Essential Tax Tips of Starting a Small Business

For those interested in starting a small business, here are the following five tax tips:

No. 1: Get an Employer Identification Number (EIN). "The very first step in getting a small business running is getting an EIN, which is used to identify a business entity," said Serna.

No. 2: Keep thorough records. "Once established, it is imperative to keep good records," said Serna. "This can actually help you save money, as good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns."

No. 3: Know your tax obligations. "If you have employees, you must know your tax obligations and familiarize yourself with the different types of employment taxes, such as Federal income tax, Social Security and Medicare tax, and Federal unemployment tax," said Serna. "If independent contractors are paid, you must file a 1099-MISC to report payments for services performed for your trade or business."

No. 4: Understand taxable and nontaxable income. This may be received in the form of money, property or services. Generally, an amount included in one's income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on a tax return and is subject to tax. Income that is nontaxable may have to be shown on a tax return, but is not taxable.

"Generally, you must include in gross income everything you receive in payment for personal services," said Serna. "In addition to wages, salaries, commissions, fees and tips, this includes other forms of compensation such as fringe benefits and stock options. If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income."

No. 5: Determine how to report your income. "If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by whether or not the rental activity is a business, and whether or not the rental activity is conducted for profit," said Serna. "Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business."

Do You Own a Vacation Rental Home with Limited Personal Use?

FROM http://www.checkpointmarketing.net/

Vacation properties are subject to different federal income tax rules depending on how much personal and rental use they have during the year. Now is a good time to plan how to use your vacation property for the rest of this year with tax savings in mind.

Guidelines on Personal Use For federal income tax purposes, personal use of a vacation property includes use by: You, Other family members, whether or not they pay fair market rent, and Anyone else who pays less than market rent. For the purpose of these rules, family members include your spouse, siblings, half-siblings, ancestors (such as parents and grandparents) and lineal descendants (such as children and grandchildren). Personal use also includes time spent at your property by another party under a reciprocal sharing arrangement, whether or not the other party pays market rent. Under such an arrangement, the parties agree to "swap" properties.

Tax Rules for Vacation Home Rentals

Your vacation home will be treated as a rental property for federal tax purposes if you rent it out for more than 14 days and your personal use does not exceed the greater of:

• 14 days, or


• 10% of the rental days.

For example, if you rent your property for 210 days and vacation there for 21 days, your property will be treated as a rental. But if you vacation there for 22 days, the property is considered a personal residence.

If your property qualifies as a rental, follow this six-step procedure to report the income and expenses for federal income tax purposes.

1. Report 100% of the rental income on your tax return.

2. Deduct 100% of any direct rental expenses, such as rental agency fees and advertising.

3. Allocate mortgage interest, property taxes and indirect property expenses between rental and personal use based on actual days of rental and personal use. Indirect expenses include such items as maintenance, utilities, association fees, insurance and depreciation.

Continuing with the previous example, you would allocate 210/231 of the mortgage interest, property taxes and indirect expenses to rental use. Then you would allocate 21/231 of these expenses to personal use.

4. Deduct as rental expenses the allocable expenses from Step 3.

5. Stop here if you show a profit. Sorry, you owe taxes. But if you show a loss, you'll need to figure out whether the potential write-off is limited by the passive activity loss (PAL) rules.

In general, you can only deduct passive activity losses to the extent you have passive income from other sources, such as rental properties that produce positive taxable income. Fortunately, an exception allows you to write off up to $25,000 of passive rental real estate losses even if you have no passive income.

To qualify, you must actively participate in renting the property and have adjusted gross income (AGI) under $100,000. The exception is phased out between AGI of $100,000 and $150,000. Also, the IRS says the exception is unavailable if the average rental period for your property is seven days or less, which is often the case in resort areas. So, many owners of rental properties find their tax losses postponed by the PAL rules.

You're allowed to carry forward any unused passive losses to future tax years when they can be deducted if you, 1) report enough passive income from other sources, or 2) sell the property.

6. Deal with mortgage interest, property taxes and indirect operating expenses allocable to periods of personal use. Unfortunately, you can't deduct the personal-use portion of mortgage interest from a rental property, because it doesn't qualify as a personal residence for mortgage interest deduction purposes.

In the previous example, the ratio of personal use to total use was 21/231. So, you'd lose out on 21/231 of your mortgage interest and indirect expense deductions. But you can deduct 21/231 of the property taxes as an itemized deduction on Schedule A of your return, but it's subject to the phase-out rule for high-income folks that normally applies to these deductions.

