FindAGoodCPA.com - Not a healthcare professional? Find a CPA or EA who understands the tax issues specific to you.
IRS Web Site - for tax forms, publications, and general tax information.
MONTHLY TAX NEWSLETTERMay 2007
Free money. Reward without risk. Both of these phrases describe the term Arbitrage.
Many financial firms spend big money on talented personnel and sophisticated software to try to locate and exploit opportunities for arbitrage. One common technique is to purchase shares of a company's stock on a domestic stock exchange, while simultaneously selling the same number of shares of that company's stock on a foreign exchange.
By capitalizing on minute fluctuations in the foreign exchange rate between the U.S. dollar and that country's currency, this set of transactions can generate substantial profits. And since the firm simultaneously buys and sells the same number of shares in the same company, they never take on any of the risks generally associated with owning stock of a publicly traded company.
Financial gain without risk - that's what arbitrage is all about. Would you believe that the IRS provides self-employed individuals with an opportunity for arbitrage? All you need to do is employ your child under the age of 18.
According to the IRS' Circular E, Employer's Tax Guide, "payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child."
Plus, your child will not owe any federal income taxes as well, provided he or she earns no more than $5,350 in wages (during 2007), and has no other investment income.
On the other side of the equation, you as a business owner get to deduct on your Schedule C all the expenses paid during the year in connection with your trade or business. Keep in mind that salaries and wages paid to your staff, including reasonable wages paid to your child, count as allowable expenses.
Arbitrage In The Tax Code
Let's look at an example where:
With a top marginal tax rate of 35%, and a top self-employment tax rate of 15.3%, the $5,000 of wages you'll deduct on your Schedule C saves you just about $2,400 in federal income taxes and self-employment taxes. Meanwhile, on the $5,000 of wages received, your child won't pay a dime in taxes.
So by paying your child $5,000 in wages, the IRS rewards you with a $2,400 tax break. A risk-free transfer of money from your business checking account into your child's savings account earns you a substantial financial gain of 48 cents on the dollar. Sounds like arbitrage to me.
The IRS is well aware of this strategy, and there are certain guidelines you should follow for this deduction to survive an audit.
Putting your child on payroll also provides you with the opportunity to contribute to a Roth IRA on behalf of your child. Each year, your child can contribute the lesser of his or her gross wages, or $4,000 (increasing to $5,000 in 2008), into a Roth IRA.
Assuming the Roth rules don't change during your child's lifetime, your child will benefit from decades of compounded growth within these tax-free investment accounts. While contributing to a Roth IRA doesn't qualify as arbitrage, it's still a great tax-planning strategy worth pursuing.
Spring is traditionally a time to clean up your yard upon the completion of another winter. While you're in the cleaning mood, why not take a few steps to clean up your personal credit as well.
Review and Revise
May is a great month to take a step back and review your outstanding credit card debt. That's because the summer spending season is still more than one month away, and you have more than a half a year before you will even commence your shopping for the 2007 holidays (unless you're really a Type A holiday shopper).
Start by taking an inventory of what you currently owe on each of your credit cards. Then, take a few minutes to reset how much you plan to pay towards your credit card debt each month for the remainder of the year.
Need help crunching these numbers? Downloading our (Microsoft Excel) debt/savings calculator should save you a lot of time with this step.
Order Your Free Credit Report
Currently, three companies, Equifax, Experian, and TransUnion, track everyone's credit histories. Don't forget that banks, lenders, retailers, landlords, and other "credit grantors" use credit reports generated by these companies to determine your creditworthiness.
Your credit report reflects quite a bit of information about you and your financial affairs.
The best way to find out how your credit report looks is to order one. You're now allowed to order three free credit reports per year - one from each credit bureau - through annualcreditreport.com.
How's Your FICO?
Your FICO score is a number that quantifies your creditworthiness. The higher your FICO, the more attractive you'll be in the eyes of lenders, retailers, landlords, and other credit grantors.
According to our friends at www.myFICO.com, the FICO score for most people is calculated as the weighted average of these five attributes: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%).
To find out your FICO score, as well as suggestions on ways to improve your FICO score, visit myFICO.com
copyright - 2007 - CPANiche, LLC
|Copyright 2007 The MDTAXES Network by CPANiche, LLC Email us at firstname.lastname@example.org|