Tax Reform: At What Cost?

The Republicans are in a tough situation.  There is a tremendous amount of pressure on them to get tax reform done by the end of the year.  This type of pressure can have ugly side effects.  It’s similar to the Hail Mary play at the end of a football game.  Everyone, including the quarterback, has their eyes fixed on the end zone but nobody realizes that no one is covering one of the defensive lineman and he’s just waiting for the ball to be hiked.   The game ends without the ball leaving the quarterback’s hands.

The Big Play

Tax reform is the big play.  If it works, it could lead to an extension of the current economic rally and more.  I’m a supporter of tax reform for the purpose of accelerating job growth both now and in the future.  It’s not just about U.S. companies keeping jobs in the U.S. That has been the game for the past two decades.  The new game is about attracting foreign companies to set up shop in the U.S. and then hire U.S. workers to run their plants, companies, subsidiaries, etc.  Right now we have the highest corporate tax rate in the world which has not only prevented foreign companies from coming here but it has also caused U.S. companies to move jobs outside of the United States.  If everyone wants more pie, you have to focus on making the pie bigger, otherwise we are all just going to sit around and fight over who’s piece is bigger.

Easier Said Than Done

How do we make the pie bigger?  We have to lower the corporate tax rate which will entice foreign companies to come here to produce the goods and services that they are already selling in the U.S.   Which is easy to do if the government has a big piggy bank of money to help offset the tax revenue that will be lost in the short term from these tax cuts. But we don’t.

$1.5 Trillion In Debt Approved

Tax reform made some headway in mid-October when the Senate passed the budget. Within that budget was a provision that would allow the national debt to increase by approximately $1.5 trillion dollars to help offset the short-term revenue loss cause by tax reform.  While $1.5 trillion sounds like a lot of money, and don’t get me wrong, it is, let’s put that number in context with some of the proposals that are baked into the proposed tax reform.

Pass-Through Entities

One of the provisions in the proposed tax reform is that income from “pass-through” businesses would be taxed at a flat rate of 25%. 

A little background on pass-through business income: sole proprietorships, S corporations, limited liability companies (LLCs), and partnerships are known as pass-through businesses. These entities are called pass-throughs, because the profits of these firms are passed directly through the business to the owners and are taxed on the owners’ individual income tax returns. 

How many businesses in the U.S. are pass-through entities?  The Tax Foundation states on its website that pass-through entities “make up the vast majority of businesses and more than 60 percent of net business income in America. In addition, pass-through businesses account for more than half of the private sector workforce and 37 percent of total private sector payroll.” 

At a conference in D.C., the American Society of Pension Professionals and Actuaries (ASPPA), estimated that the “pass through 25% flat tax rate” will cost the government $6 trillion - $7 trillion in tax revenue. That is a far cry from the $1.5 trillion that was approved in the budget and remember that is just one of the many proposed tax cuts in the tax reform package.

Are Democrats Needed To Pass Tax Reform?

Since $1.5 trillion was approved in the budget by the senate, if the proposed tax reform is able to prove that it will add $1.5 trillion or less to the national debt, the Republicans can get tax reform passed through a “reconciliation package” which does not require any Democrats to step across the aisle.  If the tax reform forecasts exceed that $1.5 trillion threshold, then they would need support from a handful of Democrats to get the tax reformed passed which is unlikely.

Revenue Hunting

To stay below that $1.5 trillion threshold, the Republicans are “revenue hunting”.  For example, if the proposed tax reform package is expected to cost $5 trillion, they would need to find $3.5 trillion in new sources of tax revenue to get the net cost below the $1.5 trillion debt limit.

State & Local Tax Deductions – Gone?

One for those new revenue sources that is included in the tax reform is taking away the ability to deduct state and local income taxes.   This provision has created a divide among Republicans. Since many southern states do not have state income tax, many Republicans representing southern states support this provision.   Visa versa, Republicans representing states from the northeast are generally opposed to this provision since many of their states have high state and local incomes taxes.   There are other provisions within the proposed tax reform that create the same “it depends on where you live” battle ground within the Republican party.

