College Tuition Tax Credit: A Consolation Prize to Big Tuition Bills

College Tuition Tax Credit: A Consolation Prize to Big Tuition Bills

If you’re a parent, I’m guessing that at some point you’ve freaked out thought about the cost of your child’s future college tuition.  College costs are rising about 7% per year here in the U.S., and don’t look to be slowing down any time soon.  Most conventional advice we hear about ways to afford college costs has to do with starting to save early, or scouring the earth for potential scholarships.  What many of us forget is that we already have saving opportunities build into our tax code, in the form of a college tuition tax credit.

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Woman Owned Business Tax Benefits: What's Out There?

Woman Owned Business Tax Benefits: What’s Out There?

Several weeks ago I was in a meeting with a small business owner at my office.  She’d come by to talk about her plans to transition away from her business, as she is in her 50’s and getting burnt out.  She’s built a successful enterprise over the years, and stands to make a nice profit on the sale of her equity stake.

Her biggest problem in this transition?  Taxes, of course!  Although she stands to receive a nice chunk of change from the sale, she’ll end up owing several hundred thousands of dollars between state and federal taxes.  And as we worked through the mechanics of the transition and how she might reduce her tax burden, she asked a question I hadn’t thought much about: “aren’t there tax benefits I can claim as a woman owned business?”

I hate to admit this, but woman owned business tax benefits aren’t a subject I’d looked into before.  I’d always assumed there were some tax benefits for women and minority owned businesses, but I’d never looked into what they were exactly.

So I researched it.  And since I’m certain there are thousands of women entrepreneurs out there wondering the same thing, I consolidated my findings into this post.

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How to Use Strategic Asset Allocation to Reduce Your Tax Bill

How to Use Strategic Asset Location to Reduce Your Tax Bill

I’m a believer that the biggest factor contributing to the returns in your portfolio is asset allocation.  The amount of your portfolio you choose to invest in stocks, bonds, real estate, or anything else will ultimately have the biggest effect on how your portfolio does over the long run.

In other words, the decision of whether to buy Lowe’s or Home Depot isn’t nearly as important than the decision to be in large cap stocks or international bonds.

If you’re being strategic about your saving, you’ll probably try to utilize tax advantaged accounts like IRAs, Roth IRAs, and 401(k)s as much as you can.  If you’re using them (like most people), after a while your total portfolio will probably be spread across several different types of these accounts.

Today’s post covers asset location.  Rather than replicate the exact same asset allocation in each of your individual accounts, placing your investments across them strategically can work to reduce your tax bill and enhance your after tax returns.

Since some asset classes are more likely to distribute taxable income & capital gains, parking them in the accounts you don’t pay tax on (like a Roth IRA), only seems logical.  When done thoughtfully, asset location can as much as 0.25%-0.75% per year to your portfolio’s returns.

Read on to learn how it works.

 

 
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Defined Benefits Pension Plan: Helping Business Owners Shelter Thousands from Income Tax

The Defined Benefits Pension Plan: Helping Business Owners Shelter Thousands from Income Tax

Taxes are frustrating to nearly every small business owner I speak with.  Most people agree that we should all pay our fair share.  But after working countless thousands of hours to build a viable business, it’s easy to feel like Uncle Sam’s reaching into our pockets too far.  That’s why I focus on helping my clients who own businesses make sure they’re not paying more in taxes than they need to.  One great tool we can use in this endeavor is a defined benefit retirement plan.  Whatever you want to call it, DB plan, defined benefits pension plan, etc., it can be a killer way to defer a huge portion of your income from taxation.

I realize you might cringe when you read the words “pension” or “defined benefit”.  The idea of promising employees a monthly check throughout their retirement may not foster warm and fuzzies.  But if you don’t have employees, or only have a few, a defined benefit plan can offer some pretty major tax advantages.

Read on to learn how you might take advantage of them.

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Grantor Retained Annuity Trust: An Easy Way for Business Owners to Reduce Wealth Transfer Taxes

Grantor Retained Annuity Trust: An Easy Way for Business Owners to Reduce Wealth Transfer Taxes

For business owners starting to think about the next generation, the phrases”estate tax” or “transfer tax” almost seem like curse words.  The bad news is that when you build an estate of a certain size, the IRS wants to get in your pockets regardless of what, when, or how you transfer your assets to beneficiaries.  The good news is that there are plenty of strategies available to help you minimize these taxes.  The grantor retained annuity trust is one of them, and will be the topic of today’s post.  We’ll cover what they are, why they’re beneficial, and how you might go about using one.

