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Thread: Tax question

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    Default Tax question

    I'm not a dancer (yet!), but I do have a question for you finance-savvy ladies....

    Does the government collect taxes on money you invest/save? (Money markets, stocks, bonds, etc.) Let's say, hypothetically, that a dancer works for 10 years and, with some wise investment choices, has $300,000-500,000 in investments whose interest totals around 10% and she's ready to retire, living solely on the interest (please disregard the unliklihood of this situation). Would the government want a percentage of all that money that's saved/invested even though she's only "earning" a fraction of that amount ??? Or would they just tax the interest/what she withdraws? Or... what?

    Thanks in advance to anyone who can answer my questions! It's truly appreciated! I want to be responsible with the money I make.

  2. #2
    God/dess montythegeek's Avatar
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    Default Re: Tax question

    This is a yes and no answer when you were hoping for a simple one.

    First the income tax is a tax on that income. So if you have 100K and earn (hypothetically) 5% on it and are in the 28% marginal tax bracket the taxes are (100,000* .05 *.28 ).
    Second some income is taxed different from other income-under current tax law a dividend from owning say Proctor and Gamble pays a lower rate than money on deposit in a CD or US government bond. One reason for this is because P&G also pays taxes on its income. So the component on that dividend is at a much lower rate. Note, this is a Federal income tax aspect. Other assets paying interest are not taxed by the Feds because they are debts of a state government and are called tax exempt bonds. There are limits on how much you can hold in this form before it starts altering the taxes you pay on other income but that is not likely to be a MAJOR deal on a couple of hundred thous. $. Closer to a million and it could matter.

    There are exception to this in states taxation. Some states have an "intangible property tax", where your financial assets are subject to a tax like your real estate is subject to a tax. This is common in states which do not have a state income tax. I am not aware of the current rules, but Florida used to have this, but the tax was pretty small but not trivial. More like what a state income tax would be like if there was one.

    Other states have both an income tax and an intangible tax and give you the option to pay one or the other. This was true in Ohio in 1986 when I left there.

    You can also put some of your savings in a form where it is either taxed up front (Roth IRA) than grows tax free. or Traditional IRA or 401K where it goes in untaxed and compounds tax free but you pay your regular income tax rate when you take it out of the account.

    You may do best with a mix of holdings in different forms--some Roth, some IRA, some dividend, some tax exempt, some (gasp MEL) gold, some real estate (personal) and even some income earning real estate. If you have enough assets to be worried about tax implications of these things--hire an accountant or a tax savvy financial advisor. A simple(cheap) way to look at these things in a planning context is to do the tax planning module at the end of the tax program if you use TAXCUT from H&R Block or MS Money or Quicken may do similar things. It is by no means perfect but is a start and can be bought for $30.

    And this is the simple explanation!! There are entirely legal and moral ways to reduce your taxes, but some are too complicated to explain in sentence or 2.

    The last line "I want to be responsible with the money I make" means you are thinking ahead. GREAT idea [clap]

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    God/dess Zofia's Avatar
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    Default Re: Tax question

    Montythegeek, the Supreme Court outlawed the intangibles tax. Hooray for them!!!!!!!! Otherwise your answers are right on.

    Z

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    Banned Melonie's Avatar
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    Default Re: Tax question

    We haven't yet discussed the "capital gains" tax. This can be significant if a substantial portion of your investments are in stocks.

    To review, let's go over the examples again assuming you are in a 28% federal + 5% state tax bracket on ordinary income.

    If you put $10,000 into a bank account or CD or money market account, and earn say 3% or $300 a year in interest, you'll have to pay $300 * (.28+.05) = $100 of the $300 in income taxes. However, if you want to withdraw your original $10,000 you will not have to pay additional taxes. Exception is early withdrawl of CD funds before the CD matures where the bank can charge you a huge penalty like up to 10% or $1,000.