Obamacare

One of the main reasons why the Trump administration pushed so hard for the Repeal and Replace of Obamacare was “revenue hunting”.  They needed the tax savings from the repeal and replace of Obamacare to carrry over to fill the hole that will be created by the proposed tax reform.  Since that did not happen, they are now looking high and low for other revenue sources.

Retirement Accounts At Risk?

If the Republicans fail to get tax reform through they run the risk of losing face with their supporters since they have yet to get any of the major reforms through that they campaigned on.  Tax reform was supposed to be a layup, not a Hail Mary and this is where the hazard lies.  Republicans, out of the desperation to get tax reform through, may start making cuts where they shouldn’t.  There are rumors that the Republican Party may consider making cuts to the 401(k) contribution limits and employers sponsored retirement plan.  Even though Trump tweeted on October 23, 2017 that he would not touch 401(k)’s as part of tax reform, they are running out of the options for other places that they can find new sources of tax revenue.  If it comes down to the 1 yard line and they have the make the decision between making deep cuts to 401(k) plans or passing the tax reform, retirement plans may end up being the sacrificial lamb.  There are other consequences that retirement plans may face if the proposed tax reform is passed but it’s too broad to get into in this article. We will write a separate article on that topic.

Tax Reform May Be Delayed

Given all the variables in the mix, passing tax reform before December 31st is starting to look like a tall order to fill.  If the Republicans are looking for new sources of revenue, they should probably look for sources that are uniform across state lines otherwise they risk splintering the Republican Party like we saw during the attempt to Repeal and Replace Obamacare.  We are encouraging everyone to pay attention to the details buried in the tax reform.  While I support tax reform to secure the country’s place in the world both now and in the future, if provisions that make up the tax reform are rushed just to get something done, we run the risk of repeating the short lived glory that tax reform saw during the Reagan Era.   They passed sweeping tax cuts, the deficits spiked, and they were forced to raise tax rates a few years later. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Required Minimum Distribution Tax Strategies

If you are turning age 72 this year, this article is for you.  You will most likely have to start taking required minimum distributions from your retirement accounts.  This article will outline:

• Deadlines to take your RMD

• Tax implications

• Strategies to reduce your tax bill

How is my RMD calculated?

The IRS has a tax table that determines the amount that you have to take out of your retirement accounts each year. To determine your RMD amount you will need to obtain the December 31st balance in your retirement accounts, find your age on the IRS RMD tax table, and divide your 12/31 balance by the number listed next to your age in the tax table.

Exceptions to the RMD requirement........

There are two exceptions. First, Roth IRA’s do not require RMD’s.  Second, if you are still working, you maintain a balance in your current employer’s retirement plan, and you are not a 5%+ owner of the company, you do not need to take an RMD from that particular retirement account until you terminate employment with the company.  Which leads us to the first tax strategy.  If you are age 72 or older and you are still working, you can typically rollover your traditional IRA’s and former employer 401(k)/403(b) accounts into your current employers retirement plan.  By doing so, you avoid the requirement to take RMD’s from those retirement accounts outside of your current employers retirement plan and you avoid having to pay taxes on those required minimum distributions.  If you are 5%+ owner of the company, you are out of luck. The IRS will still require you to take the RMD from your retirement account even though you are still “employed” by the company.

Deadlines

In the year that you turn 72, if you do not meet one of the exceptions listed above, you will have a very important decision to make.  You have the option to take the RMD by 12/31 of that year or wait until the beginning of the following tax year.  For your first RMD, the deadline to take the RMD is April 1st of the year following the year that you turn age 72.   For example, if you turn 72 on June 2017, you will not be required to take your first RMD until April 1, 2018.  If you worked full time from January 2017 – June 2017, it may make sense for you to delay your first RMD until January 2018 because your income will most likely be higher in 2017 because you worked for half of the year.  When you take a RMD, like any other distribution from a pre-tax retirement account, it increases the amount of your taxable income for the year.  From a pure tax standpoint it usually makes snese to realize income from retirement accounts in years that you are in a lower tax bracket.

