Reducing Income Taxes

[Scanner]

Owning a business may help but it's not a panacea for reducing tax burden.

Yes, he'll be able to shelter his money in a SEP-IRA but only a certain %age of his money will be eligible ( I think 25% - correct me if I am wrong). So if he owns a Christmas tree farm and makes 10K/year, only $2500 could be sheltered and now he owes tax on the $7500. Then there's the double SSI conundrum for self-employed.

I think the best advice we can give you is to find a trusted accountant and talk to him/her about this now for next year.

Because rather than there being one panacea, you are going to have to attack it from multiple angles - home ownership, sheltered accounts, business deductions, charitable deductions, not being married (ha, ha - the marriage penalty).

Good luck.

[DebbieL]

Originally Posted by kealina

yes that is a huge chunk to taxes but if i remember right from college (i had a professor that was from canada) your higher education/college and health care system are quite a bit more generous as well...
my professor from canada actually had another professor cover for him for part of the semester so he could fly back to canada for surgery because it was free in canada and would have cost thousands here even with his state university health care plan... if i remember right he said it would have cost something like 20K...

That's true, but unfortunately you might have to wait years here in Canada to get that surgery. I waited 2 years for a surgery I needed. Many people die on waitlists for surgeries. If people can afford it, many of them travel down to the US and pay for the surgery so they won't have to wait in pain so long.

[MonkeyMama]

Originally Posted by humandraydel

Interesting. I assume the $44k has to be FROM the business? In other words, one couldn't start a part time business on the side and sock away income from a full time job?

Mostly yes. But not necessarily, it can get pretty complex.

[MonkeyMama]

Originally Posted by Scanner

Owning a business may help but it's not a panacea for reducing tax burden.

Yes, he'll be able to shelter his money in a SEP-IRA but only a certain %age of his money will be eligible ( I think 25% - correct me if I am wrong). So if he owns a Christmas tree farm and makes 10K/year, only $2500 could be sheltered and now he owes tax on the $7500. Then there's the double SSI conundrum for self-employed.

I think the best advice we can give you is to find a trusted accountant and talk to him/her about this now for next year.

Because rather than there being one panacea, you are going to have to attack it from multiple angles - home ownership, sheltered accounts, business deductions, charitable deductions, not being married (ha, ha - the marriage penalty).

Good luck.

A SEP would not be the best way to shelter money in retirement. There are other retirement vehicles you can use to reduce your money from getting hit by social security. Plus SS only hits your first $94k or so of profits, so someone can make a lot of money from a business and have much better tax advantages.

Of course most of the clients we use these strategies for make $200k, but the guy says he makes six figures so I don't think it is that far-fetched he could do very well on his own. It is of huge tax advantage if you do it right, but I agree, you would definitely have to talk to an accountant to see what is best in your situation. At face value there isn't a lot you can do that isn't mentioned here, all the same. So don't get your hopes up for a magic fix.

[Saving in So Cal]

My husband and I were in your shoes for awhile. We found that buying a home, making charitable contributions, and maxing out our 401(k) plans were the best things we could do to lower our tax hit (at least a little).

Not to be the bearer of bad news, but you may want to verify with your company's HR department that you are actually eligible to max out your 401(k). Given your pay, my guess is that you would be considered a "highly compensated" employee under your company's 401(k) plan. "Highly compensated" employees are limited in how much they can contribute. The limit is set by some sort of formula that depends in part on the participation levels of the lower compensated employees. My husband, who worked for a very large company and made less than you, was limited to contributing 6% of his pay.

[PauletteGoddard]

The best way to reduce your income taxes is to reduce your income.
Find a job that pays less, I am sure there are many out there, or do what it takes to garner more tax credits and exemptions.

[safari]

Originally Posted by Saving in So Cal

My husband and I were in your shoes for awhile. We found that buying a home, making charitable contributions, and maxing out our 401(k) plans were the best things we could do to lower our tax hit (at least a little).

Not to be the bearer of bad news, but you may want to verify with your company's HR department that you are actually eligible to max out your 401(k). Given your pay, my guess is that you would be considered a "highly compensated" employee under your company's 401(k) plan. "Highly compensated" employees are limited in how much they can contribute. The limit is set by some sort of formula that depends in part on the participation levels of the lower compensated employees. My husband, who worked for a very large company and made less than you, was limited to contributing 6% of his pay.

This is a good point. Prior to this year the most I could contribute to 401(k) was 8% of my salary. This year they bumped it up to 10%, but it's still less than $15,500 a year. I guess being highly compensated has some disadvantages.

[b4freedom]

It just sucks. You screwed.

Traditional deductions will not help you. For one, they are capped. And even if you don't reach that cap, you have to spend more then what you get back in taxes.

Tax credits probably won't help much either because they have caps as well and anything you do to get them (like have kids) will just cost you so much more. (Having kids is not a good tax planning strategy.)

If you worked for yourself, you could shelter some more income. But, it's challenging with a job. And even still, they're cracking down on that.

Basically, the upper middle class are suddenly finding themselves paying giant tax %'s. The ubber rich tend to pay even less percentage because they set up exotic tax strategies and can afford to do so.

But, try this. Open a real estate investment trust (REIT). Take a business expense trip to Detroit. Purchase a barely livable bank owned house for $7000 to $10,000 that has a value of around $100,000. (The market is flooded with them in certain parts of the country). Sell the house to the REIT for $100,000 at 15% interest only loan for 30 years. You now have $15,000 in business expenses. The REIT leases the house back to you at $15000 a year (canceling out the $15,000 you get from earned interest). Depreciate the house at an excellerated rate of $10,000/year (this will give you a business loss). It's the depreciation of the asset that will save you the taxes.

[wellheeled]

You could use tax-exempt money market funds for your emergency fund, instead of using INGDirect or Emigrant. This way you can shield your earnings from federal and state income taxes. (Vanguard has 5 state-specific tax-exempt MM funds - I think - NY, CA, PA, and a couple other ones).

But you should be ware of the AMT, as some of these tax-exempt MM funds invest in private activity bonds that are subject to the AMT.