Longboat Retirement Solutions LLC

How You Can Pull a GE on Taxes December 11, 2012

BY: Brett Arends, Wall Street Journal

There’s been a firestorm this week over the news that General Electric GE +0.75%will pay no tax—at least, no federal corporate income tax—on last year’s profits.  But if you’re like a lot of people, your first reaction was probably: “Hmmm. How can I get that kind of deal?”

You’d be surprised. You might. And without being either a pauper or a major corporation.

I spoke to Gil Charney, principal tax researcher at H&R Block‘s Tax Institute, to see how a regular Joe could pull a GE. The verdict: It’s more feasible than you think—especially if you’re self-employed.

Let’s say you set up business as a consultant or a contractor, something a lot of people have been doing these days. And, to make this a challenge on the tax front, let’s say you do well and take in about $150,000 in your first year.

First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up expenses. (In subsequent years it’s only $5,000.)  Okay, let’s say you claim $7,000. That takes your income down to $143,000.  You can also write off all legitimate business expenses.  Mr. Charney emphasizes that this only applies to legitimate expenses.

He didn’t say, but everyone seems to understand, that this can be quite a flexible term. Even if you buy a computer, a cellphone and a car primarily for business use, you can use them for personal purposes as well. If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool.

So let’s say you manage to write off another $10,000 a year in business expenses.  That brings your income, for tax purposes, down to $133,000.  You’ll have to pay Medicare and Social Security taxes (just like GE). Because you’re self-employed, you have to pay both sides: the employee and the employer. That will come to about $19,000.  However, you can deduct half of that, or $9,500, from your taxable income. So that brings your total down to $123,500 so far.

Now comes the creative bit. The self-employed have access to terrific tax breaks on their investment and retirement accounts. The best deal for many is going to be a self-employed 401(k), sometimes known as a Solo 401(k).  This will let you save $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).  Why $43,100? That’s because with a Solo 401(k), you’re both the employer and the employee. As the employee you get to contribute a maximum of $16,500, as with any regular 401(k). But as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income.

Yes, being the boss has its privileges. (And if you’re 50 or over, your limit as an employee is raised from $16,500 each to $22,000.)

You can save another $10,000 by also contributing to individual retirement accounts—$5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a Roth, that reduces your taxable income as well. If you’re 50 or over, the limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings your income for tax purposes down to just over $70,000.

We haven’t stopped there either, says Mr. Charney.  Now come the usual itemized deductions. You can write off your state and local taxes. Let’s say these come to $10,000.  You can write off interest on your mortgage. Call that another $10,000. That’s enough to pay 5% interest on a $200,000 home loan.

That gets us down to about $50,000 And we’re not done.  If you’re self-employed, health insurance is probably a big headache. But the news isn’t all bad. You can write off the premiums for yourself, your spouse, and your kids.

And if you use a qualifying high-deductible health insurance plan—there are a variety of rules to make sure a plan qualifies—you get another break. You can contribute $3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family. You can write those contributions off against your taxable income. The investments grow sheltered from tax. And if you spend the money on qualifying health costs, the withdrawals are tax-free as well.

So call this $10,000 for the premiums and $6,150 for the HSA contributions. That gets your income, for tax purposes, all the way down to about $34,000.  If you have outstanding student loans, you can write off $2,500 in interest. And you can write off $4,000 of your kid’s college tuition and fees.  Then there’s a personal exemption: $3,650 per person. If you’re married with one child, that’s $10,950.  Taxable income: just under $17,000. That’s on a gross take of $150,000. You’d owe less than $1,700 in federal income tax.

And it doesn’t stop there. Because now you can bring in some of the tax credits. Unlike deductions, these come off your tax liability, dollar for dollar.  GE got big write-offs related to green energy. There are some for you too, although on a small scale. You can claim credits for things like installing solar panels, heat pumps or energy-efficient windows or boilers in your home. Let’s say you use a home equity loan to pay for the improvements and take the maximum $1,500 write-off.  That gets your tax liability down to $200.

Can we get rid of that? Sure, says Mr. Charney.  If your spouse spends, say, $1,000 on qualifying adult-education courses or training programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The maximum is $2,000.)  That wipes out the remaining liability.

