Artist inc workbook
PART ONE: TAX SAVINGS 101
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PART ONE: TAX SAVINGS 1011. WRITE IT DOWN AND WRITE IT OFF! By writing down a handful of often overlooked deductions, logging work at home, and using simple tax laws to your advantage, you can save a few bucks to hundreds of thousands of dollars over your lifetime. But only if you write it down. Here’s how the IRS rule on deductions reads: “You cannot deduct expenses for travel (including meals unless you used the standard meal allowance), entertainment, gifts, or use of a car or other listed property unless you keep records to prove the time, place, business purpose, business relationship (for entertainment and gifts), and amounts of these expenses. Generally, you must also have receipts for all lodging expenses (regardless of the amount) and any other expense of $75 or more.” Most important: the expenses must be ordinary & necessary for that industry, and “for the production of income”. So what does “write it down” really mean?
Ultimately, write it down and write it off! Keep a timely log – either electronic or handwritten—with entries for anything deductible, all lodging receipts while on a business trip, and a receipt box for all receipts $75 or more. FAQs
Yes, as long as the amount is under $75, and does not involve business lodging. Record the pertinent info, either by hand or electronically. But do it now.
The IRS (when you’re audited) will want to see the issuing company’s original receipt. No receipt, no deduction…no kidding. And if you don’t have the receipt, you’ll have to explain to a now-very-skeptical-about-everything auditor why you deducted it originally.
Listed property is your car, as well as property you use in conjunction with your business which can have both business and personal use, like a computer or cell phone, or if you’re in the entertainment business, a camera or TV.
Besides date, place and amount, you’ll need who you were entertaining (it must be someone with “hiring capabilities”), and what specific income-producing opportunity you were discussing. “The upcoming season” is not specific enough. “Pitched performing Louise in Gypsy”, or “pitched September art installation at their gallery” is acceptable. The only general times where an active pitch isn’t required would be opening night or a specific cast/business party, or the producer/director/hirer’s birthday celebration, i.e., something originating with the business and occurring just before, during, or just after the business event. Contrary to popular belief, going to lunch with a colleague and discussing business DOES NOT qualify.
Each gift deduction must include the date, amount, recipient, and the business relationship. The deductible limit is $25 per recipient family per year from your taxpayer’s family each year. In other words, if you and your spouse work with another couple, the most you can deduct is $25 between you. However, a gift given to more than one non-related persons (i.e., a $40 fruit basket to the entire cast & crew on opening night) is not affected by these limits, and doesn’t count toward any family’s $25 limit, as long as the gift is given to the entire work force, and not just to, say, the guys in the shop. To summarize, keep records of gifts and recipients, and give group gifts whenever possible!
Forever. The reasons are too numerous to detail. In short, anything can happen. Did you know if the IRS accuses you of tax fraud, even if you’re innocent, there is no statute of limitations? Some records you will always need: All information on investments (purchases, dividends, reinvestments, sales), and all info regarding real estate (settlement statement, rentals, improvements, depreciation tables, etc.). Don’t believe what you’ve heard about keeping records three or four years; my experience is different. For example, if you sell business property, your tax preparer should ask to see the last five years of returns. To be 100% safe, these papers must be kept until seven years after you die. That said, it’s becoming easier to keep permanent records of important papers electronically. Keep an extra copy of bank statements, tax returns, and insurance policies, as well as photos of each room in case of disaster. For safety, keep the scanned documents and archival photos with a friend or family member who doesn’t live in the area. The IRS Disaster Loss Workbook can help. For a YouTube video on how to prep for a disaster, go here.
