Monthly Archives: December 2015

Pay Less Tax on Your Investments

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It’s great to accumulate wealth by investing and saving you money, but did you know that taxes can take a large bite from your investments? Every investor, including those with 401(k)’s, IRA’s, and traditional brokerage accounts need to be aware of the impact of taxes. Here are a few tips and items to watch out for:

401(k)’s: A 401(k) can be a great way to save money for retirement as it is automatically deducted from your paycheck every time you get paid. If you are in the 25% tax bracket, every $1,000 you contribute saves $250 in taxes, plus savings for state taxes as well. You want to contribute as much as possible to reduce your taxes and save for retirement, especially if your employer has a matching contribution.

There is one common mistake that I do see often with 401(k) accounts and that is withdrawing money before retiring. It could be because you really need the money or you switched jobs and cashed out your account. You must resist the temptation to do this! Generally, there is a 10% early withdrawal penalty plus you will owe income taxes on the money withdrawn. This can easily add up to a third or even half of the money lost to taxes that you have withdrawn!

IRA’s: An IRA (individual retirement account) has similar tax characteristics of a 401(k). A strategy to maximize the tax-efficiency of your IRA may be to convert some or all to a Roth IRA. A Roth IRA has more favorable tax aspects as there are no taxes when you make a qualified withdrawal. Before making this decision, a thorough analysis should be done to make certain this strategy is beneficial for your situation.

Traditional Brokerage Account: A regular taxable investment account needs to be monitored closely to make sure you are not unnecessarily paying taxes. There are three straightforward ways to do this:

  • Invest in tax-efficient mutual funds, ETF’s, and reduce the number of times you trade in your account. Every time stocks or bonds are sold, it may result in additional taxes
  • Hold your investments for longer than one year to pay lower capital gains tax rates. This strategy compliments the first point.
  • Compare the returns of tax-free municipal bonds to regular bonds to see which produces the higher overall rate of return.

Bad Tax Planning

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Tax planning can prevent you from overpaying taxes, but it has to be done before the year is over. Good tax planning takes a proactive approach, and bad tax planning includes either not planning, breaking the law, or taking it upon yourself without using a competent tax professional.

Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients throughout the year we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.

A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more.  And of course, underreporting your income is not wise either and may result in criminal prosecution.

I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.

Taxable or Non-Taxable?

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Which items do you think are taxable and which are not? The answers are below.

  1. Workers compensation
  2. Educational assistance
  3. Cancelled debt
  4. Expense reimbursements
  5. Fringe benefits
  6. Bartering
  7. Hosting a party and receiving payment (such as a candle party)
  8. Life insurance proceeds
  9. Unemployment benefits
  10. Federal income tax refund

Taxable: cancelled debt (there are exceptions), fringe benefits, bartering, hosting a party, and unemployment benefits

Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund

There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.

Do You Watch Shark Tank?


12-01-15 shark-1384087-639x426You have probably heard of the show Shark Tank, which airs on ABC. The show is about entrepreneurs who pitch their products and ideas to a group of wealthy investors who are referred to as “sharks.” Hopefully, the sharks will bite and offer to invest some of their money in the fledgling businesses.

Many times the sharks pass up on investing in the new business, which is very eye-opening for the entrepreneurs. Other times, more than one shark wants to invest in the business because there is a lot of upside, and the risk seems worth it. There are some great business lessons to be learned by all of this.

Research the market: Are there enough people that are willing to buy your product? Even so, what price should you sell the product for and who is your target customer?

Business model: Is there enough profit to be made? Does it make sense to spend a lot of money for the return that is generated? Is it costly to acquire customers?

Careful with your funds: Some entrepreneurs invest so much money in their product that they are now broke. Worse yet is that the product may not even be viable. Even if the business is good, the entrepreneur is eager to sell and may end up taking a lowball offer just to recoup their own investment.

Lack of Experience:  When a product is good, the problem that entrepreneurs may have is usually manufacturing, distribution, and additional capital. Instead of selling a piece of your company, an alternative is to work with qualified professionals, such as consultants, attorneys, accountants, and competent employees.

Businesses are started every day. Some are successful, but unfortunately, many are not. The key to increasing your chance of success is to plan and be well thought-out. Just like preparing to take a test as a student, you have to study ahead of time to increase your chances of getting an “A.”