 

 

Gift Tax Review

Ok – before we dive into the details, let’s review what taxes typically apply when you gift an asset to someone else.

First off, you’re allowed to give away $14,000 per year, per person tax free.  If you’re married, you and your spouse are both allowed $14,000 per person per year, or $28,000 total.  So, if you and your spouse want to gift each of your kids $28,000 for their birthday every year, you could do so tax free.  (It’d be one heck of a birthday present, too).

You also have a lifetime gift exclusion.  This is the amount that you can give away, either while you’re alive or after you die, without incurring any federal estate or gift taxes.  Anything that exceeds the $14,000 annual limit (or doesn’t qualify) works against your lifetime exclusion.  The lifetime gift exclusion in 2017 is $5.49 million, which inches higher with inflation over time.  Here again you can combine your lifetime exclusion with your spouse, for a total of $10.98 million.

So let’s say that one year you and your spouse decide to gift your oldest child $128,000.  The first $28,000 would be covered under your annual allowance and excluded from tax.  The remaining $100,000 would work against your lifetime exclusion.  Neither you nor your child would owe tax on the gift, but you’d have worked your lifetime exclusion from $10.98 million down to $10.88 million.  If your future gifts (either while you’re alive or after death) exceed $10.88 million, they’ll be subject to the federal gift/estate tax:

Grantor Retained Annuity Trust: An Easy Way for Business Owners to Reduce Wealth Transfer Taxes

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Using a Section 105 Medical Reimbursement Plan to Reduce Your Tax Bill

Using a Section 105 Medical Reimbursement Plan to Reduce Your Tax Bill

“I paid out the ears in taxes this year.  How can I reduce my tax burden?”

This is a question I’m hearing a lot from business owners recently.  And while it may not sound flashy, the best way to reduce taxes is to incorporate some smart planning into your decision making.  More often than not, business owners simply don’t have the time to research and apply the opportunities offered in the tax code.

So to make your life a little easier, today’s post will cover an often unused tax saving opportunity: the Section 105 medical reimbursement plan.

 

 

An Overview of Section 105 Health Reimbursement Plans

A section 105 health reimbursement plan is a tax-efficient way to repay your employees for their health care costs.  Rather than purchasing group coverage that your qualifying employees can opt into, you allow them to find their own coverage and then reimburse them for qualified expenses.  This can include premiums, deductibles, or a wide variety of other out of pocket costs.  (Side note, there are section 105 plans that combine traditional group coverage with reimbursement for qualified out of pocket costs, but that’s a subject for a future post).

Whereas this would not have been a popular way to offer benefits a decade ago, it’s more palatable now that individual health insurance is widely available through the state and federal marketplaces.

The main benefits of section 105 plans are the tax advantages.  Most small businesses deduct the cost of health insurance premiums for their employees, and possibly for themselves.  But when it comes to their own out of pocket health care costs, business owners normally pay for them with taxable dollars.  These expenses can be deductible at the personal level, but only when they exceed 10% of your adjusted gross income.

With a Section 105 plan you can deduct your entire family’s medical expenses with without being subject to the 10% AGI floor.  Even better, it’s a deduction from income tax at the state and federal levels, AND a deduction from payroll taxes.  For some business owners this can be a savings of thousands of dollars per year.

The tax benefits don’t apply to all types of business entities, though.  S-Corps don’t get to deduct reimbursements through section 105 plans from state or federal income tax.  And if you own a sole prop, a partnership, or an LLC you aren’t considered an employee.  That means you can’t be reimbursed by a plan, and would need to employ your spouse in order to reap the benefits.

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Using Business Interruption Insurance to Protect Your Income

Using Business Interruption Insurance to Protect Your Income

Picture it now…

You own a thriving art supply store in your home town of New Orleans.  You’ve put years of your life and thousands of dollars into building the store into what it is now.  You make a nice living, and the business mostly runs itself at this point.

