Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
And by far, is income taxes. I know there are tremendous legal methods how to not pay income taxes, or to pay very little. Judge Learned Hand(his real name!) once said in a court case " it is the right of every American citizen to arrange his affairs in the best manner possible to pay as little in income taxes as possible."
What are some of your ways to accomplish this? If you can bypass or overcome this obstacle, you have a real chance of creating wealth in this country. Remember, income is not wealth. Think about it. This is the 4th obstacle. You can find the other 3 on the Blog page. I'll give my ideas on this subject at a later time. Lets' see some of the other ideas. Rich in Fl.
Great topic Rich. If there was an award for the best topic starter, you would be in the running!
One of the ways I have drasticlaly reduced paying Uncle Sam over the years is by being a business owner. I have always had a corporation (S Corp) which has allowed me to have many additional deductions that the average wage earner does not get. For iinstance, my personl vehicle, gas, repairs/maintenance, food, travel and entertainment all become write offs for me through the company. Those are just a few of the hundreds of items that can be deducted through a corporate entity.
Another is contributing to a traditional IRA. This also gives you a tax deduction (although upon withdrawal at age 59.5, taxes are paid then).
Great topic Rich. If there was an award for the best topic starter, you would be in the running!
One of the ways I have drasticlaly reduced paying Uncle Sam over the years is by being a business owner. I have always had a corporation (S Corp) which has allowed me to have many additional deductions that the average wage earner does not get. For iinstance, my personl vehicle, gas, repairs/maintenance, food, travel and entertainment all become write offs for me through the company. Those are just a few of the hundreds of items that can be deducted through a corporate entity.
Another is contributing to a traditional IRA. This also gives you a tax deduction (although upon withdrawal at age 59.5, taxes are paid then).
- If you want to pay $0 in taxes, expatriate yourself. You will pay no taxes (in this country, at least). Or you can move to another country, start a business, and then the first $150K of your income (or something around that) is tax exempt in the U.S. Of course, I don't think this is a reasonable plan for most Americans.
- If you have a lot of cash, buy tax-free municipal bonds (bonds issued in the state you live or in a state that has no income tax).
- 1031 Exchanges will allow you to defer taxation for as long as you'd like.
- Give gifts to your heirs. Up to $12,000 a year can be given tax-free, to help reduce estate taxes later in life.
Excellent input Will. As they say on FEUD, the # 1 answer is Have a business or second business to turn EXPENSES into DEDUCTIONS". They are far from being the same..
The tie for # 1 is OWNING real estate. Rich.
I also believe having a very good accountant/tax guy is critical.
As some of you know, I work for the railroad. It's the "real" job. I used to use a very well-known tax-preparer in my area. One day I was told of another ex-railroader, who is retired, has been doing guys taxes for years, which has led to a nice little post-retirement tax service business. AND he's owed rentals in the past.
Ron is VERY knowledgeable ;) with all the deductions we are entitled too. We are out of town a lot, and are "compensated" tax-wise with certain deductions. My other tax-preparer never mentioned them, I don't think she knew they exsisted. It was a significant amount of money.
He's late 60's early 70's, on a quess. As long as he's around, I'll be a client. Having him personally own rentals in the past, was a BONUS for sure. He's really made things easy.
J Scott- Thanks for the addition, I really agree with 1 of your 4 thoughts.
1031- Excellent point with which I agree 100%. Needs to be used correctly and at the correct time.
expatriate yourself- This is really extreme, # 1 and if you re-read my original post, this was aimed at "creating wealth in THIS country".
Buying tax free - This also is off base. This doesn't directly help you to AVOID taxes. The money you're using to buy these bonds is AFTER TAX money. You are too late at that point to save the taxes you'll pay.
Give money away- This also defeats the purpose . Remember, this is to CREATE wealth for yourself or your estate. Giving your estate away doesn't create wealth.
Norm- you found a jewel. I've found TWO good advisers in 40 years.
