Business On The Side

Mary Weinand
Our guest blogger is our colleague Mary Weinand, Human Sciences Specialist, Family Finance, in southeast Iowa

Given the economy, many people are trying to make ends meet with a side job or small business. Before you begin, consider what expenses might go with the business as well. Running a business can be profitable but it can be expensive too. Deductible expenses help entrepreneurs with many of the costs of running a company. Business owners include expenditures on tax returns so that not all of the business sales are taxed as earnings.

The IRS realizes there is a cost to doing business but there may be limits and timing issues for many deductions. Business expenses are reported in the year they are paid – which can differ from the year income is earned. There are some exceptions to this rule, which can allow a business to carry a loss forward to the next year. If your expenses exceed your income for the year you may be able to carry forward some of the business expense to the next year. Check with your tax accountant to make sure you are reporting correctly on your taxes.

According to IRS.GOV, you have to file an income tax return for 2018 if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Instructions for Form 1040.

Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. You can be liable for paying self-employment tax even if you currently receive social security benefits. The law sets a maximum amount of net earnings subject to the social security tax. This amount changes annually. All of your net earnings are subject to the Medicare tax.

Some common deductions for small businesses:

Vehicle – If you use your vehicle in your business, you can deduct vehicle expenses. If you use your vehicle for both business and personal purposes, you must divide your expenses based on actual mileage.

Employee Salary – If you pay someone to perform business services then you can deduct their salary or contract services on your taxes. Be sure the service is related to the business and not for your personal benefit. For example, if you own a home cleaning service you can’t deduct the employee salary to clean your own home.

Interest – You can deduct the expense of interest for money borrowed for business activities.

Business-Related Education – You can deduct seminars, classes, educational tapes or CDs, and convention fees related to your business.

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Identity Theft and Your Tax Return

Social Security numbers have to be correct on tax returns. At the Volunteer Income Tax Assistance sites we receive an immediate reject on the return if the name and numbers don’t match Social Security records.  We also receive a reject code when a social security number has already been used on a tax return. Individuals must still file a return, but with the electronic submission blocked, it must be a mailed copy.

The IRS  and Iowa Department of Revenue will send you a letter saying more than one return was filed in your name.  Be sure to respond to the letter promptly. Use the internet to validate the IRS phone number and address (scam artists are now creating very good look alike letters). Call and discuss the evidence needed to support your tax return submission.

A letter will also be sent if the IRS or Iowa Department of Revenue has a record of earned income that you didn’t report on a return. It may mean your SSN was used by someone else so they could avoid paying taxes on their earnings.

Social Security numbers can be obtained through scams or by buying numbers that were stolen in a security breach.  If you have been notified that someone has committed tax-related identity theft with your personal information, report it promptly. Go to identitytheft.gov to complete and send the IRS Identity Theft Affidavit.  By doing this, you will also file a complaint with the Federal Trade Commission and obtain an ID Theft Recovery Plan.

After your identity is falsely used for tax purposes, the IRS will send you an annual PIN number (a new number each year). This PIN number will be added to your tax return to verify your identity to the IRS, and will prevent anyone else from continuing to use your social security number on false claims.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Defining Unexpected Expenses

Life is full of surprises and events that sometimes shatter our daily routines and our finances. 

Conventional wisdom says that the money in an emergency fund would be earmarked for “unexpected expenses.”  That is true.  However, let’s think about what expenses actually are (and are not) unexpected.

Expenses that are not unexpected: monthly and annual bills

  • Regular annual or semi-annual expenses are not unexpected: these include property taxes, car insurance premiums,  annual life insurance premium, eye exams and other once-a year expenses.  You can plan and prepare for these expenses by setting aside a fixed amount each month.  Since you know these expenses are coming, they cannot truly be considered emergencies.
  • Occasional maintenance or repairs, such as a leaky roof or a dishwasher breakdown are not fully unexpected. either.  The same is true for other ordinary home repair, care repair, and moderate medical bills.  You may not know exactly what expenses will come up, but if you have a body, a car or a home, you need to expect to spend money on maintaining them. Setting aside money each month will build a fund for home repair and maintenance, car repairs, and  ordinary medical bills.

What expenses are truly unexpected?

An emergency fund is intended for expenses that fall outside the categories of “annual bills” or ordinary maintenance of home, car, and health.  Unexpected expenses are events like losing your job or being struck by a massive, out-of-the-norm health-related bill beyond what insurance will cover.  Emergency funds are designed for expenses that are highly unusual, not for common occurrences.

Bottom Line: It is possible that the savings account you were labeling as an “Emergency Fund” is actually your “Yearly Expense and Maintenance Fund.” That’s a good fund to have. But perhaps you also need an emergency fund.

 

 

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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Early Results from Tax Season

Early returns prepared at the Volunteer Income Tax Assistance (VITA) site where I volunteer are resulting in similar refunds or taxes due from previous years. VITA serves individuals with incomes at or below $55,000.

Dependents listed on returns are the biggest factor resulting in similar results. The child tax credit increased to $2000, the refundable portion of the child tax credit has increased to $1,400, and there is a non-refundable credit of $500 for dependent individuals who are 17 or older on December 31st of the tax year.