Mid-Year Tax Strategies

From a federal tax perspective, you may benefit from taking some extra vacation days during the rest of the year. That could move your home from being classified as a rental property for tax purposes to being classified as a personal residence. With a personal residence, you can usually deduct all the mortgage interest and property taxes (part as rental expenses and part as itemized deductions). And you can usually shelter any remaining rental income with allocable indirect operating expenses (such as utilities, maintenance and depreciation).

On the other hand, you may have plenty of passive income or AGI below $100,000 and no problem with the seven-day rule. In these scenarios, you can currently deduct your whole rental loss. If the nondeductible mortgage interest allocable to personal use would be a relatively small amount, consider minimizing your personal use for the rest of the year in order to increase your fully deductible rental loss. You might also be able to rent the place out for more days, which would boost your cash flow.

The rules explained here apply only to vacation home rentals that have limited use by you (or your family and friends). For properties that are classified as personal residences, different tax rules apply. Contact your tax professional for more information on vacation home rentals.

Why Many Feel They Are Overbilled By Trusts And Estates Lawyers

FROM FORBES.COM

Traditionally, legal fees are predominantly based on time. Many trusts and estates lawyers bill in terms of time and expenses. However, wealthy clients are becoming increasingly critical of legal billing practices. One perennial criticism is that legal fees are too high. Another is that billing by the hour has an implicit conflict of interest. In a survey of 168 wealthy clients (net worth = U.S. $10 million or more) who had a trusts and estates lawyer construct their estate plans, these and other criticisms were evaluated.

All wealthy clients in the study were queried about the fairness of the bills they received from their trusts and estates lawyers. Only one in 10 thought the billing was fair; the remainder felt they were over billed to some extent. A third felt severely over billed, about 30% said they were moderately over billed, and slightly more than a quarter said they were slightly over billed.

This sentiment was much more pronounced among the affluent clients with more complex financial situations. It is probable that the “high complexity” group paid higher legal fees. Their situations probably required more time to resolve, and the fees were more significant as a result. A contributing factor may also be the lack of adequate explanations of the bill and the fees.

According to Daniel Geltrude, Managing Partner of Geltrude & Company and Director of the firm’sFamily Office Practice, “There is clearly an issue with the perception of wealthy clients that they are not getting the value they paid for. They believe that they are paying too much for the value they are receiving in their estate planning. However, the issue is not one of the costs of the legal expertise, but it is about the cost in relation to the perceived value delivered.”

This realization is reinforced as only a sixth of the affluent clients reported that the trusts and estates lawyers’ rates were too high. The wealthy know the rates when they engage the trusts and estates lawyer (and had they felt that the rates were out of line, they would have opted for a less expensive professional).

The difficulties do not arise from the rates themselves. They occur when the rates are multiplied by the hours to create the final fee as 85% of the wealthy said that their lawyer spent too much time on their estate plan. Another major source of dissatisfaction for nine out of 10 affluent clients is that on the bills they see additional charges for expenses and people that make no sense to them.

What is essential and often missing is that the trusts and estates lawyers need to more effectively communicate the value they are providing to their wealthy clients. Moreover, these conversations should be solidly on the benefits of the planning and not an explanation of the expenses.

Estate Planning for the Young Professional

For many, estate planning can often be placed into a box that belongs solely to individuals who are either of an advanced age or have significant assets. In reality, however, the practical aspect of having an estate plan in place is a benefit for any individual who is willing to pursue it. Whether a loved one is, or you yourself are, a young professional, there are certain decisions that can be made to protect your future.

Having an executed will is the best way to avoid intestate succession – when someone dies without a will, a court will distribute property according to state law, which may not match the wishes of the deceased. Having a say in the future of your possessions and interests can be incredibly empowering, particularly for a young individual. There is no way to gauge exactly where a person’s path will lead, but having a few provisions in place can help family members in deciphering your individual wishes. Even if a young professional’s assets are not particularly substantial, in terms of any real estate or bank accounts, having a set designation as to who is authorized to control these assets remains an important facet of estate planning.

In regard to ownership, it is vital to discuss the potential repercussions in the event of an emergency as to who will be able to access any joint accounts or jointly owned real property. Whether it is a parent, grandparent, or trusted advisor, every young professional has the right to decide how their personal assets are controlled. Depending on the skills and circumstances of each individual, it could potentially benefit a young professional to require a trusted family member to sign off on any jointly owned assets. It may even be the case that there are already trustees in place to help manage distributions if you are a currently designated beneficiary of a trust.

