Quote of the day

Loading Quotes...

The 2017 tax plan – A quick look at the impact to a couple

The daily press briefing was held last week and a new proposed tax plan was part of that briefing. What’s strange is that even less was revealed as compared to the details offered during the campaign. This is part of the one-pager that was handed out, the part that discusses individuals. I’m in favor of simplification, but also concerned about unintended consequences of how specific bits of the tax code affect the individual. The first thing I heard, and the sheet confirms, is that the standard deduction will be doubled. I won’t quibble over the use of ‘double’ when the current standard deduction is $12,600 for a couple, and they said $24,000 in the new plan. What continues to disturb me is what would be dropped. The plan says “home ownership,” which to me is both mortgage interest and property tax, yet, in the Q&A they only said mortgage interest.

The new standard deduction would certainly eliminate the need to itemize for a good number of those who do, but at what cost?

I mocked up a 2016 return for a couple. A professional couple, both with college degrees. Their combined income after their 401(k) deduction is $100K. Their itemized deductions start with the house, $16,000 in mortgage interest, and $8,000 property tax. Their state tax is $3427, and $10,000 in donations. This accounts for their Itemized deductions. They also have $16,200 in exemptions. Net taxable, $46,373, and a tax bill of $6,029.

Now, let’s consider, what we know of the new tax plan. No exemptions, no property tax or state tax deductions. They get to deduct their $16,000 in mortgage interest as well as the $10,000 in donations. This results in a net taxable $74,000, and even though we don’t know more than “3 brackets, 10%, 25%, 35%,” let’s hope for the best and assume the 10% applies up to the $75K first discussed last year. A new tax bill of $7,400.

A few points. This couple had nothing handed to them. In 2015, the average starting salary for college grads was $39,045. If this couple met at school, and their degrees were in STEM (science, technology, engineering, math) they could have started at $110K, combined. Instead our couple is out of school 10 years and has 2 kids. They saved to put 20% down on a $500K house, which is above the country’s average, but not high considering their proximity to the city.

I’ll be the first to say that I understand there may be little sympathy for a $100K couple, but this is just an example.

The $10/hr couple (or $40K/yr) with 2 kids used to have the same $16,200 exemption, plus a $12,600 standard deduction. They paid tax on $11,200 for a tax bill of $1,120. (I know, I ignored child tax credits here, so they may be at $0), but under the new plan, will be taxed on $16,000, for a $500 increase (we don’t know what the child tax credit will be in the new tax code, we only have the one-pager.)

It’s safe to say that repealing the ‘death tax’ won’t help the average American. This tax is likely to affect .2% of estates, that’s just 1 in 500. A couple would need to have assets worth $10.98M on their death before paying a dime in the estate tax. Those who want to eliminate it are the rare top of the economic ladder. Keep in mind, a couple worth, say $10B would pay a tax of nearly $4B. It would take a million families to pay an extra $4,000 to make up these lost taxes. Crazy to just eliminate this.

As we get more details, I’ll offer more analysis of how these changes might affect wage earners at different levels.

 

When @Rosie Retweeted

There’s a certain excitement when a celebrity or anyone you really admire responds to a tweet of yours. That sentiment may seem strange coming from a 50+ year old vs a teen ager, but I think that feeling of looking that actor, rock star, author in the eye and sharing a thought with them has shifted from the real world to the online one.

Now. Rosie O’Donnell. She grew up in New York, and is my age. So I caught her as a rising star as she gained popularity in the world of comedy. There are a lot of comedians out there, some better than others. But, when I say that Rosie is far and above, the one with the biggest heart, I don’t exaggerate. Let me repeat that. Biggest. Heart. Ever. From a Huffington Post article, “By 2005, she had already contributed well over $60,000,000 to charities focused on the health and well being of children.” It’s 12 years later, and I’m trying to find a current total, but even if we stop on the number, it’s insane. $60 million dollars.

I’ll be honest here. I liked her standup. My New York roots gave me a special love for stand up comedy, and the thrill of seeing a comedian on TV that you remember seeing on a small stage in the city, just getting started. When Rosie moved on to The View, I was working, and didn’t see her too much.

She hit my radar again when Trump, during a debate, answered a question about calling women pigs, with the line, “Only Rosie O’Donnell.” He went for the laugh, I suppose. It wasn’t funny then, and it’s not funny now. Here’s what is funny. Rosie has earned one name, and it’s not ‘pig,’ it’s ‘Philanthropist’.” Trump doesn’t release his tax returns, so we don’t know how much he donates, but from all the detective work the media have done, we know it’s close to zero.

