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Showing posts from 2014

Financial Power and the Importance of Reserves to You

There are two reasons that make financial reserves important to you. One reason is defensive the other is empowering. Defense for an Emergency When traveling through remote areas you probably like to keep plenty of gas in your tank as the next gas station might be many miles away. It works the same way with money. We never know when we could suddenly lose an important source of revenue like your job or an important piece of business. So it is the course of wisdom to save up money, a reserve, just in case you need it when the unexpected happens. The standard recommendation use to be to have at least two months of reserves in the bank. But the world has changed and you may need to have more than two months. Consider your situation and have a plan in place for what you will do if your cash flow dries up. How much would you need until you can land another job or get enough additional business to replace the cash flow? These questions should give you an idea about how much you need. Power to a…

What Will Your Taxes Be On The Sale Of Your Rental Properties?

The idea for many with rental properties is to have a stream of income now and assets to sell when you retire. Many investors are not aware of what the tax consequences will be when they sell the properties and this concerns me because they are likely in for a big surprise.
Capital Gains There are a couple of components of income taxes when you sell a rental property. Assuming you cannot exclude the gain (have not owned and lived in the property sold as your main home for at least 2 of the last 5 years), then you will be looking at both Capital Gains Tax and Ordinary Income Tax on the sale of the property. The Capital Gains Tax generally is on what you sell the property for less the cost of the sale and less your adjusted basis in the property.

Generally your basis is your cost of acquiring or building the home that you have not deducted previously on your tax returns. You may have additions or reductions of basis for various things which are detailed in IRS publication 523 Selling …

When and How to Use Retirement Accounts

Really successful people do things that others do not do.  One of those things is use of retirement accounts in a powerful and purposeful way.  When and how should you use retirement accounts?

Retirement accounts are useful for two things.  One is to defer taxes and the other is to force you to keep that money set aside for retirement or pay a penalty.  All retirement accounts but ROTH IRAs can grow tax free until you take the money out at which time the entire amount you withdrawal is taxable income to you.  During the year you turn 70.5 years old you are required to take what are called Required Minimum Distributions.  So while you don't pay taxes on that income now the intent is for it to become taxable income to you at some time in the future.

When Should You Use Retirement Accounts So contributions to your retirement account(s) are deductions for you on your tax return in the year the contribution is made (possibly until you file your tax return).  Reducing your taxable inco…

Things That Will Make You Money - Number 16 - Save Money

Really successful people do things that other people will not do.  One very important thing they do is save money. I was shocked to learn from a Business Week post that:
Just 45 percent of upper-middle-class households (income from $75,000 to $99,999) saved anything in 2012, according to the Fed study. That means the other 55 percent didn’t save for a house, retirement, or education. About 16 percent spent more than they earned and went further into debt. The Fed study is called "Supplemental Appendix to the Report on the Economic Well-Being of U.S. Households in 2013."

So we learn form this, even the majority of the upper-middle-class do not save money. Guess what really successful people do and why? That's right they save money or put money aside but how and why?

Powerful Reasons for Saving Yes really successful people save money but not just to save. They have powerful reasons for saving. Savings do two things for you. One is it gives you money for a rainy day when yo…

Things That Will Make You Money - Number 15 - Commitment

Really successful people do things that other people will not do.  You may recall this wise exchange in the movie the Karate Kid:

Either you karate do "yes" or karate do "no." You karate do "guess so,"
[squish]
just like grape. Understand?
Most people are motivated just by a chance to make some money but they do not really think things through and get a realistic expectation or are really committed to their business.  If it makes money great otherwise they give up quickly. Believe me, other people can tell when someone is really committed to a business or what they are trying to sell.  Once someone perceives you are not really committed to what you are doing it will be next to impossible to convince them to do business with you now or in the future as your opportunities "get squished just like a grape."

Really successful people commit to a business only when they are "all in" and it shows. So you have to be convinced this is "wha…

Things That Will Make You Money - Number 14 - Staying Power

Really successful people do things that other people will not do. Most of your competition will be gone in two years. Will you still be standing? It amazes me how many people and businesses make a lot of noise in the market and then within just a couple years  they are gone. Really successful people do not give up easily, they have staying power. Starting a BusinessWhen starting a business you know it will take time. Even if you are really clever you should expect it to take time to get your business to where you want it to be. Overnight success is not real and expecting it will lead to disappointment. Expect to work hard over time to develop your business. Too many start and quit before they even had a real chance at success. So have staying power by planning for it to take time to develop and grow your business. It is rare that a business even breaks even in the first few years. So be realistic and patient and give yourself a chance to succeed. The media glorifies the rare success tha…

Budget for Business Owners and Workers on Commission

Making a budget is helpful especially if your income is predictable. But what about when you never know how much or when your income will come in.  That is sort of my situation and making a budget with those conditions is a real challenge and perhaps even more important to you.

Some salary and commission employees budget to live off the salary and then save and or invest the commission checks.  In this case too you can set a budget based on your salary and then make adjustments and treat yourself when the commissions come in.

But what can the straight commission people and business owners do? What you can do is the expense side. First, budget your necessary expenses like the mortgage/rent, utilities, food, transportation, etc. and leaving out optional purchases like clothes, travel, electronics, etc.  Start with money that you do have and see how long you can live off of that money.  Then as money comes in you add other non-essential expenses. As you bank money that exceeds these non-e…

After Tax Investments: Dividend Income > Tax Advantages

After tax investments should be a big part of your retirement plan as I previously posted.  Not only can you reduce your taxes, your after tax investments can also be accessed now without paying an early withdrawal penalty tax to the IRS. So they are a great of source of funds to pull from in the event of an unexpected emergency or investment opportunity.  But what about the tax on the profits?  That is a great question.  In fact, I received this tweet as I was writing this post:

@jeffhaywoodCPA I'm doing my first aftertax investing today! Always used post tax before...Any advice to keep taxes away? BroadETFs OK?
— Jason Murray (@Jasonjason1111)  In most cases your profits from your after-tax accounts will either be classified as dividends or capital gains. Here is how the IRS defines dividends:

Dividends are distributions of property a corporation pays you because you own stock in that corporation.  If you read between the lines you will notice, that dividends are really your share…

Tax Implications When You Sell a Business

What will be the tax implications when you sell a business?
Pass Through Entities:The tax on the sale of a business will typically depend on your ownership structure and the terms of the deal.  Sole proprietors, partners, and members or shareholders of an S Corporation will be taxed according to their personal tax situation.  So a seller that has one of these structures will want to consider the overall tax consequences of the sale on their personal tax return.  The ordinary income recognized on the sale of a business can move the seller into other income tax brackets so the tax impact could be greater than just the tax on the sale, it could also increase other taxes as well.
The sellers may be taxed on the profit of the sale at ordinary income tax rates or favorable capital gains tax rates or a combination of the two depending on the types of assets sold.  So the asset allocation of the sales price is very important. From the seller's perspective it is advantageous to have as much …