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There’s no doubt that a moneymaking hobby can dramatically reduce the amount of time until retirement. Not only can you sock away more money, you can also use that income during your retirement. This reduces the amount that you need to save prior to retirement. Since hobbies are enjoyable, it’s a win-win situation.

But like most other income, income from your hobby is also taxable. Taxes are a considerable expense, so they should be minimized, when possible.

This is a touchy issue for the IRS. Many people try to deduct losses for activities that are primarily conducted for enjoyment. It’s easy to get yourself into trouble.

Hobby Tax Tips

  1. For tax purposes, understand what “hobby” means. The IRS considers a hobby to be an activity that is done primarily for enjoyment, not for making a profit. If your activity is considered to be a hobby, you can’t use the tax deductions available to legitimate business. However, you will be taxed for profit and can deduct your expenses in the same year. 
  • For example, if you bought $1,000 in rare coins and didn’t earn any income, you couldn’t deduct the $1,000 from your other income. However, if you sold the coins for $1,200, you would be taxed on the $200 profit, provided you sold the coins in the same tax year they were purchased.
  1. Hobbies are terrible for tax purposes. It’s important to create a business for your hobby. Think business, not hobby. If you expect to make a profit, and your expectation is considered to be reasonable, then you can consider your hobby to be a business. There is more information available from the IRS here.
  • There is no advantage to not declaring your hobby a business if your intention is to earn income. When it comes to the IRS, remove the word hobby from your vocabulary.
  1. Consider hiring your non-working family members. Remember that no income tax has to be paid below a certain income threshold. Paying your children or non-working spouse a salary to help you with your business is a great way to avoid income taxes. 
  • Paying your spouse keeps the money in your collective pockets. Paying your children provides a great way to save money for college, tax-free. Ideally, you would be in the position to pay both.
  1. If your goal really is early retirement, consider investing the profits in tax-deferred retirement accounts. Depending on how much income you earn, your options will vary. But at the very least, an IRA makes a lot of sense. You can shield your income from taxes, at least temporarily. 
  • A Roth-IRA requires after-tax income, but the earnings are tax-free. A traditional IRA uses pre-tax income, but the earnings are taxed.

IRAs are great, but remember the money is out of your hands until the standard retirement age. If you want to retire early and need that money, be sure to invest the money wisely. Avoid spending the extra income on other things.

Learn how to run a business wisely. There are a plethora of books and other sources that will provide the information needed to run a business effectively. Maximize your income for the amount of time you want to dedicate to your hobby. Don’t hesitate to get expert tax advice, too.

A moneymaking hobby can be an important part of any early retirement plan. Think about the things you like to do and make a list of ways you can make money from those activities. But take the steps to avoid paying more taxes than necessary.

Many of us wish to leave the majority of our assets to our loved ones, but we also want to offer some to charitable organizations. This is where some smart tax planning can really pay off. 

One of the most important parts of setting up your 401(k) is naming a beneficiary. This ensures that your 401(k) can pass to someone without going through probate. However, the beneficiary will have to pay income tax on the 401(k) balance. The tax rate in this circumstance can be very steep, depending on circumstances.

There are other assets that can be passed to your heirs that are not taxed as aggressively. For example, if you pass stocks held outside of a qualified account to your heirs, your beneficiaries are not responsible for any capital gains that were achieved while you held the stock. The current price becomes their new price-point. 

Leaving your 401(k) to your favorite charity and leaving the more tax-advantaged assets to your heirs makes a lot of sense. A greater percentage of your wealth will pass to where you choose, instead of to the government. Charities, since they are non-profit organizations, are tax exempt. So they pay no income tax on assets they receive.

Planning ahead now will help you avoid common mistakes.

