Individual Tax

How Freelancers Can Write Off their Business Travel Expenses

While there are many risks of being a freelancer, it cannot be denied that there are plenty of benefits, too.

One advantage of being self-employed is that you can make more money than you would if you were an employee. You can also work at the comforts of your home.

Moreover, freelancers like you also get to enjoy many tax deductions like home office and business travel.

If you haven’t realized, going on a business travel can benefit your trade.

Here are three good ideas that you may want to explore if you want to maximize your tax deductions by going on a business trip anytime soon:

  1. Visiting a client

Perhaps you have a client in an area away from your tax home, or your primary place of work. You might want to visit that client and several customers to strengthen you relationship with them.

You don’t need to spend the entire them talking to them. You can schedule a meeting for a few hours.  Just make sure to keep note of the things you talked about during the meet.

  1. Meeting a Vendor

Do you know a supplier of a vendor that you can meet in Miami or another area that’s far from your home? You might want to meet him to negotiate a new deal, or how you can improve your business relationship together.

  1. Attend a conference

Are there any workshops, seminars, or conventions that you can participate in?  Attending one that’s relevant to your trade may teach you new skills or update your knowledge. The activity may also give you the perfect time to meet prospective clients or vendors.

What expenses can you write off?

 Any of the abovementioned ideas are justifiable enough to be the purpose of your next business travel. What’s more exciting is that you can deduct all your business travel-related expenses on your next tax returns.

Remember this–you can write off your business travel expenses as long as the primary purpose of your trip is ordinary and necessary for your work.

An ordinary expense is defined as common and accepted in the trade or business that you are in. If you are in the IT field, then your participation in an information security summit can be considered an ordinary expense.

On the other hand, the IRS considers travel as a necessary expense if it is appropriate for a taxpayer’s business.

You can write off the following travel expenses:

  1. Meal Expenses

You can also deduct the costs of meals that you had while you were on a business travel. However, there’s only a 50 percent limit on meal expenses.

There are two methods that you can choose from in figuring out your meal expenses.

The first is the actual cost.  This simply means claiming 50 percent of the actual cost of your meals during your business trip. If you are to use this method, you should have receipts or records of your actual expenses.

The second option is to deduct the standard meal allowance (SMA) of $51 a day, which is the rate for most of the small localities in the US. The advantage of this option is that you don’t have to keep every receipt, as you simply subtract the SMA.

However, the SMA is a bit low. Thus you may not be able to enjoy larger deductions on your tax return if you opt for this method.

Keep in mind that you can claim meal expenses even if your dinner or lunch with a prospective client didn’t lead to a deal. So even if you met potential clients, you can deduct the costs of their meals in your next tax return.

But you may also wonder—can you claim the meal expenses during a business meeting? After all, it is a common practice to discuss a deal or get to know a prospective partner while eating.

The answer is yes–you can also claim meal expenses that you incurred while entertaining customers or potential business partners.

In fact, it is not only the meals served to your clients that you can claim as tax deductible.  You can even include taxes and tips, cover charges if you brought your guests to a nightclub. The rent that you paid for a room in which you held a dinner party for your guests can also be deducted as a meal expense.

But the IRS won’t allow claiming deductible on lavish and extravagant meals. There’s no definite dollar amount for a lavish or extravagant meal, so it can really be tricky for most business owners to determine which meals to expense.

Let’s say that you treated a potential client to dinner at a five-star hotel. Would that be considered lavish or extravagant meal? Perhaps, but you can also justify that it is reasonable given the circumstances. Maybe the client that you met is the CEO of a Fortune 500 company, whom you just can’t bring to any ordinary restaurant.

  1. Lodging Expenses

Unlike in meal expenses where you are limited to a 50 percent tax claim, you can deduct 100% of your lodging expenses during a business travel.

You can even stay an extra day in your destination and claim associated stay-over costs. For example, you had your last meeting on a Friday, but you didn’t leave until Saturday afternoon because you wanted to get a reduced fare on that day. You can claim the stay-over costs on Saturday even though you had no business-related activities on that day.

But if you stayed for a couple more days just to enjoy the sights, then you can’t deduct the hotel charges for those extra days.

  1. Transportation Expenses

Whether you traveled by car, bus, train, or airplane, from your home to the business destination, you can write off your transportation expenses during a business trip.

But if you were provided tickets by a client, your cost is zero.

If you were able to fly because of a frequent flyer reward, then you won’t be able to claim the airfare.

You can also claim transportation expenses to and from the airport to your hotel, and the hotel to the offices of your clients or customers.

If you brought your own car, you can write off your gas expenses, toll fees, and parking. You can even charge the expenses you incurred for maintaining your vehicle, like car wash, replacement of tires, or oil change. However, you have to keep your receipts to prove that you indeed had paid for the said services while you were on a business travel.