SPECIAL NOTE:  If you decided to delay your first RMD until after December 31st, you will be required to take two RMD’s in that year.  One prior to April 1st and the second before Decemeber 31st.  The April 1st rule only applies to your first RMD.  You should consult with your accountant to determine the best RMD strategy given your personal income tax situation.  For all tax years following the year that you turn age 72, the RMD deadline is December 31st.

VERY IMPORTANT:  Do not miss your RMD deadline.  The IRS hits you with a lovely 50% excise tax if you fail to take your RMD by the deadline.  If you were due a $4,000 RMD and you miss the deadline, the IRS is going to levy a $2,000 excise tax against you.

Contributions to charity to avoid taxes

 Another helpful tax strategy, if you make contributions to a charity, a church, or not-for-profit organization, you have the option with IRA’s to direct all or a portion of your RMD directly to these organization. In doing so, you satisfy your RMD but avoid having to pay income tax on the distribution from the IRA.  The number one rule here, the distribution must go directly from your IRA account to the not-for-profit organization.    At no point during this transaction can the owner of the IRA take possession of cash from the RMD otherwise the full amount will be taxable to the owner of the IRA.  Typically the custodian of your IRA will have to issue and mail a third party check directly to the not-for-profit organization. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The #1 Question To Ask Yourself Before Selling A Stock

When is the right time to sell an investment? It's a tough decision that individuals have a difficult time making but it's one of the most important decisions that you will have to make as an investor. Often time the decision to "buy" an investment is much easier.  You gather information on a given investment, look at the trends in the market acting on that investment, assess the risk versus reward trade off, and you put your strategy to work. Deciding to sell has a lot more emotions involved which frequently causes investors to make the wrong decision.

When do I sell a big winner?

First scenario is "the rocket ship". You purchased a stock and the stock price has gone through the roof. It's made you a ton of money on paper, you proudly boast to your friends and co-workers about the price that you bought it at, and in certain instances it has been a life changing financial event. The mistake investors make here is they get into what we call "the teddy bear syndrome".

Teddy bear syndrome.....

Have you ever tried to take a teddy bear away from a five year old......good luck. As adults, we often fall into the same behavioral pattern with very successful investments. Individuals typically have a strong emotional attachment to their most successful investments. But you will frequently hear many legendary investment managers make comments like: "Investment decisions are not emotional decisions. You have to remove your emotions from the decision-making process." Let's say you bought $10,000 of XYZ stock at $10 per share and five years later it's now selling at $890 per share turning your $10,000 into $890,000. Do you sell some of it, maybe all of it?

Here is the key question........

"If you had that $890,000 in cash in your hand today, would you invest all of it back into XYZ stock at $890 per share?"

Most people would say "No!! That's crazy. I would diversify that $890,000 across a number of holdings and the stock has already gone up so much". Continuing to hold a stock is the same decision as buying a stock. But doing nothing is easier because we feel like we are not making a decision, we are just "continuing to hold". Remember, it's easy to sell a stock that has lost money. It's much more difficult to sell a stock that produced a gain. Of course, this brings up the question of how do you find the right stocks to invest in?

"If I sell the stock, I'll have to pay tax on the gain."

Question: Would you rather pay taxes on a gain or lose money? Usually if you are paying taxes it means that you are making money. If I sold the stock holding in the example above, I would have an $880,000 long term capital gain at a minimum would pay around $132,000 in long term capital gains tax at 15%. This would leave me with $758,000 cash in hand from a $748,000 gain plus $10,000 original investment. What if instead of selling I continue to hold the stock and to no fault of company XYZ the economy goes into a recession? The stock goes from $890 a share to $500 a share. Now my total investment is worth $500,000 instead of $890,000. It's still a good investment because I bought it at $10,000 and it's still worth $500,000 but if I sold it at $500 per share I would still pay tax on the gain, now a smaller amount of gain, and be left with around $425,000. That poor decision cost me $333,000 after tax.

