What legal steps you can take to reduce your taxes?

User Forum Topic
Submitted by jimmyle on April 14, 2009 - 7:38am

Here are what I am doing right now:

1. Max out on 401K contribution. But no contribution to Roth IRA because I need to save cash for buying a house in the near future.
2. Buy online (ebay, craiglist where you don't have to pay taxes) whenever I can.

What other action can I take?

Submitted by DataAgent on April 14, 2009 - 8:21am.

1. Have a non-working spouse start a home-based business. Most businesses show taxable losses the first few years.
2. Buy a rental property. Even if you break-even with your cash flow, you can still depreciate the property creating a taxable loss.

Submitted by Noob on April 14, 2009 - 8:36am.

In order to reduce:

  • Income taxes, make less money.
  • Real Estate taxes, own cheaper property.
  • Use taxes, use less.
  • Sales taxes, consume less.
  • Sin taxes, sin less fequently.
  • Less is more.

    Submitted by Coronita on April 14, 2009 - 9:23am.

    #2 you suggested (buying online without paying taxes) is technically not legal.

    Submitted by jimmyle on April 14, 2009 - 9:32am.

    Hope the gov't won't start collecting sales data from ebay. There is no craiglist record for transactions so it is good.

    Submitted by Coronita on April 14, 2009 - 10:04am.

    jimmyle wrote:
    Hope the gov't won't start collecting sales data from ebay. There is no craiglist record for transactions so it is good.

    I don't think the state treasuries would be that well organized.

    Other things...

    * Donate all the crap you don't want and take the writeoff. Make sure you get all the documents that prove your donations and don't go overboard or taxman will call you.

    * If you have parents/relatives from overseas that stay with you for an extended period of time, claim them as dependents (read the Fed rules on this...Perfectly legal if you meet the time test).

    * Did you have an job related expenses you had to cough up yourself (books, training material for your job etc, dues,etc)?

    * More variables if you start a business, but it also raises your risk of audit.

    Submitted by an on April 14, 2009 - 10:15am.

    flu wrote:
    #2 you suggested (buying online without paying taxes) is technically not legal.

    Not always. If he's talking e-bay & craigslist, it probably mean he's buying it used. Used stuff don't have sales tax, since sales tax has already been paid for that item. If he's talking about new items, then I do agree with you.

    Submitted by SanDiegoDave on April 14, 2009 - 11:15am.

    The biggie is the home-based business, or side consulting that can generate a 1099. It opens up a great deal of home based deductions that would normally have to amount to over 2% of AGI before they even begin being deductible. I ran into that with my 2008 taxes. Lots of work-related expenses not covered by my employer that didn't pass the 2% threshold. Time for me to go out and get some side work.

    Anyone need the services of a computer network expert? VoIP, Wi-fi, routing/switching, LAN/WAN, Cisco, Nortel, Juniper. I bring 10 years of global enterprise level experience. Small jobs welcome :)

    Submitted by DataAgent on April 14, 2009 - 11:55am.

    "Time for me to go out and get some side work."

    You don't need income to writeoff the expenses of a side-business. You just need to show future intent of generating income. This intent is easily shown by: biz license, fictitious biz name, biz checking acct, biz cards etc.

    As an example, small biotech firms have a long startup cycle. Many don't show any income for years. These biotech firms still writeoff their expenses for tax purposes.

    Submitted by waiting for bottom on April 14, 2009 - 12:01pm.

    DataAgent wrote:
    1. Have a non-working spouse start a home-based business. Most businesses show taxable losses the first few years.
    2. Buy a rental property. Even if you break-even with your cash flow, you can still depreciate the property creating a taxable loss.

    Careful on the rental property. If you have more than $150K of AGI - no write off for you!

    Submitted by DataAgent on April 14, 2009 - 1:11pm.

    There's always an exception. But as a general rule self-employment and rental property allow for lots of nice tax deductions. To the OP... buy some time with a good tax accountant to create a strategy for your unique tax-minimization case.

    Submitted by FormerSanDiegan on April 14, 2009 - 1:44pm.

    The #1 legal tax break is write-off of interest of your first mortgage. Of course, getting that requires you to leverage real estate which has been a losing proposition the last few years.

    Regarding rental property ...
    You can use any amount of rental property loss against passive (e.g. rental) income. However, there are limits when applying it towards regular (e.g. wage or investment) income.
    Unless you are a real estate professional, the tax loss on rental property is limited to 25K per year taken against ordinary income. Once you make above 100K this amount is reduced $1 for every $2 you make and is thus eliminated at 150K (as waitingforbottom said).
    If you make over this amount the tax loss is carried forward (tax loss carryover) until you either count it against rental property income or sell the property and count it against capital gains.