Yes, it’s called the “Cohan rules”, but it covers only selective items you absolutely had to purchase yet can’t find the receipt, like postage if you can prove you mailed out flyers, business supplies if you have the results (i.e., paint if you have 20 finished paintings), or a real estate license if you’re an ongoing real estate professional. The important concept behind the Cohan rules is there must be clear secondary proof the expenditure was made or it must be inconceivable the taxpayer could not have made the purchase. The Cohan rules specifically do NOT cover computers used outside of a home office, other items also put to personal use, business meals and entertainment, and business mileage, although a recent court case did allow mileage that absolutely had to be driven. Anything with multiple-use potential (internet, cable, cell phones) must have usage logs to be deductible…otherwise, no write-off. 2. KNOW THE DIFFERENT TYPES OF INCOME When most folks think of income, they think of wages, reported on W-2s, where your employer withholds taxes before you get the paycheck. However, income can also be reflected on varying types of 1099s where no taxes have been withheld, such as 1099-DIV for stock dividends, 1099-INT for bank or bond interest, 1099-G for unemployment or state/local tax refunds, 1099-R for pension or IRA distributions, or a 1099-MISC for just about anything else, including self-employment income as an independent contractor, business owner, or “freelancer”. Are you an employee or self-employed? Employee = taxes withheld. If you have a job that pays $700, and you get a check for, say, $529.71 (because your employer withheld taxes), you are getting wages, you’re an employee, and you should get a W-2 from that company at the end of the year. You may or may not be able to deduct against that income, depending on your situation, so keep track of your deductions just in case! Self-employed = no taxes withheld. If you’re getting paid with no withheld taxes, you're an independent contractor. If your $700 job pays you the full $700, you’re self-employed, and the IRS says you own a business, with all the responsibilities that entails, as well as the perks.. Upside of being a self-employed
Downside of being self-employed
FAQs
Yes, if you got a check for work you performed where no taxes were withheld. Congratulations! The IRS defines it as engaging in an activity for income or profit in which you’re involved with continuity and regularity. That’s you!
When you’re employed and taxes are being withheld, the owner pays half of the payroll taxes (aka FICA taxes, aka Social Security & Medicare, a total of 7.65%) and your half – another 7.65% — is withheld from your paycheck. But as the owner, AND the employee, you pay both halves, totaling 15.3%, as well as (approximately) 5%-10% State/Local tax and usually 10%-25% Federal taxes, so your total tax rate is anywhere from 25%-50%.
If you are starting out, 20-25%, and 30-35% if you’re in the 25% or higher bracket.
Figuring a standard deduction: any income over $46,250 for singles, anything over $92,500 for married couples. Each child increases the break point by $3,900, so a married couple with two children would move into the 25% bracket around $100,000. And remember, if you make over the threshold, that doesn’t mean ALL your income is taxed at that rate, only the amounts above the break point.
Other than your boss being a slave-driver? Having to make two payments on April 15—one for any taxes you may owe, and one for the new year’s first quarter payment. It can be a nasty surprise if your income shot upwards and your payments didn’t. With the new ACA and accompanying subsidies, repayment of your health care subsidy after a “good” year could be another huge shocker.
Legally, when your end-of-year liability exceeds $1,000 on the Federal level, $500 on the State level. Realistically, whenever you’d rather space out payments instead of owing a big lump sum.
By far, the Electronic Federal Tax Payment System, or EFTPS. It’s remarkably easy to set up, including quarterly payments automatically debited if you choose. If you’re employed or self-employed, you’re an “Individual”, and you’re a “Business” if you have employees. The caveats: you must open it before you need it (they mail you a PIN) and you must initiate the payment the day before it’s due. If you have employees, you MUST use the EFTPS system.
Definitely. Many people get hit by what I call “part-timer’s curse”. If you make $200 a week from each of three sources, they each withhold as if you make $10,000 a year, not $30,000. The gap between taxes withheld and taxes owed can be ENORMOUS. Worst hit are married couples when both work multiple jobs.
If you get a raise, especially a substantial one, be sure to have a larger percentage taken out of your paycheck. Why? You’ve already used your personal exemption and (at the least) your standard deduction, so the $10,000 raise could cost you 30% in taxes, while your withholding rate is still 10%-15%. This past year I saw one client, used to $600 refunds, get a bill for $900.
There could be several reasons: If you earn under $600 from one company, they’re not required to send you a 1099. Even when you do earn $600 or more, some companies/individuals mistakenly don’t send a 1099. Your copy of the 1099 could’ve been lost in the mail.
ABSOLUTELY! Several reasons: First, it’s the law. Second, never assume just because you didn’t get a copy, the IRS didn’t get one. And third, if the IRS gets proof of independent contractor income you didn’t report, you’ll get a bill for taxes on the FULL AMOUNT (the IRS always assumes no deductions), or worse, an audit. The IRS rules put the responsibility clearly on the taxpayer to declare all income, regardless of whether it’s documented via a check, a 1099, or nothing at all.