The fallen star

Most investors have been here at one point or another. You purchased a stock that rose in value dramatically but for whatever reason the stock lost all of its early investment gains and your investment is now underwater. Many investors will say “It’s a good long term holding so I’m just going to wait for it to come back.” While we are all familiar with the buy and hold strategy, there is a risk and opportunity cost with this strategy. The risk being that it may never come back to its original value. The opportunity cost is the money invested in that underperforming company could be growing somewhere else instead of just “waiting for it to come back”.

You must ask yourself the same key question that was listed above: “If I had that money in my hand today, would I invest all of it in that stock?” If the answer is “no”, you should probably sell some or all of it. Do not hold a stock solely based on a target share price. I will hear people say, “Well I bought it at $55 per share so I’m going to wait until it at least gets back to that price.” That is not an investment strategy. You must look at the fundamentals of the company, their competitors, global market conditions, company management, the company’s strategy, and their financials to really come up with a price target for the stock.

The inherited gem

It's a common occurrence that individuals will inherit stock from a family member and they know that family member had a strong emotional attachment to the stock because they either work for the company or they never sold a single share during their lifetime. It's easy to feel that selling the stock is in some way selling the memory of that family member. I will often hear comments like: "My dad worked for the company and held that stock for 40 years. He would be rolling in his grave right now if he knew I was thinking about selling his stock." This frequently happens because the generation before us had pension plans to support them in retirement and did not have to sell stock to supplement their income or they came from a generation that was very frugal about spending money. Your needs and circumstances are probably very different from the person that you inherited the stock from so you need to look at that investment holding from your financial standpoint.

I work for the company........

If you work for a publicly traded company then there is a good chance that you own shares of that company in an employee stock purchase plan, retirement plan, options plan, or brokerage account. Since you work for the company it usually means that you have "drank the kool-aide" and believe in the company's mission, vision, and you feel like you have more control over the fate of your investment. Remember, even though you work for that company it's still one company and attaching too much for your net worth to one investment is very risky. It's even more risky for employees because if something negatively impacts the company not only is your employment at risk but so is your total net worth if a large portion of your investment portfolio is tied to the company that you work for. Make sure you periodically calculate a total of all your investment holdings and compare that to the amount invested in your company's stocks to make sure you stay balanced in your overall investment approach.

Ask yourself the easy question.......

While making the decision to buy, sell, or hold an investment is not always an easy one. Finding the right answer may be as easy as asking yourself: "If the amount invested in that stock was in cash and in my hand today, would I invest 100% of it back into that stock holding?"

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Tax Deductions For College Savings

Did you know that if you are resident of New York State there are tax deductions waiting for you in the form of a college savings account?  As a resident of NYS you are allowed to take a NYS tax deduction for contributions to a NYS 529 Plan up to $5,000 for a single filer or $10,000 for married filing joint.   These limits are hard dollar thresholds so it does not matter how many kids or grandchildren you have. 

529 Accounts

529 accounts are one of the most tax efficient ways to save for college. You receive a state income tax deduction for contributions and all of the earnings are withdrawn tax free if used for a qualified education expense.  These accounts can only be used for a college degree but they can be used toward an associate’s degree, bachelor’s degree, masters, or doctorate.  You can name whoever you want as a beneficiary including yourself.  More commonly, we see parents set these accounts up for their children or grandparents for the grandchildren.

Can they go to college in any state?

If you setup a NYS 529 account, the beneficiary can go to college anywhere in the United States. It’s not limited to just colleges in New York.  As the owner of the account you can change the beneficiary on the account whenever you choose or close the account at your discretion.

What if they don't go to college?

The question we usually get is “what if they don’t go to college?”  If you have a 529 account for a beneficiary that does not end up going to college you have a few choices.  You can change the beneficiary listed on the account to another child or even yourself.  You can also decide to just liquidate the account and receive a check.  If the account is closed and the balance is not used for a qualified college expense then you as the owner receive your contributions back tax and penalty free.  However, you will pay ordinary income tax and a 10% penalty on just the earnings portion of the account.

What if my child receives a scholarship?

There is a special withdrawal exception for scholarship awards. They do not want to penalize you because the beneficiary did well in high school or is a star athlete so they allow you to make a withdrawal from the 529 account equal to the amount of the scholarship. You receive your contributions tax free, you pay ordinary income tax on the earnings, but you avoid the 10% penalty for not using the account toward a qualified college expense.