    Tax loss on rental property has two components:
    1. Actual losses (which are bad because this is negative cash flow).
    2. Losses due to depreciation (Generally better since this is a "phantom" loss valued at about 3.6% of the value of your structure each year).

    I would not buy rental property for the tax benefits. Buy for cash flow, appreciation or principal pay down (renter pays for your house over time). Consider the tax benefits a bonus. For example, if you make over 150K you can build up a large carryover loss in the early years. As the property seasons and cash flows better in the future (assuming rents increase at some point or the property is paid off) the income stream can be tax-free, because the carried-over tax loss can be counted against rental income *

    * Disclaimer - I am not a lawyer or an accountant, but have prepared my own taxes for rental property owned over the past decade.

    Submitted by Coronita on April 14, 2009 - 5:00pm.

    FormerSanDiegan wrote:
    The #1 legal tax break is write-off of interest of your first mortgage. Of course, getting that requires you to leverage real estate which has been a losing proposition the last few years.

    Unfortunately, this itemized deduction I believe also starts getting reduced above certain income levels...

    Also, there is a point in which you end up paying AMT....and some itemized deductions won't count toward AMT (property tax and income tax deductions aren't part of AMT calculation, for instance).

    Ironically, experimenting with my tax software, I think mortgage interest payments are still deductions when computing AMT.....

    Submitted by surveyor on April 14, 2009 - 5:58pm.

    waiting for bottom wrote:
    DataAgent wrote:
    1. Have a non-working spouse start a home-based business. Most businesses show taxable losses the first few years.
    2. Buy a rental property. Even if you break-even with your cash flow, you can still depreciate the property creating a taxable loss.

    Careful on the rental property. If you have more than $150K of AGI - no write off for you!

    Please google "real estate professional tax deduction".

    Then $150k of AGI don't matter.

    Submitted by luchabee on April 14, 2009 - 8:12pm.

    If you are maxing out your retirement plan or are taking minium required distributions from an IRA, you might want to look at other options, including:

    1. Tax-free bonds

    2. For high-income folks, some insurance options allow for tax-deferral.

    3. Charitable trusts and annuities can also work well: avoidance of some capital gains taxes, tax-free payments, immediate tax deduction, and can be timed with IRA distributions or Roth conversions.

    I hate taxes.

    Submitted by Coronita on April 14, 2009 - 9:05pm.

    luchabee wrote:
    If you are maxing out your retirement plan or are taking minium required distributions from an IRA, you might want to look at other options, including:

    1. Tax-free bonds

    2. For high-income folks, some insurance options allow for tax-deferral.

    3. Charitable trusts and annuities can also work well: avoidance of some capital gains taxes, tax-free payments, immediate tax deduction, and can be timed with IRA distributions or Roth conversions.

    I hate taxes.

    The Variable Annuities are probably too complex for most mortals, and they have huge fees.

    Dumb question on Charitable trusts? How do these help when one isn't in the mood of being charitable? Not that I don't donate..Just curious though are there advantages to charitable trusts versus folks that normally don't donate?

    Submitted by luchabee on April 15, 2009 - 12:55am.

    I am mostly passing on information from advisors I have heard on the radio (so check with a competent tax and legal advisor, if interested, like Rich), but variable annuities do have a place for some very high-income earners, who have maxed out their contributions to qualified retirement plans. And yes, they are complicated with big commissions for the advisor, no doubt. However, the tax-deferral is what is sought in these cases and you will have to pay to get it.

    I'm sure Rich would be the one to talk to on these insurance planning issues. Of course, anyone should talk to a very competent and experienced tax advisor, if they are making this kind of money.

    Charitable trusts are more for older folks (though they can make deferred payments later on), who have long-term capital assets and would like to sell them for retirement income.

    The charitable trust allows them to sell any capital asset tax-free, even real estate, stocks, etc. (They will pay taxes on future income payments, but the trust can grow tax-free.) The person funding the trust will then select a payout rate of say 7% to 15% per year on the full value of the asset without any CG taxes being paid.

    The donors then have to have at least 10% of the asset value go to the charity after their lives, but they will get an immediate deduction for this gift they will be making years down the road (not bad).

    They are flexible tools in terms of passing income to children and have estate tax savings, too, if applicable. Also, the assets don't have to be that large (maybe a nice second home?)so a regular Joe can save on taxes and make an impressive gift to the church, hospital, community center, etc. He might even get a building named after him, as well. Any estate planning firm, comprehensive financial advisor, or large charity can help with setting them up.

    One limiting feature right now, of course, is that some of the significant benefit is that you don't have to pay CG taxes initially. As a result, given declines in real estate and stocks, most of these assets must have been obtained many years ago to have a lot of appreciation. So, we are talking about older people mostly. On the other hand, especially for seniors who are looking to leave a legacy to charity and possibly their kids, a trust can be an ideal way to accomplish a lot of goals.

