September Newsletter

Over the past few years, state revenue departments have been getting creative in making new tax laws to capture non-resident income taxes. If you are an individual operating as a sole-proprietor consultant or service provider, here is what you need to know.

This could be you

You could owe state income taxes to a state you never visited or worked in. Non-resident employees doing the same work you do as a consultant may not have to pay state income taxes while you must. Federal law protects non-residents from state revenue attacks, but only if you sell tangible property (like pencils, watches and other physical property). It generally does not protect those who provide services. Every state can be different. Just because you know your state’s rules, do not assume other states follow the same guidelines. Nor should you assume other state laws are logical or reasonable.

What can you do?

If you are a consultant providing services to out-of-state customers, here are some tips.

	Research the states rules. Research your customers’ state tax laws for non-resident service businesses. Also review that state’s non-resident employee wage rules. See if they treat them both the same way.
	Become a temporary employee. If non-resident rules are different for consultants versus employees, consider becoming a part-time employee or temp employee. Adjust your bill rate to allow for the employer paying half of your Social Security and Medicare.
	Physical presence. If you conduct your work in the out-of-state location, a non-resident tax return is usually due. But this is not always the case.
	Service or product? Remember, selling product across state lines is different than providing a service. Nexus laws and tax cases make physical presence required. But here too, there can be exceptions.
	If in doubt, ask for help. The best advice is to ask for help. This area of tax code is rapidly evolving. There are no national guidelines and states like California and Michigan are very aggressive. Exceptions in state rules make mistakes easy to happen. This can lead to you owing taxes to another state based on your out-of state activities.

Small service businesses cannot readily defend themselves against large state revenue departments so they are becoming victims as one state tries to take another state’s income tax revenue. While you may receive a credit in your home state for taxes paid to another state, it is not always easy to do and penalties are often applied. Your best defense is knowledge.

If you are like most of America, finding ways to save more and spend less is a challenging task. Sometimes all it takes is a creative solution to change your behavior. Here are some ideas.
Turn yourself into a vendor. Each month when paying your bills, present yourself a savings invoice. Then when bills are paid, your bill to yourself pops up. Pay the savings account bill by sending a check to a specially marked savings account. Pay with cash. Each month pre-determine what you will spend out of your paycheck for core items like food and entertainment. Place the funds in envelopes. When the cash is gone, so is your spending money for the month. Put your credit cards into deep freeze. Don’t want to cut your credit card in half? Try putting it in the freezer instead. Place your credit card in a sealed water-tight plastic freezer bag. Place the bag in a container and fill it with water. Stick it in your freezer. Put an expiration date on the bag for thawing. Caution: This idea won’t help you with internet purchases.
Put your bank on an island. Open a savings account in a bank that is inconvenient for you. Make your deposits by mail, but do not set up internet connectivity to the account. Choose a location that makes you plan for a visit to make withdrawals. This should slow down your desire to use these funds. Make it a game show. On large purchases, conduct research to identify your desired brand and model. Then play “Let’s Make a Deal” by negotiating with different suppliers to get the best possible price. Or try the “Price is Right”, by shopping around for your common supplies to purchase at a lower price point. Multiply your brain. For the next few months, never spend money or pay bills alone. Have your significant other or a friend pay bills with you and shop with you. This added spending awareness and additional voice may help rethink old spending habits.

These creative ideas all have one thing in common. They bring attention to your current spending habits with the goal of changing your spending patterns. If none of these ideas work for you, have fun and come up with some of your own.

With the recent volatility in the stock market, it is only natural to want to sell your investments. While the market may panic, making an informed, calm, and planned decision can be your best option. Part of this decision-making process is understanding the tax consequences of selling your investments.

As the above tax rate chart suggests, understanding the tax consequence of selling an investment can be complicated. Your tax obligation could be subject to no tax or up to 39.6% plus an additional 3.8% for the Net Investment Income Tax. Here are some things to think about.

Within retirement accounts

	Selling investments within retirement accounts. Selling investments within your retirement accounts is not usually a taxable event. The potential tax event occurs when you take the funds out of your account either by a withdrawal or occasionally as a rollover into another account.
	Follow the account rules. Each of your retirement accounts has its set of rules. If you follow them, you can avoid early withdrawal penalties. Following the holding period rules within Roth accounts can also make your withdrawals tax-free.

Gains and losses outside retirement accounts

	Losses. You may deduct investment losses of up to $3,000 per year. These losses first offset any investment gains. If there are no gains your loss can offset your ordinary income. So the benefit of losses can be worth next to nothing or up to 39.6% if it offsets ordinary income.
	Non-investment losses. Unfortunately, individuals may not offset losses on the sale of non-investment property. So if you sell a car and make money, you need to report the gain. If you sell the car and lose money, there is no deductible loss unless it is part of a business transaction.
	Long-term better than short-term. Holding an investment for longer than one year is key if you want to minimize your tax obligation. Short-term gains are taxed the same as wages.

If nothing else, please remember your investment decisions can often have tax consequences. Please ask for help before taking action.