Aside from the three major expenses, you can also write off the following:

  • Shipping of baggage
  • Dry cleaning and laundry
  • Business calls
  • Tips
  • Other out-of-pocket expenses such as computer rental fees

The rule of thumb is that expenses that are directly related to your business trip can be written off.  For example, you had paid for the shipping of your brochure or documents needed for a seminar or convention. You can deduct the shipping expenses.

But you can’t expense personal charges like gym or fitness fees. You can’t also deduct fees for movies or games.

Things to Remember Before Traveling for Business

 Now that you have learned the expenses that you can claim on your next tax return, you should then know the things that the IRS will look into before it accepts your tax deduction claim.

These include:

  1. Establish the Purpose of Your Travel

One, your travel should be primarily for business. You can prove this by showing that you have at least one business appointment or meeting schedule before you leave home.

This means that you can’t just depart for the Bahamas or Florida with the hopes of meeting a potential client there. Or collecting business cards of people you would present as business associates.

An invitation to a conference, emails, and other correspondences—these are enough to prove to the IRS that you went to a particular destination for a business-related activity.

But what if you don’t have any invitation or email proving that you went to a certain destination for a business activity?  Let’s say you want to spend a vacation in Miami, and also get some potential clients there.

You can mix pleasure with business, so to speak, by placing several advertisements in the area.

For example, you’re a distributor of computer software. You are hoping to expand your business by distributing more products in Miami.

What can you do to achieve that goal? You can post online ads showing to prove that indeed, you were looking for new business contacts in the area.

And when you get there in Miami, meet a couple of those who have responded to your advertisement. Document your meeting by taking photos, or keeping the business cards of your prospects.

However, you should also look at the time spent for business-related activities during your trip. It would be hard to justify travel costs for a week-long trip to Miami if you only spent 2-3 days meeting with clients.  The IRS will likely call your attention if you declared that you spent just half of your time in Florida meeting prospective customers or dealers.

What if your residence is just a few hours away from Miami? Does that mean you can’t claim your travel expenses as tax deductible?

You can, as long as you can prove that you had to sleep or rest in Miami so that you can meet the demands of your work. Let’s say that you slept in the hotel where you held a meeting to avoid possible traffic problems. The IRS will consider your overnight stay in Miami to be business-related, and allow you to make a claim.

  1. Allocate your expenses

If you traveled for a business meeting but also went to see some old friends or visited tourist destinations, you will have to allocate your expenses. You can only deduct your business-related expenses, and not the costs that you incurred for personal activities.

For example, you rented a car to take you to Miami from New Orleans. Your business travel amounted to around 2,000 miles round trip. But on your way back to NOLA, you decided to take a detour to Jacksonville to visit your old college buddy.

Because the detour to your college buddy is personal and not business-related, you cannot claim your expenses for that part of the trip.

Generally speaking, you can’t claim the expenses of your spouse if he or she accompanied you in your business trip unless the presence of your significant other was necessary.

No, your spouse taking down notes for you during your trip isn’t justifiable. Your partner should have done something more critical, like serving as your interpreter, or even helping you close a deal.

  1. Keep your receipts and related documents

Lastly, keep all your receipts during the trip. You may even write down details at the back of the receipt, like the names of the business associates you met and the purpose of the meeting.

If your total expense during the trip is $75, you don’t need to show your receipts, though.

Don’t throw away other papers such as conference or seminar program. Those papers can justify your tax deduction claim.

 

Going on a business travel is like hitting two birds with one stone. Your firm not only stands to benefit from you embarking on a business travel, but you can also reduce your tax obligations.

You can meet a potential client during a business travel, or strengthen your relationship with your current customers. You can also attend a convention or seminar to enhance your skills, or learn a new one.

Moreover, you can write off business travel expenses like lodging, transportation, and meals, although the latter has a limit of 50 percent of the total costs.

The IRS, though, has been quite strict when it comes to business travel claims. You can fend off an audit by properly allocating your expenses, keeping receipts and related documents, and establishing the purpose of your travel.

If you’ll follow the tips mentioned in this article, then you should have no problems in claiming business travel deductions.

Hire Your Children To Save Taxes

Child labor is a subject that has a negative connotation in our society. For most people, it means depriving children of their childhood. It means forcing them to work when they should be at home watching TV, or playing in the fields.

But it is a different matter altogether if the child is employed by his or her parent’s company.

If you have a small business and you have children aged below 18 years old, it is highly recommended that you hire them as employees. It can be a very fulfilling experience to them. It can hasten their growth, develop a sense of pride and self-worth, and teach them to be more responsible.

Moreover, it can save your company thousands of dollars in taxes. It’s like hitting two birds with one stone—your children can be productive during their spare time and you andyour company can get to save a lot of money.

Hiring teen and young adults in a family owned business benefits both parents and the young ones. Parents get to save more as their businesses have lesser tax burden. Children, on the other hand, can be productive and get some extra money for their extracurricular and summertime activities.

