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Lane
Lane, CFP, MBA, CRPS
Category: Finance
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Experience:  Providing Financial & Tax advice since 1986
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what are the best legal tax shelters/deferred investments?

Resolved Question:

what are the best legal tax shelters/deferred investments? I am a doctor and I'm told that the only tax advantages I have are my 401k, children, and interest of my mortgage. I am in a private single specialty group in Georgia and paid by salary.
Submitted: 1 year ago.
Category: Finance
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, is your group open to using a Defined benefit plan? (qualified plan that allows contributions higher than the typical 401(k) in some cases)

NPVAdvisor :

A cross tested new-parity pla can be funded in such as way as to allow contributions that are actuarially drive gto provide a certain retirment benefit .... and many times allow for much higher contributions that they basic 401(k) ploan

NPVAdvisor :

These age based (better said, how much time do I have left to retire with a given benefit) type plans are appropriate when the business wants to provide a certain group of employees, such as the business owners and key employees, higher contributions than it does to other employees.

NPVAdvisor :

I this same category are also Tiered Plans - you might want a tiered plan over age-weighted plans because they can have an equal


rate to all participants in the same category or tier. Again, this works well for certain key employees among the business owners so they can get theses higher plan contributions.

NPVAdvisor :

Other than getting the group to look at these special retirement plan designs, side businesses that may one day be profitable, they provide for legitimated losses in the first few years, ...

NPVAdvisor :

Charitable contributions, of course

NPVAdvisor :

Ahh there you are Hello

NPVAdvisor :

There's tax loss harvesting ... if you do have investment losses in say individually owned investments, rather than just hanging on sell and reinvest in something different. You can deduct up to $3000 a year of investment losses against your ordinary income

NPVAdvisor :

529 plans for the children's education don't provide any Immediate gratification, but if you're going to fund education, let the dollars grow tax deferred and then pull them out tax free (and there is a STATE income tax deduction is you use GA's 529 plan)

NPVAdvisor :

For retirement the ROTH IRA does the same ,,, again no immediate gratification, but grows tax deferred and can be pulled out tax free at retirement ... can be very powerful when you're about to hit that next tax bracket for the year (again, DURING retirement) shot down the qualified plan dollars and pull the rest of that year's retirement from the roth

NPVAdvisor :

Is your group a Professional Corp?

NPVAdvisor :

If so, in Ga you can file for S Corporation status, this election allows for the entity to have pass-through tax treatment. With pass-through taxation, the income to the entity is not taxed at the entity level; however; the entity does complete a tax return. The income or loss as shown on this return is “passed through” the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns.

NPVAdvisor :

I see that you're in chat ...but you don't seem to be responding, I'll give it a few, but then switch Q & A mode. ... We'll still be able to continue a dialogue there, just not in real time.

NPVAdvisor :

Child care credit

NPVAdvisor :

Maybe the Q and A mode will help

NPVAdvisor :

Also, for the traditional IRA, even if you are covered by a 401(k) at work all or some of the contribution may be deductible

NPVAdvisor :

For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work are as follows:



  • For single filers: $59,000 to $69,000

  • For head of household filers: $59,000 to $69,000

  • For married couples filing jointly: $95,000 to $115,000

  • For married couples filing separately: $0 to $10,000

NPVAdvisor :

OK I still can't see you. I'll switch to Q & A mode now. I have a 5:00 meeting with a client, but will check back in after that to continue the dialogue .... hope to speak with you later.

Lane, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 3705
Experience: Providing Financial & Tax advice since 1986
Lane and 3 other Finance Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Your Money Now replied 1 year ago.
I would also mention (in addition to tax deferred investments of so many varieties) that if avoiding tax is the goal, that municipal bonds are popular. They are exempt from federal, state, and often other taxes.

They don't pay as high a rate, but are also considered (generally) in a lower risk category than US stocks for example).