    Submitted by FormerSanDiegan on April 15, 2009 - 9:25am.

    flu wrote:
    FormerSanDiegan wrote:
    The #1 legal tax break is write-off of interest of your first mortgage. Of course, getting that requires you to leverage real estate which has been a losing proposition the last few years.

    Unfortunately, this itemized deduction I believe also starts getting reduced above certain income levels...

    Also, there is a point in which you end up paying AMT....and some itemized deductions won't count toward AMT (property tax and income tax deductions aren't part of AMT calculation, for instance).

    Ironically, experimenting with my tax software, I think mortgage interest payments are still deductions when computing AMT.....

    Yes, mortgage interest is still deductible under AMT. Property tax and state income tax are not deductible under AMT, but remember there is a large exemption under AMT, so the extent that this impacts someone will depend on their income and total deductions.

    Yes, deduction phase outs do start occurring at higher income levels, but these tend to have a smaller impact than AMT for most normal people (making less than 300K)

    There seems to be a sweet spot for optimal use of mortgage deduction while falling just below AMT and not impacted by phase outs. Punch in a joint income of 225-250K or so, assume mortgage of 700K-850K into your tax software and see what happens.

    Submitted by Coronita on April 15, 2009 - 9:39am.

    luchabee wrote:
    I am mostly passing on information from advisors I have heard on the radio (so check with a competent tax and legal advisor, if interested, like Rich), but variable annuities do have a place for some very high-income earners, who have maxed out their contributions to qualified retirement plans. And yes, they are complicated with big commissions for the advisor, no doubt. However, the tax-deferral is what is sought in these cases and you will have to pay to get it.

    I'm sure Rich would be the one to talk to on these insurance planning issues. Of course, anyone should talk to a very competent and experienced tax advisor, if they are making this kind of money.

    Charitable trusts are more for older folks (though they can make deferred payments later on), who have long-term capital assets and would like to sell them for retirement income.

    The charitable trust allows them to sell any capital asset tax-free, even real estate, stocks, etc. (They will pay taxes on future income payments, but the trust can grow tax-free.) The person funding the trust will then select a payout rate of say 7% to 15% per year on the full value of the asset without any CG taxes being paid.

    The donors then have to have at least 10% of the asset value go to the charity after their lives, but they will get an immediate deduction for this gift they will be making years down the road (not bad).

    They are flexible tools in terms of passing income to children and have estate tax savings, too, if applicable. Also, the assets don't have to be that large (maybe a nice second home?)so a regular Joe can save on taxes and make an impressive gift to the church, hospital, community center, etc. He might even get a building named after him, as well. Any estate planning firm, comprehensive financial advisor, or large charity can help with setting them up.

    One limiting feature right now, of course, is that some of the significant benefit is that you don't have to pay CG taxes initially. As a result, given declines in real estate and stocks, most of these assets must have been obtained many years ago to have a lot of appreciation. So, we are talking about older people mostly. On the other hand, especially for seniors who are looking to leave a legacy to charity and possibly their kids, a trust can be an ideal way to accomplish a lot of goals.

    Thanks for the info. A couple of years ago, when we grinded through the numbers, it seemed for us at leastbuying a separate termed life insurance + tucking the money away post tax was on par with the VAR plans, particularly since the VAR's had really big fees to the insurance co....The other drawback was that the VAR plans seemed to have very limited investment choices in terms of funds, and if there was a self directed component, the trading commissions were pretty significant. I guess it didn't make sense for us because we weren't rich enough. And frankly, given how the equities markets turned out, it was probably a good thing we didn't do a VAR at the time, because again I believe the VARs we looked at were heavily biased toward stock/mutual fund investing. However, talking to various financial planners about VARs, they seemed to confirm what you say about folks who are wealthy and need a tax haven.

    The other irony was back then, we were deciding between MetLife and AIG...Good thing we picked MetLife, in retrospect :)

    Submitted by Coronita on April 15, 2009 - 9:59am.

    FormerSanDiegan wrote:
    flu wrote:
    FormerSanDiegan wrote:
    The #1 legal tax break is write-off of interest of your first mortgage. Of course, getting that requires you to leverage real estate which has been a losing proposition the last few years.

    Unfortunately, this itemized deduction I believe also starts getting reduced above certain income levels...

    Also, there is a point in which you end up paying AMT....and some itemized deductions won't count toward AMT (property tax and income tax deductions aren't part of AMT calculation, for instance).

    Ironically, experimenting with my tax software, I think mortgage interest payments are still deductions when computing AMT.....

