Tax Planning Isn’t Rocket Science, But it Can Save You Money!

Launch of Friendship 7

This is an old NASA shot of the launch of Friendship 7.

Today I want to talk about tax planning, and  why it’s so important.

I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special.  She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first.  So she called me.

Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined.  Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole.  Then we started talking.

You see, she didn’t need to make the purchase right away, she was just thinking about it.  So I decided to see what would happen if we split the $30,000  between 2013 and 2014, $15,000 each year.  What a difference!  Instead of paying over $9000, she’ pay $688 per year total for her state and federal income  taxes combined.  That wasn’t a typo–six hundred and eighty-eight dollars a year.  $1376 total tax for a savings of over $8000!

So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000.  How cool is that?

In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well.  For many people, splitting up the IRA withdrawal  would not save them any taxes at all.  But my point is–how do you know?   By taking the time to ask–she saved $8000.

What’s going on in your life that could benefit from a little tax planning?  Selling some stocks or mutual funds?  Donating to charity?  Do you own a small
business?   Are you getting married?  Getting divorced?  Having a baby?  Getting a new job?  Buying a home?  Any of these events, and many more, could use
a little tax planning.

My business card says, “If you don’t have a tax strategy, you’re probably paying too much.”    It’s true.  So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes.  Why would you want to give the IRS more money then you need to?  It’s not rocket science, it’s just common sense.   The best way to keep more of your money is to make a plan for keeping it.  Call me.  I can help.

Top 5 Reasons Your Tiny Business May Not Be Doing As Well As It Could Be

August 20, 2013 by Jan Roberg · 2 Comments
Filed under: Small Business 
Throwing Money Away

Photo by Tax Credits at Flickr.com

 

The government defines small businesses as companies making less than $7 million a year or having fewer than 500 employees.  The companies I work with generally have three or fewer employees and only dream about seven million dollar revenues.  I call these “tiny” businesses.

 

As tiny businesses, we’re generally ignored by the government.  When you hear something in the news about Congress passing legislation to “help” small business owners—they don’t mean us.  That’s okay with me.  We tiny businesses can get into enough trouble all by ourselves.  Here are my top 5 picks for tiny business problems.

 

1.  Not working around Roadblocks.   Every tiny business has roadblocks; you need a license, or special training or there’s a law change.  No matter what type of business you have, there will be roadblocks.   The successful tiny business finds a way to work through or around them.

 

True story:  There was a small business owner who was basically ready with her business; the only thing left was to get her web-site up.   She had asked me for some help.   Mind you, the only thing stopping her business from getting off the ground (at least as she explained it to me) was her website.  I gave her names of people who could make her website for a fee and  I also gave her free website resources as budget was an issue for her.

 

Six months later we met again.  She still didn’t have a website.  The work was stalled because she couldn’t find the “right” art for it.  She wanted a picture of a compass.   She had hired a high school kid to draw it for her for free.  He wasn’t done yet.  Okay—go to Google images, type in compass and you get hundreds of pictures.  Granted, she’d probably have to pay to use one of those pictures but her “free artist” hadn’t gotten the work done in six months.

 

And letting a high school kid that you’re not even paying be the reason your business hasn’t gotten off the ground?  That’s ridiculous.  Now in fairness, the compass idea was a cool idea and it tied to her business theme.  But—it wasn’t necessary to her business.  She could have already been up and running for 6 months while waiting for this art that she wanted so badly.

 

Sometimes, we’re our own worst enemies.  If you’ve got a roadblock that’s holding your business back get a second opinion.  There’s usually more than one way to skin a cat.

 

2.  Not knowing who your customers are. If you own a business you’re selling something.   The tough question is who’s going to buy it?

 

I once knew a woman who had started a business making bows.  She had made hundreds of bows, invested in a bow making machine and lots of expensive ribbons.  She hadn’t sold a single one.  She really liked making bows so that was what she was doing with her time, but she hadn’t figured out who would buy them.  At that point, that wasn’t really a business it was just a hobby. You have to have customers, someone willing to pay for what you’re selling to be a real business.

