General Business and Finance Blog

It is universally accepted that death and taxes are the only two certainties of life.  However by designing a tax efficient strategy for investment and distribution, people who are retiring can keep majority of their assets for themselves and for their heirs. Here are four of them.

1. Selecting appropriate investments

Municipal bond is a choice of most of the retiring people for investments.  These bonds enjoy exemption from Federal taxes on the interest.  If your tax bracket is higher, then these bonds give you a real advantage.

You can also think of investing in mutual funds which are tax-managed.  There are a lot of strategies employed by the managers of these funds to get the tax efficiency. Also from 2003 onwards, the maximum federal tax rate on many dividend producing investments is limited to 15%. So it is advisable to make an appropriate mix of municipal bonds, high yield bonds and growth stocks or value stocks to get maximum tax advantage.

2. Order of liquidating your securities

This is a very important decision to be taken by the retiring people.  Generally it is advisable to hold on the tax deferred investments because they compound on a pre-tax basis and naturally have better earning potential as compared to taxable investments.

However, remember that the tax deferred investments ordinarily attract federal income tax rate of 35% while the rate is maximum 15% for taxable investments.  This is because capital gains on these investments held for less than a year will be taxed at a regular rate.

So it isn’t good to hold taxable securities for a longer time in order to get the tax rate of 15%.  Long-term capital gains are most attractive from the point of view of estate planning because you get the ‘basis’ on appreciated assets.

3. Appropriate gifting strategies

There are many strategists to make the payment of taxes easier for your heirs.  The option of transferring assets to an irrevocable trust is a good one if you are approaching the threshold of million.  In this arrangement assets are passed on without estate taxes, which save thousands of dollars to your heirs.  A specific point is – keep in mind moving assets from your tax deferred account prior to 70 ½ years.

You can make a tax free gift of ,000 for every individual (,000 for married couples) every year.  This is a good distribution strategy from your taxable estate.  Also making gifts to kids over fourteen years of age is a good strategy because the dividends which are gains will be charged at a lower rate than those charged to the adults.

4. Management of RMDs

It is necessary that you should start taking an annual RMD from your traditional IRAs after your age of 70½.  The logic behind RMD rule is very simple –withdraw less every year if you’re expected to live longer.  The RMDs take into account the age of a participant, and they are based on a uniform table.  If you are unable to take the RMD, then it can result into tax penalties which are 50 per cent of the required distribution amount.  If you feel that you will be taken into a higher tax bracket at the age of 70 ½ due to RMD rules, you may start withdrawing when you are in sixties.

However if you are contributing to Roth IRA, there is no necessity to take distribution by age 70½.  You will be never required to take distributions from such accounts and whenever you withdraw it is tax free.  So you should liquidate your investments from a Roth IRA only after exhausting your other sources of income.

There will always be some complications when you plan your taxes for retirement.  So it is better to plan well in advance and if necessary consult a tax adviser and a real estate expert to sort out your options.

Money is not everything. There are travelers’ checks, money orders, and credit cards. When you start your own business, there’s a way for you to obtain much-needed capital, too. This way is called small business financing credit card.
Small business financing credit card, also known as small business starter credit cards, is a great way to keep your personal and business finances separate. Personal Credit Card Versus Small Business Financing Credit Card
In the past and even at present, lots of entrepreneurs rely on their personal credit to get their business up and running. The problem with this is that they carry the debt from their business into their personal credit cards. Ultimately, they end up hurting their personal credit scores.
This is where small business financing credit cards come in. They offer higher credit limit. Additionally, they keep business and personal expense separate, thereby making it painless to track tax deductions. More importantly, you may write off your small business financing credit card’s finance charges and annual fees. Why Get a Small Business Financing Credit Card1. Build Credit
A small business financing credit card is a good way to build a financial history. Your business is a start-up; it’s unknown. This makes it difficult for your business to obtain loans. A small business financing credit card will remedy this. It will provide banks with the spending footprints they need to reassure themselves you’re a responsible borrower.2. Avoid Intermingling
When it comes to managing your expense, there’s one thing you should always do. Segregate, segregate, segregate. Do not mix business and personal transactions. This might later on create tax and money management problems. 3. Prevent Shoebox Accounting
It is always a nightmare to track business expenditures. With a small business financing credit card, however, you can turn the nightmare into one you can easily snap out of. Your credit card company will provide you with a year-end statement where you can find your transactions summarized, itemized, and categorized. With such a report available, there’s no need to keep a shoebox stacked with receipts. 4. Special Rewards
The credit card industry is so competitive providers fall over themselves to lure borrowers. Accordingly, a reward and discount program for small business credit card users was developed. Every time you use your small business financing credit card, you qualify for discounts and rewards, ranging from office supplies and plane tickets to phone services. How to Manage Your Small Business Financing Credit Card Effectively
Credit cards, whether personal or corporate, will always be open to potential abuse. Effectively manage your small business financing credit card by:1. Limiting card hopping
Sure, you qualify for multiple cards, but this does not mean you should sign up. You shouldn’t. This will only tempt you to overspend. It will hurt your credit rating, too.2. Steering clear of cash advances
Never use this credit card feature unless you need to bail yourself out of jail. It comes with whooping credit card fees and interest costs.3. Avoiding late payments
The more delinquent your payments are, the higher the fees and interest rates you would be saddled with. Moreover, late payments hurt your credit reputation.4. Using grace
Many companies offer a 21-day grace period to clients before asking them to pay for purchases. Turn this to your advantage by drawing up a schedule of your purchases and payments.
Use your small business financing credit card prudently. Remember, credit cards should be a financial safety net, not a trap.

