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Archives for September 2014

Newest Tax Haven for Wealthy Americans – Puerto Rico

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Newest Tax Haven for Wealthy Americans – Puerto Rico
Puerto Rico took a huge hit during the recession. Unfortunately, tourism, which once brought in big dollars to the region has not fully recovered leaving economic and government leaders to seek new alternatives to bring revenue and investments into communities large and small throughout Puerto Rico. One of the primary methods leaders chose for attracting new money revenue and investments into the region is through significant tax breaks.

Act 22

Act 22, known as the Act to Promote the Relocation of Investors to Puerto Rico, provides investors and traders who maintain residences in Puerto Rico for a minimum of 183 days per year to pay no local or federal taxes on capital gains. They also pay no local taxes on income resulting from most dividends or interest income for a period of up to 20 years. Even people who continue employment with a company on the U.S. mainland while living in Puerto Rico are exempt from paying U.S. federal taxes on their salaries.

U.S. citizens must still pay federal income taxes on dividends and interest income from mainland companies, but the tax savings are significant enough that major investors are taking interest – and inviting friends.

The Beauty of Puerto Rico as an American Tax Haven

These changes, combined with the modern infrastructure available in cities like San Juan, make Puerto Rico an attractive choice for investors – never mind the amazing weather and stunning beaches. As far as tax havens go, this is a beautiful choice when it comes to tax benefits easily reaching six figures for many investors and creature comforts alike.

The real beauty of turning to Puerto Rico as a tax haven for Americans is the fact that you don’t have to sacrifice your citizenship in order to do so.

What Does Puerto Rico Get out of this Deal?

Puerto Rico’s unemployment rate still remains high. The New York Times places it in the range of 13 percent which makes it one of the highest in the U.S. The per capita income, also according to the New York Times for Puerto Rico is also around $15,200, which is half of Mississippi’s per capita income. Mississippi is the poorest state in the U.S. to put things into perspective.

The plan is for the new investments and spending on the island to create jobs that will spur even more spending among the local population. The goal is to bring in high dollar investors who are millionaires, if not billionaires, in order to bring some of the fruits of their labors into Puerto Rico. With a growing discontentment among high income earners in the U.S., it may be an achievable goal.

Proceed with Caution

However, some tax experts are urging caution before diving right in. The U.S. is cracking down on what it considers tax dodging and those who have corporate interests on the mainland might want to avoid any appearance of becoming “unpatriotic” in the eyes of investors and consumers. Consider carefully and consult your accountant before taking the plunge to minimize your risks if this is something you’re considering.

5 Ways Life Insurance Benefits Small Business Owners

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

5 Ways Life Insurance Benefits Small Business Owners
The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.

Life Insurance as an Employee Benefit

You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.

Funding Buy Sell Agreements

If you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the business for cash from the deceased’s estate ? and that the deceased’s estate will sell.

If you fail to create a buy-sell agreement, you may find yourself in business with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.

And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy.

Key Person Insurance

Does your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.

Bonus Plans

Some life insurance policies – specifically “permanent” insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to “poach” your key people.

Supplemental Retirement Planning

Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time.

You can use this for retirement or even as a source of reserve capital for your business. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.

There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.

Home Office Deduction is Now Simplified!

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Home Office Deduction is Now Simplified!
The home office deduction allows you to deduct certain expenses related to the operation of your home office from your taxable income. In past years, taking the home office deduction required you to make a variety of complex calculations. However, beginning in 2014 (tax year 2013), the IRS is offering a simplified home office deduction method.

The Regular Method

If you use the regular home office deduction method, you must keep track of all of the expenses related to the operation and/or maintenance of your home during the year. To determine the portion of these expenses that is deductible for your home office, you must calculate the percentage of your home that is used as an office and multiply this percentage by each of the expenses.

The Simplified Method

If you choose the simplified method of determining your home office deduction, only one calculation is required to determine the amount you can deduct. Simply multiply the number of square feet in your home office by $5. You don’t need to keep records of any specific expenses incurred, nor do you need to allocate them individually.

Considerations

Although the simplified method is useful for many taxpayers, it isn’t the right choice for everyone. Some taxpayers who have kept records of their expenses may be able to claim a larger home office deduction under the regular deduction method. In addition, whereas the regular deduction method allows for carryover into the following year, the simplified method does not. Finally, while the regular method includes a depreciation deduction for the business use of your home, the simplified method doesn’t allow a depreciation deduction.

Sources: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction.

5 Common Mistakes Rental Property Owners Make

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
5 Common Rental Property Income Mistakes
Entering the property rental market is a common way to increase your net worth in the long run as well as generate some passive income in the short run. If you are new to the landlord business though, you may fall prey to some common rental property income mistakes when you file your tax return. Of course, the best way to ensure that you don’t make any of the following mistakes is to have a professional prepare, or at least review, your return; however, knowing what the most common mistakes are is a good place to start.

Not declaring rent when it is received – any rent received by a landlord must be declared in the year it is received. It is common, for example, to require a deposit as well as first and last month’s rent when leasing a property. Even though the last month’s rent isn’t actually due yet it must be declared in the year when you receive the funds.
Security deposits count as income if not returned – if you collected a $2,000 security deposit and find that you need to keep $1,000 of it when the tenant moves out to repair damages and/or clean the property you need to declare the $1,000 as income. Of course, you may also have corresponding expenses if the funds are used to complete repairs.
Expenses paid by a tenant are income to the landlord – if your tenant fixes something on the property, the money spent by the tenant is actually income to the landlord if the cost of the repairs is deducted off the rent. Again, you may also have a corresponding deduction for the cost of the repairs, meaning you need to declare both income and expenses.
Property and furnishings are depreciated differently – property is often rented “furnished”. You may deduct the cost of the furnishings but make sure you calculate the deduction properly. Residential rental property is depreciated over 27 1/2 years while furniture is depreciated over just seven years.
Failing to document – if it isn’t in writing is doesn’t count! Everything from your original lease agreement to the cost of replacing a lost key should be documented in writing. Not only does this ensure that you will get credit for all your allowable deductions but is also protects you in the event of an audit by the Internal Revenue Service.

By avoiding these five common rental income tax mistakes you can dramatically reduce the chances of an error on your tax return.