Congratulations. You’ve pulled a GE. You owe no federal income taxes at all.

OK, it’s just an illustration. Few will be quite so fortunate. On the other hand, it’s not comprehensive either. There are plenty of other deductions and credits we didn’t mention. You could have written off up to $3,000 by selling loss-making investments. Your spouse may be able to use a 401(k) deduction as well. There are lots of ways to tweak the numbers.

In this case, you’ve paid no federal income tax, and meanwhile you’ve saved $19,000 toward your retirement through Social Security and Medicare, and $53,000 through your 401(k) and IRAs. You’ve paid most of your accommodation costs (that is, the interest and property taxes on your home), covered your health-care costs and quite a lot of personal expenses through your business account, paid $4,000 toward your child’s college costs and had about $2,000 a month left over for cash costs.

Who says GE has all the fun?


401(k) Fee Disclosure Rules: Is Your Plan a Rip-Off? August 5, 2012


New Federal Rules Will For the First Time Expose Your Retirement Fees

Do you know how much your 401(k) plan is costing you and your fellow employees? Probably not. Even your employer may not know.

Fees charged by the financial institutions that administer these employee tax-deferred savings accounts are often a mystery. If you don’t believe this, go to the drawer where you keep your quarterly 401(k) statements and see if you can find the word “fee.”

These statements give the dollar value of shares in different investments, such as mutual funds. Yet the performance of these investments is actually better because instead of stating fees, these statements give investment-return figures after fees have been taken out.

This omission is highly convenient for the large brokerages and insurance companies that provide 401(k) plans because it allows them to charge high fees, paid by investors who have no inkling of the hit their retirement accounts are taking. While these institutions must disclose all fees when asked, federal rules haven’t required them to voluntarily disclose these fees — until now.

Sweeping new rules from the U.S. Department of Labor are designed to shine a bright light on 401(k) fees. One of the requirements is a new format for quarterly statements that will show fees. The statement you receive in the fall will look nothing like the ones piled up in your drawer. It will include an eye-opening table showing fees and actual returns for each investment before fees are taken out.

Fees from plan providers often run more than 1 percent annually. (This comes on top of the fees you’re paying to the investment companies whose products you’ve selected for your plan.) One percent may not sound like much, but like the water bill you get from a leaky faucet, this is serious damage over time. An independent study found that the total fees paid on 401(k) plans reduce the total retirement accounts of the average American couple by a whopping 30 percent.

The government is trying to shed light on fees to keep them in check. But despite numerous notices from the DOL, many employers remain clueless about the new rules and looming deadlines for compliance. The first of these comes July 1, when providers are required to have disclosed, and employers to know, all plan fees and the services they cover.

Employers are then required to determine whether these fees are reasonable in relation to the national market — whether lower fees are available for the same services. For example, some arrangements cover employee education (training on selecting investments from among those offered by the plan) as part of the deal, but many don’t. When education is provided, it sometimes involves conflicts of interest that the new rules seek to eliminate.

Though the rules call for heavy fines for employers who fail to comply, many companies are literally doing nothing because they haven’t read notices from the DOL, don’t understand them or don’t take them seriously.

If your employer falls into this category, they could end up in serious trouble with regulators. And if your plan is being charged excessive fees, this could continue to drain your 401(k) account. So it’s in your interest to make sure your employer is on top of this situation. To ensure this, you could:

• Take a printout of this column or send a link to your company’s human resources department. At small companies, these people are responsible for dozens of other matters, so the new rules may be news to them.

• Tell them that there are various sources they can check to confirm the requirements and rigors of the new rules. The DOL is a good place to start.

• Ask your HR people if they’ve determined what fees are being charged. In all likelihood, their plan provider has already provided required fee information. If not, HR should write the company a letter documenting this failure. This will cover them with federal regulators and put the onus on the plan provider.

• If the plan provider has supplied the fee information, ask HR if they understand it. At smaller companies, they may not, because many providers are burying it in a document the size of a phone book. Does your company have an independent advisor to interpret these fees and determine whether they are reasonable by pinpointing where they land in the national spectrum?


Marc Faber 2012 – Where to Put Your Money June 9, 2012

Filed under: Economics,Investing Globally,Uncategorized — larsfforsberg @ 7:46 pm
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