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Our "Tax Tips" are updated weekly to provide current & useful tax information. Return to this site every week for helpful tax-cutting suggestions, tax reminders, and current tax information. If you would like more information on anything in "Tax Tips," please contact us. The One Best Tax Tip The best thing you can do to consistently minimize your taxes is: keep good records. To accomplish this, consider using Quicken or Money. Contact us for more information. Marriage or Divorce - Check Your Social Security Number The IRS reminds newlyweds and the recently divorced to make sure names on their tax returns match those registered with Social Security. A mismatch between a name on the tax return and a Social Security number (SSN) could unexpectedly increase a tax bill and reduce the size of any refund. For newlyweds, the tax scenario can begin when the bride says "I do," takes her husband's surname but doesn't let Social Security know about the name change. If the couple files a joint tax return with her new name, the IRS computers will not be able to match the new name with the SSN. Similarly, after a divorce, a woman who had changed her name and had made that change known to the Social Security Administration, should contact Social Security if she reassumes her maiden name. It's easy to inform the Social Security Administration of a name change by filing Form SS-5 at a local office. It usually takes two weeks to have the change verified. The form is available on the Social Security Administration Internet site, by calling 1-800-772-1213, and at local IRS offices. (The IRS Internet site provides the addresses of local offices.) Generally, taxpayers must provide Social Security numbers for each dependent claimed on the tax return. For adopted children without Social Security numbers, the parents can apply for an adoption taxpayer identification number (ATIN) by filing Form W-7A with the IRS. The ATIN is used in place of the Social Security number on the tax return. The ATIN form is available on the IRS web site, or by calling 1-800-829-3676. Penalty-Free Early Withdrawls from Your Retirement Accounts If you need to withdraw funds from your IRA or other retirement plan prior to age 59 and , generally you will owe a 10% penalty, in addition to the regular income tax on the withdrawal. There are ways to avoid the penalty. Call us first! Don't Make Decisions Alone Most business owners feel isolated, and believe that their business is unique. Truth is, the technical parts of your business might be unique, but the business part of your business is extremely common. Yet so few people have any training as being managers and entrepreneurs. So, having other business owners in different fields as confidants is a great way to learn about general business. Most decisions are general in nature and others have had to make them. Get into a close relationship with several other business owners and help each other by being sounding boards. Don't Assume a Business Will Be Your Retirement Many business owners mistakenly fail to set up retirement plans outside of their business and excuses for this are legion. The rationale is that the business can be sold to provide the retirement. That may be true, but dont bet your Golden Years on this. Industries change and evolve, and its a mistake to assume that youll have anything to sell. Better to carve out $5,000 to $15,000 per year and earmark it for retirement funds. Then, you can still get to that Beach or Mountain Cottage. If you can sell your business, too, it will just be a nicer place. Social Security Benefit Delayed is Generally Wealth Denied. Those who continue working after reaching age 65 and do not need their Social Security benefits during these working years have a choice. They may start receiving benefits at age 65 or delay the start of the benefits until some later date, and receive larger monthly benefits once the delayed payments begin. The after-tax wealth advantage is enhanced by investing the benefits using a buy and hold investment strategy that results in unrealized capital gains. Contact us if you are considering this option. The IRS is Wrong 46% of the Time. If you were a teacher, what grade would you give a student who got only slightly over half of the answers right? A U. S. Treasury Department study reveals that the IRS answers provided through its web-based Tax Law Assistance program were right only 54% of the time. A Financial Wake-Up Call If youre at least 25 and not already receiving Social Security benefits, a statement thats coming to you from the Social Security Administration (SSA) could serve as a wake-up call about retirement, disability, and estate planning. Beginning with those who have a January birthday, the SSA has begun mailing workers over the age of 24 an estimate of their Social Security retirement, disability, and survivor benefits. Your statement should arrive about three months before your birthday. (Thus, if you have a January or February birthday you should receive it very shortly if it hasnt already arrived.) The four-page earnings and benefit statement will include a record of the yearly earnings that the SSA has on file for you, plus an estimate in todays dollars of the monthly retirement benefit you will be eligible for based on retiring at age 62, at normal retirement age (which ranges from 65 to 67 depending