Don't make this mistake.............

We often see individuals making the mistake of setting up a 529 account in another state because “their advisor told them to do so”.   You are completely missing out on a good size NYS tax deduction because you only get credit for NYS 529 contributions.  A little-known fact is that you can rollover a 529 with another state into a NYS 529 account and that rollover amount will count toward your $5,000 / $10,000 deduction limit for the year.  If a client has $30,000 in a 529 account outside of NYS we typically advise them to roll it over in $10,000 pieces over a three year period to maximize the $10,000 per year NYS tax deduction. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Social Security Loophole: Age 62+ With Kids In High School

There is a little known loophole in the social security system for parents that are age 62 or older with children still in high school or younger.  Since couples are having children later in life this situation is becoming more common and it could equal big dollars for families that are aware of this social security filing strategy.

Here is how it works.  If you are age 62 or older and you have children under that age of 18,  they can collect a social security benefit based on your earnings history equal to half of the parents social security benefit at normal retirement age. This amount could equal as much as $16,122 per year for one child for higher income earners. If you have multiple children the total annual amount paid to your family members could equal between 150% to $180% of your normal retirement benefit which could be in excess of $40,000 per year depending on your earnings history.

There are some key considerations.  First, your children cannot collect on this “family benefit” until you have begun to collect your social security benefit.  You can turn on your social security benefit as early as age 62 but they reduce the monthly amount that you receive if you turn on the benefit prior to your normal retirement age.  However, it may make sense to do so depending on the amount of the family benefit paid and the duration of the benefit. If you wait until normal retirement age, you will receive a slightly higher social security benefit for yourself, but all of the social security dollars that could have been paid to your children is lost.

Second, if you are still working and your earned income exceeds certain thresholds this filing strategy may not be advantageous due to the earned income penalty.  They reduce your social security benefit by $1 for every $2 earned over a given threshold ($16,920 in 2017). Not only is your social security benefit reduce but also the benefit to your dependents.

Due to these restrictions, this filing strategy yields that greatest benefit to parents that are either fully or partially retired, age 62 or older, with a child or children below the age of 18.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Who Pays The Tax On A Cash Gift?

This question comes up a lot when a parent makes a cash gift to a child or when a grandparent gifts to a grandchild.  When you make a cash gift to someone else, who pays the tax on that gift?  The short answer is “typically no one does”.    Each individual has a federal “lifetime gift tax exclusion” of $5,400,000 which means that I would have to give away $5.4 million dollars before I would owe “gift tax” on a gift.  For married couples, they each have a $5.4 million dollar exclusion so they would have to gift away $10.8M before they would owe any gift tax. When a gift is made, the person making the gift does not pay tax and the person receiving the gift does not pay tax below those lifetime thresholds.

“But I thought you could only gift $15,000 per year per person?”  The $15,000 per year amount is the IRS “gift exclusion amount” not the “limit”. You can gift $15,000 per year to any number of people and it will not count toward your $5.4M lifetime exclusion amount.  A married couple can gift $30,000 per year to any one person and it will not count toward their $10.8M lifetime exclusion.  If you do not plan on making gifts above your lifetime threshold amount you do not have to worry about anyone paying taxes on your cash gifts.

Let’s look at an example.  I’m married and I decide to gift $20,000 to each of my three children.  When I make that gift of $60,000 ($20K x 3) I do not owe tax on that gift and my kids do not owe tax on the gift.  Also, that $60,000 does not count toward my lifetime exclusion amount because it’s under the $28K annual exclusion for a married couple to each child.

In the next example, I’m single and I gift $1,000,000 my neighbor. I do not owe tax on that gift and my neighbor does not owe any tax on the gift because it is below my $5.4M threshold. However, since I made a gift to one person in excess of my $15,000 annual exclusion, I do have to file a gift tax return when I file my taxes that year acknowledging that I made a gift $985,000 in excess of my annual exclusion.  This is how the IRS tracks the gift amounts that count against my $5.4M lifetime exclusion.