Tax Benefits

There are several ways for your company to benefit from hiring your children as workers:

  1. The child’s salary is free from taxes.

You might know that the first $6,300 of income in a fiscal year is free from federal taxes. This is called the Standard Deduction. So if you hire a child as an employee of your firm, you’re basically keeping that amount in the family. Hire someone else and that $6,300 is taken out of you.

That money coming from your own pocket can be used by your son or daughter to buy a car, or go on a vacation. Even better, he can use it to support himself or his college education.

  1. The child’s salary will be tax deductible.

Let’s say that you are hiring your child with an annual pay of $6,300.  You can declare that amount as tax deductible from your business income.  The first $6,300 earned by a child working in his/her parent’s firm is not subject to tax. Yes, this means that your child’s earning will not only be subject to federal income tax tax but also state tax, FICA, or Medicare.

You, as the business owner, meanwhile, can declare that amount as fully deductible. This means that you will get a tax relief based on your child’s salary as an employee of your business.

For instance, your business is in the 35 percent tax bracket. You hire your 14-year old son to work in your office and help you with the filing of documents, or working  with the spreadsheets. For the year, he earns $6,300 in wages. He must also has no other sources of income.

You, as the business owner, stand to save $2,205 since the full amount of his wages will be deductible as compensation.

  1. No FICA taxes.

As mentioned earlier, your child’s salary isn’t subject to FICA tax. This means your firm won’t have to pay FICA taxes on your child’s wages.

However, there are certain requirements for your child’s salary to be exempt from this kind of tax:

  1. Your business is a sole proprietorship
  2. It is a husband-wife partnership
  3. It is a husband-wife LLC considered as husband-wife partnership for tax purposes
  4. It is a single member LLC treated as sole proprietorship for tax purposes

It should be noted that your child’s salary is not exempt from FICA taxes if your business is a corporation. FICA tax exemption is also not applied if the business is a partnership, or one or more partners are not parents of the child.

  1. Setting up retirement savings plan.

What most people don’t realize is that children under 18 can contribute to their own individual retirement account (IRA). This can be a great way for them to get a head start as far as saving and investing money is concerned.

Your child can contribute up to $5,500 to a traditional IRA. He can subtract the amount from their income for tax purposes. However, your child can’t make more contribution to what he earned in a year. So if he earned $5,000 in a year, the maximum IRA contribution he can make is $5,000.

  1. Shifting a parent’s higher taxed income to a child.

Since your child can save by a) having his income exempt from taxes and b) having the option to set up IRA on the income, you can then shift your higher taxed income to him.

Going back to our examples, your son makes $6,300 and then adds $5500 as a contribution to an IRA. Thus he has $11,800 shielded from taxes, and your business can write off that amount as a legit business expense that can reduce your gross income.

That’s the maximum amount that your child can make in a year sans tax. If you give him a higher pay than $6,300 in a year, the next $9,275 will only be taxed at a rate of 10%.

Thus, your son stands to have a tax of just $927.50 for the year on aggregate earnings of $21,075.

You’ll be wise enough to include that amount in your own income as you can incur a tax liability of $10,600. You can save up to $9,672 in taxes by doing so.

Guidelines

There are several things that you should know if you are to hire your kids as employees. Knowing these guidelines should keep the IRS from disallowing your company from claiming said tax exemptions:

  1. He/she must be a real employee.

Your children should be hired as bona fide employees. This means that they have work that is helpful and appropriate for your business. Typical jobs for children include routine office work such as typing jobs, stuffing envelopes, cleaning the office, answering phones, or making deliveries.  Tech-savvy teenagers can help in marketing a company through social media. Or they can help in maintaining the spreadsheets of the firm.

They can’t be hired for jobs that have no connection with your business, like mowing your lawn at home. Suffice to say, children shouldn’t be asked to do household chores and get compensated for it.

Since your child is considered as a real employee, he or she should fill out their timesheets. It is also recommended that they sign a written employment agreement that specifies the duties and work hours of the employee.

  1. The work must be age-appropriate.

The work assigned to your child should be age-appropriate. There’s a chance that a 8 or 9 -year old child can help in some tasks in the office like stuffing envelopes or even making deliveries. But it will be difficult for the IRS to believe that a child aged below that age can perform any useful work for your firm. Employing a 6 or 7 year old for photocopying work or filing can put you in trouble with the IRS.

It’s also a no-no for children aged 16 years and below to work in a dangerous industry. Hence if your business is heavy equipment contracting, you can’t assign your 15-year old son to the field.

  1. Child should comply with legal requirements.

Since the child is considered a real employee, he or she should comply with the same legal requirements as you would when you hire a stranger. Thus, he will have to apply for a Social Security Number and fill out IRS Form W-4. He or she should also complete Form I-9 of the U.S. Citizenship and Immigration Services.