Regardless of your physical fitness, creating incapacity documents are a necessary step to take as a responsible adult. Having to draft a document that basically assumes the worst-case scenario is tough for any individual at almost any age. However, in order to have certain personal wishes made known, you have to be willing to take some time to ascertain what those wishes truly are. While there may be little to his or her name at this stage of life, a young professional’s plan for incapacity can be most helpful in the event of an unexpected crisis.

Even at this uncertain stage of life, a young professional, will almost certainly have possessions and interests that they hold to be valuable. The important thing to remember is that it cannot really hurt you to have an estate plan, or at the very least, consult with an experienced attorney who can help you to get the process started. By becoming familiar with asset protection strategies and executing incapacity documents, you or the young professional in your life may be able to progress into adulthood with one less burden.

NIIT again! Planning for the 3.8% tax on trust net investment income

To help fund the Affordable Care Act, a 3.8 percent net investment income tax took effect in 2013. The tax, known as the NIIT, is imposed against individuals, trusts and estates on non-business income from interest, dividends, annuities, royalties, rents and capital gains above certain thresholds.

For the tax year 2016, the threshold for trusts and estates is $12,400. Thus, if a non-grantor trust has net investment income, the 3.8 percent tax may be applied to the lesser of the amount of the undistributed net investment income or the amount in excess of $12,400. For individuals, NIIT applies to amounts in excess of $250,000 of adjusted gross income for joint filers or $200,000 for non-married filers.

For grantor trusts, NIIT applies not at the trust level, but instead at the grantor level. This can be significant, not only because individuals have a much higher threshold but also because of the rules regarding material participation for determining whether a business activity is a passive activity, making income from that point possibly subject to NIIT.

Minimizing NIIT

There are several ways for a trust to minimize NIIT. First, the trust could invest in tax-exempt income. Secondly, the trustee could allocate indirect expenses to undistributed net investment income. For example, all or a portion of trustee fees could be allocated to capital gain that is not distributed by the trust, resulting in a reduction in undistributed investment income subject to NIIT.

Another way to minimize NIIT for a trust is for the trustee to make discretionary distributions of net investment income to the beneficiary. If the trustee knows the adjusted gross income of the beneficiary, the trustee could distribute net investment income to the beneficiary that would not cause that adjusted gross income to exceed the much higher individual threshold, and at the same time, reduce or eliminate the NIIT for the trust.

As part of such a planning strategy, the use of a one-pot trust could help provide more flexibility for distributions to multiple beneficiaries. However, evaluation of the standard for making distributions may need to be considered. In addition, the trustees will still need to consider not only whether such distributions are authorized or could cause a breach of the trustee’s fiduciary obligations, but also such factors as the maturity of the beneficiary, loss of creditor protection, future estate taxes or the future divorce of a beneficiary.

5 Money-Saving Tax Tips to Use This Summer

FROM FOOL.COM

If you think you're done with taxes now and can enjoy not thinking about them until March or April of 2017, think again. To minimize your tax bill next year, there are some smart moves you can make now and in the months ahead. Savvy tax planning doesn't have to take a lot of time, but it's a year-round undertaking. Here are five money-saving tax tips to put to use this summer.

ONE

One of the smartest ways to lower your tax bill is to put more money into your tax-deferred retirement accounts, such as traditional IRAs and 401(k) accounts. Since pre-tax money is used to fund these accounts, adding more money now will lower your total taxable income and lead you to pay out less in income taxes next year.

There could be other benefits to increasing your retirement contributions, too. That's especially true if your employer offers a matching contribution to your 401(k) and you are not yet contributing enough to take full advantage of that. As an example, if your company provides a 50% match on the first 6% of your salary, and you are not yet contributing 6%, then you are saying no to free money. Bumping your contribution rate up to that 6% will not only provide you with an immediate 50% return from your employer, but it will also lower your tax bill. That's a huge win!

If you're worried that can't afford an increase, then I'd still advise you to go for it, but start out small. Simply add an extra 1% of your salary to a tax-deferred plan right now and judge for yourself how it goes. My hunch is that after a few paychecks, you'll hardly notice the difference. If so, then add another 1% a few months down the road, and repeat that process as many times as possible. Do that enough times, and you'll be at the maximum level, turning you into a retirement rock star.