Then Hurricane Katrina comes to town.  The building you lease is ruined.  Your storefront and merchandise are ruined.  You have no cash flow to pay creditors, and are forced to close the store.

This is a pretty extreme example, but is exactly what happened to thousands of businesses in the wake of the disaster in 2005.  It’s also a risk that can be completely covered with business interruption insurance.

Virtually any disaster that is out of your control and risks your business’s profitability can be covered in a business interruption policy.  In other words, you can protect business profits and your personal income from a fire, flooding, earthquake, or other disaster.

This post will cover the ins and outs of business interruption insurance.  We’ll address what it does and doesn’t cover, when you should consider buying it, how much coverage you need, and how to purchase a policy.
 

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How to Tell Whether You Have Enough Money to Retire

How to Tell Whether You Have Enough Money to Retire

“I’m not sure I have enough saved up to retire.”

“How can I know for sure my savings will last after I stop working?”

“I”m concerned I’ll spend through my savings too fast and run out of money when I’m 80.”

These are a few common phrases I hear from people who are approaching retirement.  Many people I speak with in the their mid 50s and early 60s these days have saved diligently for years for their own retirement.  But now as they approach the transition from accumulating wealth to spending their savings, the question of whether they’ve saved enough becomes extremely important.

Plus, when you mix in longer life expectancies, rising health care costs, and expensive stock and bond markets, there’s a lot of uncertainty surrounding the issue.

So in today’s post, I’ll cover some of the leading ways you can determine whether you have enough saved up to stop working.  Without putting you and your family’s future at risk, that is.

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What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

You’ve seen the stats.  Long term care is expensive, and we’re all likely to need it at some point in our lives.  The cost of spending time in a nursing home or assisted living facility adds up quickly, which is why many retirees choose to insure against it through a long term care insurance policy.

Problem is, since there’s a high likelihood of requiring long term care, insurance is an expensive proposition in its own right.

Are you better off crossing your fingers and hoping you don’t need expensive care for a long period of time?  Or is it better to cover this risk through an insurance policy that will cost you an arm and a leg anyway?

This post will cover the essentials of long term care insurance, including exactly how to decide whether picking up a policy is a good decision for you and your family.

 

Long Term Care: The Stats

So here’s the big question.  What are the chances you’ll ever need long term care?  According to longtermcare.gov, about 70% of people turning 65 will need long term care services at some point in their lives.  With the average annual cost of a nursing home totaling about $96,000 these days, this can be a scary proposition.

The stats can be misleading, though.  Many people who need long term care services only need them for short periods of time.  And since most long term care policies have elimination periods (the period before the policy starts paying out) of around 90 days, many people won’t even need care long enough for their coverage to kick in.

What Everyone Ought to Know About Long Term Care Insurance

What Everyone Ought to Know About Long Term Care Insurance

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You've Inherited an IRA. Now What?

You’ve Inherited an IRA. Now What?

Inheriting an IRA is quite a bit different than inheriting any other asset.  Unlike cash or investments in a traditional investment account, if you inherit an IRA you’ll need to start withdrawing from the account in order to avoid hefty penalties.  In this post we’ll cover what your options are when you inherit an IRA, and how you can best manage it for you & your family.

 

How IRAs are Passed After Death

Whereas many of your assets will be distributed to heirs according to your will, IRAs are instead distributed by contract. Your custodian (the brokerage firm that holds your account, like Vanguard or TD Ameritrade) lets you designate as many beneficiaries and contingent beneficiaries as you like.  Once you die, your account bypasses your will, the probate process, and is distributed according to this beneficiary designation.

When account holders don’t designate any beneficiaries things get a little murkier.  When the account holder dies, their account is distributed according to their custodian’s default policy.  At most custodians this default policy diverts the IRA back to their estate (and goes through probate) but at some it’s diverted to their spouse first.  Unfortunately, if the account holder didn’t designate a beneficiary while they were alive, you’re at the mercy of your custodian’s policy.

If the account is indeed diverted back to their estate, it’ll be distributed according to your state’s interpretation of their will.  And if they didn’t have one (meaning they died intestate), the state will make its own decision on who should inherit the asset.

The moral of the story?  Take advantage of the opportunity to bypass probate, and designate your beneficiaries formally while you’re still alive.

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