If it’s a pension 1099-R, or if taxes have been withheld on the 1099, yes; otherwise, usually not. If you didn’t get a 1099 from someone who DID withhold taxes (pretty rare), get a copy—you will need that to file, or at the very least, for your permanent records.
Yes. These are your business expenses—same for an accompanist, scene partner, contractor, fellow band member, etc. Be sure you have their name, address, and either a Federal Tax ID number or a Social Security number. You must also send the IRS a copy, plus a Form 1096, which is a summary of all 1099s. Penalties just spiked for not sending a 1099: $100 minimum, $250 for “intentional disregard”. You can order free copies of both forms here: http://www.irs.gov/Businesses/Online-Ordering-for-Information-Returns-and-Employer-Returns.
Currently, since you’re going through the music company, there’s no need to send a 1099.
If you don’t want to be forced to give your Social Security number to vendors, get a free Federal Employer’s Identification Number online here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online. You will probably be a “sole proprietor”; your reason for requesting the EIN is “started new business”. Let me know if you need more help.
It depends on your expenses as a percentage of your income. Usually a W-2, since the employer is paying half the employment taxes, but with today’s tax code, the higher the expenses, the better it might be to get a 1099. It can be tricky and varies by person; check with me to be sure.
Definitely. If they hire you as an independent contractor, they don’t have to pay half the payroll taxes; it’s suddenly your responsibility. They also don’t provide workman’s comp or wage protections, make unemployment contributions, or pay health and pension benefits or overtime. You also won’t be protected by any workplace health, safety, or anti-discrimination rules. And if you fall off a ladder, well…I’m sure they’ll hope you get better.
Yes, and it’s taxed at ordinary income rates. Remember all the folks who got a car from Oprah ten years ago? In the 30% marginal bracket (25% Federal, 5% State), they had to pay about $6,300 in income taxes on that $21,000 car.
YES! They’re going to tax you on it anyway, and it’s MUCH easier to pay in little pieces. The Feds and most states tax you on that income. Tax oddity: Although unemployment is issued by states, it’s rare for them to withhold state income taxes. Unlike most other states, California, Virginia and New Jersey do not tax unemployment. 3. RUN A PROFITABLE BUSINESS FROM HOME. If you can run a sideline (or main) business from home, do it. This allows you to deduct a portion of mortgage interest or rent, home utilities, insurance, repairs, maintenance, trash removal, lawn care, cleaning supplies, and other upkeep through your home-based business. Your home office could also become the first and last workplaces of the day, which could result in deductible business miles. There are some very strict rules: Home must be your principle place of business. Plus, you must use that room (or that part of a room) regularly and exclusively for that business—no dinner table, no kids’ playroom, etc. To qualify, you must do at least one of the following:
Plus, you must have no other fixed location to perform “substantial administrative or management activities of your trade or business.” If your employer provides you an office at work, it doesn’t pass the test. If the office is a separate structure from your home, ANY part used in connection with your trade or business qualifies, if you qualify for a home office. Otherwise, separate buildings must be used to warehouse items that are bought and sold on a regular basis. The IRS instructions give an example of a plant store owner who grows and stores plants in his backyard greenhouse. FAQs
Work logs are the answer. Keep notes regarding your hours. Sampling (averaging three months) is allowed, if your year is relatively consistent. If not, keep logs for all 12 months.
There are two methods allowed, but everyone should at least do method #1 for comparison. 1. Square Footage method Measure your office area. Then measure the total space in your house or apartment. If you use any otherwise unusable part of your home for storage of business items (unfinished basement space or unlivable attic space for props, costumes, inventory, etc.), add that sq. footage to both the deductible space and the total space. If unsure about total square footage, you could ask the landlord or check your real estate closing info. 2. Rooms method If the rooms are relatively similar in size, divide the number of office rooms by the number of total rooms.
Save them. They’re added into the “cost basis” of the house, so a portion gets depreciated annually if you have a home office. The rest is added to the cost basis of buying and improving your home, which can reduce taxes when you sell. Currently, homeowners can profit $250,000 every two or more years on the sale of their main home per person, so those expenses would be useable if the profit were over a quarter million per person, or you stayed less than two years. Also, if you were forced out by unexpected changes, the profit can be pro-rated. These changes include divorce, job loss, job promotion, job demotion, forced property conversion, unemployment, or death. Regardless, bring/send the “settlement statement” from the closing to the tax appointment if you bought or sold, as some prepaid expenses might be deductible.
