Online Advisor
Timothy W. Tuttle &
Associates
Volume 18
Edition 8 Please
email comments to newsletter@tuttlefirm.com
Aug 2022
Major Events This Month:
Upcoming dates:
September 5
- Labor Day
September 15
- Filing deadline
for 2021 calendar-year S corporation and partnership tax returns on extension
- Due date for 3rd
quarter installment of 2022 estimated income tax for individuals, calendar-year
corporations and calendar-year trusts & estates
Welcome to the last month of traditional summer vacation!
And what better way to lead the final month of summer vacation by outlining
ideas to save money while taking that long-deserved break.
This month's letter includes a review of five ways to
take advantage of IRA accounts to reduce your tax burden. All done with plenty
of time to implement the ideas before the end of the year.
There is also an article to help avoid the tax penalties
built into the hobby tax code that excludes the ability to deduct your expenses.
All this plus lots of tips to improve your credit score!
Please feel free to forward the information to someone
who may be interested in a topic and call with any questions you may have.
5
Great Things to Know about IRAs
IRA's can be a powerful tool to lower taxes all while
saving for retirement or other predetermined uses. Here are five fairly
unreported things to know about IRA's.
- A
nonworking spouse can have an IRA. If your spouse doesn't
work, you may still be able to open and contribute to an IRA for your
spouse, assuming that you work and file a joint tax return. This can be a
great way to help reduce your taxable income each year.
- Even
children can have IRAs. If your child has
earned income, you can open and contribute to an IRA. Just ensure you can
document the earnings. While your child can contribute their own earnings,
many parents will help keep track of things like babysitting money, then
match those earnings in either a traditional or ROTH IRA. Often the ROTH
IRA is preferred, because the future earnings could be tax free! Your
child's IRA is managed by an adult until the child is old enough for the
account to be transferred to their name.
- You
may still contribute to an IRA if you have a 401(k) or similar program at
work. As long as you do not exceed the income limits, it
is ok to have both an IRA as well as other forms of retirement savings
plans. It's simply important to know your options and plan accordingly.
- Non-deductible
contributions may be made. If you exceed IRA
income phaseouts, contributions to your IRA may not reduce your taxable
income for the year. But you may still want to make after-tax
contributions to a non-deductible IRA, as the earnings can still grow
tax-deferred.
- It's
not just for retirement. With traditional IRAs,
if you withdraw funds before the age of 59 1/2 you may be subject to
income tax AND an early withdrawal penalty. But there are exceptions to
this rule. These include withdrawals for a first time home purchase, major
medical bills, college costs, birth/adoption and many others. However, it
is important to know the rules BEFORE you withdraw the funds.
Tax rules surrounding IRAs are vast and complex. But
within the rules are numerous situations that if you know they exist, can help
you plan for a more tax-efficient future.
Turning
Your Hobby Into a Business
You’ve loved dogs all your life so you decide to start a
dog breeding and training business. Turning your hobby into a business can
provide tax benefits if you do it right. But it can create a big tax headache
if you do it wrong.
One of the main benefits of turning your hobby into a
business is deducting all your qualified business expenses, even if it results
in a loss. However, if you don’t properly transition your hobby into a business
in the eyes of the IRS, you could be waving a red flag that reads, Audit Me!
The agency uses several criteria to distinguish whether an activity is a hobby
or a business. So why not make your business activity bullet proof! Here is
what you need to know:
The
business-versus-hobby test
|
BUSINESS
|
versus
|
HOBBY
|
|
You have a reasonable expectation of making a profit.
|
Profit
Motive
|
You may sell occasionally, but making money is not your
main goal.
|
|
You invest significant personal time and effort. You
depend on the resulting income.
|
Effort
and Income
|
It's something you do in your free time; you make the
bulk of your money elsewhere.
|
|
Your expenses are ordinary and necessary to run your
business.
|
Reasonable
Expenses
|
Your expenses are driven by your personal preferences
and not strictly necessary.
|
|
You have a track record in this industry, and/or a
history of making profits.
|
Background
|
You don't have professional training in the field and
have rarely or never turned a profit.
|
|
You have multiple customers or professional clients.
|
Customers
|
You have few customers, mainly relatives and friends.
|
|
You keep professional records, including a separate
checkbook and balance sheet; you have business cards, stationery and a
branded business website.
|
Professional
|
You don't keep strict professional records of your
activities; you don't have a formal business website or business cards.
|
Honest
assessment
As you can see, there is a degree of interpretation
involved in reviewing any activity. So, if your dog breeding business (or any
other activity) falls under any of the hobby categories on the right side of
the chart, consider what you can do to meet the business-like criteria on the
left side. The more your activity resembles the left side, the less likely you
are to be challenged by the IRS. And to remove any doubt, your best defense is
making some money!
