Top Tax Planning Tips for Self-Employed

People who work for themselves enjoy several perks and benefits. However, a nice tax break is not necessarily one of those perks. Because self-employed taxpayers have to pay their own payroll tax – the entire 15.3 percent Social Security and Medicare tax – they often get taxed heavily. 

There is some relief starting this year thanks to the Tax Cut and Job Acts and a new 20% “pass-through deduction.” That means self-employed workers can now deduct 20 percent from their self-employment income before taxes. That will definitely help, but there are some other steps you can take to help you reduce your tax bill. 

Start by estimating your business income. If you’re going to earn a lot and qualify for a higher tax bracket, then start looking for deductions. Taking as many deductions as possible is a good idea if you’re going to end up in a higher bracket. 

It’s also a good idea to time your income. In other words, you can do your billing towards the end of the year and use it to your advantage. You can also sell assets before or after the end of the year, based on your estimated income and tax bill. 

It’s also a good idea to time your expenditures. You can even purchase items on December 31 and still get the benefit of depreciation for the entire year. Lastly, make sure you count your medical insurance premiums as a deduction. This can help save you big. 

These are just a few of the things you can do to help reduce your tax bill when you’re self-employed. For more valuable tips to save on taxes contact GROCO. 

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Stock Market Moves for Newbies

Are you new to the stock market? Are you still on the outside looking in? You likely have plenty of questions. There are countless stock market strategies out there, so which ones are the best for new investors? Here are a few to consider. 

The IRA Route – if you have an IRA, either a Roth or a traditional one, you can use that account to invest in the stock market. By using an IRA, instead of a typical 401k plan, you often have a lot more choices in how to invest your money. 

Invest Your Extra – getting into the stock market is a good idea for just about anyone. However, if you don’t have a surplus of income, then it might be better to wait. Investing only the money you won’t need for the next five years is a safe way to go. 

Be Passive – that doesn’t mean you don’t take any risks. But it does mean you pool multiple stocks instead of betting on one single company stock. This creates a good balance because the strong stocks help offset the weaker ones. Over time the passive stock strategy historically offers much higher gains than aggressive strategies. 

Limit Active Stock Trades – that being said, it’s ok to invest in individual company stocks. However, you should limit the amount you put into these kinds of stocks to 10 percent of your portfolio. 

Stock trading always has risk, but using these tips can help reduce the risk, which is important for many new investors. 

 

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Republican Senator Wants to Reduce Capital Gains Taxes

Now that the republican-led congress has pushed the Tax Cut and Jobs Act (TCJA) through, it’s looking to continue the momentum. Next on the radar are capital gains taxes. And recently, republican senator Devin Nunes, from California, introduced legislation that would lower the amount taxpayers fork over for capital gains. 

Nunes, who is a senior member of the tax-writing House Ways and Means Committee, argues that indexing capital gains to inflation would build off the TCJA and incentive investment. Nunes says the bill would continue the tax-cutting trend started by the TCJA. He said: “This is a common-sense reform that will remove an unjust tax, contribute to economic growth, and help both large and small investors keep more of their own money.” 

Currently, people pay capital gains taxes on the difference between the amount they pay for the stock and the amount they earn when they sell it. The new bill would change that formula. Instead investors would pay the difference between how much they paid for the investment, plus inflation, and how much the investment was sold for. 

Many conservatives are pushing the Treasury Department administration to make it happen. However, democrats say the Treasury Department does not have that kind of power. Treasury Secretary, Steen Mnuchin, for his part, has said he thinks the battle over indexing capital gains should be fought in Congress. 

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States Taking the Federal Government to Court Over Tax Changes

The battle over the Tax Cut and Jobs Act (TCJA) continues and now two several states are taking the matter to court. One of the biggest controversies of the TCJA was the reduction of the state and local income tax deduction from federal returns. Many American taxpayers used this deduction to help shave hundreds, or even thousands, of dollars off their tax bills. 