When I'm looking for a new acct., I always ask him how much HE paid last year in taxes? If he paid more than I did, why would I want him careing for MY money. If he won't answer the question, I walk away. Rich in FL.
So far my mode of tax planning has involved all of what Will said with regards to utilizing a business entity. I have an s-corp. Not only do I write off EVERYTHING that is remotely related to the functions of the business to reduce tax liability, I also don't pay Social Security tax on a corporation. That can be huge.
Of course, my business function is real estate, so that's a "gimmie" for creating future wealth.
I'm not too diligent about investing in the IRA. Honestly, I've let it sit rather stagnant since (as of late) I feel I can get a better return in real estate than in the stocks, mutual funds, etc. which comprise the IRA.
My accountant is excellent. She consistently gives advice to reduce my tax liability. Although, I have never asked her what she pays in taxes! I will next time I see her though!!
The primary area that I'm lacking is with 1031 exchanges. I haven't done one and don't know much about them.
"I'm not too diligent about investing in the IRA. Honestly, I've let it sit rather stagnant since (as of late) I feel I can get a better return in real estate than in the stocks, mutual funds, etc. which comprise the IRA."
Mark, have you considered rolling your IRA in to a self-directed IRA so that you can use it for real estate? There are IRS rules to navigate around, but several here on BP are doing it.
"My accountant is excellent. She consistently gives advice to reduce my tax liability. Although, I have never asked her what she pays in taxes! I will next time I see her though!!"
I asked my CPA that question and he said exactly what I thought he'd say; "none of your business." Crusty guy that we've been with since 1993. I'm sure he pays very little in tax.
Jon- My guess is your acct doesn't want to tell you what he pays in taxes because he pays TOO much. He would be proud to tell you, if the amount was small, imo. I posted an in depth post on this subject in the blogs. Check it out and review it for me. Rich.
Jon- My guess is your acct doesn't want to tell you what he pays in taxes because he pays TOO much. He would be proud to tell you, if the amount was small, imo. I posted an in depth post on this subject in the blogs. Check it out and review it for me. Rich.
I expect one of these days he'll say "remember when you asked me what I pay in taxes? I paid $xx last year." He is the type to repond negatively, initially, until he's had time to think about whether or not he wants to answer and what he wants to say.
Example: I told him about what you are doing, and his knee jerk reaction was "he's cheating." However, after listening some more he acknowledged that you could be legit with the IRS. Just his way.
Jon- Should I e-mail you my letters from IRS reducing my 79 and 80 taxes from over $600,000 to $1000.38. That might get his attention. I get that reaction from a lot of accts, until I educate them. Sorry situation, imo. Rich in FL.
EXACTLY! And I am one of them. They key is knowing which investments are the easiest and most profitable without the time and efforts, somewhat turn key. In my opinion, the best way to use self-directed money for investments is for making loans secured by RE. A buy and hold scenario is much more complicated, has a ton of rules and regulations to follow and you lose a very powerful reason for RE investing - depreciation deductions. Since your IRA is already tax deferred, you miss out on the depreciation. You also have limited leverage abilities, which is the second most powerful reason to invest in RE. YOu must use non-recourse loans and they require a minimum of 30% down and the costs, fees, and terms and less desirable.
If you own a SDI, my suggestion is to make loans with it. You get 10%+ in interest with no headaches or managerial responsibilities, and no ongoing monthly requirements. (Just my opinion!)
Will and those that voted for the original post of mine in this thread,,,,, IT IS THE SHORT version. Go to my morning blog of the same title. It has all the guts and fun stuff. Let me know if you get "all warm and Fuzzy about NOT paying taxes, LEGALLY". Rich in Fl.
Sounds great Steve. If he says no, find another accountant!! He is too conservative. The other way to find out if he knows his stuff, is have him explain Go Zone to you and 50% depreciation. If he stares at you funny, get rid of him!! Hes' not keeping up. Rich.