    As an alternate, say you put that same $10,000 into a tax exempt state bond that also earns 3%. You'll also earn $300 in interest, but you get to keep all of that since the interest is tax exempt. However, if you sell the bond to get your original $10,000 back, the actual amount of money you get back may be less than $10,000 or more than $10,000 depending on which direction the bond market has moved since you bought the bond. If you can sell it for more than $10,000 you'll also probably have to pay a capital gains tax on the profit (which is typically only half as much percentage wise as tax on regular income and interest).

    Next example say you buy $10,000 worth of a high dividend stock such as a natural gas trust. These stocks currently pay 8% dividends or $800. You'll have to pay tax on that $800, but it's typically in the 16% ballpark or $128. Then say you want to sell your stock to get your $10,000 back - like the bonds the actual amount you can sell the stock for may be less than or greater than $10,000. If it's greater, you must pay capital gains tax on the profit (again with capital gains tax being at about 1/2 the rate of ordinary income tax provided you owned the stock for more than a year).

    If instead you bought $10,000 worth of gold, you earn absolutely no interest. When you sell your gold to get your $10,000 back, the actual amount you get back can be greater than or less than $10,000. While you're supposedly liable for capital gains tax on a profitable sale, which is monitored if huge transactions are involved, in general you wind up not paying any tax at all on profitable gold sales in amounts under $10,000.

    In the case of letting your investment compound for many years, the bank account or CD or money market account pays you interest every year, so that if you withdraw everything at the end of say 10 years you get back all of the money and are not liable for additional taxes.

    In the case of tax free bonds, at the point where you sell the bonds (or they mature), you're liable all at once for all of the increase in value over and above the amount of money spent to purchase the bonds. This can be a pain in the butt, since instead of adding $300 to your income every year over a 10 year period the entire say $15,000 of profit on selling 10 years of bonds that originally cost $10,000 each year will be added to your income in the single year that you finally sell them (or they mature). This can jack up your tax bracket and also cause the taxes you owe on your regular income to increase significantly.

    Same situation is true with high dividend stocks, with the exception that stocks never 'mature' meaning that you won't be forced to sell them before you want to (and therefore won't be hit with a huge addition to your income in a single year until you choose to sell them).

    In either case, selling bonds or stocks for a higher price than you bought them for is "gravy", since this is an additional profit over and above the dividends and interest they have been paying to you for the entire time that you have owned them. This "gravy" factor does not exist with bank accounts or CD's or money market accounts - with them you get back exactly the amount that you put in. Of course the flip side is that bank accounts or CD's or money market accounts pretty much guarantee that you'll get back all of the original money you put in, where stocks and bonds do not and you can lose a significant amount of the original purchase price if you fail to sell stocks or bonds in a falling market!

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    God/dess montythegeek's Avatar
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    Default Re: Tax question

    Montythegeek, the Supreme Court outlawed the intangibles tax. Hooray for them!!!!!!!! Otherwise your answers are right on.

    Z
    Zof?
    The Florida state form is online at this address for 2003
    I also saw KY and others.
    http://www.myflorida.com/dor/forms/2003/dr601i.pdf
    I could find nothing with the search term "intangible" at the scotus.gov Coul this have been a state supreme court ruling the tax was a violation of a state constitution because, off the top of my head, I now no Federal issue involved in a state tax since the US constitution is silent about state taxes.
    A state SC ruling one is a violation of the state constitution is 100% credible.
    Got a case name? I would like to read it.

  6. #6
    God/dess montythegeek's Avatar
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    Default Re: Tax question

    Minor note to Melonie--some preferred stocks are callable amd redeemed and some corporate buyouts trigger cash distibutions rather than like-kind tax neutral conversions. Both these are fairly uncommon and are by no means the rule.

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    Default Re: Tax question

    Zof?
    The Florida state form is online at this address for 2003
    I also saw KY and others.
    http://www.myflorida.com/dor/forms/2003/dr601i.pdf
    I could find nothing with the search term "intangible" at the scotus.gov Coul this have been a state supreme court ruling the tax was a violation of a state constitution because, off the top of my head, I now no Federal issue involved in a state tax since the US constitution is silent about state taxes.
    A state SC ruling one is a violation of the state constitution is 100% credible.
    Got a case name? I would like to read it.
    Montythegeek,

    I'm at home right now, and don't have any sources at hand. I'll have to look when I get in to the office Monday.
    Z

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    God/dess montythegeek's Avatar
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    Default Re: Tax question

    Thanks Z

    I also saw an article about a repeal in NC in the state dor 2002 changes file. The lugislature could have botched it and messed thing up statewise.