    Yes, mortgage interest is still deductible under AMT. Property tax and state income tax are not deductible under AMT, but remember there is a large exemption under AMT, so the extent that this impacts someone will depend on their income and total deductions.

    Yes, deduction phase outs do start occurring at higher income levels, but these tend to have a smaller impact than AMT for most normal people (making less than 300K)

    There seems to be a sweet spot for optimal use of mortgage deduction while falling just below AMT and not impacted by phase outs. Punch in a joint income of 225-250K or so, assume mortgage of 700K-850K into your tax software and see what happens.

    I don't know what exactly it is, but I get hit with AMT every year...and as you indicated it's a hit much more so than the mortgage deduction phase out (....well,at least until Obama changes the rules to the mortgage interest deduction that :( )

    ...Part of the problem probably is from the fact that my property tax bill is a non trivial amount, and as an itemized deduction, makes a nice deduction that doesn't count in the AMT calculations.

    *edit*
    I think my effective federal tax rate ends up being around 15.8% each year (state is about 7% i think- not done with this year's taxes and most likely will file an extension).

    * Back to the original poster's question. The other thing was (at least under the Bush plan), a good portion of my income was from dividend income, which under Bush was 15%....Not exactly tax "exempt", but better than paying oh, 20..25%+ on W2 income or waiting for long term cap gains rates....
    That will change for some people under Obama, so those days are probably numbered...And that involved (heresy) buying sin stocks that paid good dividends (Phillip Morris, Altria, ChevronTexaco, etc)...Dividends from MO, PM,CVX are 7.7%, 5.8%, 3.8%.

    *Not investment advice: i suck at it, really.

    Submitted by mikese on May 18, 2009 - 1:50pm.

    spam

    Submitted by temeculaguy on May 18, 2009 - 2:08pm.

    Tax reward auto loan from the san diego county credit union! (or whatever cu that has them) If you have a car loan, make sure it's deductable.

    Submitted by peterb on May 18, 2009 - 2:15pm.

    Move to a state without income tax. That'll save you about 10% right there, compared to living in CA. Find one without sales or income tax and you're even further ahead of the game. Not sure that exists in the USA, though.

    Submitted by UCGal on May 18, 2009 - 2:26pm.

    peterb wrote:
    Move to a state without income tax. That'll save you about 10% right there, compared to living in CA. Find one without sales or income tax and you're even further ahead of the game. Not sure that exists in the USA, though.

    You can move to Vancouver, WA (no income tax) and shop across the river in Portland, OR (no sales tax.)

    I know a couple of people that do this.

    Submitted by meadandale on May 18, 2009 - 2:48pm.

    peterb wrote:
    Move to a state without income tax. That'll save you about 10% right there, compared to living in CA. Find one without sales or income tax and you're even further ahead of the game. Not sure that exists in the USA, though.

    If Klownifornia continues down the path we appear to be heading I may do just that. Texas is starting to look better and better.

    And I'll be writing a Dear John letter to my congress people and senators at both the state and federal level to let them know why I'm taking my small business and 6 figure income out of the state.

    Submitted by SK in CV on May 18, 2009 - 5:07pm.

    The home office thing is a crock.

    In order for expenses to be legally deductible, they must be directly related to the business. If you're actually incurring the expenses, then the tax savings would only be a portion of the expense. You end up with LESS money even if the expense is deductible.

    There might be a minor savings for auto expenses, if the mileage allowance for REAL business mileage is more than it actually costs you to operate your car.

    The home office deduction, in order to qualify (again, legally) must be related to a room or area of your home that you use exclusively for that business. Not a room (or area) that you also use for other things. So if you have an office that you also use for your personal stuff, no deduction. Or if it's sometimes used as a guest room, no deduction. And even if you do have an area you use exclusively for that business, the extra deduction it generates will more likely than not be very small.

    It never makes sense to spend real dollars to generate a tax deduction with roughly a maximum of a 40% (in california) tax savings.

    Submitted by BKlawyer on May 18, 2009 - 8:00pm.

    Sure- Do it yourself. And when you have an appendicitis download the do-it-yourself appendectomy kit from www.medicalzoom.com.

    Submitted by vichi12345 on May 18, 2009 - 10:24pm.

    spam

    Submitted by temeculaguy on May 19, 2009 - 12:09am.

    DO NOT CLICK ON THE LINK ABOVE.

    Normally I would never instigate a discussion of weaponry, but Allan, can you do something to scare off vichi, maybe just something regarding caliber or stopping power, something along those lines. Just for me, since I can't figure out a way to shoot fireballs through the internet, if the technology exists, I'm sure you know how to access it.

    Submitted by sdrealtor on May 19, 2009 - 8:45am.

    Damn you TG! Dont ever say dont push that button! I was going along fine until you told me not to and then I just had to do it. Damn you......

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