  1. Compensation must be reasonable.

Simply put, your child’s salary should be consistent with market rates.

Many shrewd business owners would try to give their children a big compensation because it can give them more tax savings in the long run. It would enable them to shift much of their income to their kids who are likely to be in a much lower income tax bracket. But you shouldn’t attempt to do this as the IRS would eventually find out about this if they do an audit.

In paying your children, you should give them a reasonable compensation. The total compensation must include the salary plus all the fringe benefits such as health insurance and medical expense reimbursements.

To get an idea on how much you are to pay your child, you can call an employment agency to see the typical compensation for the type of work that your youngster will do in your business.

  1. Pay in cash.

It’s up to you to decide how much you would pay your son for the services he renders to your business. Just make sure that you pay him in cash if you don’t want to get in trouble with the IRS. Compensation in the form of foods and other things won’t cut it.

There was this case of a tax preparer in Washington who also owned an employment agency. She employed her three children aged 8, 11, and 15. The kids earned a combined $15,000 in two fiscal years for doing tasks like filing and stuffing envelopes. Their mom deducted their salary as business expenses. The IRS disallowed it.

Why?  It’s because the children’s wages was used by their mom to pay for their food, often pizza.  Also, she used the money to pay for their tutor’s fees.

While the mother argued that it was her children who asked her to spend their earnings that way, the Tax Court ruled in favor of the IRS. It noted that it is her parental obligation to provide food and support her children’s education, and the wages of the kids should not be used for these purposes.

  1. Be diligent about documentation and book keeping.

One way to ensure that this arrangement won’t backfire on you is to be diligent about the documentation and book keeping. Doing so would convince federal or state auditor that you reasonably employed your children for your business, and that your tax claims are legit.

Aside from getting all the state permits necessary to employ children, your company’s recordkeeping and payroll tax accounting must also be fool-proof. The payroll for your kids must be done in the same way that an employer would do the payroll for another employee. Paying a fair market rate, as mentioned earlier, would also satisfy the auditors.

  1. Your child should also help your business.

Finally, business owners should not only be concerned with the tax savings they’ll get when they hire their children. They must also be sure that their children can do the tasks assigned to them. The children should be able to help the business, and not just for the tax savings that the firm gets because of them.

Sure, they’ll reduce taxes by employing a child. But if the child doesn’t do a good job at work, then it would probably best to hire another individual to do the job for the firm.

Let’s say that a father hires his 15-year old son to help typing documents in his office. He’s able to save $3,000 in taxes for doing so. But if his son just lounges around the office and doing nothing, then the father didn’t really get the best out of this arrangement. It would have been better for him to hire another person who can actually help his company.

With the tax savings that small business owners can get, it really makes a lot of sense for them to hire their children during summer or even on weekends. The business owner not only stands to save on taxes, but also instils in his/her children values like hard work and responsibility.

If you decide to do this, you should ensure that you do things right. Get your children the necessary permits. Do your accounting cleanly. And give them real wages—not slices of pizza. If you do things correctly, you can save thousands of dollars in taxes while training your children who could be your successor one day.

2016 tax rates

2016 Tax Rates – Plan Ahead To Save

Many of you are getting your paperwork ready to file your 2015 tax returns but you may also want to review the latest tax brackets and standard deductions amounts for the upcoming 2016 tax year.  This can give you a head start for 2016 tax planning.

 

2016 TAX BRACKETS

INDIVIDUALS:

Over But Not Over Tax Rate
$0 $9,275 10%
$9,276 $37,650 15%
$37,651 $91,150 25%
$91,151 $190,150 28%
$190,151 $413,350 33%
$413,351 $415,050 35%
$415,051 And over 39.6%

 HEAD OF HOUSEHOLD

Over But Not Over Tax Rate
$0 $13,250 10%
$13,251 $50,400 15%
$50,401 $130,150 25%
$130,151 $210,800 28%
$210,801 $413,350 33%
$413,351 $441,000 35%
$441,001 And over 39.6%

 MARRIED FILING JOINTLY

Over But Not Over Tax Rate
$0 $18,550 10%
$18,551 $75,300 15%
$75,301 $151,900 25%
$151,901 $231,450 28%
$231,451 $413,350 33%
$413,351 $466,950 35%
$466,951 And over 39.6%

 MARRIED FILING SEPARATELY

Over But Not Over Tax Rate
$0 $9,275 10%
$9,276 $37,650 15%
$37,651 $75,950 25%
$75,951 $115,725 28%
$115,726 $206,675 33%
$206,676 $233,475 35%
$233,476 And over 39.6%

The IRS has also released its standard deductions chart for 2015. Everyone who pays taxes will get a small increase in their standard deduction amount.

 STANDARD DEDUCTIONS

Filing Status Standard Deduction Amount
Single $6,300
Married Filing Jointly $12,600
Married Filing Separately $6,300
Head of Household $9,300
Surviving Spouse $12,600

There are some important changes in 2016 tax code!