There are three primary issues that can create significant challenges when passing on your 401(k) to a charity:

  1. Imprecisely or inaccurately naming the beneficiary. Listing “Greyhound Rescue” as the beneficiary is likely to result in your money going through the probate process. Instead, you’ll want to write in something more along the lines of “Southern Florida Greyhound Rescue Society.” 
  • Also, be sure to list the Tax ID number for the organization. Many Tax ID numbers can be tracked down at www.guidestar.com.
  1. Possession of the account. To avoid unnecessary taxation, it is imperative that the account passes directly to the charitable organization of your choice. If your heirs or your estate were to take possession of the account and then attempt to transfer the account to the charity, your heirs would be liable for income and estate taxes.
  2. Your spouse. If you wish to give your 401(k) to a charity, your spouse must sign a form agreeing to give up all rights to the account. Interestingly, this requirement is not necessary for IRAs.

Remember that you have options. Managing your estate is not necessarily all-or-nothing. You could name multiple beneficiaries and assign a percentage to each. You could also leave your 401(k) to your heirs, and your 401(k) would only pass to the charity if all the other listed beneficiaries were deceased.

Also keep in mind that the Pension Protection Act of 2006 allows IRA holders to transfer up to $100,000 to charity without paying income tax on the withdrawal. You do have to be over 70 ½ years of age to qualify, however. So using your IRA for charitable contributions is also an option.

Leaving your 401(k) to charity can be a really smart move. The tax burden on passing your 401(k) to your heirs is considerable, while charities do not have to pay income tax. Be sure to realize the total tax burden created by your choices and plan accordingly.

Estate planning is one area where the services of a professional can really pay off. Whatever you choose to do with your 401(k), good luck, and happy planning!

Living in a foreign country holds a lot of appeal. It gives an exotic impression and seems like a never-ending vacation. But it doesn’t matter where you go, because the US government still expects you to file a tax return and pay taxes. This is true even if you become a citizen of the other country and live there full time. 

Income Tax Requirements Abroad

The United States might be the only country in the world that does this.

If you were a citizen of Italy but living and working in Argentina, Italy wouldn’t expect you to pay any taxes! You would have to pay them in Argentina, though. The US would expect you to pay both.

For your peace of mind and to keep you out of jail, become familiar with the income tax rules that apply to you as a citizen of the United States living outside the country.

Income tax rules for US citizens living abroad:

  1. No matter where you live, you must file a tax return. It’s entirely possible that you won’t owe any taxes, but you must file an income tax return each year.
  2. You’re still subjected to all US tax laws. This includes income tax rates and the same credits and deductions.
  3. There are 2 primary ways to reduce your taxes owed in the United States. The United States has a reputation for double taxation, but in practice that only applies above certain income limits.
  • Foreign tax credit: This credit is intended to protect American citizens from paying taxes twice on the same income. In essence, you can deduct any income taxes you’ve paid in the foreign country from your taxes owed in the US. There is a limit, however.
  • If you paid $12,000 in foreign taxes, you could reduce your US tax bill by $12,000. Simple enough.
  • Income exclusions: This is the other option. You can’t claim both. The income exclusion allows you to reduce your gross income by up to $97,600. You can also subtract housing costs up to a maximum amount.
  • As an example, if you earned $100,000 in a foreign country, your taxable income would be only $2,400. It would be even less after the housing cost credit.
  • The housing credit is equal to the cost of housing minus $15,216. The maximum is 30% of $97,600. If your housing costs were $25,000, you could claim an additional deduction of $9,784 from your gross income.
  • Self-employed folks are not eligible for this housing exclusion.
  1. Any gross income above and beyond these deductions will likely be taxed in both countries. Those with significant incomes can expect to have a portion of their income double taxed.

Many wealthy and not-so-wealthy people are choosing to renounce their US citizenship. In many cases, this is due to the tax situation. Over 3,000 people did exactly that in 2013. Even if you don’t owe taxes, the cost to have your income tax return prepared in a foreign country can range from $3,000 to $7,000! That’s a lot of to pay, especially if you’re under the income limits.

