Investment direction for taxes on book royalties?

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Investment direction for taxes on book royalties?

Postby NHRATA01 » Wed Dec 26, 2012 9:59 am

My wife has self-published a novel which has provided a decent windfall in the past 2 months of around 30K. Going forward certainly the book (and possible others) will continue to provide some more income over the course of the next few months and beyond. The royalties, which do not begin being paid out until January 2013, do not have any amount withheld by the publisher for taxes. What I'd like to do is once the checks start showing, pull out about 30% to set aside for the eventual tax bill that will come do by April '14. What would be an ideal investment vehicle in this scenario? I am willing to deal with moderate volatility but not so much as say TSM, though would prefer to do better than the ~1% rate on a cash fund. If I did lose some money on it by tax time I can fill the difference with funding from elsewhere. It would of course be in a taxable account, so there's tax efficiencies worth considering. I wasn't sure if a muni bond fund would fit the bill? It would be monthly deposits of varying amounts. Any thoughts?
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Re: Investment direction for taxes on book royalties?

Postby Aptenodytes » Wed Dec 26, 2012 10:27 am

NHRATA01 wrote:My wife has self-published a novel which has provided a decent windfall in the past 2 months of around 30K. Going forward certainly the book (and possible others) will continue to provide some more income over the course of the next few months and beyond. The royalties, which do not begin being paid out until January 2013, do not have any amount withheld by the publisher for taxes. What I'd like to do is once the checks start showing, pull out about 30% to set aside for the eventual tax bill that will come do by April '14. What would be an ideal investment vehicle in this scenario? I am willing to deal with moderate volatility but not so much as say TSM, though would prefer to do better than the ~1% rate on a cash fund. If I did lose some money on it by tax time I can fill the difference with funding from elsewhere. It would of course be in a taxable account, so there's tax efficiencies worth considering. I wasn't sure if a muni bond fund would fit the bill? It would be monthly deposits of varying amounts. Any thoughts?

1) You'll need to pay estimated tax quarterly, so your ability to sneak out a return on the money you set aside for taxes is going to be constrained to an average balance of about 1/8 of the tax total (one half the quarterly total). Doesn't seem worth the hassle.

You can follow the letter of the law and avoid keeping up with estimated taxes (if your total withholding is equivalent to last year's tax bill), and this is actually what I do to cope with my side income's tax implications. But even under that scenario the hassle doesn't seem worthwhile.

2) You don't refer to tax-advantaged investing of the royalty income, but hopefully you are looking at SEP-IRA and self-employed 401-K options for this income. I use SEP-IRA for the simplicity, but the self-employed 401-K allows for larger totals in exchange for more paperwork.

3) You also obviously want to search out as many possible deductible expenses against the book-writing business as possible (laptops, internet fees, advertising expenses, etc.).
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Re: Investment direction for taxes on book royalties?

Postby NHRATA01 » Wed Dec 26, 2012 11:46 am

Aptenodytes wrote:
NHRATA01 wrote:My wife has self-published a novel which has provided a decent windfall in the past 2 months of around 30K. Going forward certainly the book (and possible others) will continue to provide some more income over the course of the next few months and beyond. The royalties, which do not begin being paid out until January 2013, do not have any amount withheld by the publisher for taxes. What I'd like to do is once the checks start showing, pull out about 30% to set aside for the eventual tax bill that will come do by April '14. What would be an ideal investment vehicle in this scenario? I am willing to deal with moderate volatility but not so much as say TSM, though would prefer to do better than the ~1% rate on a cash fund. If I did lose some money on it by tax time I can fill the difference with funding from elsewhere. It would of course be in a taxable account, so there's tax efficiencies worth considering. I wasn't sure if a muni bond fund would fit the bill? It would be monthly deposits of varying amounts. Any thoughts?

1) You'll need to pay estimated tax quarterly, so your ability to sneak out a return on the money you set aside for taxes is going to be constrained to an average balance of about 1/8 of the tax total (one half the quarterly total). Doesn't seem worth the hassle.

You can follow the letter of the law and avoid keeping up with estimated taxes (if your total withholding is equivalent to last year's tax bill), and this is actually what I do to cope with my side income's tax implications. But even under that scenario the hassle doesn't seem worthwhile.