 

3.  Partner problems.  Recently I was asked, “Why do you hate partnerships?”  It was a fair question, I was being pretty negative.  The truth is, I don’t hate partnerships, I’ve just had to dissolve too many of them.  Partnerships get started because two or more friends decide they want to go into business together.  Good friends (or spouses) do not always make good business partners.  If there is a disagreement—how do you settle it?

 

I recently sat down with a couple that had a pretty good business plan and they seemed to be a good choice for a partnership.  But I was asking a lot of questions and I’m glad I did.  It seemed that Adam and Eve each had two income streams that they were thinking about for the partnership—sales of widgets and sales of thingamajigs.  Adam was going to cut back on his widget sales to pursue the thingamajig sales full time in the partnership.  Eve couldn’t sell thingamajigs she was just going to help Adam with that and in the meantime she would still sell widgets.  It all sounded like a good plan.

 

Except:  Widget sales was technically another job.  The money Eve earned selling widgets was outside the partnership—just as Adam’s widget sales were outside the partnership.  Adam was counting on Eve’s widget income to help support him because he knew that the thingamajig income wouldn’t be enough to support him during the first year.  Eve was hoping the thingamajig income would supplement her widget income; she wasn’t planning on turning over half of her widget income to Adam.

 

The bright side to this scenario is that they were thinking and talking before they made the partnership.  They hit a roadblock, yes, but they’re smart and will work around it somehow.  Too often I see partners who went into business together and later wind up fighting because they didn’t spell out their expectations up front.

 

4.  You gotta work at your business—I can’t tell you how many times people have come to me because they bought a business or invested in a business that required no work—and they lost their money.  If it sounds too good to be true, it probably is.  And if you’re picking a business, do something you love to do—because you’re going to be at it a lot.

 

5.  Not planning for your taxes—This wouldn’t really be a tax blog if I didn’t mention taxes now would it?  The whole idea about owning a business is that you want to be profitable.  If you’re making a profit, then there are going to be taxes.  If your small business is making enough money to support you and your family then you know you’ve got self-employment taxes to pay.

 

Screwing up one year—that happens.  Screwing up two years—you need to be more careful.  But if you screw up and don’t make your estimated tax payments after you’ve been profitable and owed tax money for three years in a row—you’re asking for trouble.  Our business cards say, “If you don’t have a strategy for your taxes, you’re probably paying too much.”  Taxes take a huge chunk out of your earnings.  Don’t let IRS penalties and interest make matters worse.

Time Value of Money and Taxes

August 9, 2013 by Michael Siebert · 2 Comments
Filed under: Taxes 

Photo by Brian Mooney at Flickr.com

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein

_______________________________________________________________________

You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea.  Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.”  Basically, money is worth more now than it is later.  This idea would not exist however, if there was no concept of “interest”.

 

There are two types of interest – simple and compound.  Simple interest is interest paid on a beginning principal balance only.  If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph.  Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time.  On a graph compound interest appears with a geometric (or exponential) growth pattern.

 

The present value of a future sum is the core formula for the time value of money.  All time value of money equations are based off this formula so it is extremely important to review.  It is expressed as such:

 

PV = FV / (1 + i)^n

Where

PV = Present Value
FV = Future Value
i = interest rate
n = number of periods

 

The future value of a present sum is expressed as FV = PV * (1 + i) ^n.  We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.

 

So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?

 

Retirement Planning:  We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half.  This is because Susie’s IRA endured 14 more years of compounding.  The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision.  With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions.  If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally.  Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?

 

Tax Planning: Accelerate deductions, postponing income recognition.  This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow.  By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due.   Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years.  The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does.  Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.

 

Investment Planning:  Younger people can be more aggressive because they have more time to make up for their losses.  A younger person’s portfolio can afford more risky securities such as stocks.  As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.

 

With time value of money, the uncertainty of the interest variable is the most difficult to tame.  Those who can predict its patterns the best, tend to make the most money.

The Curmudgeon’s Guide to Year End Tax Tips for Real People

December 27, 2011 by Jan Roberg · Leave a Comment
Filed under: Tax Tips 
Happy New Year Flag 2012

Photo by Deborah Malec on flickr.com

If you Google “year end tax tips” you’ll get over 4 million entries. Granted, I’ve littered the field with a few of my own blog posts as well, but to be perfectly honest, most of those “tips” you find on the internet are pretty worthless to a “normal” taxpayer. I’m talking about regular people with W-2 type income or retirement money.