The problem is many taxpayers who live in states with high income taxes are feeling the pinch of this change, including many residents in New York and New Jersey. Several states have taken measures to find loopholes for wealth taxpayers who will be hit the hardest come tax time. 

Now, four states, including New York and Jersey, have sued the federal government in Federal District Court in Manhattan, claiming the new law is an “unconstitutional assault on their sovereignty.” 

The filing also claims, “limits on the deduction, and the potential economic damage as a result of its implementation, deliberately seeks to compel certain states to reduce their public spending.” 

The so-called “SALT deduction” places a limit on combined state and local income taxes, including property and sales taxes, of $10,000.  

While the suit has been filed, it remains to be seen how the courts will receive it, especially if it reaches the Supreme Court, which could soon lean conservative. 

 

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New Tax Reform Could Change How Dependents Affect Your Taxes

For years, taxpayers have enjoyed a certain number of personal exemptions at tax time. If nothing else they could count themselves. If you were married and dependent children then the number of exemptions just kept going up. But now things have changed under the Tax Cut and Jobs Act. So here’s what you need to know. 

Gone is the personal exemption, which in 2017 was worth $4,050 for each dependent you claimed, including yourself. That is a lot of money for families with many children or other dependents. The standard deduction has gone up, but for big families the increase will not be enough to offset the difference from losing the personal exemption. 

On the plus side, the Child Tax Credit is still in place and it could be worth as much as $2,000 per qualifying child. The exact amount will depend on your income. The credit is also refundable now. In years past it was not. That means if the credit exceeds your tax liability you receive the remaining amount as a cash credit. That could help offset losing the personal exemption, as well. 

It remains to be seen how each family with dependents is affected, but the bottom line is the new tax law could change your tax situation this year. If you want to get a better idea of your tax liability for the 2018 tax year, then click here to use the IRS withholding calculator. You should do this sooner rather than later. 

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Shareholders Pleased as Musk Decides Against Taking Tesla Private

Tesla’s CEO Elon Musk recently created quite a stir after suggesting he was considering taking his car company private. Things got even more serious last week when Musk hired Morgan Stanley to advise him regarding such a bid. 

However, news broke early Saturday morning that Musk had abandoned the idea. Although he said there was more than enough funding to do it, ultimately he decided against it because current shareholders asked him not to. 

Investors surely had their reasons for wanting the company to stay public, including a very large tax bill if Tesla had gone private. Musk had said his idea would’ve been to allow current shareholders to remain invested if they wanted, via a special fund. He also said he would’ve offered $420 a share to those who wanted to sell. 

That being said, if current shareholders would’ve stayed invested they would have had to sell their current shares and then purchase shares in the special fund. So what would the tax implications had been if that had happened? Any investors that made a profit from selling those shares would’ve been taxed no matter what they did with the money. 

For investors that got in at the beginning a hefty tax bill would have awaited them. Consider that when the company first went public it opened at a price of $19 a share. The stock has since climbed to a current rate in the neighborhood of $340 a share. For someone that originally invested $10,000, that would now be worth close to $179,000 at the current share price. With the top capital gains tax rate at 20 percent, that’s a $33,800 tax bill. 

But shareholders are breathing a sigh of relief knowing they won’t have to pay that price, at least for now. 

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Corporations Are High on Buybacks, But What About Their CEOs?

Since the Tax Cut and Jobs Act went into affect this year many corporations, including several of the largest, have been actively and aggressively buying back stocks. In fact, based on company reports, corporations are buying stocks back at a record rate of more than $5 billion a day.

With all the buybacks, most investors see it as sign of increased confidence by company CEOs. However, that is not really the case. If you take a closer look at what CEOs are doing with their own money, then it’s a much different story.

According to information obtained from regulatory filings by TrimTabs Investment Research, company executives sold $8.4 billion of their shares in the month of May, followed by another $9.2 billion in June. That’s the highest two-month period of sell-off amongst company insiders, over the last year.

Overall, during the second quarter, companies authorized $436.6 billion of stock buybacks. That beat the previous record of $242.1 billion by about 45 percent. That happened in the first quarter of 2018.