  • New Limit For Earned Income Credit =  $6,269 for those who have 3 or more qualifying children in 2016 (Married Filing Jointly)
  • Had a Foreign Income = The foreign earned income exclusion is $101,300 for 2016.
  • Personal Exemption =  $4,050 for this year.  Alternative Minimum Tax  (AMT) exemption amount is $83,300 (Married Filing Jointly) and $53,900 for singles.

How The IRS Tells The Difference Between Negligence And Tax Fraud

Cheating on your taxes is a crime. However, only .0022% of taxpayers are actually convicted of a tax crime. This percentage is surprisingly small especially when you take into consideration that the Internal Revenue Service estimates approximately 17% of taxpayers do not comply with tax laws in one way or another. Over the past ten years, the number of tax crime convictions has decreased.

The IRS reports that individual, middle income earning taxpayers account for 75% of the cheaters. Corporations account for the majority of the rest. The worst tax cheaters are usually workers from the service industry and other cash intensive businesses from handyman to professional doctors. For example, the IRS makes the claim that waitresses and waiters, on average, underreport their tips in cash by 84%.

How Taxpayers Cheat

Many of the people who cheat on their taxes deliberately underreport income. A study performed by the government found that the bulk of people that underreported income were clothing store owners, self-employed restaurateurs and car dealers. Salespeople and telemarketers were next followed by doctors, attorneys, accountants and hairdressers.

A far distant second were taxpayers that are self-employed who over deduct their business expenses including car expenses. The Internal Revenue Service has surprisingly concluded that a mere 6.8% of tax deductions are actually overstated or false.

When you are caught cheating on your taxes by an IRS auditor, you can just have to pay penalties and civil fines or your case can be referred to the division of criminal investigation.

Negligence or Fraud?

IRS auditors have been trained to find tax fraud, an act done willfully with the intent to defraud the Internal Revenue Service. That is beyond making an honest mistake. Examples of fraud include keeping 2 sets of books, using a fake social security number or claiming dependents when you have none. Even though auditors have been trained to look for tax fraud, they do not start off suspecting it. They have an understanding about how complicated the tax law is and expect all tax returns to have a few errors. Normally, they’ll give you the benefit of the doubt and they will not come after you if they believe you made an honest mistake.

If you made a careless mistake, you could receive a 20% penalty on your tax bill. While this is not great, it is better than a 75% penalty for fraud. Even to the courts and the IRS, the line between fraud and negligence is not clear. Auditors are able to spot common problems on tax returns that constitutes fraud such as fake receipts, altered checks and businesses without records.

The chance of being convicted of a tax crime is extremely low but it does occur. If you are being accused of fraud, you need to hire the best legal counsel specializing in tax crimes.

Tax Advantages of being a home owner

home

 

When you own a home you are able to deduct a lot of home related expenses if you itemize your deductions. That means that you will have to file Form 1040 including schedule A. Below is a look at some of the taxes advantages when you own a home.

Mortgage Interest

All of the mortgage interest you pay each month is tax deductible unless you have a loan over $1 million dollars. That is great news since most of the money you pay goes toward interest.

Even if you refinance your home, get a line of credit or get a home equity loan, the interest is generally fully tax deductible on equity debts that are $100,000 or under.

Even second homes are fully tax deductible. It can be a home, RV or boat as long as it has facilities for sleeping, cooking and a bathroom. You can even rent your second home as long as you stay in your home 14 days a year or more than 10% the amount of days you rent the property (whichever is more). If you do not stay in your home that long, the IRS will consider it a rental property and you will lose your mortgage interest deduction.

Points

If you paid points on your mortgage so you could get a better rate, you can get a tax break. When you purchase your main residence, the IRS will let you deduct all of the points during the year they were paid.

When you refinance your home, you still get a tax break but the points usually get deducted over the loan’s life.

For lines of credit or home equity loans, you can deduct the points the same year they are paid if the money is used to do work on the home. If you use the money to do anything else, the points will be deducted throughout the term of the loan.

On second homes and vacation residence, the money paid in points must be amortized over the term of the loan.

Property Taxes

Another big tax break you will receive is deducting the amount you paid for property taxes during the year. All of your property taxes that were paid will be itemized as an expense on IRS Schedule A.

Sell Your Home

If you sell your home, you can avoid some of the taxes on any profit you make. A sales gain up to $250,000 for individuals and $500,000 for married couples is tax free if the property was owned for 2 years and has lived in it 2 years before the sale. If you do not meet the residency and ownership requirements, you will owe tax on all of the profit.

Unforeseen Circumstances

If you sell your home because of unforeseen circumstances, the IRS provides some tax relief for people who have to sell before they fully qualify for the tax break.