Yesterday, in my admittedly juvenile attempt to get a retweet from Rosie, I tweeted the image to the left. We’ve heard about the wall. The $25B price tag. There’s so much wrong with this whole scenario, there’s no good place to start. The proposed government budget has a defunding of Meals on Wheels, a charity that helps to feed those in need. Yet, it’s pushing to build a wall that will be a symbol, and nothing more. Expensive, and ineffective, as I tweeted, the technology exists to defeat it. It’s called a ladder. Rosie has been pretty vocal on twitter about her distain for Trump and she liked this one, a retweet soon followed. Thanks, Rosie! Keep up all of your good work!

Rich Country / Poor People

The country has grown richer, a lot richer. Our total net worth, as reported by the Federal Reserve, and the WSJ graphic, has passed $92.8T. That’s Trillion, as in a “one” with 12 zeros. A trillion is also a million million, so $92.8T is $92.8 million times a million.

How many households are we talking? If we divide this huge treasure over the population, what are we worth, on average? Good question.

 

 

 

 

 

 

We are up to 119.03 million households in the US. When we divide, the result is $779,635.

As a country, this makes us pretty well off. The average family can own a paid-off house worth $235K, and still have $545K which, for retirees, can provide over $20K per year income. Combine this with another $20K in social security, for a couple, and the numbers still look good.

Not so fast.  The totals reported, the treasure of nearly $93 trillion dollars, fails to discuss one crucial factor, the distribution of this wealth.

CNN offered a look at how this wealth is distributed.

That leaves just 1% of the total pie for the entire bottom half of the population. Note that while that article was written in 2016, just before the election, it used data from 2013. The point remains, half are sharing just 1% of this wealth. I don’t have a solution, today I am just making an observation. The totals and the averages that are reported are meaningless without digging deeper. A $500K average doesn’t help when your family and 8 others have virtually nothing, but one family has $5M. Keep all this in mind when you see any articles that offer this type of news presented as if we are all somehow better off.

Freebie Broadband Deals

Today, a guest post from Crystal –

Many companies offer incentives to entice new customers into buying their products. In the case of broadband, this has now become a growing trend but it is always important to consider carefully if buying the broadband package is actually worth the gift and whether or not, you could actually get better value elsewhere that a company that does not offer a free gift, but actually works out a lot cheaper. This article explores the world of free gifts and whether or not it is worth it in some case, or it is just a novelty.

Many people believe this can save you money, there are two options to consider with your free gift. The first one is whether or not you actually need the gift, for example, if you weren’t buying the broadband, would you potentially go out and buy the gift anyway. If this is the case, this is the ideal situation, however, if you don’t need the gift, it may also be beneficial to get the deal anyway as one could sell the gift and gain some extra money in the process. Free gifts such as a reward voucher can be a good example to use, you must ask yourself the question of whether or not you will use the reward voucher, it will normally be for the same company and so it is important to do your research to see if there is actually anything you want to buy from the company because you may find that there is simply nothing you would like to spend your money on out of the products that they offer.

There is no doubt there is potential to save a little extra money here, by buying the things you need and capitalizing on the free gift and you don’t even have to leave your house to do so. However, in this day and age there are also plenty of other ways to make a bit of extra money, again online and again, without leaving the comfort of your own home.

Some companies will also offer gifts in the form of electronics and this can be a good example to use and try to weigh up the pros and cons. For example, if the free gift is a television, this can be very profitable, but you must ask yourself if you need a television? Do you already have one? If you do then it may be wiser to sell the free gift as it comes and you can get cold hard cash instead. The resale value of a television for example will be very high, providing you do not take it out of the packaging and you can find a buyer. Speak to friends, family or even put it on eBay, it could be very easy to sell and get cash in no time at all. If you are selling a free gift, you must do the calculations. Will the money you get from the gift actually be worth spending more money on what could be a much more expensive broadband package than many other service providers and it is also important to make sure you know it can be sold quickly as otherwise you could be left with an expensive broadband deal and a spare television collecting dust, slowly depreciating in value.

In conclusion then, when entering into a broadband deal, this is a long term commitment and before you go splashing out on something just because you get a fancy new gift with it, it is important to weigh up both the advantages of the free gift, in terms of money and how much you will save and the disadvantages of the free gift, in terms of are there other broadband providers out there that don’t offer free gifts, but actually work out cheaper in the long term. You should also consider other factors in terms of broadband speed and the quality of the service provided.