No, although it’s recommended. Personally, I only have one; I figure in an audit, the IRS will want to see all the accounts anyway. The trick with only one account is to keep very clear, very detailed records regarding expenditures and deposits: you don’t want a holiday or birthday check to be treated like self-employed income!
Yes. Keep a folder with all the closing info, as well as any and all improvements over the years. Long-term improvements are added to the cost basis of the house, and not only increase depreciation deductions for a home office, but could also reduce taxes when you sell. Keep in mind, when you profit by selling your main home after claiming a home office, you’ll owe taxes on the depreciation “allowed or allowable” to take over those years.
No, although it’s recommended. Personally, I only have one. In an audit, the IRS will want to see all accounts anyway. The trick with only one account is to keep very clear, very detailed records regarding expenditures and deposits. Expenditures, because you’ll need clear details on anything you’re deducting. Deposits, because the IRS default position in an audit is all deposits are income. That means if you don’t keep notes, everything from friends reimbursing you for lunch to a birthday check from Mom will be treated (and taxed) like self-employed income. 4. MAKE YOUR TRAVEL PAY YOU Travel gives the rare opportunity to legally deduct more than you spend. The rates allowed for meals while out of town on business, and for operating a car for business (both in and out of town), can be more than the costs. Once again, the IRS will want to see your written notations and receipts if you’re audited, but there can never be too much supporting documentation for business travel. Brochures, study guides…everything helps establish the business purpose.
If your mode of transport is a car, there are eight questions you must answer every year:
IN TOWN TRAVEL Type 1—Traveling to produce income In town, traveling for business, trying to produce income in your current profession. In town travel is deductible (regardless of whether it’s a mile driven, a subway token, a bus fare, taxicab, whatever) when it’s any unpaid business travel except research, but only if you log it. Did you drop off a resume? Pick up a script? Go to an audition? How about visiting with an agent? Rehearsing with the band? Shopping for costume supplies? It’s all deductible business mileage. Also deductible are the associated tolls and parking. Plus, there’s an if one, then all concept: if you drive 11 miles to the nearest Costco to get batteries for a business recorder, you can pick up personal items there as well, and the travel to and from is still deductible.
That’s okay; just deduct mileage without the side trips. If the trip straight to the deductible meeting was 8.0 miles, and the drive back with errands was 11 miles, use 16.0 miles for biz. Type 2—Traveling to temporary location In town, traveling to the job at a “temporary work location”. A fixed location would be your office at work. A temporary location would be almost anything else, except a routine second job where you go on your day off. A musician who teaches trumpet at the high school can’t write off mileage to and from his teaching job, but he can write off mileage to and from his band’s rehearsal, and the odd gig here or there, although not to his regular, ongoing Saturday night gig once his group becomes the house band. FAQ: I only have odd job. Are the drives to and from deductible? If you don’t have a regular job, driving to an odd-job location is the commute, and not deductible. For a drive like that to be deductible, the job must be outside of the city and the surrounding suburbs in which you live—no matter how far—and you must stay overnight. Type 3—Traveling to fixed location Going to your job at a “fixed location” (the same place) day after day. Now it gets tricky. Commuting is not deductible, and every day you work, before you can deduct any business mileage, you must account for two commutes: #1) from where you wake to the first place you do business, and #2) from the last place you do business to where you sleep. For most employees, this is driving to and from work. However, once you’re at work, the mileage going to a second location for work IS deductible, like a second worksite, or errands run for the boss when mileage isn’t reimbursed. If you’re self-employed, it depends if your home is your principle place of business. If so, your commute is from where you wake up to the first place you do work. If home is your principle place of business, your “commute” could consist of walking down the hall. In that case, driving from the home office to the second workplace of the day is deductible, and driving back as well, if you work at the home office afterward and write down your proof. If, however, you only work at your home office in the morning before you leave but not after you return at night, the morning drive IS deductible, but the evening return is the commute, and not deductible. Again, with type 3 mileage, before any business mileage can be deducted, you must account for two commutes on any paid workday. FAQ: Does a home office mean all driving to any