Run Personal Finances Like a Business

 

Run Personal Finances Like a Business

Most executives neglect their personal finances because they are too busy with their jobs or businesses. That’s a serious mistake. If you are a student, please check out the financial aid you can apply for.
 
Stay alert for opportunities to save and profit:
Pension plans. Business owners and the self-employed can take advantage of special pension options open to them. If you are making $100,000 a year, you could easily put away $30,000 pre-tax into a defined benefit pension plan. Greater earnings may justify even larger contributions. Compounding tax-free dollars gives an enormous investment edge.
A favorite tax-planning tactic is to have a minor child work for a family-owned business. The first three thousand dollars earned by the child is tax-free, and further income is taxed at low rates. In addition, the company gets a deduction for the child’s salary. Now, a dramatic taxpayer victory shows just how effective this tactic can be.
The taxpayers owned a mobile home park and hired their three children, aged 7, 11, and 12, to work there. The children cleaned the grounds, did landscaping work, maintained the swimming pool, answered phones, and did minor repair work. The taxpayers deducted over $17,000 that they paid to the children during a three-year period. But the IRS objected, and the case went to trial. Court’s decision: Over $15,000 of deductions were approved. Most of the deductions that were disallowed were attributable to the 7-year-old. But even $4,000 of his earnings were approved by the court.

Key Features

The children actually performed the work for which they were paid. And the work was necessary for the business. The tax-payers demonstrated that if their children had not done the work, they would have had to hire someone else to do it.
Types of jobs children could do: Write checks or send out bills for your business, do simple maintenance and painting for investment real estate you own, etc.
Set a spouse up in business. Most male executives don’t realize the tax benefits they could get from encouraging their wives to start businesses. Some of the benefits:
As long as the business shows a profit for three of the first five years, the IRS generally won’t challenge the right to deduct losses in the other two years. These losses can be offset directly against the high-earner’s high-tax bracket income.
• If the wife’s business travel plans coincide with those of her husband, she can travel with him, all fully deductible. (Of course, a business trip can also coincide with vacation travel. But be sure it’s predominantly business travel.)
The wife can invest up to $2,000 of earned income in an IRA. (The full $2,000 is deductible only if neither you nor your spouse is an active participant in an employer-sponsored retirement plan or, if you are, your adjusted gross income on a joint form is less than $40,000.)
• Three-generation financial planning. Consider asking your parents to transfer some of their wealth directly to your children. (Easiest way to skip a generation: Each grandparent gives each grandchild $10,000 a year in tax-free gifts.)
Supporting elderly parents. If you are self-employed, consider employing your parent in the business. There is also this good personal finance description by investopedia.
 

Opportunities

Write the monthly checks. Manage a piece of real estate. Investigate any investment you are considering.

Special concern

If your parent is under 70 and receives Social Security benefits, he or she will lose $1 of Social Security for every dollar earned over a certain amount. One way around this is: Set up an S corporation with the parents as stockholders. The dividends paid out of the S corporation do not diminish Social Security payments. Of course, once the parent reaches 70, no earnings affect Social Security payments.

Executive corporation

This can be a major advantage for a corporate executive with an independent job function and the clout to negotiate a major tax-saving arrangement with the employer. The reward: Tax benefits and opportunities are maximized.

 

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