The laws surrounding the reporting of foreign investments and bank accounts are very arduous. The banks themselves have to report your accounts. You also have to individually report each account holding $10,000 or more

It’s important to file your US tax returns. The penalty for failing to file while living abroad starts at $10,000 and can go as high as $100,000. This can be true even if you don’t owe any taxes. 

If you’re under the income limit, your US tax bill is likely to be zero. However, the cost and hassle of filing that return can be significant.

One thing is for sure: file your US tax return, no matter where you reside!

Have you thought about the timing and tax issues of when your children will receive their inheritance from you?

Financial experts are saying that due to steadily rising life expectancies, many of us will live into our 80s and 90s, and your kids are likely to be in their 60s or 70s before receiving their inheritances. 

Would you like to pass along some assets before they reach this age?

Fortunately, you don’t have to die to be able to give them portions of their inheritance.

Consider these suggestions for some tax-advantaged strategies for passing along assets while you’re alive:

  1. Talk with your children about starting education savings for each of their kids. Many states offer savings plans that grow tax-free. Some of these plans even allow kids to use their education dollars at a university in another state.
  • The sooner in your grandkids’ lives you set up the education accounts, the more money those accounts will accumulate because they’ll have a longer period of growth.
  • In the event you wish to give the money directly to a university, you don’t have to pay a single bit of taxes to do it.
  1. Give your kids “gift” dollars each year. Whether it’s for their birthdays, Christmas, or May Day, you can give each of your children up to $14,000 yearly (as of 2013) tax-free. In fact, you can give up to that amount to as many people (related or not) as you like without you or them being taxed on that money.
  • Consider how your children in their 30s could use the money when they’re working so hard to raise young families.
  • Can you imagine the joy, pleasure, and perhaps stress-relief you can give to each of your kids by making some generous gifts now, without anyone paying any taxes on the gifts?
  1. Pay for expected medical costs. If you have children or grand-children that will always need a special type of medical care, give some money to the medical facility. This way, you’ll avoid having to pay any taxes on the money you give, no matter how large the amount.
  2. Use your life insurance cash value. You can borrow money, tax-free, against your life insurance cash value and give it to your children. The government doesn’t tax those borrowed funds, regardless of the amount you take out of your policy.
  • Your kids will also receive the funds tax-free as long as each gift is below the IRS limits ($14,000 in 2013).
  • As long as your policy stays in force, those funds remain tax-free to you. You don’t need to ever pay them back if you don’t want to. Upon your death, your heirs don’t have to pay those dollars back to the life insurance company, either. The policy will cover the loans.
  • Keep in mind, though, that the loans will reduce the death benefit to your beneficiaries. So taking out the loans is giving your children some funds now instead of later.

When you give now to your heirs, you’ll also reduce your overall assets that may be taxed upon your death.

Everybody wins:

  • You get to see the looks on their faces when you gift a large amount of money.
  • Your heirs get to use the money now, when they might really need it.
  • Your heirs will pay fewer taxes and retain more of the assets upon your death. 

Surprise your children by gifting some of their inheritance tax-free now, when you can all enjoy the special time together!

If you’re self-employed, there are many deductions available to you that the average person without a business can’t take advantage of.

In fact, if you don’t have a small business, you might consider the many financial benefits of starting one. Simply making an honest effort to earn income from what is normally just your hobby can open up a lot of tax advantages, even if you keep a regular full-time job.