other biz location is deductible? No. For you to deduct the drive to the second location, you must first work at your home office and log the work. Same after you return, if you wish to deduct the return trip. Be sure you have specific notes. General, vague notes will be deemed unreliable by the IRS in an audit and tossed out. One newer advantage: Printing “Sent” lists can help prove work was done within a particular timeframe. FAQ: What if I work split shifts? Driving back and forth for split shifts is considered all commute, and not deductible. This includes days with a matinee and an evening show: all commute. That said, if you’re a piano teacher and you give two lessons in your home studio in the morning, race home to teach another between shows, and then burn the midnight oil at your desk putting the finishing touches on your new ad, ALL your driving is business driving: your commutes were 1) walking to your piano for the first lesson, and 2) dragging your tired bones up the stairs to bed at midnight. OUT OF TOWN TRAVEL
How is this substantiated? Again, keeping your log is most important, and you may have an airline ticket or receipts which establish you in the travel town…but in this case, e-mails, programs, agendas, and supporting material all help. Any valid business activity that fulfills the above five requirements gets you that day’s transportation, lodging, food, and incidentals. But you must have the proof. Recently, the Tax Court threw out tens of thousands of dollars of claimed travel deductions because the taxpayer merely had the dates, times arrived, and cities listed, and no notes about clients contacted, meetings, or results. Don’t be that taxpayer! Business days mixed with off days If you had to stay around for other business purposes, a day (or a holiday, or a weekend) can lapse in-between and still be counted as business days. Auditions on Tuesday and callbacks on Thursday make Wednesday a deductible business day as well. Travel to and from is considered work. Using these rules, one could travel on Thursday, go to three auditions on Friday, go to (hopefully three) callbacks on Monday, travel back on Tuesday and write off five and a half days as work! (You get 3/4ths of a day the day you leave and 3/4ths the day you return.) Fun fact: You can stay an extra day (without any work requirements) if you can prove delaying your return actually reduced your costs, and therefore your deductions. Keep in mind that one appointment DOES NOT make the whole trip deductible. A sole job interview on Friday makes NONE of the trip deductible, except the travel costs from your hotel to the interview and back. Deducting food via a per diem If, your travel DOES qualify as business, then along with your lodging and travel costs (mileage, if driving), you also get to deduct $46-$71/day for food, depending on the dates you traveled and the visited city. Each city has a specific allotted amount, and some have on and off-season rates. Another option is what you actually spent on food, and you’re allowed to calculate both and use the larger number. The only caveat is the option must be consistent for the year. In other words, you can’t deduct the daily allotments for that three-month small town job away from home, then use the actual amounts for that New York weekend business trip where you ate at every great restaurant you could find!. Per diem rates can be found http://www.gsa.gov/portal/content/104877?utm_source=OGP&utm_medium=print-radio&utm_term=perdiem&utm_campaign=shortcuts. FAQs
Because travel home on your days off is impractical, every day is considered a work day. However, a sidetrip delaying your return home by three days wouldn’t be deductible at all.
Since you had no control, deduct his or her total as well. And if it’s four clients and you, deduct 80%...all but you, since you’ll be taking the per diem. If both client and you are expected to bring spouses (i.e., Annual Family Business Retreat) then your spouse IS deductible. Otherwise, to deduct your spouse’s expenses you must be able to prove your spouse also worked for the company, or had some other legitimate business function, like a translator.
Some things can still be fully deducted. Rental cars cost the same regardless of passengers, so the entire amount can be written off on a full business trip, even if your spouse is with you. Similarly, if the hotel charges the same for single or double rooms, you can deduct the whole amount. However, if there is a difference, you can only deduct the single room rate. But the spouse’s airline ticket, personal transportation, meals and other expenses are not deductible.
It depends if they were reported on your 1099 or W-2, or not. It also depends on how much they were paying and what cities you were in. If they were reported as income, you can deduct the greater of the IRS allowed expenses or your actual receipts. If not reported as income, only the receipts you have for the amounts you spent OVER the per diem is deductible.
If per diem is $170/day for room, meals and incidentals or less, you get to keep the difference, TAX FREE! If more than $170/day, it depends on what city you were in and when, up to $251/day. Keep the cities/dates in your logbook.
