How does this help you? Short term, you have little choice of the tax rate you fall into. But you should not be “surprised” at how much tax you owe. Too many people are. In the long term, you may want to see what you can do to move “down” this list. Be sure to read the caveat in the last paragraph.
As you know, money pulled early from retirement is “expensive” money, both in terms of taxes, and also beause it will not be there when you retire. Hopefully, you won’t need to draw money from retirement funds early to meet living expenses. If you do, know that the tax rate is closer to 40% than 10%. The federal penalty for early withdrawal is 10%, plus the state adds a penalty also. And, you have to pay income tax on the money. The retirement fund people may offer to withhold federal (and state) tax, but they default to just withholding the penalty amount, not the penalty plus the income tax.
The self-employment income tax rate is closer to 50%. This includes federal and state income taxes, plus 15.3% for Social Security and Medicare. This includes income to partners in a partnership or members of an LLC who are performing services.
Income from wage jobs can be more like 30%. You pay income tax on this money, and they withhold half of the Social Security and Medicare from your check before you even get it. I think of this withholding as a tax. The benefit here is that the income tax is withheld before you ever see it, in hopefully the correct amounts.
Ordinary income is not earned by services, so there is no Social Security nor Medicare to pay. This would include things like interest—but with current interest rates you’d have to have a LOT of money to make any substantial amount of interest, and S Corporation earnings. There is still income tax on this, but it is taxed at a lower rate.
Capital gains rates are lower, closer to 15%, but you have to first buy an asset, and then sell an asset. See the definition of assets in a later issue.
Even better is cash flow without income tax recognition. I’m not suggesting you don’t report your income! Always report all your income in full. The tax code, however, allows you to take a depreciation expense against income from some capital assets. So it is possible to have cash flow that does not get taxed at all. The tax rate on this money is 0%.
Income tax rates are “progressive”—that is to say, the more money you make, the higher the rate is on your income, so the rates above are not only for a specific income level, they will also change as the rates get changed each year. Also, Social Security has an upper limit (this is a component of SE tax). This is a very broad illustration of tax rates and there are many nuances, adjustments, rules and limitations. I’ve spent 15+ years on this topic. Your actual results may vary.
IRS Shut down Sunday October 11 through Tuesday October 14
Everyone likes to take a little break, even the IRS computers. We’ve been informed they’ll be taking a little break, but they’ll be back online at 3 am on Tuesday October 14th. What this means for you, if you’re still on extension, is that if we finish your return during that interval, your return won’t be filed until they’re back online.
Classes: Basic Payroll, Real Estate Depreciation, Schedule C for Enrolled Agents and Schedule C
Here’s a link to the seminars page on my website: www.taxbuddha.com/seminars.html
In conjunction with the IRS and EDD, I’m going to be doing some Basic Payroll seminars coming up in the near future. We don’t cover wages for apartment managers.
Basic Payroll Seminar runs 9 am 3 pm with an hour for lunch
The next seminar will be:
San Francisco at the SBA office 455 Market Street, 6th floor
(I take BART to Embarcadero or Montgomery Street)
Tuesday, November 4, 9:00 am – 3:00 pm
Register by going to http://www.edd.ca.gov/Payroll_Tax_Seminars/ and find your favorite location.
These seminars have proven to be very popular for business owners and bookkeepers, plus they’re free.
Real Estate Depreciation, Schedule C for Enrolled Agents
On November 11th, I’ll be at Taix Restaurant in Los Angeles presenting two seminars for Continuing Professional Education for Enrolled Agents and others, starting at 4 pm for two hours, then dinner, and finishing 7-9 pm at 1911 Sunset Blvd, Los Angeles CA. See www.lacsea.org for more information. This class is not free.
Here are the two blurbs:
Real Estate Depreciation From the Ground Up
How to Prepare your Own Schedule C
Get ready for next year and filing your own Schedule C for last year. Review what the IRS wants to know from you and how to report it for your business. This is a class for business owners who need a basic understanding of their 1040 Schedule C tax forms. We’ll also talk about what to do with the numbers once you have them. We can’t guarantee you won’t get audited, but this class will make it less likely.
I will be at the US SBA office in San Francisco at 455 Market Street, 6th Floor.
Tuesday, November 18, 6:00 pm – 8:30 pm
The Eightfold Path to Pay Less Tax and Avoid an Audit
Eight basic things business owners want to know printed in a booklet in “executive summary” form. This is ten years of working with the IRS Tax Code distilled down so it doesn’t take YOU ten years.
Just another way we’re trying to simplify your life. And the purchase is tax deductible!
You can order from Amazon.com. Here’s the link to Amazon: http://www.amazon.com/Eightfold-Path-Less-Avoid-Audit/dp/0615233422/ref=sr_1_22?ie=UTF8&s=books&qid=1226611038&sr=1-22
The booklet also contains sections on how returns are selected for audit,
when to seek professional help, and how long to keep your tax records.
Little Box of Inc: Incorporations Made Easy published on Kindle
The book with tips about how the S Corporation works is now published to Amazon’s Kindle, updated with additional information about S Corporations, and can be found by searching for Andrew S Rogers as author, and click on “Kindle.” Here’s the blurb:
Considering incorporating as an S Corporation? This booklet will help you understand how the S Corporation works, what you need to do to become incorporated and what you need to do once you have a corporation to stay out of trouble. The structure and the requirements are reviewed, as well as helpful tips to use your corporation to reduce your tax liability and retain your status as an S Corporation. I’ve worked with S Corporations for many years, and as a tax preparer, I can choose the kind of entity I have for my business: I choose the S Corporation myself, and I’ve convinced many of my fellow tax preparers to incorporate as well. I’ve divided the information into clear, easy-to-understand topics, and cross-referenced sections when it might be helpful.
After you’ve read this material, you can view on-line videos via YouTube.com for free to access more advanced information about S Corporations. You may also be interested in my “Choice of Entity” class – see below.
Tax Buddha Messenger Bags
Want to be the first person in your tax bracket to sport the fabulous Tax
Buddha Messenger Bag? I’ve now got a “shop” on Café Press
at www.cafepress.com/TaxBuddha in
case you’d like to order your own
Tax Buddha logo items. The messenger bag came out particularly well, not
quite “saffron,” but easy to find in an airport.
Phone and Fax Numbers
Our northern California occasional in Alameda:
1516 Oak Street, Suite 109
Alameda CA 94501
Phone numbers are:
Phone (510) 332-0401
Fax (925) 478-2726
“You too can be enlightened about tax” — Tax Buddha