on when you were born), or at age 70. In addition, it will estimate the monthly benefit youd be eligible for if you became totally disabled; plus it projects the monthly benefit your family would receive if you die. Update on the Nanny Tax If you employ someone such as a baby-sitter, housekeeper, yard care worker, or a private nurse to work in your home, you may owe payroll taxes on their wages. Because these types of workers often work for several other families as well, it may be hard to think of them as your employees. However, they likely are if their work is under your supervision and control. Failure to report and pay these taxes when they apply can leave you liable for both your and the employee's share of FICA, federal and state unemployment taxes, and possibly federal income tax that should have been withheld from the employee's wages. In addition, because it's often many years down the road before a problem comes to light (for example, when a former employee tries to file for unemployment or for social security benefits at retirement), the various penalties and interest that apply can also be significant. Want to Go Offshore? Should You? With many clients focused on protecting their hard-earned assets, the interest in offshore asset protection trusts is increasing. For many, the costs and headaches of creating and maintaining an offshore presence aren't worth the effort. For others with enough assets, however, offshore trusts can provide significant protection. As always, the devil is in the details. Is Borrowing from Your 401(k) A Good Deal? Even with this years market turbulence, a lot of people are sitting on a significance balance in their 401(k) accounts. Thus, its not surprising that to some this looks like a tempting source of funds for a down payment on a new house, college education expenses, or those other major financial commitments that life always seems to bring. Should you take advantage of the opportunity when you need a loan? The interest rate is often tempting (frequently just 1% or 2% above prime) however, its generally not tax deductible. In addition, if you leave your job, you normally have to repay any outstanding loan within 60 days. Failing to do this can leave you owing not only income tax on the outstanding balance but also a 10% penalty if youre under age 59. Is It a Hobby or a Business? Whats your idea of the perfect job? For a lot of people its one where they can convert their hobby or personal interests into a way to make a living. What could be better than that? Perhaps nothingprovided the venture proves to be profitable and has positive cash flow. However, if losses occur, not only does the activity become a cash drain, it may also attract the attention of the IRS when you try to deduct the losses. The best way to avoid problems with the so-called hobby loss rules is advance planning and appropriate records. If you have questions about this area of the law, please dont hesitate to contact us. It's the Only Guaranteed Tax Shelter Left No, it's not Real Estate, and it's not Small Business Ownership. The only real tax shelter left to Americans is the Retirement Plan. This could be in the form of IRAs, 401(k)'s, Simple Plans, Keogh Plans, and other types of Qualified Plans. Where else can you get Uncle Sam to help make a savings deposit for you? For every $1,000 you contribute, Uncle Sam cuts your tax for that year by $250 to $450! Looking at it another way, you can give Uncle Sam this money (by paying higher annual taxes), or you can put it into a retirement plan and let it work for you. Yes, you'll owe tax when you take it out. But it's like an interest-free loan for many years! Don't Spend Money Just to Save Taxes Lots of people say, "I wish I had more deductions". Sometimes, the best deduction is NO deduction. For every $1,000 you spend, you only save maybe $350 in taxes. You're still out the $650! As they say at Cow College U, you can't even make that up in volume! Better to make sure you get your money's worth out of the spending first - the tax deduction is only a consolation prize. Take Consistent Action to Lower Your Tax Bill Notice how airplane pilots use a checklist for everything? It helps them be confident that they're doing everything necessary for a safe flight. If you want to make sure you're doing all you can to cut your tax bill to the bone, you've got to be systematic about it. Contact us for a "Tax Planning Opportunities Checklist", which can help you spot areas where you might be missing the savings. At the very least, it will give you assurance that you're doing all you can to minimize Uncle's share. Doing Your Own Tax Return Can Be Expensive The preparation of your tax return should raise questions about the nature of your investments, your retirement finances, your insurance needs, and funding for special events such as your children's college education. Depending on the complexity of your affairs, you could have any number of nontax concerns that need an annual review. The preparation of your tax return should be more than just an exercise to see how much is left over after you pay the government. You should be the primary beneficiary of your hard work. Let us help you keep more of what you make. Contact us, we are here to help you! |
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Larry N. Harrison & Co.
Helping Our Clients Identify and Achieve Their Life Goals