2) You don't refer to tax-advantaged investing of the royalty income, but hopefully you are looking at SEP-IRA and self-employed 401-K options for this income. I use SEP-IRA for the simplicity, but the self-employed 401-K allows for larger totals in exchange for more paperwork.

3) You also obviously want to search out as many possible deductible expenses against the book-writing business as possible (laptops, internet fees, advertising expenses, etc.).

Ah, thank you. So in regards to 1) I need to do some more research on the tax payment schedule. I was unsure if I would be opening us up to penalties by claiming it at the year's end as I would do with our personal income - I'm no tax code expert but I am aware that not allowing sufficient witholding from your salary makes the IRS cranky. I realize this is starting to get off the original topic, but how exactly does one pay taxes on the royalties quarterly? Is there a form of some sort to fill out and mail to the IRS? Very much in the dark on that one.

In regards to 2), I have my typical 401K through which I maximize contributions. Spouse has a 403B available that had not been fully utilized but likely will in '13 due to the windfall. I assume maxing both of those available tax-advantaged spaces would make this income ineligible for further tax advantaged investing?

3) A great point I had not considered and will make sure we document all expenses, there have been quite a few in publishing costs and promotional expenses.

Thank you for the help!
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Re: Investment direction for taxes on book royalties?

Postby Aptenodytes » Wed Dec 26, 2012 12:33 pm

NHRATA01 wrote:but how exactly does one pay taxes on the royalties quarterly? Is there a form of some sort to fill out and mail to the IRS? Very much in the dark on that one.

The IRS wants estimated taxes paid on your overall tax liability, not source by source. So if you follow the IRS instructions on estimated tax you'll be OK. If you use TurboTax or equivalent I believe it has help for that.

NHRATA01 wrote:In regards to 2), I have my typical 401K through which I maximize contributions. Spouse has a 403B available that had not been fully utilized but likely will in '13 due to the windfall. I assume maxing both of those available tax-advantaged spaces would make this income ineligible for further tax advantaged investing?

No, they are unrelated. 403B contributions are made with income from the employer that offers the 403B. The IRS doesn't care that the reason you could afford to max out the 403B was because of the royalties.

However, please do your own research on the options available to you. In my experience I have always counted book royalties as ordinary income, which avoids paying self-employment tax but also means that royalty income can't be sheltered in a SEP-IRA or self-employed 401-K. I have counted royalties as ordinary income and consulting fees on other writing as self-employment income. In my case royalties are a small fraction of consulting income, so I have never been motivated to check on other options.

There are tests to determine whether royalty income is ordinary income or self-employment income. Do your own research and/or consult genuine experts to make your own judgment.

NHRATA01 wrote:3) A great point I had not considered and will make sure we document all expenses, there have been quite a few in publishing costs and promotional expenses.

This will only be of significant help if you treat the royalties as self-employment income, which may not be an option.

I've probably already overstretched the limits of my knowledge, so let me underscore the point about doing your own research and consulting an expert.
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Re: Investment direction for taxes on book royalties?

Postby NHRATA01 » Wed Dec 26, 2012 1:47 pm

Yes, looks like quite a bit more research on my part is in order. Though having dug around, I think I've at least found some information making my original post moot. Wife did the Kindle Direct Publishing (KDP), and from the literature I am finding online, they will automatically withold 30% of royalty payments to hand over to the IRS. So that at least answers my simple question of what to do about satisfying the IRS on the most basic level. I hadn't actually seen a payment yet, so it probably would've been self evident if I'd waited...
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Re: Investment direction for taxes on book royalties?

Postby SteveKL » Wed Dec 26, 2012 2:23 pm

NHRATA01 wrote:Wife did the Kindle Direct Publishing (KDP), and from the literature I am finding online, they will automatically withold 30% of royalty payments to hand over to the IRS.


First, congratulations to your wife for not only finishing her novel and nursing it along through electronic publication, but also finding an audience that has resulted in sales which have generated an outstanding $30K in royalties. Nicely done! Best wishes for continued success in her writing endeavors.

According to Amazon's KDP info, the 30% withholding applies to "non-US entities". If you have a valid TIN on file with them, in my experience Amazon does not withhold anything. This is based on my personal experience as both a KDP author, and an Amazon third-party seller (different relationships, each resulting in Amazon paying me money from time to time).