Important note: This article speaks to the federal tax liability on gifts. If you live in a state that has state income tax, your state’s gift tax exclusion limits may vary from the federal limits.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Should I Gift A Stock To My Kids Or Just Let Them Inherit It?

Many of our clients own individual stocks that they either bought a long time ago or inherited from a family member.  If they do not need to liquidate the stock in retirement to supplement their income, the question comes up “should I just gift the stock to my kids while I’m still alive or should I just let them inherit it after I pass away?”   The right answer is largely influenced by the amount of appreciation or depreciation in the stock.

Gifting Stock

When you make a non-cash gift such as a stock, house, or even a business, the person receiving the gift assumes your cost basis in the assets.  They do not receive a “step-up” in basis at the time the gift is made.  Example, I buy XYZ Corp stock in 1995 for $10,000.  In 2017, those shares of XYZ are now worth $100,000.  If I gift them to my kids,  no one owes tax on the gift at the time that the gift is made but my kids carry over my cost basis in the stock.   If my kids hold the stock for 10 more years and sell it for $150,000, their basis in the stock is $10,000, and they owe capital gains tax on the $140,000 gain.  Thus, creating an adverse tax consequence for my kids.

Inheriting Stock

Instead, let’s say I continue to hold XYZ stock and when I pass away my kids inherited the stock.  If I pass away in 10 years and the stock is worth $150,000 then my kids receive a “step-up” in basis which means that their cost basis in the stock is the value of the stock as of the date of my death.  They inherit the stock at $150,000 value, sell it the next day, and they owe $0 in taxes due to the step-up in basis upon my death.

In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.

The concept is often times reversed for assets that have depreciated in value…..with an important twist.  If I purchase XYZ Corp stock in 1995 for $10,000 but in 2017 it’s only worth $5,000, if I sold the stock myself I would capture the realized investment loss and could use it to offset investment gains or reduce my income by $3,000 for the IRS realized loss allowance.

Here is a very important rule......

In most cases, do not gift a depreciated asset to someone else.  Why?  When you gift an asset that has depreciated in value the carry over basis rules change.  For an asset that has depreciated in value, the carry over basis for the person receiving the gift is the higher of the fair market value of the asset or the cost basis of the person making the gift.  In other words, the loss evaporates when I gift the asset to someone else and no one gets the tax advantage of using the realized loss for tax purposes.   It would be better if I sold the stock, captured the investment loss, and then gifted the cash.

If they inherit the stock that has lost value there is no value to the step-up in basis because the stock has not appreciated in value. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Tax Secret: R&D Tax Credits…You May Qualify

When you think of Research and Development (R&D) many people envision a chemistry lab or a high tech robotics company.  It’s because of this thinking that millions of dollars of available tax credits for R&D go unused every year.   R&D exists in virtually every industry and business owners need to start thinking about R&D in a different light because there could be huge tax savings waiting for them.

Most companies don't realize that they qualify

Road paving companies, manufactures, a meatball company, software firms, and architecture firms are just a few examples of companies that have met the criteria to qualify for these lucrative tax credits.

Think of R&D as a unique process within your company that you may be using throughout the course of your everyday business that is specific to your competitive advantage.  The purpose of these credits is to encourage companies to be innovative with the end goal of keeping more jobs here in the U.S.   If you have an engineers on your staff, whether software engineers, design engineers, mechanical engineers there is a very good chance that these tax credits may be available to you.   The R&D tax credits also allow you to look back to all open tax years so for companies that discover this for the first time, the upside can be huge.  Tax years typically stay open for three years.

Accountants may not be aware of these credits

One of the main questions we get from business owners is “Shouldn’t my accountant have told me about this?”  Many accounting firms are unaware of these tax credits and the process for qualifying which is why there are specialty consulting firms that work with companies to determine whether or not they are eligible for the credit.  Some of our clients have worked with these firms and the company only pays the consulting firm if you qualify for the tax credits. Kind of a win-win situation.