Consider these tax deductions:

  1. Home office. Whatever percentage of your home is used for business can be used in deductions from your income. For example, if your rent is $1,000 / month, and you use 30% of your square footage for business, you can deduct $3,600 from your income (12 x $300).
  • The catch is that the space must be used exclusively for business. So, if your parents sleep in your office on Christmas Eve, you lose out on the entire deduction. The IRS is a real stickler on the home office deduction.
  • Your computer can be deducted as well, also based on percentage. If you use your computer 50% of the time for business, you can deduct 50% of the cost.
  • You can also deduct the same percentage of your utilities. That includes, heat, electricity, Internet, and more.
  • Even a portion of repairs to your house can be taken as a deduction in the same percent. It must be a repair that affects the whole house, like a new roof, air conditioning system, or flooring.
  • Of course, any money you spend on renovating your home office is also deductible from your income.
  • You can even deduct your child’s allowance by paying them to do age-appropriate tasks around the office like sweeping, dusting, and filing.
  1. Travel expenses. You can deduct your business-related travel expenses, like hotel and air-fare. You can also deduct 50% of the cost of your meals on your business trips or even business meals in your home town.
  • It’s vital to keep a journal so you can prove that your travel was business related. 
  • You could even have a working vacation and take the family along. You won’t be able to deduct their travel or food costs, but you can still deduct the cost of your hotel room. Of course, if your family members work for you, it’s a moot point!
  • If you are also vacationing, be sure that you’re spending at least part of the time meeting with clients, going to training, or on other business-related tasks. If you only spend 2 hours out of a week on business, you’re asking for trouble. Be reasonable.
  1. Automobile. If your vehicle is used exclusively for business purposes, you can typically deduct all your vehicle expenses. In most cases, your vehicle will be used for both business and personal use, so keep a log of your mileage, designating each trip as personal or business.
  • In general, all travel between business locations is deductible. So, travel from your home office to the office supply store would be deductible. Travel from one client location to another would be tax deductible.
  • However, the miles you drive to your office from your home are not tax deductible, if your office is located away from your home.
  • These deductions can be used by mileage or business use percentage. If you use your car for business purposes 30% of the time, by mileage, you can deduct 30% of your vehicle expenses. Or, you can multiply your business miles by that year’s designated amount from the IRS.
  •  Use whichever method provides the greatest deduction. Typically, less expensive cars would use the mileage method. For more expensive cars, the percentage method provides a larger deduction. Try it both ways.

Having a small business on the side can bring many useful deductions. Just a few are mentioned in this article. With a little planning, a significant portion of your rent or mortgage, utilities, automobile, and travel expenses can be deducted. This can easily save you thousands of dollars every year.

Maybe now is the time to turn that hobby into a business. You might even make some money and have a lot of fun at the same time. Consider it!

Tax Advantages of Owning a Small Business

MONEY

If you’re self-employed, there are many deductions available to you that the average person without a business can’t take advantage of. In fact, if you don’t have a small business, you might consider the many financial benefits of starting one. Simply making an honest effort to earn income from what is normally just your hobby can open up a lot of tax advantages, even if you keep a regular full-time job.

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There is no foolproof way to avoid being audited. The IRS makes most of its selections either based on the fact that the filer is part of a targeted group or because a computer program picked out the tax return.

 

However, even though many of the returns are chosen by random means, there are certain red flags that make a return more likely to be audited.

 

If you don’t want the IRS knocking on your door, avoid these red flags:

 

  1. Arithmetic errors: If you make an addition or subtraction error, you’re going to hear about it. This usually doesn’t result in a full-blown audit, but check your math before filing your return.


  • If you do get a letter from the IRS about your perceived mistake, double check. Sometimes a number was read or keyed incorrectly.

  1. Mismatched numbers: For example, if the numbers on your 1099 form don’t match the entries on your return, the IRS will notify you. Again, double check and be sure that the error was yours, not theirs. Sometimes an IRS employee will enter a social security number as income!

  2. You get most of your income in cash. The IRS will be looking for unreported income, and any cash deposits made to your accounts will be scrutinized. If those deposits aren’t being reported as income, you’d better be able to explain it.


  • Self-employed and small business owners are particularly targeted.


  • Keep excellent records, especially about your deposits.

 

You talk too much. If you’re ever foolish enough to try to pull a fast one on the IRS, keep your mouth closed. You’d be surprised how many neighbors, friends, and even family members report what they’ve heard.


