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Help Your Working Teen Get a Jump-Start on Saving

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Happy family watching funny video on laptop together with their adopted daughter during leisure time at homeYou may have a teen in your family who holds down a part-time job or works full-time during the summer. You can help your child lay the groundwork for future retirement security early on by encouraging your child to open an individual retirement account (IRA).

You may, or may not, get some resistance, especially if your child has other plans for spending the money. However, you should persist since the benefits can be significant over the long term. Here are some points you can bring up as you make your case.

Savings Can Grow Over Time

When it comes to building savings, your child’s age is a major advantage. Given enough time, even a relatively small investment could grow into a significant sum due to the power of compounding. For example, a one-time investment of $6,000 could grow to $110,521 in 50 years, assuming a hypothetical 6% annual return. Invest $6,000 every year for 50 years at 6%, and your child could accumulate over $1.7 million. Of course, investment returns can vary from year to year and are not guaranteed.

IRAs Offer Tax Advantages

As long as your teen does not participate in an employer’s retirement plan, contributions to a traditional IRA will be fully tax deductible. (With plan participation, income limits may apply.) Any earnings that investments in the IRA make will grow tax deferred. Your child won’t have to pay any income taxes on the IRA funds until they are withdrawn from the IRA.

Contributions to a Roth IRA are not tax deductible, but they can be withdrawn tax free at any time for any purpose. Earnings accumulate tax deferred and can be withdrawn tax free once your child reaches age 59½ and has had a Roth IRA for at least five tax years. Tax-free withdrawals are also available after five years for first-time home buying expenses (to a maximum of $10,000) or on account of disability or death.

Your teen can contribute up to $6,500 to one or more IRAs in 2023 or the amount of his or her annual compensation, if less. The IRS adjusts this IRA contribution limit periodically for inflation. Your child has until the April tax-filing deadline to contribute to an IRA for the prior tax year.

If you would like some help deciding which type if IRA may make the most sense for your teen child, be sure to get in touch with your financial professional.

Beneficial Ownership Information Reporting Under the Corporate Transparency Act

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Serious millennial man using laptop sitting at the table in a home office, focused guy in casual clothing looking at the paper, communicating online, writing emails, distantly working or studying on computer at home.What is Beneficial Ownership Information Reporting?

Beneficial Ownership Information (BOI) reporting is a federal requirement by the Corporate Transparency Act (CTA). BOI reports include information about all the company’s beneficial owners.

Who is considered a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25 percent of the company’s ownership interests.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a United States federal law that aims to increase transparency in corporate ownership. The law requires that individuals considered beneficial company owners in the U.S. provide the Financial Crimes Enforcement Network (FinCEN) with specific information.

For individuals, that includes:

  • their full name
  • date of birth
  • current residential address
  • a federally issued identification number from a driver’s license or passport

For companies, that includes:

  • legal entity name or DBA name
  • business address
  • state jurisdiction of formation of registration
  • IRS TIN

Any changes to the above reporting information must be updated with the FinCEN within 30 days of the change.

What is considered a Reporting Company?

Companies required to report a BOI are referred to as reporting companies. There are two types of reporting companies: domestic and foreign. They are defined as follows:

  1. Domestic reporting companies are corporations, limited liability companies (LLC), and other entities created by filing a document with a secretary of state or similar office in the U.S.
  2. Foreign reporting companies are entities (including corporations and LLCs) formed under a foreign country’s law and registered to do business in the U.S. by filing a document with a secretary of state or similar office.

There are 23 types of entities that are exempt from the reporting requirements. Those entities can be found on the FinCEN website.

What is the Reporting Process?

The reporting process takes place via an online portal on the FinCEN’s website. Filing begins January 1, 2024, with an initial filing window of one year (i.e., initial BOI reporting can be done from January 1, 2024, through January 1, 2025). The FinCEN will not accept BOI reporting before January 1, 2024. There is no fee for submitting this information.

New entities established after December 31, 2023, must report within 90 days of establishment.

Hefty civil ($500/day) and criminal penalties (up to $10,000) can be imposed on companies that fail to file a complete report.

To be sure that you and your firm comply with BOI reporting requirements, check with your trusted tax accountant or CPA.

Back to Business Basics

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Hand drawing a conceptual diagram about the importance to find the shortest way to go from point A to point B, or a simple solution to a problem.It’s reassuring to remember that downturns are a normal part of the business cycle. And, just as there are strategies that help businesses thrive during profitable times, there are basic survival tactics that businesses can employ when the outlook is less than rosy.