If you’re out of town and the company is picking up the tab for everything, you get to deduct $10 for the first overnight and $5 for each additional overnight, for travel incidentals like baggage carrier and hotel maid tips, without needing receipts or notations in your logbook.
The rate of the town you slept in
It’s important that the reason for the business travel is set up and documented in advance (i.e., with logged long-distance calls to the business, e-mails back and forth), so you can prove the trip was for business. Remember: your physical presence must be required. Auditioning or interviewing for a job in your current business is one example. Doing three months out of town in summer stock is another. For each deductible trip, record the odometer reading (if driving) as well as the date you left your door and the odometer & date you returned to your door.
An actor traveling to NYC to see Broadway performances is considered research, and travel for research is not deductible. Otherwise, I’d be “researching” a book on Tuscan wines every year!
Travel for educational courses in your current field taught by others IS deductible.
If you’re renting, borrowing, or pitching in for gas money on a business trip, use that amount. If the entire trip isn’t business, use your actual costs times business use percentage (business miles divided by total miles). If the car is leased, you have two choices: costs multiplied by business-use percentage, or business miles.
Only if you want the money. No records, no money.
If non-business mileage was out of your control, don’t use it in your calculations. Make notes.
If you’re working out-of-state on temporary assignment—say, summer stock or a company assignment—it’s important you put “0” (zero) exemptions on your state withholding forms, even if you have kids and/or normally don’t pay income taxes. Non-resident states tax you on the monies you made there.
It’s a good idea to do it, since sometimes trips turn out to be non-deductible upon closer inspection. But for the number you give me, multiple business flights, lodging, taxis, etc., all go into one “Travel” total.
If the business travel out of the country lasts less than a week, it’s all deductible as business, regardless how much time is spent on business. More than a week, and 75% of the days out of the country must be workdays for the trip to qualify as a business trip. One oddity: don’t count the day of departure in the calculations, but count the day of return, and as a day of work.
Many other countries have reciprocal agreements with the US regarding taxes, but that’s mostly INCOME taxes, where what you pay them is credited against US income taxes. You’ll still be liable for payroll taxes—Social Security and Medicare—on your earnings. If that country didn’t withhold taxes, all income and payroll taxes will be due the US, as well as your home state and locality, if applicable. If it does have a reciprocal agreement, you’ll get the first $97,600 excluded from income taxes in 2013, and then become liable in the US. 5. MAKE EVERYONE HELP WITH YOUR RETIREMENT By taking advantage of matching plans at work, and basic tax-preferred savings (IRAs, SEP-IRAs, Roth IRAs, 401(k)s at work, Personal 401(k) plans, 403(b)s, 457(g)s, etc.), you can:
How do “others contribute” to your retirement?
FAQs
Be aware of your 401(k) plan at work Currently, employees can be automatically enrolled into a 401(k) plan at work if your employer has a plan. While that’s great news, be sure you’re enrolled in the plan best for you: either the Traditional 401k, or the Roth 401k. There are also new opportunities to convert your 401(k) to a Roth 401(k) within your own plan, if it offers both. Regular distributions from a 401(k) at work can now begin at 62, even if you still work for the company. So should I choose a Roth IRA, or a Traditional IRA? Whichever is best for you. My usual suggestion depends on your tax bracket. If you’re in the 20% or lower overall bracket, you can pay the taxes now with a Roth, and get all your future earnings tax-free. If you’re in the 30% or higher bracket, the massive tax break today via a Traditional IRA is hard to resist. There are exceptions when you know your situation is going to change, i.e., you’re certain to be in a higher or lower tax bracket at retirement, you’re about to graduate med school, you’re just about to come into a lot of inheritance, etc.
No. $5,500 is simply the maximum, not the minimum. Any amount, up to $5,500 can be contributed to your IRA, with an additional $1,000 if you're 50 or over by the end of the calendar year. Tax oddity: If you were born January 1, it counts as the prior year!
Yes! Do that, or add to your current one. The tax laws allow additional contributions each year, and the advantages over time are amazing. The savviest taxpayers max out every January 2nd.
If caught early and by the taxpayer, some innocent mistakes can be fixed easily and cheaply with new IRS programs. Fixes get more expensive with time, and/or if the IRS finds the mistake first.