At the tax site, parents often state they won’t claim a dependent, even when they are eligible. If someone can be claimed as a dependent on your return it should be done; the IRS doesn’t allow a choice. Income deductions don’t increase and the $500 credit may be lost.

Lower withholding hasn’t been a problem with clients we’ve seen, but it has resulted in slightly higher incomes on the state returns, due to reduced deduction on Line 31. While most individuals won’t exceed the federal standard deduction, it makes sense to gather and record allowable deductions so they will carry over in software to the state return. Iowa has a standard deduction of $2,030 for single and $5,000 for couples, so it’s much easier to itemize on the state return.

If you aren’t setting up your refund to be deposited directly into your checking or savings account, this would be the year to start. As one client stated, ” The Federal government could shut down again. It’s hard to tell when I would get my refund, if I have a check mailed. Here is my bank information!”


Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Have You Reviewed Your Beneficiary List Recently?

Have you reviewed your beneficiary list recently?  Why should you do this?  Some of the biggest headaches experienced by tax, legal and financial advisers occur when their clients are not current with their beneficiaries.  

During a meeting of older adults, I had a woman admit that her mother was her beneficiary.  In the same breath, she mentioned that her mother had been dead for 14 years.  I highly encouraged her to change her beneficiary as soon as possible.

If you have not left clear and up-to-date instructions, your heirs will face real legal obstacles; sometimes long and expensive legal and family disputes result, often not ending well. Many of these mistakes are so easy to avoid: simply check your beneficiary forms while you are still breathing! Encourage your family members to do the same.

Any big life event – such as a birth, a death, a marriage, a divorce, a remarriage, a new grandchild, or a change in the tax law – is a reason to revisit your beneficiary forms.  My brother-in-law had three brothers and all three had been through divorce; there were children and remarriages. In those situations, updating beneficiary forms is critical.

Avoid the headaches.  To avoid beneficiary form problems, it is important to name a contingent beneficiary in case the primary beneficiary precedes you in death or chooses to disclaim the benefit.

Take an inventory of all retirement accounts and investment accounts — locate beneficiary forms for each one.  After reviewing and updating them now, and adding contingent beneficiaries to each, mark your calendar to review them annually. Keep on file a copy of the most current beneficiary form for all your accounts, and make sure your family members know where to locate them.

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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It May Be a Rough Ride: Prepare for Tax Filing

Form 1040

Filing our 2018 income tax returns may be rougher than normal, because much has changed. Why? Three big reasons:
• There are significant changes in tax law, which affect deductions, exemptions and credits used by virtually all Americans;
• The Federal government dramatically revised Form 1040, the form used by everyone when filing individual income tax, and forms 1040EZ and 1040A have been eliminated; in addition, there are minor changes to the Iowa 1040;
• The partial shutdown of the Federal government creates many unknowns with regard to transmitting returns electronically.

Imagine being a tax software developer. They’ve known all year that the law had changed and the forms were going to change, and they received draft copies of what the forms might look like, but the final forms weren’t released until the second week of December. Just imagine how people have been scrambling to make all the needed adjustments and test all the functions. In addition, it seems likely that the federal shutdown has affected their ability to get technical assistance and to test the compatibility of their software with the IRS system. It almost sounds like a horror story! (That’s a joke, but not really)

What does this mean for us taxpayers? Above all, I think it means we need to be cautious about our expectations. I’m thinking of expectations about the timing and the size of our refunds.
• The changes in the law (and the changes made to year-round tax withholding) will affect us all, and until we calculate our returns we won’t really know if our refunds will be similar to past years’, or higher or lower.
• As far as timing, the IRS won’t even be accepting returns electronically until January 28 – about ten days later than normal; that’s a delay for some folks right from the start. And of course we always need to be cautious about timing expectations – it is never smart to spend money before you have it, OR to make promises that you can pay by a certain date “because surely I’ll have my tax refund by then.” The IRS recently announced that it would be processing refunds even if the government shutdown continues; that’s reassuring, but it is certainly not a guarantee that they’ll be able to do it in a timely manner. Note: also keep in mind that since the passage of the PATH Act in 2015, the IRS delays all refunds that include the Earned Income Tax Credit or the Additional Child Tax Credit until at least February 15. This delay may affect more people this year, because more people may be receiving the Additional Child Tax Credit.

What are your questions about your 2018 tax return?

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Put Your Savings on Auto-Pilot

As we continue with America Saves Week, today’s theme–automatic savings–is a strategy for those who struggle with making a commitment to save.

The idea is to save without thinking about it. To start, arrange for your paycheck to be directly deposited into your bank account, if possible. Then, with each paycheck, pay yourself first by directing a dollar amount or percentage of your paycheck to be directly and automatically deposited into a savings account.  This strategy can also be applied to retirement investment plans.