Wow, that might be a first - where a reply to the thread has out-voted the original post, AND they both hit 10 votes. Great thread, and great to get the feedback as well (IMO).
Another is contributing to a traditional IRA. This also gives you a tax deduction (although upon withdrawal at age 59.5, taxes are paid then).
Will,
I see you mentioned the traditional IRA. At my REIA meeting last night, I had the chance to talk with a service provider who handles SDI. He indicted that Roth IRA may be the better vehicle, since taxes are paid upfront and the appreciation is allowed to grow untaxed. What's your take on that statement? And how about comparing traditional vs Roth for SDI?
Also, I mentioned that I have an HSA (Health Savings Account), and he said that it could also participate in Self Directed plans. When I told him the funds to the HSA were employer contributed, he said that was even better (free money). Any familiarity with using an HSA in this way, and what types of investments would be a good fit?
He indicted that Roth IRA may be the better vehicle, since taxes are paid upfront and the appreciation is allowed to grow untaxed. What's your take on that statement?
That depends on your age Steve. For people who are younger, say under 45 (not an official cut off or anything) the Roth is a better option for the following reasons: More likely, you will be making a higher wage upon retirement than you do now increasing your taxes and having a tax free withdrawal would be an advantage, and two - taxes are certainly expected to be higher upon our retirement since Uncle Sam has proven to be irresponsible over the years and their only answer is to raise taxes, not lower them.
That all said, if you make the EXACT amount today as you do upon retirement, then the traditional IRA and the Roth IRA would have equal values.
Example, you invest $100k in a traditional IRA today (tax deferred) and $100,000 in a ROTH (after taxes) which if you are in the fed & state total tax bracket of 35%, your Roth would be $65,000 after taxes paid. THen the Roth grows tax free but starts at $65k and the traditional grows tax deferred but starts at $100k. At the end of 20 years, both IRA's would be exactly equal.
If you are looking for tax deductions and the IRA is a vehicle of choice for you, then the traditional makes sense. If you want to free income upon retirement, then the Roth is the better choice.
That all said, investing in RE using a SDI can be complicated as there are many rules and limitations on transactions. Holding RE in your IRA on a buy and hold is very limited as well and therefore, I always recommend that SDI owners use their IRA's (both ROTH and traditional) to make loans rather than hold RE. It is more of a turn-key investment, less limitations (you just can't loan to any disqualified party such as kids, parents, or any linial decedents)
You can certainly self direct your HSA as well, but many employer contributing plans administrators do not allow roll-overs so that is something you would have to find out (similar to 401k' plans)
There are also self administered 401k plans which are even more beneficial than a SDI as well as your ability to create and operate your own pension plan with employer (your own company) contributing and the amounts of funds which can be contributed each year far exceed the SDI which is limited to $5k annually for single people, 10k annually for married couples filing jointly and $12k annually for married couples with the "catch up" provision.
Another option is to create your own SDI from a SEP IRA. All you need is your own business and you can start a SEP IRA which allows you to contribute up to $45k annually (I think that number is correct from memory) which is much higher than the ROTH or traditional IRA. This too can be self directed.
I use Equity Trust Company as they have the lowest all-inclusive fees and are the easiest to work with in my opinion.
www.trustetc.com - (MODERATORS I have no affiliation with them and this is not an ad, only a reference for others to learn. Equity Trust webiste has a ton of info on it so one can read up on some of the rules and limitations as well as a FAQ page.
We use to do a full day workshop about investing out of state or your own backyard and had it professioanlly recorded and edited. One of the subjects was all about self directed IRA's and all the prohibited transactions and disqulaified parties were laid out in an easy to understand format. If you are interested, you can check out the info on my webiste's education page. We have had requests for the IRA section to be on its on CD, but that would require some additional time and edditing expense so we have not done so.