YES, AND AT A HUGE RATE IF YOU’RE UNDER 59½! Within 60 days you MUST have those monies re-invested in another qualified retirement plan or you’ll owe taxes at your current tax rate, PLUS a 10% penalty if you’re under 59½. It could easily trigger a tax rate over 40%! Best strategy: Have it rolled over electronically to a self-directed IRA, via a Trustee-To-Trustee Transfer. Then, if you keep these monies separate from other IRAs and do not contribute more, they cannot be touched by creditors, regardless of the balance, whereas regular and Roth IRAs only have a protection level of $1 million. If you contribute more to rolled-over IRAs, the protection reverts to the $1 million level.
There are six very distinct tiers to retirement planning and saving. Tier One is light years ahead of the rest: Tier One—Max out your employer’s contributions If your employer matches ANY of your contributions into a 401(k)-or-the-like plan, maximize the company’s contribution. If you work for a company that has something great like this, simply go to the benefits person and ask the magic question: Am I maxing out my employer’s contributions? Don’t stop until the answer is YES. It’s free money, and the advantages are staggering. In the 30% bracket (25% Fed/5% state), it’s the real-world equivalent of a one-time overnight gain on your money of 185%!!! Even in the 20% bracket, it’s the equivalent of a one-time 150% overnight return! Tier Two—Pay off credit card debt. Starting on the card with the highest interest rate first. Credit card debt can (and will) eat you alive. Tier Three: Roth IRAs. They grow and are withdrawn tax-free. The tax-free status of most home ownership is also on a similar plain, just usually not with the same long-term growth potential. Roths are great tax opportunities as well. Once past 59½, if you’re not maxing out your Roth every year and you have interest bearing accounts, you’re paying income taxes by choice. Tier Four—Regular IRAs, etc. Regular IRAs, SEP-IRAs, and contributions to 401(k)-type plans over and above the Tier One employer matching. Savings are deductible and grow tax-deferred but are taxed upon withdrawal. Lower in this tier are tax-deferred annuities and the like, but still way ahead of Tier Five. Tier Five—Dividends, and Stocks producing capital gains. Tier Six—Regular savings. They are taxed every year, so you lose 15-30% of any gain each year to taxes. One important concept about saving for retirement: It’s like a jail sentence of your choosing. You can either do 10 years at 21 years of age, 30 years at 31, or 50 years at 41. While slow and steady wins the race, starting young trumps all.
Unfortunately, you can’t. The law only allows you to go back three years to correct mistakes. That’s why it’s very important to check the Social Security statement EVERY YEAR. Everyone over 25 should be getting a social security statement each year just before their birthday. Laws now allow a non-spouse to inherit your work-related pension plan Your designee can receive your workplace pension plan as long as it goes directly into their account(s). Rules may vary on distributions afterwards, but don’t overlook this!!! Never underestimate the importance of a solid plan. The hardest fight to fight is the one from the grave.
In almost all cases, NO, since you’re probably in a higher income tax bracket than you’ll be in retirement. Also, having both tax-deferred and tax-free accounts give you more flexibility in retirement and for estate planning. For example, if you choose to leave some money to a charity, you’d leave them a portion of the 401(k), whereas a family member in the highest tax bracket might get the Roth. But if you’re in that situation, it’s worth it to sit down with an expert to make sure you know what you’re getting and getting exactly what you want. Tax shock of the year Speaking of tax moves near retirement…since last year, I discovered three of my clients on the verge of retirement had bought homes. While that sounds great on the surface, each of them took large chunks from their retirement accounts to pay for the homes. Then came the huge nasty shock: these withdrawals jacked the clients into higher tax brackets, so rather than deferring the taxes in higher brackets to pay in a lower bracket in retirement, they got taxed at higher rates than the tax breaks they’d received over their work life. Don’t be afraid to call me, or any tax professional you trust, before you make a big financial move. What seems like a great bargain at one price may not if you have to add 25% or more to the cost. Directory: Artist INC -> Materials Materials -> Pre-Seminar Survey Austin 2014 Gender Age Range Race/Ethnicity What is your highest level of education achieved? What is your primary artistic discipline? Do you have formal education in your artistic discipline? Download 0.72 Mb. Share with your friends:
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