Tips
to Improve Your Credit Score
Credit scores are used to determine interest rates on
mortgages, car loans and even the amount you pay for insurance premiums.
Because of this, it is a good idea to review ways to improve yours. Here are
some ideas:
- Look
for errors on your credit report. The place to start is
a review of your credit reports. You are entitled to get a free copy of
your credit report every 12 months from each credit reporting company:
Equifax, Experian and TransUnion. So get a copy of your report and review
it for accuracy. Aggressively follow up to correct any errors using the
process outlined by each credit reporting company.
- Pay
bills on time. The easiest way to improve your credit
is to have a string of on-time payments for all bills reported to the
credit agencies. This is the most important part of your credit score
equation. So while reviewing your credit report, pay special attention to
who is reporting your payments and note if any are delayed. Then gather
all your monthly bills, identify the due dates, and take advantage of
automated tools to ensure the payments are always on time.
- Get
credit card utilization as low as possible.
The amount of credit you're using at any given time is called your credit
utilization, and is the second-biggest factor in your credit score next to
paying on time. For example, if your credit card limit is $5,000 and your
balance is $3,000, your credit utilization is 60%. Try to reduce this
percentage to no more than 20%. You can do this by spending less, paying
off as much of your balance as possible, or increasing your credit limits.
- Sign
up for score-boosting programs. A newer way to help
improve your credit is to include information on your credit report that
normally isn’t reported. Programs like Experian Boost and UltraFICO help you add bills such as rent, utility,
and cell phone payments to your credit report, and to analyze how you use
your checking, savings or money market accounts. Be aware that these
program may ask for access to you bank accounts and could easily work
against you if the reporting has a negative impact on your credit if there
is a billing problem.
- Avoid
requests for new credit. Trying to open a new
credit or loan account could lower your score by as much as 10 points. The
more inquiries made by creditors who are trying to assess your
creditworthiness when trying to open a new account, the more impact it has
on your credit score. If you notice a number of vendors are making
inquiries, you can always turn off this function with credit agencies.
Just remember to turn it back on if you are actively refinancing your
mortgage or looking for other credit. While in the long-term your score
can be maximized by having a diverse mix of different types of credit
accounts, in the short-term adding new accounts will negatively affect
your score.
How quickly you can raise your credit score obviously
depends on your individual situation, but following these tips will lead to a
higher credit score sooner rather than later.
Great
Ways to Avoid Vacation Spending Traps
You probably know how easy it is to spend a lot of money
while on vacation. The best way to avoid overspending is to know the problem
areas and be prepared before you go. Here are five typical vacation spending
traps (and tips to avoid them):
- Paying
full price. If you plan on going to an amusement
park or a fair, most offer pre-sale discounts or set aside days with
special rates. Some examples include half-price admission days, opening
day, closing day or certain days during the week. In addition to admission
discounts, you can often find discounted ride tickets or coupons for food
or attractions the day before heading to the attraction.
- Falling
for carnival or arcade gimmicks. All you need to do is
make one of three basketball shots to win that huge pink gorilla. Or maybe
you think you can master that claw machine and snag a new iPhone! Don’t
fall for it. Chances are the rim is one foot higher, two inches narrower
and the ball might even be egg-shaped. Go ahead and give it a try for fun
— just try not to get frustrated if you don’t hit the shot. Carnival and
arcade games can be a good time if you have the right mindset. Treat them
as entertainment with a spending limit, not a way to easily win a valuable
prize.
- Not
having a food strategy. Do you really need
that whole deep-fried onion? Or that entire bucket of fries? Set aside
some money for fun food items, but decide on a dollar limit before
arriving at your destination. Also consider preparing some of your own
meals to cut down on your overall food budget.
- Impulse
buying. Souvenir shops are great, aren't they?
The problem is you (or your kids!) may want to get something at every
stop. Identify the shopping areas you would like to visit ahead of time
and set a spending limit for both you and your kids.
- Ignoring
the weather. All it takes is a pop-up thunderstorm
or unexpected heat wave and you can watch the prices on ponchos and
bottled water shoot up faster than Old Faithful at Yellowstone National
Park. Before you go, check the weather, bring appropriate gear and find
out where you can get water.
Vacations are a great way to spend a late summer day and
make some memories. Saving some cash with some savvy decisions makes it even
better!