Control Spending

Finances should be your fundamental concern when economic conditions are unsettled. When sales are slow, it’s time to preserve your cash. Look closely at how you can reduce overhead. Make certain that all your operating expenses are necessary. Even if you’ve recently made cuts, see if there are other measures you can take. Unless absolutely necessary, consider putting plans that call for capital investment on the back burner until conditions improve.

Maintain Customers

While containing costs is essential, maintaining your customer base is also crucial. So, when you’re deciding how to trim spending, make sure you don’t make cuts in areas that deliver real value to your customers. At the same time, watch your receivables. Make sure your customers’ accounts stay current.

Think Short Term

Plan purchases for the short term, keeping a minimum of cash tied up in inventory. At the same time, however, make sure you’ll be able to restock quickly. Your suppliers may be able to suggest ways you can cut costs (perhaps by using different materials or an alternative manufacturing process). See if you can negotiate better credit terms.

Plan for Contingencies

There’s a big difference between imagining that you might have to seriously scale back your business and having an action plan in place that you can quickly execute. To develop a realistic contingency plan, prepare a budget based on the impact you imagine an extended downturn would have on your business. Then outline the steps you would need to take to survive those conditions. For an added level of preparedness, draw up a second, “worst case scenario” budget and chart the cost-cutting steps you’d need to take to outlive those more dire circumstances.

Many businesses will survive challenging economic times by being informed about their financial condition and by planning ahead to succeed.

Tax Tips for Businesses

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Flat monthly payments calendar. Woman with payment schedule pay money for interest rate, fees, principal and financial bills by month period. Reminder of salary day. Due date of debt, loan, house rentAs a business owner, you should familiarize yourself with your federal, state, and local tax requirements. Understanding what your obligations are will assist you in filing returns and paying taxes accurately and on time. Whatever taxes you are required to pay, you have to be very aware that there are deadlines for remitting them and any delays on your part could result in penalties. Here are some tips that can help you avoid tax trouble with the IRS.

Employment Taxes

The IRS requires employers to withhold federal income tax and FICA (Social Security and Medicare) taxes from their employees’ wages. The IRS also wants you to remit these employment taxes, along with your company’s FICA contributions, to them in a timely manner. Failing to remit these taxes can lead to serious penalties for noncompliance. This is one issue you absolutely must stay on top of.

Remember, sole proprietors, general partners, and, usually, members of limited liability companies do not have Social Security and Medicare taxes withheld like employees do. Instead, they must pay self-employment taxes, which typically cover Social Security and Medicare.

Estimated Taxes

You must generally make quarterly estimated tax payments to cover self-employment taxes and income tax on income that is not subject to withholding. If you do not make required estimated payments on time, you may owe the IRS an underpayment penalty.

Misclassifying Workers

Employees and independent contractors are treated differently for income tax withholding and employment tax purposes. Generally, the more control you have over a worker’s tasks and hours of work, the more likely that individual is an employee. In the case of employees, you must withhold federal income tax and FICA taxes, pay your share of FICA taxes, and pay unemployment taxes. You are not required to withhold income or FICA taxes from an independent contractor. Independent contractors pay income taxes and self-employment taxes on their own. If the IRS determines that your business has misclassified employees as independent contractors, it could prove to be costly.

Keep Business and Personal Transactions Separate

Personal bank and credit card accounts should always be kept separate from business accounts. Doing so makes it easier to identify all appropriate business expenses at tax time. That, in turn, simplifies things when it comes to claiming business tax deductions.

Substantiating Business Expenses

Like every business, your company will incur various expenses that are simply the cost of doing business. Many of these business expenses will be deductible. You should have proof of purchase for those expenses that you intend to deduct. Proof can be a cancelled check (or a legible image of the check), or a credit card, debit card, or electronic funds transfer (EFT) statement that shows the payee, amount of purchase or transfer, and the date of the transaction.

It’s also important that you can provide an invoice or receipt that identifies the purchase. If it’s not clear what the business purpose for the purchase is, then you should attach a note of explanation or write directly on the invoice or receipt. This can be helpful if the deductibility of the purchase is ever questioned by the IRS. Deductions for business travel expenses have very specific substantiation requirements, so be sure you are familiar with them before claiming these expenses.