The KDP tax withholding help page is here: https://kdp.amazon.com/self-publishing/ ... YJ32T5D3U4

Also, Amazon pays its KDP authors monthly (not quarterly or annually) so it is easier to budget revenue and estimated tax payments.
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Re: Investment direction for taxes on book royalties?

Postby sscritic » Wed Dec 26, 2012 2:36 pm

I like withholding. It can come from employment, from social security, from a pension, or from a withdrawal from an IRA or one of those number letter thingies.
6 Additional amount, if any, you want withheld from each paycheck . . . . . . . . . . . . . . $

If you choose to pay estimated taxes, don't forget your state.
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Re: Investment direction for taxes on book royalties?

Postby PaddyMac » Wed Dec 26, 2012 2:40 pm

I assume that none of this income is credited as being earned in 2012? Although you may not get the money until Jan 2013, if the royalties were generated in 2012 and Amazon is paying based on accrual (not cash), then you may see a 1099-MISC for this income. Not sure about that, but you will know soon enough!

We earn most of our income from book royalties. It is Schedule C income. Despite what previous poster said, royalty income earned using regular business skillset (and fiction writing also) is subject to self-employment taxes; only really strange royalties not related to your skillset are not. Check with a CPA, but be careful of not declaring it as SE income.

So, yes, count all your expenses. Also look info Business Use of the Home expenses if your wife wrote the book at home in a dedicated area or room. You'd be surprised how those expenses add up, particularly because you take that percentage of mortgage/rent as a deduction on Schedule C, thus reducing your SE taxes.

As for paying estimated taxes, def. ask Amazon NOT to withhold taxes. They will need a W-9 form in order to do that. Easy step.

Next, estimate the extra income for 2013, and make 1/4 payments on April 15, June 15, Sept 15 and January 15. You can easily pay online - and even set up these payments in advance - at https://www.eftps.gov/eftps/index.jsp

If you want to pay "accurately", then you can do a quarterly profit and loss and file irregular payments. But since the payments will be frontloaded in January, it's better for you to spread out the tax over the year. So long as you pay 90% of the tax you owe, there should not be a penalty.

I would estimate 20% effective rate on the net profit for the estimated taxes, not 30%, unless you are in a very high tax bracket.

And seconded the idea of getting either a SIMPLE or SEP-IRA (low paperwork), or a Solo 401k from Vanguard ($20 per year per fund) where she can save more of her income. But none of these plans will reduce the SE tax, just Federal and State.
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Re: Investment direction for taxes on book royalties?

Postby NHRATA01 » Wed Dec 26, 2012 3:21 pm

Oy vey.

So I did see in the Kindle FAQ that there is 30% with holding for non-US residents, but when I had searched elsewhere it seemed as if that withholding applied to US residents also. But if you've been down this road I'll take the voice of experience. I suppose when the first check shows soon (by end of December I believe) I'll know.

Paddy, I am curious though why would it not be advantageous to have Amazon withhold? We are in a somewhat high bracket (about 160K AGI from our salaries). More troubling, is if you are correct and the income is going to be credited as earned in 2012 that is going to cause me some headaches (I say that light-hearted as it would be quite arrogant to suggest that earning more money than expected is a burden). I've managed our AGI to right below the Roth IRA contribution threshold for 2012. This 30K will make us ineligible; I can do the back door method though I've already made a 3K contribution for 2012 that will have to be undone, re-characterized, and whatnot. Some more lessons learned.
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Re: Investment direction for taxes on book royalties?

Postby SteveKL » Wed Dec 26, 2012 4:34 pm

NHRATA01 wrote:I suppose when the first check shows soon (by end of December I believe) I'll know.


Amazon KDP does not issue royalty checks, they deposit earnings in your bank account every month via ACH. Your wife has a KDP account management page which shows current sales of each of her KDP titles, along with royalties paid or due her. In addition, KDP sends her an emailed remittance advice once a month shortly before that month's payment is due to hit the account.

Your wife can go to her KDP account page using her Amazon login, and generate reports showing Month-to-Date Unit Sales, Prior Six Weeks' Royalties, and Prior Months' Royalties.

Contrary to what another poster suggested, even if you find that your wife has the option of having Amazon withhold taxes (and I doubt that's an option), do NOT entrust them with this task! Larger than even the largest commercial trade publisher, Amazon is a gigantic organization and outsources a great deal of accounting and customer service tasks outside the US. If something goes wrong, it can be an absolute nightmare to track down someone who can help you or even answer questions confidently.

