It's Not Too Late to Contribute to Your IRA

It's Not Too Late to Contribute to Your IRA for 2012

By Tom Copeland. Published with permission.

One of the biggest tax breaks available to family child care providers is the Individual Retirement Account (IRA).

When you put money into an IRA for 2012 it will reduce your 2012 taxable income. You won't have to pay tax on it (along with the interest you earned) until you withdraw it after age 59 1/2. 

By not having to pay tax on your contributions and interest for many years your money will accumulate much faster than if you invested outside an IRA. For more on the tax benefits of IRAs, see my article.

Note: a ROTH IRA works differently than all other IRAs. You won't get an immediate tax deduction when you make your contributions, but you won't pay any tax on the contributions and the interest earned when you withdraw them.

In general, you will be better off contributing to a Roth IRA than a Traditional IRA. See more.

The deadline for making a contribution to your IRA for 2012 is April 15, 2013. You can both establish and contribute to your 2012 IRA by this date (see exception for a SIMPLE IRA below).

Family child care providers may be eligible to contribute to the following IRAs:

Traditional IRA: If you are single you are eligible to contribute. If you are married and filing jointly and your spouse is not covered by a retirement plan at work, you are eligible to contribute if your family's adjusted gross income (AGI) is less than $183,000 ($188,000 for 2013). If your spouse is covered by a retirement plan at work, you are eligible to contribute if you family's AGI is less than $112,000 ($115,000 for 2013).

Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

Roth IRA: If you are single you are eligible to contribute if your profit is less than $125,000 ($127,000 for 2013). If you are married and filing jointly, you are eligible to contribute if your family's AGI is less than $183,000 ($188,000 for 2012).
Maximum contribution - $5,000 per person ($5,500 for 2013); an extra $1,000 if you are age 50 or older.

SIMPLE IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.
Maximum contribution - $11,500 of your profit ($12,000 for 2013); plus an extra $2,500 if you are age 50 or older.
Note: To contribute to a SIMPLE IRA for 2012 you must have established it by October 1, 2012.

SEP IRA: You are eligible to contribute whether you are single or married and regardless of your family's income.
Maximum contribution - 18.59% of your profit.

Additional Rules

You don't have to contribute the maximum contribution to establish an IRA. You can contribute less than the maximum in subsequent years.

You cannot contribute more than a total of $5,000 ($5,000) each year to both a Traditional IRA and Roth IRA. You could contribute $2,000 to a Roth IRA and $3,000 to a Traditional IRA in one year, but not $4,000 to a Roth IRA and $3,000 to a Traditional IRA.

You can contribute the maximum to either a Roth or Traditional IRA and the maximum to a SIMPLE or SEP IRA. You can't contribute to both a SIMPLE IRA and SEP IRA in the same year.

Although many child care providers contribute to their IRA after the tax year is over, it's always a better idea to contribute early in the tax year to get the maximum interest over time. So, plan to make your 2013 IRA contributions now!

Tom Copeland - www.tomcopelandblog.com

 

Image credit: firstbankmiami.com

For more information about IRAs, see my book Family Child Care Money Management & Retirement Guide.

Posted by Tom Copeland at 10:46 AM in Money Management & Retirement | Permalink

Incorporation

Questions and Answers from Tom Copeland's Tax Webinar

Published with permission.

Incorporation

“Under what circumstances should I be a Limited Liability Company (LLC)?”

 

- In general, I don’t recommend that providers incorporate their business as an LLC or S or C Corporation. It’s a complicated decision involving legal and tax issues. I would only consider incorporating if you plan to be in business a long time, have a lot of personal assets you want to protect, have an annual profit of at least $30,000 and don’t mind doing extra paperwork each month. Before making this decision talk to a tax preparer and lawyer who understand family child care and can explain the consequences. I’ve written about this in detail in my book Family Child Care Legal and Insurance Guide.

 

“If I incorporate as an S Corporation how will this impact employees?”

 

- You will fill out the same payroll tax forms as a corporation the same way you would do if you had employees as a sole proprietor (self employed). You would also have to treat yourself as an employee of the corporation and withhold Social Security/Medicare taxes and follow the other federal and state payroll tax issues for yourself.

 

“If I incorporate and make my wife and daughter co-owners, are they then not employees and I don’t have to worry about payroll taxes?”

 

- No.You would have to withhold Social Security taxes on your wife and daughter (if she was age 18 or older).

 

“I just started my business and haven’t incorporated it. Can I use my Social Security number with parents?”

 

- You can give your Social Security number to parents for them to claim their child care tax credit. I recommend you get an Employer Identification Number (EIN) and use this in place of your Social Security number. You don’t need to be incorporated to get an EIN.

 

“What forms do you use to file taxes as a partnership or corporation?”

 

- If you file as a partnership or corporation you will not file Form 8829, Form 4562 or Schedule C. If you file as a partnership you must file Form 1065 U.S. Return of Partnership Income and each partner must file Form 1065 Schedule K-1 Partner’s Share of Income, Credits, Deduction. If you file as an S Corporation file Form 1120S U.S. Income Tax Return for an S Corporation. If you file as a C Corporation file Form 1120 U.S. Corporation Income Tax Return.

 

Other

 

“Would you advocate getting your taxes done by more than one preparer?”

 

- No. Find someone who understands your business and has experience doing other family child care tax returns. If you are unhappy with your tax preparer and can’t resolve your differences, seek out another tax preparer and drop your old one.

 

“Can I use the handouts I got for this webinar for future family day care trainings?”

 

- Yes. Make sure my name and my blog address is on the bottom (tomcopelandblog.com).

 

“If I deducted everything I would show a loss. Is it better to show a higher profit if I wanted to apply for an auto loan?”

 

- Sometimes claiming all the deductions you are entitled to will reduce your profit and make it hard to get an auto or home loan. In this case, explain to the loan officer that some of the expenses on your Schedule C may not represent actual costs to you each year. This includes depreciation from Form 4562 and house depreciation on Form 8829. See my article for more information.

 

Tom Copeland - www.tomcopelandblog.com

 

For more information about the pros and cons of incorporating, see my Family Child Care Legal & Insurance Guide.

Posted by Tom Copeland at 02:01 PM in Legal & Insurance, Record Keeping & Taxes | Permalink