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    Banned Melonie's Avatar
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    Default Re: Tax question

    Minor note to Melonie--some preferred stocks are callable amd redeemed and some corporate buyouts trigger cash distibutions rather than like-kind tax neutral conversions. Both these are fairly uncommon and are by no means the rule.
    Yup, Geek, I am aware there are many special circumstances investments such as preferred stock, zero coupon bonds, warrants, options, futures etc. as well as potential disruptive events such as corporate takeovers, mergers and of course bankruptcies. I figured these were well beyond the scope of investment 101 discussions on a stripper website.

    BTW Geek I have probably read one of your published 'opinions'

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    Default Re:Tax question

    Lets not forget that the tax rate on long-term capital gains and most dividends has dropped to 15% now (5% if your income is low).

    Its nice to see a lot of well informed people and perhaps more importantly, people planning for the future. Many dancers I have met either think they should never report anything because its cash, or want to buy a house and suddenly need 3 years of tax returns for which they have no backup.

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    Banned Melonie's Avatar
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    Default Re:Tax question

    Quote Originally Posted by NVJosh link=board=6;threadid=3558;start=msg57318#msg57318 date=1071888261
    Many dancers I have met either think they should never report anything because its cash, or want to buy a house and suddenly need 3 years of tax returns for which they have no backup.
    While dancers were always required by law to report their incomes and pay taxes on that income, I have to agree with you that in past years the 100% cash nature of most dancer's incomes and the anonymity of dancers working under stage names provided an easy opportunity not to do so. However, since 9/11 and the resulting Patriot Act, since the IRS made a huge investment in improving their computers and automatic data acquisition systems, and since the IRS and 40 US states entered into a joint tax enforcement agreement, this isn't so easy to get away with any more.

    On the "supply" side, today many clubs have enacted funny money systems and dance ticket systems where less money is changing hands directly between customers and dancers and more money is being paid to dancers by clubs at the end of the night. Many clubs also charge dancers stage/house fees on the nights they work. Combined with clubs requiring dancers to fill out job applications with their Social Security #, it creates a situation where club financial records exist which could be used by the IRS and state tax dept's to prove that a dancer worked at a club, received payments directly from the club, made payments directly to the club, and by inference also received money from club customers.

    On the "consumption" side, the IRS automatic reporting requirements make a lot of every US resident's financial information available to the IRS such as the amount of interest they earned on money deposited in bank accounts (and therefore their bank balance), the amount they earned on investments (and therefore the amount of their investments), the amount they spent buying a new car or a new house (acquired indirectly through state title agencies registering new deeds/titles), etc. This leads to a situation where IRS computers automatically compare the amount of money a person has deposited, invested and/or spent on large purchases versus the amount they reported as income during the same period.

    As you pointed out in your comment about a dancer wanting to buy a house and running into big problems, this is based in part on the Patriot Act's increased tracking of large amounts of cash. Today if a person wants to spend more than $10,000 on anything, it's virtually assured that somebody in government is going to be checking into where that person got the $10,000 in the first place ! This is indeed leading to a situation where a person, even if they have $100,000 in cash, will be unable to spend that money on a house or a new car or other large purchase unless they can produce documentation that they earned that money legally and paid taxes on it.

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    God/dess Emily's Avatar
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    Default Re:Tax question

    but what if your investments went down or earned no interest? Then how will they know?

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    Default Re:Tax question

    Quote Originally Posted by Emily link=board=6;threadid=3558;start=msg57365#msg57365 date=1071909234
    but what if your investments went down or earned no interest? Then how will they know?
    Well, this is also an advantage of sorts where investment income or losses are concerned - you're allowed to write off the losses against any gains you made on different investments, up to $3000 worth per year I think. You're also allowed to carry the loss from this year forward and apply it to gains you may have next year if the losses exceed $3000.