Sidebar: It's great that your wife's first (?) novel has met with such commercial success. But if you/she are waiting for a royalty "check" that isn't coming, and haven't figured out Amazon's tax withholding policy, now might be an excellent time to thoroughly re-read (twice!) KDP's extensive online help and FAQ information. Also, there is an active and very knowledgeable KDP forum (much like this one) where other users will be eager to assist with questions and concerns that are specific to Amazon's publishing program.
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Re: Investment direction for taxes on book royalties?

Postby sscritic » Wed Dec 26, 2012 5:20 pm

SteveKL wrote:Contrary to what another poster suggested, even if you find that your wife has the option of having Amazon withhold taxes (and I doubt that's an option), do NOT entrust them with this task!

I don't know if I am that other poster (I can't find anyone else who recommended withholding), but I certainly said nothing about Amazon.
I like withholding. It can come from employment, from social security, from a pension, or from a withdrawal from an IRA or one of those number letter thingies.

Nope, I didn't mention Amazon. I use withholding from social security to pay my tax on my Illinois pension. Or do I use my withholding on my California pension? Or do I use my social security withholding to pay the tax on my California pension? I assume you know that a husband can use his wife's withholding to pay the tax on his income if he files jointly (and even if filing separately in a community property state).

The IRS doesn't care the source of your withholding; I can't even find the form where I would enter my itemized withholding.
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Re: Investment direction for taxes on book royalties?

Postby SteveKL » Wed Dec 26, 2012 5:58 pm

sscritic wrote:...I certainly said nothing about Amazon.


Sorry, I misread your post. I thought you meant "I like withholding [in this instance]" rather than "I like withholding [in general]". Because the OP asked for investing advice for book royalties, I tried to be careful and not derail the discussion too far toward the specifics of Amazon's excellent, but complicated, Kindle Direct Publishing (KDP) program.

Cheers!
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Re: Investment direction for taxes on book royalties?

Postby sscritic » Wed Dec 26, 2012 6:55 pm

SteveKL wrote:Sorry, I misread your post. I thought you meant "I like withholding [in this instance]" rather than "I like withholding [in general]".

But I do like withholding in this instance assuming the OP has a job with wage income (or social security or ...). That was my point in my last post (and the first one); the source of the withholding does not have to be the same as the source of the income. All that matters is the total withholding, not the source.

Two advantages to withholding:
1) Estimated payments have to be made by the four due dates; all your withholding can be on 12/31 (see posts about withholding from RMDs).
2) There is a penalty for underpayment of estimated tax; there is no penalty for underpayment of withholding* (this is separate from lying on your W-4).

* If this were a question, it would be a trick question. Let's just call it a trick statement. :)
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Re: Investment direction for taxes on book royalties?

Postby PaddyMac » Wed Dec 26, 2012 8:16 pm

Good info above for OP on how Amazon pays (our publisher is not Amazon fwiw). It should be easier to find out how much is 2012 income, if any. Also look carefully at any 1099 to see how they are characterizing the income and copy that on your taxes. One year our publisher had half as royalties and the other half as regular earned income for whatever reason (publishers' accounting software seems to be atrocious in my experience).

As for withholding: All of our income is from self-employment. I would find it very confusing to have some income streams withholding tax; I'd rather be in full control of paying estimated tax. It might work for others of course.
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Re: Investment direction for taxes on book royalties?

Postby sscritic » Wed Dec 26, 2012 8:28 pm

PaddyMac wrote:As for withholding: All of our income is from self-employment. I would find it very confusing to have some income streams withholding tax; I'd rather be in full control of paying estimated tax. It might work for others of course.

If he has employment and not just self-employment, he might prefer withholding. In my case, social security won't withhold California taxes,* nor will Illinois as far as I know, so I increase the withholding from my California pension to cover all my income, including dividends from Vanguard. I used to pay estimated taxes; I found it easier to just set a dollar amount for both state and federal withholding. With pensions, the income is pretty stable from year to year (I have never received a year end bonus :) ). It is also easy to hit a safe harbor based on your last year's taxes.

* Another trick statement: California doesn't tax SS, but social security won't withhold state taxes even if your state does tax SS. You need another way to account for taxes: estimated payments or withholding from another source.
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