  • This can even include things like charitable donations. If you claim you’re giving 50% of your income to charity, it looks odd to the IRS. They’re going to take a closer look at everything on your return. That doesn’t mean you can’t give 50% of your income away – it simply means that everything else will be scrutinized.
  1. Your tax preparer is questionable. Not all tax preparers are created equal. Some simply aren’t very good. Others are intentionally breaking the law. They may promise a large refund and then claim false deductions on your return. While you’re not entirely at fault, the IRS will be coming after you, too.

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Being audited is never a positive experience. On the other hand, if you act in good faith, it’s unlikely that anything bad will happen beyond an increase in your tax bill.

 

The tax code is complicated – everyone knows that, even the IRS. Be honest and you have little to fear. However, keep these red flags in mind before filing your tax return!

Post Tags:

Small Business, taxes

ABOUT BRYANDIE

Bryandie Cox-Walker, founder of Business Building Profit Lab, a virtual business school, is a millennial entrepreneur and successful business owner with over fifteen years of experience in financial services. She holds two master’s degrees in business, a bachelor’s in Sales and Marketing, and several certificates. She has a passion for learning and helping people get their businesses up and running from the ground. Bryandie has had success in building three separate successful businesses within the past decade. Her extensive knowledge and training are in Income Tax preparation, Credit repair, Life insurance, and business consulting, giving her an exclusive insight into the world of credit and finance.

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Be charitable. Charitable gifts and lifetime transfers are a way to reduce your estate taxes and get your money to the organizations that mean the most to you.

Even if you’re not wealthy, an estate plan can ensure that your assets pass on to those whom you want to receive them.

 

Estate taxes are imposed on the heir of an estate and include any real estate, stock, cash, or other assets transferred to heirs at the time of death. There are both federal estate taxes and, in some states, state estate taxes.



Wouldn’t you rather see these items stay in your family instead of being eaten by Uncle Sam?

 

Laws can vary from state to state, so be sure to find the details that apply to your situation.

Use these tips to reduce your estate tax burden:

Give the money to your children while you’re still alive. You can give up to $14,000 per year to any of your children or grandchildren. If you’re married, you and your spouse can each give a total of $28,000 per child each year. This can add up. 

 

 

Be charitable. Charitable gifts and lifetime transfers are a way to reduce your estate taxes and get your money to the organizations that mean the most to you.

 

  • There are several ways to gift money and assets to charitable groups. Not surprisingly, charities are well versed in gift giving and taxes. Their help is also free!

    Set up a trust. An irrevocable life insurance trust permits the transfer of assets up to the value of the life insurance premium. The real benefit comes from the value of the policy.

  • Life insurance proceeds are normally free from taxes. This is quite simple to set up, but a trust attorney can ensure that it’s done properly.

    Transfer assets to your spouse. Gifts given during your lifetime or left to your spouse in your will are not subject to income taxes, up to approximately $10 million.

However, your spouse will eventually have to pay taxes upon their death. But this extra time can be put to good use to further reduce the tax liability.

Enjoy it. Any money spent won’t be part of your estate come tax-time. If you’ve focused on saving in the past, maybe it’s time to enjoy some of your money.

 

Move. Not all states collect an estate or inheritance tax. Moving to a different state could save your estate a lot of money. A little over half the states don’t collect these taxes, and one of them may appeal to you. Do some calculations and see how much you would save if you moved.

 

Set up a family partnership or family LLC. These business entities are another way to potentially reduce estate taxes.

 

Estate planning isn’t just about protecting your assets. It’s also about meeting your financial goals. If you don’t have an estate plan, it’s never too soon to start. An attorney is a great place to begin. Just be sure that they have expertise in estate planning. For example, most attorneys don’t have the slightest idea how to set up a trust.