The home office deduction gets a bad wrap. There are so many rumors out about the home office deduction that you may want to avoid the whole subject. But if you have a home office and aren’t deducting it, you could be missing out on some very valuable tax savings. Let’s take a look at the truth behind the myths about the home office deduction.

Myth Number 1 – The home office deduction is a red flag for an audit.

Twenty years ago, this might have been true, simply because it was unusual. Now, the home business seems to be almost as popular as home ownership! Millions of individuals operate some kind of business activity out of their homes. Others telecommute, and deduct their home office expense as an itemized deduction. The home office deduction is no longer an automatic flag for an audit.

The key to avoiding an audit is reasonableness. The IRS uses computer analysis on all tax returns. Any deduction that is excessive on your income and the benchmarks for your industry may be questioned.

Bottom line: Deducting a portion of your home expenses as a cost to operate your home-based business is expected!

Myth Number 2 – If I take a home office deduction, I can deduct all the costs of my home.

You deduct a portion of your home expenses as a home office expense based on the square footage of your home office space. If you have a 2000 square foot home, and a 200 square foot office, you could deduct 10% of your home expenses.

Unless you operate a day care center, your home office space must be exclusively used for business. Your kitchen will not qualify as home office space simply because you use the table to complete paperwork. If you use the space for personal and business, it does not qualify.

The easiest way to keep track of this is to designate a room or rooms for home office purposes. If you don’t have a complete room to use as office space, use furniture to separate the personal part from the business space.

Of course, there is an exception to this rule. If your business is wholesale or retail and you do not have any other fixed location, you can include any space you use for storage of inventory or product samples as part of your home office. This space does not need to be used exclusively, but must be used regularly, and be suitable for storage.

Bottom line: Calculate the square footage you use exclusively for business and the square footage of your storage space for inventory to determine your home office deduction.

Myth Number 3 – I can only take the home office deduction if I work at home exclusively.

Old rule! Congress expanded the home office deduction to allow business owners without any other fixed business location to take a home office deduction regardless of the number of hours they spend at home. If you provide services to customers or clients at their location, you can still qualify for the home office deduction. You simply must use your home office for administrative and management duties.

Bottom line: You can deduct your home office as long as you don’t pay for other office space to run your business.

Myth Number 4 – The home office deduction will make me lose my tax exclusion on the sale of my home.

The rules have changed here, too. If you use 10% of your home for business purposes, you no longer have to recognize 10% of the gain on the sale that could have been excluded if you meet the requirements for the sale of your principal residence.

What you do need to do, however, is include any depreciation deduction you took in prior years as a taxable capital gain. You still benefit, because your capital gain rate is most likely lower than your ordinary income tax rate. You are able to take the original depreciation deduction at ordinary income tax rates, and bring it back into income when you sell your home at the lower capital gain rate. Your depreciation deduction can also reduce your self-employment taxes.

Bottom line: You can still save taxes overall by taking the home office depreciation deduction each year.

Operating your business from home is a very smart move financially for the new or small business owner. You can save yourself thousands of dollars in rent by operating at home rather than renting business space.

But the cost of housing your business is an expense, and should be treated that way. You would not hesitate to deduct rent expense for your business. Treat your home business expense the same way. The tax money you save can be used to grow your business, or even to fund your family vacation! Talk to your tax preparer if you have more questions, and get ready to take that home office deduction on your next tax return!