TWO

The phrase "spring cleaning" isn't exactly music to homeowners' ears. Yet this tiresome annual ritual can turn into a tax-saving venture.

For years, my wife and I have been trying to pare down our possessions. They clog up our living space and create mental clutter that stresses us out. There are usually many trips to Goodwill involved in this process. But whenever tax time rolled around, I was unable to claim a tax break for the things we donated because I didn't keep clean records.

That changed this year. TurboTax has a handy tool that has made the process much easier. Using the company's ItsDeductible tool, I take a brief survey of what we're donating each week. The tool has acceptable estimates for each item's value, and it keeps a log of everything that's been donated. In total, it takes just five minutes each week. And when the time comes to file my tax return, the deductions are seamlessly added to my tax return, because I also use TurboTax to file.

While we prefer ItsDeductible, know that it's not the only tool that can help you track your charitable donations. H&R Block, for example, has a similar tool called DeductionPro. Do a bit of shopping and decide which offering makes sense for you. By the way: Most of these programs, including ItsDeductible and DeductionPro, are 100% free to use.

THREE

If you're a parent and an entrepreneur, then there's a smart way you can not only reduce your taxable income, but also give your kids a way to earn money and learn the value of hard work: employ them. If you happen to own your own business, you can hire your children under the age of 18 and then deduct the wages you pay them from your own taxable income. Additionally, if you operate a sole proprietorship, you can even employ your children without having to pay Social Security taxes or Medicare taxes on their wages.

What's the catch to this great tax deduction? Namely, you'll want to ensure you're paying your kids under the age of 18 a reasonable wage based on the work they're performing. Otherwise you could raise a red flag that triggers a tax audit -- and no one wants that.

Additionally, give serious consideration to reviewing your withholding status on your W-4 at least once per quarter. With half the year having passed, summer is often a great time to assess how much you've paid in federal income taxes so far, compared to what you expect to earn for the full year. Since most taxpayers wind up netting a refund come tax time, chances are that you've overpaid what you'll likely owe. This means the government is keeping your money for the next few months to a year without giving you a red cent in interest. If you adjust your tax withholding on your W-4, then you may be able to put more money into your pocket with each paycheck for the remainder of the year and put that money to work immediately, not months from now.

FOUR

You could save thousands of dollars off your utility bills over the next couple of decades by installing a solar energy system. And with the recently extended solar investment tax credit covering 30% of the cost of the system and installation, it's probably more affordable than you think. There are also ways to reduce or even eliminate the up-front cost, too.

Between low- or even no-money-down loans, along with solar system lease and power purchase agreements (usually called PPAs), you can sign up for 20 years of low-cost solar and pass on the tax credit to the installer or lender you work with. Meanwhile, you get the benefit of a lower monthly bill for the next 20 years.

Going solar isn't the only way to save money on your utilities while also getting a tax break. The Nonbusiness Energy Property Credit can get you up to 10% back if you make certain energy-efficient home improvements. These include insulation, high-efficiency water heaters, heating and air-conditioning systems, and external windows. Not only will these improvements help you save money on your utility bills, but a tax credit for 10% of the cost can make it an easier decision.

Keep in mind that this tax credit has a lifetime cap of $500 and is set to expire at the end of 2016.

FIVE

A final way you might shrink your tax bill this year is by opening a Flexible Spending Account (FSA) if you're able. These plans are typically offered by employers, with contributions coming out of your paycheck on a pre-tax basis. (That means you're not taxed on them.) For 2016, the limit is $2,550. If you're in the 25% tax bracket and can shrink your taxable income by $2,550, you'll avoid paying nearly $640 in taxes.

There are several varieties of FSAs. A healthcare FSA (not to be confused with a Health Savings Account, or HSA) lets you sock money away for healthcare expenses, while others focus on dependent care expenses (such as day care) or adoption expenses or health insurance premiums. With a healthcare FSA, the money you contribute to the account can be used tax-free on qualifying healthcare expenses, such as: birth control pills, breast pumps, chiropractor services, dental work, drugs, eyeglasses, fertility treatment, hearing aids, optometrist services, psychiatric care, smoking cessation programs, some weight-loss programs, wheelchairs, wigs, X-rays, and more. Expenses that miss the mark include cosmetic surgery, diapers, gym memberships, electrolysis, many nonprescription drugs, nutritional supplements, teeth whitening, and veterinary services.