We recently attended a seminar that was sponsored by Alliantgroup out of New York City and on their website it listed the following description of companies that qualify for these credits:“

Any company that designs, develops, or improves products, processes, techniques, formulas, inventions, or software may be eligible. In fact, if a company has simply invested time, money, and resources toward the advancement and improvement of its products and processes, it may qualify”.

We love helping our clients save taxes and in this case, like many others, we were looking at R&D in a different light. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Financial Planning To Do's For A Family

My wife and I just added our first child to the family so this is a topic that has been weighing on my mind over the last 40 weeks. I will share just one non-financial takeaway from the entire experience.  The global population may be much lower if men had to go through what women do.  That being said, this article is meant to be a guideline for some of the important financial items to consider with children.  Worrying about your children will never end and being comfortable with the financial aspects of parenthood may allow you to worry a little less and be able to enjoy the time you have with them.

There is a lot of information to take into consideration when putting together a financial plan and the larger your family the more pieces to the puzzle. It is important to set goals and celebrate them when they are met.  Everything cannot be done in a day, a week, or a month, so creating a task list to knock off one by one is usually an effective approach.  Using relatives, friends, and professionals as resources is important to know what should be on that list for topics you aren’t familiar with.

Create a Budget

It may seem tedious but this is one of the most important pieces of a family’s financial plan. You don’t have to track every dollar coming in and out but having a detailed breakdown on where your money is being spent is necessary in putting together a plan.  This simple Expense Planner can serve as a guideline in starting your budget. If you don’t have an accurate idea of where your money is being spent then you can’t know where you can cut back or afford to spend more if needed.  Also, the budget is a great topic during a romantic dinner.

You will always want to have 4-6 months expenses saved up and accessible in case a job is lost or someone becomes disabled and cannot work. Having an accurate budget will help you determine how much money you should have liquid.

Insurance

You want to be sure you are sufficiently covered if anything ever happened. One terrible event could leave your family in a situation that may have been avoidable.  Insurance is also something you want to take care of as soon as possible so you know the coverage is there if needed.

Health Insurance

Research the policies that are available to you and determine which option may be the most appropriate in your situation. It is important to know the medical needs of your family when making this decision.

Turning one spouse’s single coverage into family coverage is one of the more common ways people obtain coverage for a family. Insurance companies will usually only allow changes to policies through open enrollment or when a “qualifying event” occurs.  Having a child is usually a qualifying event but this may only allow the child to be added to one’s coverage, not the spouse.  If that is the case, the spouse will want to make sure they have their own coverage until they can be added to the family plan.

It is important to use the resources available to you and consult with your health insurance provider on the ins and outs. If neither spouse has coverage through work, the exchange can be a resource for information and an option to obtain coverage (https://www.healthcare.gov/).

Life Insurance

The majority of people will obtain Term Life Insurance as it is a cost effective way to cover the needs of your family. Life insurance policies have an extensive underwriting process so the sooner you start the sooner you will be covered if anything ever happened.  How Much Life Insurance Do I Need?, is an article that may help answer the question regarding the amount of life insurance sufficient for you.

Disability Insurance

The probability of using disability insurance is likely more than that of life insurance. Like life insurance, there is usually a long underwriting process to obtain coverage.  Disability insurance is important as it will provide income for your family if you were unable to work.  Below are some terms that may be helpful when inquiring about these policies.

Own Occupation – means that insurance will turn on if you are unable to perform YOUR occupation.  “Any Occupation” is usually cheaper but means that insurance will only turn on if you can prove you can’t do ANY job.

60% Monthly Income – this represents the amount of the benefit.  In this example, you will receive 60% of your current income.  It is likely not taxable so the net pay to you may be similar to your paycheck. You can obtain more or less but 60% monthly income is a common benefit amount.

90 Day Elimination Period – this means the benefit won’t start until 90 days of being disabled. This period can usually be longer or shorter.

Cost of Living or Inflation Rider – means the benefit amount will increase after a certain time period or as your salary increases.

Wills, POA’s, Health Proxies

These are important documents to have in place to avoid putting the weight of making difficult decisions on your loved ones. There are generic templates that will suffice for most people but it is starting the process that is usually the most difficult.  “What Is The Process Of Setting Up A Will?, is an article that may help you start.