The info is available on the IRS website at www.irs.gov by clicking on publication 590. The problem is, unless you understand had to read Chinese (not literally), it is very difficult to understand. They make tose documents so long and complicated, God only knows why, perhaps so some morons could have high paying government jobs, who knows. One of the many reasons we included it in our workshop was to make it easy for people to understand and apply in the real world. We also taught about how to use other people's IRA's for YOUR investments.
That all said, if you make the EXACT amount today as you do upon retirement, then the traditional IRA and the Roth IRA would have equal values.
Nationwide,
I follow your reasoning but your argument does not consider the tax treatment on the withdrawals.
Roth contributions are taxed but withdrawals are tax free. Traditional IRA contributions are not taxed but withdrawals are taxed as ordinary income. So far we both agree.
The factor to consider is how much growth is expected within the IRA and how much time elapses before withdrawals are made. In your example, you deposited $100K into each IRA vehicle and both achieved the same rate of appreciation with the expected result that each would have the same value after 20 years.
For the purpose of illustration, let's say that each IRA will have total contributions of $100K and be worth $400K after 20 years, at which time withdrawals begin.
If all $400K is withdrawn over the taxpayer's lifetime, the taxpayer with the traditional IRA will eventually pay ordinary income taxes on the entire $400K. .Whereas, the Roth IRA taxpayer has already paid ordinary income taxes on his $100K contribution, so, his $400K withdrawal is tax free.
For the Traditional IRA to have a lower tax liability than the Roth IRA, you need zero growth and the taxpayer has to be in a lower tax bracket for withdrawals than he was for Roth IRA contributions.
If there is growth, the Tradtional IRA fares better than the Roth IRA only when the taxpayer is in a lower tax bracket during the withdrawal period. However, there is a breakeven point after which time the total taxes on the traditional IRA withdrawals become greater than those paid on the Roth IRA contributions. The Roth seems to have a clear tax advantage over the traditional IRA the longer the IRA is maintained.
Originally posted by nationwidepi:
Example, you invest $100k in a traditional IRA today (tax deferred) and $100,000 in a ROTH (after taxes) which if you are in the fed & state total tax bracket of 35%, your Roth would be $65,000 after taxes paid. THen the Roth grows tax free but starts at $65k and the traditional grows tax deferred but starts at $100k. At the end of 20 years, both IRA's would be exactly equal.
If you contribute $100K to your Roth IRA, the taxes on your contributions are paid out of pocket -- not out of the IRA. The Roth IRA still "starts" with the same $100K.in contributions as the traditional IRA in your example.
- If you have a lot of cash, buy tax-free municipal bonds (bonds issued in the state you live or in a state that has no income tax.
J,
I am sure you meant to say -- Buy tax free municipal bonds issued by the state where you live, or, LIVE in a state that has no personal income tax.
Otherwise, buying out of state municipals issued by a state with no income tax would still make the municipal bond income subject to my resident state's income tax.
I am sure you meant to say -- Buy tax free municipal bonds issued by the state where you live, or, LIVE in a state that has no personal income tax.
Otherwise, buying out of state municipals issued by a state with no income tax would still make the municipal bond income subject to my resident state's income tax.
Hey Dave -
While I've never purchased any out-of-state municipal bonds, so I don't know for certain, I've always been under the impression that the issuer of the bond determines the taxation status.
That said, perhaps I'm interpreting it incorrectly (the second column indicating no tax owed from bonds in some states)? It does make sense that the issuer shouldn't be able to determine whether you need to pay tax in your municipality or not (only your local government determines that).
If so, and I'm wrong on this, I sincerely apologize for any bad info I've provided, and thanks for the correction!
Since the Rorh and IRA talk has kind of taken over my thread, I would suggest that if still interested in more tax info and estate planning, you might want to take a look at a couple of recent blogs. They piggyback on this thread , and also The Retirement Secret and Secret part 2. Good luck. Rich in FL.