Unforeseen circumstances include:

– Job loss
– Divorce
– Death
– Multiple births during the same pregnancy
– Employment changes that make it hard for the owner to pay mortgage and cover all basic living expenses.

Also, you can receive a partial exclusion if you have to sell because of damage to the residence from a man-make disaster, if the property is converted involuntarily, taken by the government or natural disaster. Check with your tax professional for more information.

Foreclosure

Under the Mortgage Debt Relief Act, homeowners that were either foreclosed, had their debt reduced in a restructuring of their mortgage or had a short sale do not have to pay taxes on the canceled debt as taxable interest. This tax law is only in effect until the end of 2013 unless Congress takes action.

What Is A Bitcoin?

Bitcoin

A Bitcoin is a form of digital currency that is not controlled by the government or any other entity. It was invented in 2009 by an entity or person operating under Satoshi Nakamoto. It is a completely anonymous system. It exists on a peer-to-peer digital forum. Consumers purchase the Bitcoins on the forum and they store them online is a Bitcoin wallet totally free from intervention of the government.

Bitcoin promises a totally anonymous currency system that has eliminated any possibility of inflation bred by the government. The Bitcoin system is based on cryptography and complicated mathematics. Over the past year, Bitcoins popularity has soared exponentially in a speculative market that has created a Bitcoin bubble. The supporters consist of a population of select, tech-savvy, anti-government users due to the fact there is no digital trail.

Crypto-Currency

The reason Bitcoin is a crypto-currency is because its existence is only online and is therefore free of systemic manipulation by the banking system.  Bitcoin mining is the process of creating Bitcoins and are entirely regulated by a network of holders of Bitcoins’ computers. All Bitcoin transactions and Bitcoin transfers happen internationally without banking fees, taxes, time delays or constrictions.

The Bitcoin Wallet

The way you store the Bitcoins you acquire is in a virtual Bitcoin wallet. These wallets are usually established through third party sites or using a computer software. Bitcoin wallets do not invest the money you have deposited in your wallet the way a bank does when they are holding your money. Since Bitcoins are free of any federal interference, the currency is not insured federally by the FDIC.

After you establish your Bitcoin wallet, you officially belong to a network where you can trade and make transactions of Bitcoins. For transfers, you just have to use the other person’s anonymous ID number. It takes several minutes to process the transfer.

Largest Known Investors In Bitcoins

The Winklevoss twins are outspoken believers in Bitcoins. They have spoken out that they reason they have chosen to use the Bitcoin currency is because they have enormous faith in the mathematical based framework free from human error and politics. These extremely wealthy twin brothers got their notoriety from making the argument that they were instrumental in the meteoric rise of Facebook. They were portrayed in the movie “The Social Network”.

Bitcoin Mining

Bitcoin mining is the first step to create Bitcoins that holders can trade. Power computers create Bitcoins using the solution of complex mathematical equations. By design, the equation are exceptionally complex and labor intensive to limit the existing Bitcoin supply.

Bitcoin mining has a downside. It uses an extraordinary amount of energy with computers that are excessively powerful in order to solve these complex equations. It is estimated that 24 hours of Bitcoin mining equates to $147,000 of electricity use just to operate the hardware for mining.

What Can You Purchase With Bitcoins?

Almost anything you can think of can be purchased with Bitcoins. The Bitcoinstore.com is a retailer that has the most online traffic. There was an online black market retailer that helped to make the Bitcoin popular known as Silk Road. Before it was taken offline, you could buy any imaginable drug totally anonymously because the Bitcoin is untraceable.

Many retailers are beginning to accept Bitcoin as a payment method. You will more and more retailers showing the Bitcoin symbol to let people know they are accepting Bitcoins. People are using the crypto-currency to purchase everything from ordering pizza to clothing to paying bar tabs. Some hotels are also beginning to take Bitcoins for hotel stays, dining, room service and drinks.

The Bitcoin Craze

How Big Is The Bitcoin Craze? Bitcoin surpassed a $1 billion total valuation for all existing Bitcoins on Apr. 3, 2013, an all-time high. The high valuation proved that the Bitcoin craze was in the middle of a bubble that had been growing with the ever increasing media coverage since inception. In 2010, if you owned $100 worth of Bitcoin, the value would have increased to $72,500 only one year later. In a ‘Gawker’ article written one week later helped the value skyrocket to $250,000. On Apr. 3, 2013, that same $100 bought in 2010 was worth approximately $1 million dollars.

Is The Bitcoin Bubble Unstable?

The Bitcoin is a very volatile market as you can imagine based on the extraordinary rise in value after only a few years. On Apr. 9, 2013, it reached a new high value at over $200 for each Bitcoin. On Apr. 10, just one day later, the value dropped to $105 for each Bitcoin. The reason that the Bitcoin market is instable is because the speculators determine the value based on its potential investment value. It is not determined by the amount of Bitcoin use or trade.