An FSA has a significant drawback, though: It's use-it-or-lose-it with the money you contribute each year. The rules were recently relaxed just a little so that now your employer may choose to extend the spending deadline by up to 2-1/2 months or permit you to carry over up to $500 to spend in the following year. It might not offer either option, though, so learn the rules for your particular account. Also, you generally have to set up an FSA during your employer's open enrollment period, so find out when that is.

Take some action now and you can save hundreds or thousands of dollars in taxes.

Health savings accounts: A second retirement plan

FROM CNBC.COM

Ask around for retirement advice and you are likely to hear a familiar refrain: Start saving early, and put enough into your 401(k) plan to capture the maximum matching contribution from your employer.

But some experts argue that many investors are passing up (or underutilizing) a powerful savings tool — the triple tax-advantaged health savings account — in their pursuit of a secure retirement. Greg Geisler, an associate professor of accounting at the University of Missouri–St. Louis, is one such expert.

In an article published earlier this year in the "Journal of Financial Planning," Geisler argues that, in many cases, workers with both employer-matched 401(k) plans and HSAs are better off from a wealth-building standpoint prioritizing contributions to HSAs.


"HSAs," wrote Geisler, "need to be incorporated into financial planners' recommendations to individuals."

"The proper advice to some individual clients," he added, "may be to maximize contributions to their HSA first and then contribute enough to their 401(k) to get the maximum employer contribution second — instead of the traditional advice to get the maximum employer 401(k) match first."

Health savings accounts — authorized by the Medicare Modernization Act of 2003 — are available only to people enrolled in high-deductible health insurance plans meeting strict criteria, including certain minimum deductibles and out-of-pocket maximums. As with 401(k) plans, HSAs typically offer a menu of investment options.

The estimated number of Americans covered by HSA-eligible health plans stands at 22 million and is growing at a fast clip of about 25 percent a year, according to the Health Savings Account Council at the American Bankers Association. Most HSA-eligible health plans are employer-sponsored, but the plans are also sold through the exchanges created under the Affordable Care Act.

In theory, HSAs encourage consumers to save for future medical expenses and spend more prudently on health care since they are using their own money. According to some advisors, HSAs are also the Holy Grail of savings vehicles because of their rare triple-tax benefit. Contributions to HSAs are made with pretax dollars (in most states), assets grow tax-free, and distributions are tax-free if used to pay for qualified medical expenses or as reimbursement for such expenses.
"With an HSA, money goes in tax-free, builds up tax-free and, as long as it is pulled out for a qualified medical expense, comes out tax-free."
-Paul Fronstin, director of health research at the Employee Benefit Research Institute
Unlike workplace flexible-spending accounts, HSAs don't have a "use-it-or-lose-it" rule and are "portable," meaning workers who are no longer covered by HSA-eligible health plans because of job changes can continue to tap existing HSAs to pay for qualified medical expenses.
What's particularly enticing to some savers is the fact that withdrawals for qualified medical expenses can be taken at any time. For instance, retirees with balances that have been building over time can take tax-free withdrawals for qualified medical expenses incurred years earlier.

There is no need to provide proof of having incurred qualified medical expenses to take withdrawals, but it's wise to keep records in case of an Internal Revenue Service audit of your HSA distributions, experts say.
"With an HSA, money goes in tax-free, builds up tax-free and, as long as it is pulled out for a qualified medical expense, comes out tax-free," said Paul Fronstin, director of health research at the Employee Benefit Research Institute. "You get a better tax break [on withdrawals for qualified medical expenses] than you get with a 401(k) or an individual retirement account."

Amy Hubble, a certified financial planner, said HSAs can be a powerful retirement-savings vehicle for younger people and those without children, who typically don't have big medical expenses and are able to let their balances compound over long periods.
Hubble tries to convey this message to clients whose benefits at work include HSA-eligible health plans. But she has found that some clients are reluctant to choose high-deductible coverage and forgo the traditional co-pay for doctors' visits.

"For people who don't visit the doctor very often and can stomach paying the rare visit out of pocket, the ability to compound investment growth over a long working lifetime can be incredibly powerful," said Hubble, founding principal of Radix Financial.

Hubble points out that one of the primary reasons to save for retirement is to put aside money for medical expenses, which can be daunting for older Americans. Fidelity Investments estimates that a couple, both age 65 and retiring in 2015 with Medicare as their primary insurance, will need $245,000 in today's dollars for health-care costs during retirement.

According to Geisler at the University of Missouri-St. Louis, for many employees the tax savings on contributions to HSAs increases wealth by more than an employer match on 401(k) contributions.