Here are some reasons to try it:

  • By automating our savings, we take the thought out of it, and some may argue, the pain. Automatic savings works because it gets past our tendencies as humans to procrastinate and do nothing.
  • It addresses our lack self-control; we know we should save money, but we end up spending it on temptations and things that bring us pleasure.
  • Finally, many of us have difficulty considering the future. Our minds are occupied with the present, making it difficult for us to prioritize what we might need tomorrow over what we want right now. When we automate our savings, our focus on the present is no longer a problem.

It might not be a strategy for everyone; for example, individuals with unpredictable income should be cautious. However, there is strong evidence that people who commit to saving automatically tend to save more.

Automatic savings is simple tool that can make a difference in our ability to save money. Why not put your savings on auto-pilot?

So Why Do Children Not Understand Money Concepts?

In a 2017, a T. Rowe Price survey, found parents are talking to their children about shopping, but are skipping conversations about household budgets, savings and financial goals. Close to 75% of survey respondents say they regularly have conversations with their children about money, but the focus is on spending—not the family’s current financial situation.

Are we sheltering our children from money? 

The survey found that many parents think they strongly encourage their children to talk about money, the children only agreed 19% of the time.  One in four parents discouraged their children from talking about money.

Children want to learn the financial basics – 34% want to know how banks and credit cards work; and 29% want to learn about managing money.

Protecting children from the financial challenges and decisions faced by adults may not be giving them an opportunity to form habits that can prevent financial stress when they are older. Understanding the source of money, choices involved with use, and it’s limitations form a basis that will impact attitudes and skills in management.

There are places to teach money management – the grocery store, or when paying everyday utility bills. Lessons taught by parents will reinforce and strengthen school based lessons in financial literacy. Basic skills become stronger when practiced. It can include balancing a checkbook, keeping spending records, comparing returns from savings to other investment options.

The T. Rowe Price survey shows that only half or fewer of parents have strong financial habits. One example – more parents save for a family vacation than have an up-to-date will.  One in ten do not save regularly for retirement, purchase life insurance or save for a family vacation.

Where does your family fall in the 10% or 90%?

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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Time to Re-balance Your Portfolio

Third quarter reports for retirement investments are beginning to arrive. Stock portions of portfolio’s are showing strong gains. Financial professionals are sounding uncomfortable, pointing out the climb can’t continue.

Management of investments is a habit that most individuals don’t practice. We don’t re-balance by taking a profit from the portion of our portfolio that has shown gains and buy into less expensive assets.

An analogy to the increase in stock values is to have the accelerator stick on your car and instead of 55 mph you are going 70 on a two lane road.  Your 55% allocation to stocks has grown to 70%. The growth is nice to see, but since your original plan was to invest 55% of your portfolio in stocks, it also means:

  • higher risk than originally planned, and
  • Potential for loss when market adjustments take place.

Re-balancing means fees for the sale and purchase of new assets. I’ve found some articles that recommend re-balancing only when there has been a 5% change. If you allocate 55% of your account to stocks and it grows to over 60%, then you’d want to consider reducing your risk back down to a comfortable level.

An option for individuals who don’t feel comfortable dealing with the allocations in their retirement funds is selecting a target date fund. It is designed to follow a glide path to a target retirement date that moves assets to more conservative funds when recovery time from adjustments is limited.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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The Cost of Convenience

This week, Boise, ID, (where my daughter lives) received huge amounts of snow which they are ill-equipped to handle…they have a limited number of snow plows which are used to clear only the major highways. Most snow events melt in less than 8 hours so residential streets are left to melt, which typically isn’t an issue. Following this huge snow event, however, my daughter has been unable to get to the grocery store; they have been without milk for 4 days now AND more snow and freezing rain is predicted for tomorrow. This is a problem for someone with 2 little ones at home.

Now desperate, my daughter has begun checking out grocery-delivery services. For an order of $150 or more, one store will deliver for a $6.95 fee if you want the groceries delivered in a one-hour window.  A 2-hour delivery window costs $3.95; and a 4-hour window is only $2.95. If your order is less than $150, the fee is $9.95.  

Another store in her area offers a grocery pick-up service for $5. You order and pay for your groceries online and pick your groceries up, curb-side…never setting a foot in the store.

My daughter sees other benefits, besides convenience, and thinks this way of shopping could become a habit. With 2 little ones sitting in the cart when she shops, she is more likely to make unplanned purchases; that doesn’t occur when ordering groceries for delivery. The app used to order the groceries has a bar code scanner so as items are used at home, you can create your shopping list by scanning the can label before tossing it in the recycle bin.  The app easily allows you to compare prices and shop by aisle. A search for canned tomatoes will show you all choices/brands with a per unit price displayed. Redeeming coupons is as easy as scanning their bar codes. The app also tracks frequently purchased items for quick reference.  

These two store chains are typically more expensive than the huge deep discount store (which is like a big warehouse where product is in boxes on the shelves and you bag your own groceries). My daughter does not choose to shop there because of the challenge of shopping with two little ones in tow. So, since she has already made the decision to shop at the more expensive store, why not take advantage of the delivery service? (especially now that her car is stuck in 15” of snow at the bottom of her driveway!)  What services in your community do you find available and worth the extra cost?

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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