Are Bitcoins Secure?

Bitcoins that are stored in your Bitcoin wallet, should be secure because of the currencies anonymous nature. The problem is if your wallet is hacked or if you trust a fraudulent person with a transfer, it is not possible to recover your losses or find the person who mislead you.

Can My Wallet Get Hacked?

Using a third party Bitcoin wallet makes it unlikely to get hacked; however, there is still a risk that it can be hacked causing you to lose all of your Bitcoins. Although Bitcoin’s cryptography is declared secure because it is extremely complex, it is a public source which means hackers all over the world can try to hack it. The problem with Bitcoins is you either have to trust a third party to store your Bitcoins or you can use your own software which increases the chance of being hacked. In 2011, a Bitcoin holder went to bed with his computer on. When he woke up, his 25,000 Bitcoins were gone. There was no chance of them ever being recovered.

Will Bitcoins Fade Away?

It is illegal to create currency that competes with the United States currency so it is not clear if using Bitcoins is level. The Bitcoin supply is intended to be scare which makes it practically impossible to use Bitcoins on an international level. It has been said that the Bitcoin cannot succeed long term because the ever increasing value of the Bitcoin would be disastrous to the economy if millions started regularly using Bitcoins.

Bitcoin is nothing less than a roller coaster ride

Now here’s a chart of Bitcoin over the past year, using data from Coinbase, a leading Bitcoin exchange:

BITCOIN PRICE

5 Important Tips For 2014 Tax Planning

Your new goal for 2014 should be to gain a higher level of understanding about your income taxes, plan for your tax liability and get organized. This will make tax season much easier and could save you some of your hard earned money.

Below are some simple tips to help you achieve your new goal.

Create a 2014 tax file. You can use a folder, bin or electronic file on your computer.  Include all transactions and documents that might affect your 2014 tax return.

If you use the electronic file, all you have to do is scan all your tax documents and move them into the folder on your computer.  The great thing about using an electronic file is you can easily e-mail the folder to your tax preparer when it is time to file. An electronic file also takes up much less room and will not clutter your desk. It is important that you back up your electronic file so you will not lose your tax file if anything happens to your computer.

Add important notes on your documents to help your tax preparer understand each transaction. You should include documents such as W2’s, K-1s, 1099s, property sale documents, escrow papers, property tax receipts, vehicle registration receipts, receipts for any tax deductible purchases, and donation receipts.

If your financial position will change this year, schedule a tax planning appointment halfway through the year. Financially altering events that occur in 2014 include marriage, divorce, having a baby, buying a home, selling a home or any other event that will affect your taxes. Do not try to set up an appointment in the middle of tax season. Waiting until the middle of the 2014 will assure your tax professional will have enough time to spend with you help you adequately plan for your taxes.

Fund your retirement plan. Check with your employer to see if you can contribute more to your retirement plan and confirm you are fully taking advantage of the employer match, if you have a retirement plan with your employer.

If you do not have a retirement plan, you need to open a ROTH IRA , IRA or other type of retirement plan. An investment house or bank can help you decide the best plan for your specific financial situation. This will help you plan for your future and will reduce your tax liability this year.

Prepay your income tax liabilities. If you do not prepay your income tax liabilities timely, the IRS will penalize you. You should write down your estimated tax payments and the due dates on your calendar. For 2014, the installment due dates for individuals are April 15th, June 16th, September 15th and January 15th, 2015.

Keep up with current news relating to tax legislation. The tax laws are constantly changing. You might think you know the valuable credits and deductions but Congress might have obliterated them.  Keeping up with the new tax law changes will help you take advantage of all the tax credits and deductions that are available to you.

Self Employment Income Needs To Be Turned Into Pension Plan

For people who are self employed, had a great year and want to save for retirement, it is advised that they start a defined benefit plan by the end of the year. You are funding the pension plan: you can deduct and contributed the most and build up your benefits significantly in a relatively short time (often only 5-10 years). If you combine your defined benefit plan with a 401(k) plan, you will be able to shelter your income from taxes with a tax deduction that could reach a couple hundred thousand dollars each year.

 How Do I Get The Tax Deduction For This Year?

To get this year’s deduction, you will have to start the plan before the 31st of December but the good news is you do not have to fund it fully until the following year before your tax filing deadline. The exact amount that you will be able to contribute is based on actuarial calculations that consider your income, years until you retire and age. Generally speaking, the older a person is, the more they can contribute. These defined benefit plans are perfect for those individuals who would like to contribute more money than they are allowed under many retirement plans including 401(k)s or SEP-IRAs.

Defined benefit plans are best for small practices and owner-only businesses. Think architects, doctors, software developers or sales reps. If you are married to your business partner, you could put away large amounts of money for your retirement. These plans are also perfect for employees that have a side business for extra income and spouses that are self employed but they are not the partner that has to contribute to the living expenses of the family.

