The Finatical
Week of October 5th, 2021 - Saving Taxes, Inflation in the US and Europe, and The Evergrande Problem
FinaticTips - 3 Tips to Save Taxes
Starting a Side-Business
It is no secret that tax regulations slightly favour the self-employed class of society. By starting a side business, you too can capitalise on this opportunity and save on taxes. When used in the course of daily business, many expenses can be deducted from income, reducing the total tax obligation. Particularly important tax deductions for self-employed individuals are health insurance premiums which are available if special requirements are met.
Here are some common tax deductions that self-employed people enjoy:
Self-Employment Tax - Once you are self-employed, you have to bear the burden of paying tax on your own. But The good news is that the self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income when calculating your income tax. The IRS treats the “employer” portion of the self-employment tax as a business expense and allows you to deduct it accordingly
Home Office - the cost of any workspace you use regularly and exclusively for your business, regardless of whether you rent or own it, can be deducted as a home office expense.
Internet and Phone Bills - you can deduct the business portion of your phone, fax, and internet expenses.
Health Insurance Premiums
Meals - A meal is a tax-deductible business expense when you are traveling for business, at a business conference, or entertaining a client.
Travel - To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest, and take place away from the general area of your tax home
Also, by strictly following Internal Revenue Service (IRS) guidelines, a business owner may deduct part of their home expenses with the home office deduction. The portion of utilities and Internet used in the business may also be deducted from income.
In order to claim these deductions, the taxpayer conduct on the business to make a profit. The IRS evaluates a number of factors, outlined in Publication 535. Taxpayers who realize a profit in three of the last five years are presumed to be engaged in a business for profit.
Invest in Municipal Bonds
Buying a municipal bond essentially means lending money to a state or local governmental entity for a set number of interest payments over a predetermined period. Once the bond reaches its maturity date, the full amount of the original investment is repaid to the buyer.
Interest on municipal bonds is exempt from federal taxes, and may be tax exempt at the state and local level as well, depending on where you live. Tax-free interest payments make municipal bonds attractive to investors.
Municipal bonds historically have lower default rates than their corporate bond counterparts. A study of municipal bonds from 1970 to 2019 found that the default rate was 0.1% for investment grade municipal bonds versus 2.28% for global corporate issuers.
There are two types of municipal bonds, general obligation bonds and revenue bonds. No matter which type you invest in, they are usually considered low-risk investments, with a very high expectation that you’ll be able to recoup your investment plus interest.
When deciding how to invest in municipal bonds, it’s important to consider your long-term strategy. Muni bonds are appropriate for a taxable investment strategy, but not for tax-advantaged retirement accounts. A financial advisor can help you figure out where these investments should fit into your portfolio and where they might benefit you as an income strategy.
Keep in mind that when investing in municipal bonds via mutual funds or exchange traded funds (ETFs), you’ll be subject to capital gains taxes when you sell your shares. Additionally, if you buy and sell municipal bonds on the secondary market, there may be an element of capital gain or loss, and appropriate taxes apply.
You can open a self-directed account with an online broker to trade municipal bonds. Alternatively, you can buy municipal bonds via mutual funds and exchange traded funds (ETFs).
Open a Health Savings Account
Employees with a high-deductible health insurance plan can use an HSA to reduce taxes. As with a 401(k), money is contributed to an HSA before taxes. For 2020, the maximum contribution is $3,550 for an individual and $7,100 for a family.11 For 2021, the maximum deductible contribution level is $3,600 for an individual and $7,200 for a family.12
These funds can then grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when used to pay for qualified medical expenses, withdrawals aren’t taxed either.
The following are the three key benefits to a Health Savings Account:
Contributions to HSAs are not subject to federal income taxes.
Earnings to an HSA from interest and investments are tax-free.
Distributions from an HSA to pay for qualified medical expenses are tax-free.
FinaticTrends - 2 Financial Trends
1 - Inflation Decelerates in the US and Accelerates in Europe
The huge surge in inflation seen in the United States in recent months has begun to subside. It is possible that this reduction in inflation was driven by the recent outbreak of the Delta variant, which has had a negative impact on consumer mobility and spending. It could also be the case that some of the supply chain disruption and shortages that drove inflation have begun to abate. Regardless of the reason, the numbers favor the Federal Reserve’s view that the rise in inflation would turn out to be transitory.
Inflation increased in the Eurozone to the highest level in a decade, spurring a sharp rise in Eurozone bond yields as investors upwardly revised their expectations for future inflation. This data also will likely increase the probability of a shift in European Central Bank (ECB) monetary policy.
Specifically, consumer prices in the Eurozone were up 3.0% in August versus a year earlier, the highest annual inflation since November 2011 and significantly above the ECB’s target of 2.0% inflation. Prices were up 0.4% from the previous month, the highest monthly inflation since March 2021. When volatile food and energy prices are excluded, core prices were up 1.6% from a year earlier, the highest rate since July 2012 but still below the ECB target of 2.0%. Going forward, there will likely be vigorous debate among ECB leaders about the direction of monetary policy. The ECB has already signaled that it intends to ease the pace of asset purchases.
2 - Evergrande Problem
A few weeks ago, most people outside of China had never heard of Evergrande, the massive property developer. Now it is the talk of global financial markets. The yield on a four-year bond issued by Evergrande has risen from about 12% early this summer to almost 60% now. This increase reflects the massive risk premium associated with the company’s debts.
Evergrande had sold properties at a significant discount to generate cash. This enabled it to reduce debt. Still, the company failed to meet two of the “three red lines” or the government restrictions. The result has been a cash crunch and a significant risk of default—although Evergrande pleased investors last Wednesday by announcing that it would make a modest debt repayment on time this week. However, on September 13, Evergrande had issued a statement saying that the company faced “unprecedented difficulties.” It has more than US$7.6 billion in debt maturing next year. No wonder Evergrande’s share price has plummeted and bond yields have soared. While the same is not entirely true of other major property developers, there is no reason to be sanguine. After all, the net cash flow of China’s publicly listed property developers has been negative in the two most recent quarters. Moreover, Asian bond yields have been rising in recent days. Thus, it appears that trouble is brewing. There is a growing debate among economists and analysts as to what happens next. Many do not expect the government to bail out Evergrande, but they do expect a restructuring of the company and an effort to keep credit lines open.
Financial Guidance
“It is not the man who has too little, but the man who craves more, that is poor.” —Seneca
Wanting more and more will put us in a limitless cycle that keeps us poor. But if we take an inventory of what we already have — and stay grateful — we can enjoy what we have and build a wealthy life around what is truly important.
Money Fact
There is more Monopoly Money printed every year than real money.
If you take the combined value of all US money printed each year, it’s between $700M and $974M (most is just to replace old worn money except for this last year). Yet Parker Brothers reported that the combined fictitious value of their monopoly money is $30 Billion.
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