So why all the buybacks, and subsequent sell-offs by CEOs? When corporations buy back large amounts of stock it’s a boon for shareholders. Buybacks create constant demand, which helps increase share prices. It also inflates earning per share. Buybacks also benefit executives because many C-level executives receive most of their income in stock.

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Are Taxes the Biggest Threat to Your Inheritance?

When a family member passes away there is always a lot to consider. Besides all the funeral arrangements, his or her estate has to be dealt with. That is often where things get messy. Taxes are always an issue when it comes to inheritance. However, with the increase in the estate tax threshold, most people don’t have to worry too much about them.

That being said, as it turns out, taxes aren’t really a huge problem when a family member passes away, anyway. The real problem all comes down to family. In other words, the real threat to estate planning is family squabbles. In fact, according to a recent poll by TD Wealth, 44 percent of accountants, trust officers, and attorneys say family conflicts are the biggest problem for estate planning.

So-called “modern families” are a big reason for these findings. “We see more blended families, multiple ex-spouses, kids from prior marriages and situations where one spouse is much younger than the other,” said Ray Radigan, head of private trust at TD Wealth. “These fact patterns can pose problems.”

This is why estate planning is so important. The only way to see your estate divided the way you want is to create an estate plan detailing your wishes. Without a will or an estate plan, you leave everything up to the state you live in.

And as soon as families get involved, with no will in place, that’s when things get complicated. It’s also a very smart practice to keep your family members, or beneficiaries, regularly updated on your plans to avoid confusion and bad feelings.

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Is Prop 13 Protecting Californians From Big-Time Property Taxes?

Property taxes have long been a sticking point for people who own homes in California. Owning a home is not cheap. However, many property owners are discovering the benefits of a nice tax loophole known as Proposition 13. 

Prop 13 places a cap of just 1 percent of the home’s value, based on when the home was purchased. Prop 13 has been around since 1978. It was created to help home buyers as the price of homes increased dramatically. The measure was later extended to protect inherited property, as well. 

So what’s the problem with Prop 13? It turns out that many homeowners in California are renting their inherited homes for thousands of dollars a month and using the money to cover their property taxes. 

In fact, according to report in the L.A. Times, 63 percent of residents in Los Angeles County alone who have inherited such properties are renting these homes. 

Opponents say the loophole has robbed billions of dollars of revenue from cities, counties and school districts. In fact, according to the state’s non-partisan Legislative Analyst Office, it’s estimated that nearly $1.5 billion in tax revenue has been lost. 

However, Prop 13 remains popular. In fact, close to 65 percent of voters still support it, which means it won’t likely be going anywhere at least for the near future.  

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Does the Stock Market Suffer From Seasonal Affective Disorder?

Have you heard of season affective disorder (SAD)? It’s a real thing that many people suffer from. In fact, it’s estimated that 6 percent of the U.S. population suffers from SAD.

Typically described as depression associated with the late fall and winter seasons, seasonal affective disorder is thought to be caused by a lack of light. In other words, when the sky turns gray and dark, so does your mood.

So what does this have to do with the stock market? Is it possible that the weather, or at least the seasons could play a role in how investors act? No one knows how many investors actually suffer from this condition. But according to research, most people – which include investors – tend to suffer from SAD during September and October.

Of course, the effects of SAD will fluctuate throughout the year, but according to Dr. Norman Rosenthal, a clinical professor of psychiatry at Georgetown University School of Medicine and author of Winter Blues, for investors who have SAD, it can influence projections that they make depending on the time of year.

When September and October roll around pessimism can set in and that can lead to lower returns. In fact, these months are historically linked to low average returns.

Meantime, optimism in March, which coincides with more daylight, can influence some investors to buy too high. If investors have more risk tolerance they tend to push the envelope, which could lead to more buying than selling.

Lastly, according to report titled, “The Impact of Seasonal Affective Disorder on Financial Analysts,” financial analysts are not as likely to reevaluate their investment positions based on the changing emotions related to SAD.

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