Now, forgive me if I sound a little cranky, but if you’ve waited until after Christmas to do any kind of tax planning, well, you’re a little late. Consider yourself scolded. And when you file your 2011 tax return, you’re going to plan ahead for 2012 like the intelligent person that you truly are. (I mean come on, you are reading my blog right? Obviously you’re attractive too!)

In the meantime, these are the top five last minute tax tips for non-business owners offered by the IRS. Note that the strategies are offered by the IRS, the commentary is from me. It’s not that the IRS suggestions are bad—they’re good suggestions, you just need to look with your eyes open.

  1. Charitable contributions – I love charities, I want you to donate to charity, but as a tax strategy, this might totally suck. If you are not already claiming itemized deductions on your tax return, then donating to charity probably will not help your taxes. Every year – seriously, every single year that I have prepared tax returns – I meet someone who donated to charity thinking it was a tax deduction and got nothing from it. The absolute worst case was a guy who donated his car, thinking he’d get everything back on his tax return. Wrong! He got nothing. Zero, zip, zilch, nada. (Although I understand that the woman at the charity who talked him into it was really pretty, although he didn’t get a date out of it either.) Donating to charity is a very good thing, but use your brain when donating. http://robergtaxsolutions.com/2011/12/charitable-donations-how-much-should-you-tithe-why-do-it/
  2. Energy efficient home improvements — The first thing you need to know is that the maximum credit you can get for this in 2011 is $500. If you’re doing the work anyway, great, but I wouldn’t go out of my way now to try for a tax credit this late in the game. http://robergtaxsolutions.com/2011/11/what-you-need-to-know-about-the-2011-home-energy-tax-credit/
  3. Portfolio adjustment — This is where you call your financial advisor and see if you need to do any tweaking before the end of the year. With the stock market being kind of crazy, you could have big gains or big loses. But don’t just go selling off stock, it’s important that you make sound financial decisions. I often have clients tell me that they sold losing stocks and they should be able to claim huge losses on their returns. Problem is, there may have been a huge loss during the year, but they’ll have a huge gain because they’ve held the stock for several years. Having your tax and financial person coordinate together is your best strategy. http://robergtaxsolutions.com/2011/08/five-tax-issues-for-these-crazy-financial-times/
  4. Max out 401(k) contributions — For the vast majority of us, we set up our 401(k) last November and can’t change anything. Personally, I’ve never worked for a company where you could walk into the HR department and say, “Hey, I want an extra $3,000 plopped into my 401(k) this week.” For those of you who are able to make last minute adjustments, you’ve got about 3 days. Anything going into your 401(k) must be in by December 31. http://robergtaxsolutions.com/2011/11/how-much-can-i-contribute-to-my-401k/
  5. Qualified charitable contributions seniors — This is for seniors who must make required minimum distributions (RMD). If you’re one of those people who takes your RMD at the very last minute, you can have your RMD go to a charity instead. This makes your RMD not taxable to you, and you don’t need to itemize to make it work. If you’re a senior and you do not need your RMD, and you have a charity that you really like, this is a perfect way to deal with it. http://robergtaxsolutions.com/2010/12/last-minute-tax-tips-for-seniors-ira-charitable-rollover/

Okay here’s the preachy part, I’m giving you fair warning. If you plan ahead, you don’t have to worry about last minute tax strategies. You’ve already figured out your best 401(k) contribution, you’d have already sent your qualified charitable contribution, and you’d have already spoken with your financial advisor about what your best strategy for the year is. It says this on my business cards, but it’s true—if you don’t have a tax strategy, then you’re probably paying too much. You don’t have to be rich and you don’t have to be a business owner to benefit from a little planning ahead. If your tax person isn’t helping you plan ahead for next year, it’s time for a new tax person.

© 2009 Roberg Tax Solutions

111 Westport Plaza, Suite 600, St Louis, Missouri 63146 | Telephone 314-275-9160

Website Designed By Indigo Image
Info