is not how the game is played. It is the Federal Reserve guided by current Chairman Bernanke and his group of five merry men who make decisions as to how much everyone pays to borrow money, how much money is available to lend and who qualifies to get loans.
Six people determine the prosperity for hundreds of millions of people. Not in the light of day are these decisions made, but behind closed doors are billions upon billions of dollars dolled out. Any effort to expose this process, let alone challenge their power, is met with threats of catastrophe for the economy from this autocratic regime.
Back to Sam. This easy money system resulted in not just two more competitors opening up which would have met demand, but instead six opened up. Two were self-funded but the other four competitors only existed because the bankers had all this money to lend and these four businesses had these nice business plans which showed how much money would be made.
One nice by product of all of this excessive expansion, government coffers benefited by increased tax revenues. Unlike Sam, rather than earmarking these extra revenues for a rainy day, politicians the land over instead used these funds to expand government services and employees with wage and benefits exploding.
One direct impact of government involvement was soaring health care costs. Sam operates his business in New Jersey where the legislature has imposed 42 mandates on the health insurers. These mandates are required procedures that must be covered. The impact of all of these guarantees of services, was to drive premiums ever higher.
Sam had no choice but to shift the cost of health insurance to his employees. Public employees don’t share that burden as they enjoy Lamborghini level of benefits where everything is covered including dental benefits. Any thought of a municipal employee having premium co-pay in his bargaining agreement is dropped faster than a Lamborghini goes from 0 to 60 miles per hour.
Moreover, the economic realities had Sam eliminate his pension plan and institute a 401k plan. Let’s not even discuss the pensions offered to government employees after as little as 25 years of service.
All good things must come to an end and two of Sam’s competitors closed their doors. Bankers horrified at the prospect of losing money, began restricting the amount of money they had lent Sam’s other four competitors. Sales fell off as those still employed cut back their spending habits, worried their job is no longer secure.
It can be argued the banks have a case in their new found faith in fiscal prudence. Lending money will not bring back customers, will not improve their financial health, rather it will be throwing good money after bad.
Sam has different issues. He sees opportunity to expand his business because of the demise of his competitors. However, there is great uncertainty of costs in his business. The major cost of running his business is employees. Both House and Senate versions of “health care reform” included tax increases for either businesses or individuals.
Worse, Sam’s business is in New Jersey. Should he decide to build or develop a commercial property and employ at least 16 people, he is then obligated to pay $100,000 to the low income housing fund (COAH) .
Now Sam is up in years and at some point in the next ten years he might want to sell his business. Another problem deterring investing his money is Obama wants to raise the taxes on capital gains. It makes no sense to risk good money in this economy when there is less reward down the line.
To further alert Sam that the government has him in their sights is President Obama’s budget and the many statements he has made on raising taxes for those who make over $250,000 a year.
President Obama’s argument is that he’s only raising rates back to where they were during the Clinton years. A half truth was never better said. Sam lives in New Jersey, during the Clinton years his State tax rate was 3 percent, and today it is nearly 11 percent. Property taxes are 200 – 300 percent higher as well.
How can such an educated man as Obama be so ignorant of economic history? In 1937, just as this nation was clawing itself out of the Great Depression, President Roosevelt raised income taxes which served to drop economic activity and bring about an immediate return of the Depression.
Given we are clearly in the worst economy since the Great Depression and the thought of taking more money out of pockets like Sam is beyond insane. Besides having to contend with higher employee costs, lower revenues, Sam now has the real prospect that next year he will fork over more of his income to the government.
What incentive is there for Sam to expand and grow his business in this environment so that new jobs can be created?
The answer is none and so today we are witnessing the Death of a Capitalist. Sam has a profitable business that is in decline, hamstrung by government policy that rewards failure of the big banks, big auto and big insurance.
All Sam and successful businessmen like him get is the bill for these failures. So Sam hunkers down and waits for a day when an enlightened government will reward risk, allow small businessmen to keep more of their profits so they can grow their businesses once again. Let’s hope that transformation occurs before Sam’s demise.
1) Be Cautious About Making New Investments — If the economy turns down will the same level of demand exist for your products or services?
2) Pay Down Debt — In this economy, your goal outside of your mortgage should be to be debt free.
3) Don’t make emotional financial decisions — Don’t quit your job no matter how much you hate your boss. A bad boss is better than no boss.