Keeping more of sudden income

[barryallen]

We have always had a pretty moderate income; until the end of last year when we sold a video we produced.

All of a sudden we are selling many low costs DVD's at a very high profit...now we are taking in between $5K - $30K/month. We are set up as a sole proprietorship, we put part of the profits in our personal bank accounts, part goes back into a business account.

For 2005 we paid over $26,000 in income tax...mainly because we weren't prepared for the windfall....since then, we have been putting a lot of our personal monthly income ($5-10K/month) into no-penalty CD's (12-18 mo.)...but that's it

Is there more we should be doing so we don't have lose so much to taxes?

[pearlieq]

There are various ways to structure your income/assets so that your tax burden in minimized. A good accountant can help you there.

Please understand I mean no offense by saying this, but when the stakes are as high as yours are, I wouldn't be taking advice from a bunch of yahoos on the internet! You might get some general ideas, but I'd leave the real work to the pros.

From what you say, it sounds like you'll need to be making estimated tax payments. I can't tell from your post if you've already got that worked out, but they'll sock you for it if you don't (learned that one the hard way!).

Best of luck to you and WELCOME!

[barryallen]

Dude...I don't know who peruses these forums.....so not everyone is necessarily a
'yahoo'

..and general ideas is what I need BEFORE I fork over that same money to
someone like an accountant, who will in turn charge ME a fee to tell me how to save that money...

...think of it as knowing about auto mechanics BEFORE you take your Vette to a garage...so you'll know if you're getting ripped off

...now does anybody have any advice for me?

[Ima saver]

Well, if you know how much you paid in taxes last year, be sure to make quarterly payments of at least that much this year. $26,000 divided by 4 quarters is $6500 per quarter.
Next, I would open up a roth ira in each of your names and fully fund it. I suggest opening them in the Vanguard family of funds, I am partial to Vanguard Index 500.
Then I would open another mutual fund account to put your excess money there.
I am sure you can just get your 1040 estimated tax forms by calling the IRS!

[barryallen]

What's the advantage of paying quarterly taxes instead of yearly?

[Ima saver]

My husband is self employed and he has to pay quarterly. The only advantage I can see is that the IRS gets their money sooner. I guess it doesn't hurt quite as much to send $6500 every few months, but if you don't have to, then don't. Make interest on that money!

[Diolla]

The advantage is you don't get to pay penaties and interest. If you have a sudden change and underpay your taxes the IRS will (sometimes) cut you some slack and as long as you paid at least as much as the year before (before the change happened) you don't have to pay penalties. However if you know you are going to owe major bucks and purposely underpay your taxes you will have to pay penalties.

To, hopefully, help on the other part. Because you seem to have a large income alot of the ways lower/middle income people save on taxes aren't available to you. You can invest in tax free type investments such as municpal bonds or mutual funds that invest in these types of investments but that will only keep you from paying taxes on the earnings not the income you used to invest. You might look into a SEP retirement plan (for self employed people) or changing the way your business is structured. I am sure you know to keep really good records so you can deduct any expenses. If you have kids you might look into a UGTMA? Uniform Gifts to Minors Account, the laws have gotten stricter on how much you can shift to minors but there might be a break for you there.

Charitable gifts are also deductible. You could pass some of it on.

Once you have done what you can to minimize the tax hit you can count your blessing you have this problem. Congrats on running a successful business!

[sweeps]

perlieq and diolla are right. You probably need to make quarterly ("estimated") tax payments to avoid penalties from the IRS. The IRS loves to get interest free loans, but it hates to give them.

As Diolla mentioned, look into retirement plans for small businesses. SEPs, individual 401k, etc.

Make sure you are also keeping detailed records of your expenses. Every dollar in expenses you can claim reduces your taxable income. Just don't cheat -- don't claim things that are not valid business expenses. Audits can be very painful.

[Ima saver]

We are self employed but we do not claim any business expenses, because we heard that often triggers an audit. Of course, we do not have a very large income compared to yours.