How I Changed to an S-Corp to Lower My Taxes

This is a guest post by Eric Rosenberg, a full-time freelancer and blogger at Personal Profitability. Eric writes about personal finance and entrepreneurship at InvestmentZen, his own blog, and other sites around the web.

When I started writing about personal finance online in 2008, I had no idea where it would take me. Here I am nearly a decade later and writing about personal finance is my full-time job! Earning as much as I have online, I have picked up a few tax tips as well. None were as valuable to me as changing my business to an S-Corp, which I did when I went full-time in April last year. Read on to find out why I did it, how much I’ve saved, and if it makes sense for you.

Business Structures and Taxes

When I started my online money making adventure, I started working under my own name. Any time you earn money outside of a job with an employer, you are considered a sole proprietorship by default. This means that you are personally liable for any legal issues or claims and count all income and expenses on your personal tax return.

Eventually I started to make enough money that I thought it was worth filing as an LLC. Registering as an LLC was very easy and only costs $50 in Colorado. I filled out the form myself online and was operating as a business, Narrow Bridge Media, LLC, by the end of the day.

Like a sole proprietorship, single member LLC taxes are reported on your personal tax return. In both cases, you use Schedule C to report your business earnings and expenses. An LLC offers legal benefits over a sole proprietorship but as far as taxes go, they are pretty much the same thing. As I started earning more and more each year, reaching $40,000 from my side hustle in 2014, I noticed that my tax bill was going up too.

Self-Employment Tax

The big downside of self-employment as far as taxes go is self-employment tax. When you have a job of any type, both you and your employer are required to pay income taxes on your earnings. You see the taxes you pay deducted from each paycheck, with a true up due in April. You don’t typically see, however, that the employer is paying quite a bit in taxes as well.

As a business owner, you are required to pay both sides of the income tax equation. You pay your own income taxes from your personal earnings and have to pay the employer part of the taxes. This is known as the self-employment tax.

Self-employment tax adds up fast. If you earn $40,000 in a year, your self-employment tax is $5,652. If you make $100,000, you would pay $14,130. The FICA, or Social Security, component is limited to $14,694 per year, but the Medicare component does not have a cap.

How S-Corps Lower Taxes

When I quit my job in April, I knew that I would earn well over $40,000 in 2015. At the end of the year, it came out closer to $100,000 in revenue. Looking forward to increased earnings, I wanted to take steps to limit my tax liability. I found that S-Corps were the right way to do that in my situation.

An S-Corp is a type of corporation that acts somewhat independently. Think of it as a step up from an LLC. In some cases, an LLC can be taxed as an S-Corp. Because I was moving states at the same time, I decided to just register as an S-Corp from the start effective April 1, 2016. Starting on that date, the business became Narrow Bridge Media, Inc.

When the business became an S-Corp, I became its first employee. Now, rather than just keeping everything my business earns, I get a paycheck every Friday. I have to pay self-employment tax on every dollar I earn through my paychecks, but any income I earn above that is taxed at my regular income tax rate which is lower than the self-employment tax rate.

For this to work, I have to follow some special IRS rules. I have to pay myself a “reasonable” paycheck amount for someone doing the work that I do. As a content writer, I did some research and found $35,000-$40,000 per year to be common, so that is what I used for my paycheck. Any additional earnings are considered dividends, not employment earnings.

I did some math to estimate how much this would save me on my 2016 taxes, which I have yet to file, and found I would save around $6,000-$8,000. That is huge! Even with the costs of registering an S-Corp in California and dealing with payroll, this was still a no brainer.

Does an S-Corp Make Sense For You?

If you earn income on the side or are self-employed, you may be wondering if this makes sense for you. It very well might, but it doesn’t in all situations. In general, if you are making around $40,000 or more per year, it is worth looking into. If you find this too confusing or complicated, speak with a local small business accountant to find out what makes the most sense for your own unique situations.

For me, running my business as an S-Corp has been great. There were no operational changes to my business, but I am saving money on every dollar I earn over $35,000 per year. That is something anyone can get on board with! Sorry Uncle Sam, but I’m keeping as many of my hard earned dollars as I can.

It may work for you as well. If you have any self-employment income, it is certainly worth a look. Who knows, maybe you’ll save even more than me on your 2017 taxes thanks to reducing your self-employment taxes!

Next →

← Previous