When Should You Start Taking Social Security?

You can start receiving benefits at age 62 but the benefits are reduced by 25% of what you would get at your full retirement age (ages 65 through 67 depending on when you were born). Also if you wait until  after your full retirement age you get an 8% benefit for each year you wait until age 70. For example for those born between 1943 and 1954, waiting until age 70 gives you 32% more benefits for life. Another advantage to waiting is that your social security benefit is calculated using your highest earnings for a 35 year period. If you have high wage years after age 62, you can replace lower earning years early in your career and your calculated benefit will be higher. My feeling is if you are in reasonable health and don't currently need the extra funds, wait until age 70 to start receiving social security.

Starting a New Business - Beware the Self Employment Tax

All new unicorporated business owners should watch out for the self employment tax (S/E tax). It is 15.3% of 92.35% of your net business income after health insurance and is meant to cover your social security and medicare that you and your employer would have paid on your W-2 wages if you were not self employed. You do get to deduct one-half of the tax as an adjustment for adjusted gross income. However, I've seen many situations where the taxpayer has negative taxable income due to large itemized deductions and owes no income tax but still owes the self employment tax on the net income of the business. To say the taxpayer is surprised is an understatement. Watch out.

How to Help Your Tax Preparer

Give him all of your 1099s, W-2s, K-1s, 1098s, non cash donations, or anything with a government # on it that says it relates to tax reporting. Provide amounts for areas such as business income and expenses, rental income and expenses, charitable donations, medical expenses, misc expenses, office in the home expenses, business car mileage, and anything tax related that is not on a reporting form such as a 1099. Do not bring him receipts. Indicate any significant changed circumstances for the current year or the next. If you want to really make his day, fill out his tax organizer. What do you get in exchange for all of this? You get a happy tax preparer who can concentrate all his skill on trying to save you money and keep you out of trouble.

Is Reinvesting Dividends a Good Thing?

When you sell a stock you have to know your cost basis which is the original cost of the stock including reinvested dividends. Otherwise you can't calculate properly the gain or loss on the sale of the stock for your tax return.  If you've been with the same full service broker since you first bought the stock, you will have the cost basis information and everything will be fine. How many people though never change brokers or for that matter always use a full service broker?  Not knowing the full cost basis can cost you money on your tax return since your basis might be too low. The IRS assumes basis is zero if you can't prove it.

The IRS Notice: What to Do and Not Do

Don't put it away unopened in a drawer and forget about it. It probably isn't as bad as you think it is going to be. Respond as soon as possible. It makes the IRS happy and  could keep you out of trouble. Keep in mind that sometimes you have to wait about 45 minutes before you can get someone on the phone at the IRS. If you don't respond , the IRS computer will keep mailing you more serious notices with consequences like more penalties and interest. Send a copy to your CPA if you want him to handle it. Also, the earlier the CPA sees it, the more help he can be. Your CPA will usually need a power of attorney to discuss your notice with the IRS. Don't procrastinate!

Donating Household Items and Clothing

This can be a great tax deduction especially for families with growing children. When our children were younger and living at home, our deduction was usually around $3,000 each year since we gave away so much clothing. The easiest way to keep up with the donations is to record each item donated on a sheet of paper and attach it to a copy of the receipt from the charity. Keep all the receipts in your tax file. Then at the end of the year value each donated item per the valuation guide at the Salvation Army website. The deductible amount of donations of household items and clothing in good condition is based on thrift shop value which in my opinion is roughly 20% of your original cost.