    And also remember that you don't actually incur a loss unless you actually sell your stock for less money than you originally paid for it. This means that people who held onto stocks which lost say 30% of their value over the past couple of years but regained that 30% this year as the stock market rebounded really haven't lost or gained anything in terms of cash money and haven't had to pay any taxes on the change in value of their stock (they did have to pay taxes on the dividends they received from the stock though). The only thing that counts from the standpoint of capital gains or losses is the fact that you actually sold your stock, and the difference in the price you sold it for versus the price you bought it for originally.

    Generally, stock brokers provide a "Consolidated Financial Statement" at the end of the year which lists the purchase price of any investments you bought, the actual price of any investments you sold, and the amount of dividends and interest you received on everything in your brokerage account throughout the year. A copy of this also gets automatically forwarded to the IRS.

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    God/dess montythegeek's Avatar
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    Default Re:Tax question

    Quote Originally Posted by Emily link=board=6;threadid=3558;start=msg57365#msg57365 date=1071909234
    but what if your investments went down or earned no interest? Then how will they know?
    The nice simplifying thing for the IRS is that they only care about taxable events-- Income flows and transactions triggering gains. You got income, it is reported. Your money went into the account it is reported. You bought or sold it is reported. The only other variables are regular account, IRA/401K/403b account, or business account (like day traders) and you have to file papers for the later.

    The rest is programming and processing. Cross some computer threshold and a stern person with green eyeshades puts his hand out and audits.

    I am not sure of the timing, but the SC accounting is moving in the direction of the "business model" of servers at restaurants. 15-20 years ago food servers were like the SC, taxi, and hair cutting industry was 2 years ago. The ability to hide from the IRS is fading fast.

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    Default Re:Tax question

    Quote Originally Posted by montythegeek link=board=6;threadid=3558;start=msg57379#msg57379 date=1071925766
    I am not sure of the timing, but the SC accounting is moving in the direction of the "business model" of servers at restaurants. 15-20 years ago food servers were like the SC, taxi, and hair cutting industry was 2 years ago. The ability to hide from the IRS is fading fast.
    I'm afraid that this is all too true. Last year the IRS was reported to target casinos and casino workers in this regard. In fact, when many casinos were threatened with a comprehensive IRS audit of the casino's books, they cut a "deal" with the IRS where the casinos would begin reporting the incomes of their workers - INCLUDING ESTIMATED TIP INCOME - and begin to withhold income taxes on behalf of the IRS in exchange for the IRS agreeing not to audit the casinos themselves too closely. All of the building blocks for the same thing happening to strip clubs are slowly coming into place ...

    - Corporate club ownership and management that would benefit from the ability to write off workers' earnings as a business expense (which they can only do if that pay is reported as dancers income)
    - Corporate club financing i.e. new multimillion dollar clubs built with borrowed money, giving bankers a reason to poke their nose into club finances to make sure it is 100% above board (so nothing reflects negatively on the bank)
    - New state laws and local dance club ordinances which supposedly require that direct cash transactions between dancers and customers be stopped in favor of funny money and dance ticket systems where these transactions now go through the club's cash register and are recorded.
    - Clubs charging dancers nightly stage fees, and clubs charging a percentage of private dance sales and champagne room trips, resulting in direct payments between the club and each dancer which are recorded, as well as an indirect record of how many days each dancer worked in the club.

    I'm very concerned that next month a number of strip clubs are going to start mailing out copies of form 1099 to dancers, showing that the money each dancer received for private dance sales and champagne room trips throughout 2003 has been reported as income to the IRS. If this happens, unless the dancer has already been paying in estimated taxes every three months throughout 2003, she'll be hit with penalties for non-payment of estimated taxes on top of having to pay the income tax on any reported income amounts - PLUS having to pay taxes on some additional tip income which was not reported by the club but which the IRS will assume she receives.


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