College Savings

The cost of higher education is increasing at a rapid rate and has become a financial burden on a lot of parents looking to pick up the tab for their kids. 529 accounts are a great way to start saving early.  There are state tax benefits to parents in some states (including NYS) and if the money is spent on tuition, books, or room and board, the gain from the investments is tax free.  Roth IRA’s are another investment vehicle that can be used for college but for someone to contribute to a Roth IRA they must have earned income.  Therefore, a newborn wouldn’t be able to open a Roth IRA.  Since the gain in 529’s is tax free if used for college, the earlier the dollars go into the account the longer they have to potentially earn income from the market.

529’s can also be opened by anyone, not just the parents. So if the child has a grandparent that likes buying savings bonds or a relative that keeps purchasing clothes the child will wear once, maybe have them contribute to a 529.  The contribution would then be eligible for the tax deduction to the contributor if available in the state.

Below is a chart of the increasing college costs along with links to information on college planning.

FAFSA and College Savings Strategies

Need to Know College Savings Strategies

About Rob……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Avoid These 1099 “Employee” Pitfalls

As financial planners we are seeing more and more individuals, especially in the software development and technology space, hired by companies as “1099 employees”.  “1099 employees” is an ironic statement because if a company is paying you via a 1099 technically you are not an “employee” you are a self-employed sub-contractor.   It’s like having your own separate company and the company that you work for is your “client”.

There are advantages to the employer to pay you as a 1099 sub-contractor as opposed to a W2 employee.  When you are a W2 employee they may have to provide you with health benefits, the company has to pay payroll taxes on your wages, there may be paid time off, you may qualify for unemployment benefits if you are fired, eligibility for retirement plans, they have to put you on payroll, pay works compensation insurance, and more.   Basically companies have a lot of expenses associated with you being a W2 employee that does not show up in your paycheck.

To avoid all of these added expenses the employer may decide to pay you as a 1099 “employee”.   Remember, if you are a 1099 employee you are “self-employed”.    Here are the most common mistakes that we see new 1099 employees make:

Making estimated tax payments throughout the year

This is the most common error. When you are a W2 employee, it’s the responsibility of the employer to withhold federal and state income tax from your paycheck.  When you are a 1099 sub-contractor, you are not an employee, so they do not withhold taxes from your compensation…………that is now YOUR RESPONSIBILITY.    Most 1099 individuals have to make what is called “estimated tax payments” four times a year which are based on either your estimated income for the year or 110% of the previous year’s income.  Best advice……..if 1099 income is new for you, setup a consultation with an accountant.  They will walk you through tax withholding requirements, tax deductions, tax filing forms, etc.  It’s very difficult to get everything right using Turbo Tax when you are a self-employed individual.

Tracking mileage and expenses throughout the year

Since you are self-employed you need to keep track of your expenses including mileage which can be used as deductions against your income when you file your tax return.  Again, we recommend that you meet with a tax professional to determine what you do and do not need to track throughout the year.

The tax return is prepared incorrectly

No one wants a love letter from the IRS.  Those letters usually come with taxes due, penalties, and a “guilty until proven innocent” approach.  There may be additional “schedules” that you need to file with your tax return now that you are self-employed.  The tax schedules detail your self-employment income, deductions, estimated tax payments, and other material items.

Important rule, do not cut corners by reducing the gross amount of your 1099 income.  This is a big red flag that is easy for the IRS to catch.  The company that issued the 1099 to you usually reports that 1099 payment to the IRS with your social security number or the Tax ID number of your self-employment entity.  The IRS through an automated system can run your social security number or tax ID to cross check the 1099 payment and 1099 income to make sure it was reported.

Legal protection

As a 1099 sub-contractor, you have to consider the liability that could arise from the services that you are providing to your “client” (your employer).  As a self-employed individual, the company that you “work for” could sue you for any number of reasons and if you are operating the business under your social security number (which most are) your personal assets could be at risk if a lawsuit arises.  Advice, talk to an attorney that is knowledgeable in business law to discuss whether or not setting up a corporate entity makes sense for your self-employment income to better protect yourself. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.