Ideas
When Reviewing Franchise Agreements
Buying a franchise may seem like an easy way to get into
business, but there are many things to consider before you make a commitment.
Here are some thoughts.
Background
A franchise agreement is basically a contract between you
and an owner (franchisor) which allows you to use the owner’s trademark, trade
name, business systems, advertising support, and business know how. In exchange
for this right, you pay fees (often a portion of your business revenues) to the
franchisor. As with any business relationship, specific obligations and
benefits can vary dramatically.
Some franchisors offer a full range of services to help
you get started, including training, site selection, marketing plans, and
products. Others give you little more than the legal right to use their name or
symbol, after which you are on your own.
Where
to begin
Initial and ongoing expenses vary widely among
franchises, so determine all your costs before you invest. For example, some
franchisors require franchisees to pay for licensing fees, building
renovations, equipment purchases, operations manuals, real estate leases, and
other start-up costs. Other franchisors may require you to pick up such costs
as training, insurance, and advertising. So review the agreement to fully
understand your obligation.
Doing
your due diligence
Understand any restrictions on competing with other
franchisees or selling your business. While the agreement will lay out your
legal obligations, talk to other franchisees of the franchisor that you are
considering. Do they get the training and ongoing support outlined in the
agreement? Is the promised advertising actually delivered and is it very effective?
If you hear extensive complaints, you should probably keep looking.
Remember
the Document is a Required Disclosure
The franchise disclosure document is a legal document the
Federal Trade Commission requires franchisors to provide to prospective franchisees
before selling a franchise. There are 23 different sections that a franchisor
is required to disclose, from potential litigation or bankruptcy issues, to
initial fees, other fees and financial statements. Don't get overwhelmed, as
the entire document can run several dozen pages. This document can contain a
treasure trove of information. And any omission is a potential legal liability
to the franchisor, so it is worth your time to be thorough in your review.
As always, it’s a good idea to seek professional advice
before investing in a new business.
Debit
Card Smarts
Save money and potential headaches with these debit card
tips:
- Only
use in-network ATMs. All debit cards are also ATM cards
and used by many to access cash. One of the most common fees appears when
you use an out-of-network ATM.
What you can do: Understand the ATM fees charged by your
bank. Only choose a bank that provides free ATM withdrawals for in-network
locations. Look at the back of your debit card to see what ATM networks
are considered in-network. Then use only those ATMs.
- Fraud
protection benefits are different. Most credit cards
provide zero liability on any unauthorized charges. Debit cards also
provide protection against fraudulent purchases, but there may be
limitations depending on which financial institution issued your card.
According to federal law, here is the maximum amount of fraudulent
transactions you'll be responsible for depending on when you notify your
bank that your card is lost or stolen:
What you can do: Immediately notify your financial
institution as soon as you realize that your debit card is lost or stolen.
Frequently review transactions online to identify any unknown charges.
Also check with your bank to verify the liability coverage and the timing
required to report fraud on your debit card.
- Immediately
notify your bank before any unauthorized charges are made:
Zero liability
- Within
two business days: Up to $50
- After
two business days but within 60 days: Up to $500
- Fail
to notify within 60 days: Unlimited
- Have
multiple ways to access your cash. If your debit card
gets lost or stolen, have another way to pay bills until your new debit
card is issued. This is especially true if you're traveling.
What you can do: Ask your bank about its options for
issuing multiple debit cards for the same checking account. If you're
opening an account other than a free checking account, ask about potential
fees, service charges and balance limitations.
- A
debit card is not always the best payment method.
Remember that a debit card provides financial access to your bank account.
If it goes bad, your ability to pay other bills can be affected. For
example, a stolen debit card may require you to lock your checking
account. What does that mean for your other outstanding payments, like
your mortgage, vehicles or utilities? Your financial life can be thrown
into chaos.
What you can do: Avoid using a debit card on websites
that are targets for scammers. Avoid using it for air travel given all the
recently cancelled flights, as you could easily empty your checking
account while trying to get refunds. Consider having a separate bank
account as a backup in case the account linked to your debit card needs to
be shut down.
While debit cards are quickly overtaking checks and cash as the most popular
method of payment, it is important to evolve your use of them to maximize their
benefit to you.
As always, should you have any questions or concerns
regarding your tax situation please feel free to call.
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The
information contained in this newsletter is of a general nature and should not
be acted upon in your specific situation without further details and/or
professional assistance. For more information on anything in ONLINE ADVISOR, or
for assistance with any of your tax, business, or financial strategy concerns,
contact our office.
Timothy W. Tuttle & Associates
www.tuttlefirm.com