Tax

How do you multiply your net worth?

Let the government help.

Here’s how: with both the SEP IRA and the solo 401(k) retirement plans, your investment in your tax-favored retirement

• creates tax deductions for the money you invest in the plan, 
• grows tax-deferred inside the plan, and 
• suffers taxes only when you take the money from the plan. 

Example. You invest $1,000 a month in your retirement. You are in the 40 percent tax bracket (combined federal and state), and you earn 10 percent on your investments. At the end of 30 years, you have $1.58 million in after-tax spendable cash, which comes from (in round numbers):

• $1.2 million in after-tax cash from the retirement plan ($2 million gross less 40 percent in taxes—we’re taking the entire amount out of the plan in this example)
• $380,000 in the side fund (created by investing the $400 of monthly tax savings—$1,000 deduction x 40 percent)

If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10 percent (6 percent after taxes), you would have a little more than $950,000.

Winner. The retirement plan wins by $630,000—after taxes ($1.58 million vs. $950,000).

Okay, that’s the big picture. It tells you that tax-advantaged investing multiplies profits. So, do it.

If you would like to discuss your retirement options, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 20, 2021

Are you one of the millions of businesses that have an outstanding non-disaster Small Business Administration (SBA) loan? These include

• 7(a) loans (general small business loans of up to $5 million),
• 504 loans (loans of up to $5.5 million to provide financing for major fixed assets such as equipment or real estate), and
• microloans (short-term loans of up to $50,000 for small businesses).

If so, you have already benefited, or soon will benefit, from a little-known provision included in the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Lawmakers appropriated $17 billion so that the SBA could provide a temporary loan payment subsidy to businesses with these non-disaster SBA loans. Under this provision, the SBA automatically makes monthly loan payments on behalf of borrowers. There is no need to file an application.

Now, with the newly enacted stimulus law (December 27, 2020), lawmakers made this loan subsidy program even better. Its massive second stimulus bill expands the loan payments for up to 14 months for many businesses. It also extends the program to loans approved by the SBA as late as September 30, 2021.

Even better, the new law makes tax-free the SBA loan payments made on your behalf. And that’s not the end of the good news. Under this new law, you can deduct the interest and fees that were paid by the SBA on your behalf.

If you have any further questions or need my assistance, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 17, 2021

Embedded in the COVID-19 relief law is $900 billion for financial assistance.

As you would expect in these unusual times, some of the relief is in the form of direct government financial assistance and some is from tax benefits that can impact both tax year 2020 and tax year 2021.

Most of the provisions create extra deductions or credits where Uncle Sam puts cash directly into your wallet.

Here are four:

1. Recovery Rebate Payments and Credits

Remember those $1,200 checks many people got earlier in the year? 

Well, there’s another round of $600 payments coming, with rules very similar to the first round.

2. Paid Sick and Family Leave Credits

As you may remember from the March 2020 law, Congress provided two ways to give workers paid sick and family leave:

1. Employers received refundable payroll tax credits to fully offset the cost of the government mandate that employers provide paid sick and family leave to their employees.
2. Self-employed persons also qualify for paid sick and family leave. They claim a refundable tax credit against their 2020 self-employment tax.

The tax credits require that the self-employed person or the employee was unable to work due to a qualifying situation between April 1, 2020, and December 31, 2020. The maximum non-working days eligible for the tax credits are

• 10 days for paid sick leave, and
• 50 days for paid family leave.

Under the new law, you now can claim these tax credits for qualifying days through March 31, 2021. The maximum creditable days did not increase.

3. 100 Percent Business Meal Deduction

The new December 27, 2020, law allows you to deduct 100 percent of your business-related expenses for food and beverages provided by a restaurant for amounts paid or incurred after December 31, 2020, and before January 1, 2023.

4. Charitable Contributions

The CARES Act made three major changes to charitable contribution deductions for tax year 2020:

1. For individuals, there is no adjusted gross income (AGI) limit for contributions normally subject to the 50 percent and 60 percent limitations. The 2020 no-limit rule does not apply to donor-advised funds.
2. For corporations, the 10 percent limitation goes up to 25 percent of taxable income.
3. If you are a non-itemizer, you may now deduct above-the-line up to $300 of cash charitable contributions for tax year 2020 only.

The new law enacted on December 27, 2020, extends the increased charitable contribution deduction limits for individuals and corporations to tax year 2021. In addition, in tax year 2021, non-itemizers can deduct cash charitable contributions up to $600 on a married-filing-joint return ($300 for singles), but it’s below-the-line.

If you would like to discuss any of the changes described above, please contact me on my direct line at 408-778-9651.

• By Leon Clinton
• February 13, 2021