Determining what taxes your business is subject to and when those taxes must be remitted is complex. Unfortunately, errors can be costly to your business. A professional who specializes in small business tax and accounting matters can help your business put systems and procedures in place so that it can claim all the deductions it is entitled to and meet its tax obligations in a timely and accurate manner.

What Is Your Most Valuable Asset?

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Woman working on laptop online, checking emails and planning on the internet while sitting in an office alone at work. Business woman, corporate professional or manager searching the internetYour most valuable asset isn’t your real estate or the tech stocks you bought in the 90s that have done well. It isn’t even your business per se. Your most valuable asset is you — specifically your ability to run a profitable company and make money.

Are you protecting that asset from the risk that a disabling illness or accident might prevent you from working? If you don’t have disability income insurance, you’re not protected.

What Are the Odds?

People generally think the odds of becoming disabled are low. But the numbers say otherwise: More than one in four 20-year-old workers become disabled before reaching retirement age. Here’s another reality check: Serious accidents are not the leading cause of long-term disability; chronic conditions are. Muscle and bone disorders (such as a back disorder or joint or muscle pain) are responsible for more than one in four disabilities.

How Long Could You Go Without an Income?

Even a short period of disability could be devastating. The average group long-term disability claim lasts 2.6 years. Even if you have reserves you 3 could tap, your personal finances would take a hit. If and when you were able to start earning an income again, you might have to start all over.

What Would Happen to Your Business?

Your involvement is vital to your company’s financial success. If you’re unable to work, you might have to hire someone to take your place and borrow money to pay the bills until you’re back on the job. Bottom line? If you’re sidelined by a long disability, it could jeopardize the success or even the survival of your business.

What Can You Do?

Call your financial professional to review and discuss this important issue.

Try a Trust

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Two confident business man shaking hands during a meeting in the office, success, dealing, greeting and partnerYou don’t have to be fabulously wealthy to benefit from a trust. For many people, a trust is a great financial planning tool.

What Is a Trust?

A trust is a legal arrangement between the person who sets up the trust and transfers property to it (the “grantor”) and the individual or institution that agrees to manage the trust assets (the “trustee”). The grantor specifies who is to benefit from the trust (the “beneficiaries”) both during his or her lifetime and at death, if applicable, names the trustee, and spells out in the legal document creating the trust how the trust assets are to be managed and distributed.

What Can a Trust Do?

Trusts can be used for many purposes, including:

  • Managing your assets if you become incapacitated. With a revocable living trust, you can stay in control of your assets while you’re able and avoid probate after your death. You can also arrange to have a successor trustee make investment decisions and handle other financial matters for your benefit if you’re no longer able to do so. This arrangement avoids the expense and complications of a court-ordered guardianship or conservatorship.
  • Reducing the size of your estate. With a grantor retained annuity trust (GRAT), you transfer assets with the potential for appreciation to an irrevocable trust for the benefit of a child, other family member, or noncharitable beneficiary and retain an annuity interest for a term of years. When the annuity ends, your child (or other beneficiary) will receive the remaining trust assets. If you outlive the trust term, the value of the assets won’t be included in your estate.
  • Donating to charity. If you set up a charitable remainder trust (CRT), you receive an income stream from the donated assets for life or a set number of years. Then, at your death or when the trust term ends, the charity you have chosen will get the trust assets. If you set up a charitable lead trust (CLT), the charity you choose receives income from the assets for a period of time that you specify. After that period ends, the assets flow to your family as “remainder beneficiaries.” Both CRTs and CLTs offer potential income tax and estate tax advantages.
  • Preserving wealth for future generations. With a dynasty trust, wealth is preserved and generated by cascading through multiple generations. Any income or appreciation generated by the trust assets may be exempt from estate and generation-skipping transfer taxes as long as it remains in the trust and if the laws governing such trusts are satisfied. Typically, your children and then your grandchildren would be the trust income beneficiaries. You also can determine under what conditions your beneficiaries can or cannot receive income from the trust.
  • Protecting assets from creditors. When you set up a trust, you can generally include “spendthrift” provisions that prevent your beneficiaries from assigning their interest in the trust to creditors. Putting assets in trust for your child instead of giving them to your child outright may be a good way to provide asset protection in case of a future divorce or major lawsuit.

Your financial and legal professionals can provide more information about the different types of trusts and how they may apply to your situation.