If you have significant assets, estate taxes can approach 40% of the value of your estate. It only makes sense to reduce this burden as much as possible. Your heirs will thank you.

Post Tags: MONEY, TIPS

ABOUT BRYANDIE

Bryandie Cox-Walker, founder of Business Building Profit Lab, a virtual business school, is a millennial entrepreneur and successful business owner with over fifteen years of experience in financial services. She holds two master’s degrees in business, a bachelor’s in Sales and Marketing, and several certificates. She has a passion for learning and helping people get their businesses up and running from the ground. Bryandie has had success in building three separate successful businesses within the past decade. Her extensive knowledge and training are in Income Tax preparation, Credit repair, Life insurance, and business consulting, giving her an exclusive insight into the world of credit and finance.

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There is no foolproof way to avoid being audited. The IRS makes most of its selections either based on the fact that the filer is part of a targeted group or because a computer program picked out the tax return.

 

However, even though many of the returns are chosen by random means, there are certain red flags that make a return more likely to be audited.



If you don’t want the IRS knocking on your door, avoid these red flags: 

Arithmetic errors: If you make an addition or subtraction error, you’re going to hear about it. This usually doesn’t result in a full-blown audit, but check your math before filing your return.

 

  • If you do get a letter from the IRS about your perceived mistake, double check. Sometimes a number was read or keyed incorrectly.
  • Mismatched numbers: For example, if the numbers on your 1099 form don’t match the entries on your return, the IRS will notify you. Again, double check and be sure that the error was yours, not theirs. Sometimes an IRS employee will enter a social security number as income!
  • You get most of your income in cash. The IRS will be looking for unreported income, and any cash deposits made to your accounts will be scrutinized. If those deposits aren’t being reported as income, you’d better be able to explain it.

 

  • Self-employed and small business owners are particularly targeted.


Keep excellent records, especially about your deposits.

You talk too much. If you’re ever foolish enough to try to pull a fast one on the IRS, keep your mouth closed. You’d be surprised how many neighbors, friends, and even family members report what they’ve heard.


  • Remember that the IRS gives 15-30% of the additional tax collected to the whistle blower!


  • There’s even a form, Form 211, to report those not paying their taxes properly. A large number of serious crimes are solved because the perpetrator told someone what they did.

    You’re out of the ordinary. When your deductions are considerably greater than others at your income level, the computer will flag you.


  • Keep in mind that the IRS doesn’t have unlimited time and resources. They target the returns likely to result in the biggest collections. Don’t pay more tax than you have to, but don’t go too far and cross the line in your deductions.



This can even include things like charitable donations. If you claim you’re giving 50% of your income to charity, it looks odd to the IRS. They’re going to take a closer look at everything on your return. That doesn’t mean you can’t give 50% of your income away – it simply means that everything else will be scrutinized.

Your tax preparer is questionable. Not all tax preparers are created equal. Some simply aren’t very good. Others are intentionally breaking the law. They may promise a large refund and then claim false deductions on your return. While you’re not entirely at fault, the IRS will be coming after you, too.

 

Being audited is never a positive experience. On the other hand, if you act in good faith, it’s unlikely that anything bad will happen beyond an increase in your tax bill.


The tax code is complicated – everyone knows that, even the IRS. Be honest and you have little to fear. However, keep these red flags in mind before filing your tax return!

Post Tags: MONEY, TIPS

ABOUT BRYANDIE

Bryandie Cox-Walker, founder of Business Building Profit Lab, a virtual business school, is a millennial entrepreneur and successful business owner with over fifteen years of experience in financial services. She holds two master’s degrees in business, a bachelor’s in Sales and Marketing, and several certificates. She has a passion for learning and helping people get their businesses up and running from the ground. Bryandie has had success in building three separate successful businesses within the past decade. Her extensive knowledge and training are in Income Tax preparation, Credit repair, Life insurance, and business consulting, giving her an exclusive insight into the world of credit and finance.

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