 Do I Have To Make Contributions To The Defined Benefit Plan Every Year?

Once your defined benefit plan is set up, you will be required to add the minimum contribution that has been recalculated for the year. It is important that you only sign up for a defined benefit plan if you are expecting 3-5 steady years with good income. Only put in the amount you feel comfortable with. Do not let any advisors push you over that amount. Many people want to put the maximum amount in because they want to get the most take benefits; however, they need think about the future. If your business goes out of business, you are able to close the plan.

If you are not sure if you will have steady income over the next few years, you should consider contributing a smaller about to the plan and open a 401(k). This way, in good years you can contribute to the 401(k) plan after you have made the defined benefit plan’s minimum contribution.

Now is the time to start your defined benefit plan. Remember, if you want to take advantage of the tax advantages for this year’s taxes, you need to open your plan by December 31st. You have until the filing deadline to fully fund your plan and it will still count for this year’s tax return.

Strategies To Reduce The Net Investment Income Tax

The goal of planning  net investment income tax (NIIT) is to manage the adjusted gross income and net investment in order to reduce the total amount subject to federal tax. The net investment income tax is calculated using the lesser of the net investment income or the adjusted gross income over the tax threshold amount for the year.

How Is The Net Investment Income Tax Calculated?

The net investment income tax is a surtax at a 3.8% tax rate of a base income. The base income is the lesser of:

  • Net investment income
  • Modified AGI above the threshold

NIIT Thresholds

Filing Status of Taxpayer                                                        Modified AGI

Single and Head of Household                                              $200,000

Married Filing Jointly, Qualified Widower or Widow           $250,000

Married Filing Separately                                                       $125,000

If you are trying to reduce your net investment income tax, you could reduce the net investment income, AGI or both. If your adjusted gross income is lowered below the threshold, the net investment income wouldn’t apply to you because it created a negative amount that becomes zero. Also, if the adjusted gross income is above the threshold, reducing the net investment income and/or AGI lowers the amount of your income that is subject to net investment income tax.

If you reduce your capital gains amount earned during the year, your income will be reduced and your AGI will be reduced. It is important to remember that the adjusted gross income is your total income less all the first page deductions on the first page of the IRS form 1040. All itemized deductions don’t reduce your adjusted gross income.

Two Basic Net Investment Income Tax Planning Strategies

  • Reduce AGI below the threshold
  • Reduce your net investment income

Tax-Sheltered Investments

  •  Life Insurance. Growth in a life insurance policy is sheltered from current income taxes. Additionally, the death benefit is also tax free. Placing assets directly into life insurance removes that investment income from net investment income and AGI. 
  • Roth 401(k) or Roth IRA plans.  Qualified distributions from a Roth retirement plan are not included as income.
  •  Deferred Annuities. Consider using deferred annuities after all 401(k) and contributions to retirement plans have been maxed out. Annuities will shelter your earnings from immediately being taxed. They will help you smooth out your income and help keep your AGI under the NIIT threshold.
  • Possibly convert Pretax Retirement Plans into a Roth plan.  Taxpayers need to determine if this will make sense for them. The amount that is converted into a Roth plan increases adjusted gross income and income which could potentially cause income tax liability and net investment income tax liability. However, future income distributions from the Roth IRA will be exempt from tax.

 Passive Income Strategies

Consider investments where your investment can be depreciated. For example, rental real estate can be depreciated. Depreciation reduces the total rental income that is taxable. Another option is gas and oil investments. These offer a large deduction for depletion that can be taken upfront and a deduction for most of the intangible drilling costs. These deductions give gas and oil investments more tax advantages than many other investments. Both of these strategies help reduce the total investment income that is taxable.

Many taxpayers own real estate and rent their building to directly to their own business (self rentals). These may be subject to a 3.8% net investment income tax.

When taxpayers own multiple passive businesses or rental properties, they should consider how these activities are grouped to calculate passive activity loss limitations. The IRS provides taxpayers an opportunity to regroup these activities which can be a better way to handle passive losses. It can reduce the amount of income that is subject to federal tax.

Strategies for Capital Gains

Installment Sales. Taxpayers that are selling major capital assets or real estate should think about using installment sales. The seller directly finances the purchase using a loan. Taxpayers will then have the choice of whether they want to spread the capital gains over loan’s life or not. This will help smooth income for the amount of years of the loan.

Charitable Remainder Trusts. Property can be placed in a charitable remainder trust and the taxpayer can draw distributions over the rest of the taxpayer’s life. The remainder will go to charity.  The distributions are subject to the net investment income tax but it can be done over many years. Taxpayers, for example, can sell appreciated assets from inside of the charitable remainder trust and income can be distributed over many years.

Charitable Lead Trusts. Taxpayers get an upfront charitable deduction and they are able to keep the gains off of their tax returns. This is a good option for extremely generous taxpayers.