Various other offshore investments can offer a tax avoidance stance but vary in degree of risk and ease of use, reporting regulations, and access.
Expert:  Lane replied 1 year ago.

Be careful.

US citizens must pay income tax on worldwide income.

Further, not only do MUNIs not make a lot of sense today, given the tenuous nature of the tax benefit AND the fact that municipalities are no longer the safe have they used to be relative to default risk.... Without nosing your tax benefit, recommending municipal bonds in this kind of information vacuum is irresponsible.

Please, as I have asked, provide some details, so that we can have an intelligent discussion about what may make sense for you.


Lane
Expert:  Lane replied 1 year ago.

...just checking in again.

As mentioned before, with some information, we may be able to have a dialogue.

Remember, however, that "tax shelters" need to provide an economic benefit, or (if for example, you are in the 35% tax bracket) you're just spending a dollar to save 35 cents.

That's why the idea of starting a business now (that may provide current losses and even Net Operating Loss - NOL - carrovers for the next 20 years, under current law) where those early losses shelter future income...

... and when you have finally used up the carryforwards ... guess what? YOU'RE PROFITABLE (and now have only to give UP only 35% of those profits, AFTER having had tax free cash flow for years.)

The NPV on that one is HUGE.

But again, don't just spend a dollar to save 35% in taxes. The economic benefit has to be there.

Spending a buck just to save 35 cents in taxes is letting the TAX "tail wag the dog."

Come back here, give me some details, and we can have an intelligent discussion about how to maximize your situation finally (of which tax IS one of the factors.

Lane




But don't just
Customer: replied 1 year ago.


Sorry Lane, got called into work.


 


Here's my situation. I am a doctor who is a salaried employee of a single specialty medical group. We do have a 401k which I participate in. I am told that the 401k, my dependents, charitable contributions, and the interest on my mortgage are the only tax breaks I have. My salary ranges from 425-475k. So you can see, I'm very frustrated to be working so hard and lossing much of it to taxes.


 


I have several questions. 1) In ths senario, are there any other tax breaks? 2) I do like your idea of 529 education fund and would like more info on how that works. 3) How many tax deductions can I take before I am at risk for an audit? In the past, I think I've been way too conservative, but can't get any good tax advice from my tax person.


 


Another senario, my partner & I want to start our own business which is separate from my main income. She feels a S corporation would be good and provide us with a tax break. This is a legit business, not created just for a tax break. How would this work? What deductions can I take and how do I keep it separate from my main income? What happens when there are losses? I am told that it may take 4-5 years before the new business may break even or profit...depending on initial investment and overhead.

Expert:  Lane replied 1 year ago.

Sorry, just saw this (I understand completely, about your being called away, I was just checking back in this afternoon)

let me try to address your questions as you have listed...




1) "In this scenario, are there any other tax breaks?"

OK, first lets deal with tax deductions for individuals:

DO Maximize that 401(K); For the 2013 tax year you will be able to contribute $17,500 as your basic limit, which is up another $500 from 2012 AND IF YOU'RE OVER 50 there's an additional $5,500 making the total deduction $23,500.

And, I don't know your age ... , but your practice really ought to look at a cross-tested defined benefit plan. Those CAN allow you to really sock it away (tax deductibly) at a rate higher than 401(k) plans, depending on time left to retirement and salary levels.

See this:

http://www.modernmedicine.com/modernmedicine/Dermatology/Defined-benefit-plans-can-provide-larger-tax-deduc/ArticleStandard/Article/detail/695752

Also,

You CAN deduct interest on a SECOND home (everyone gets two). Here's the IRS guidance:

http://www.irs.gov/publications/p936/ar02.html#en_US_2011_publink1000229890


And finally, here's the most exhaustive list I've seen on the various tax deductions for individuals:

http://www.jamesdance.com/deductions.htm





2) I do like your idea of 529 education fund and would like more info on how that works.

The immediate tax benefit of s 529 plan is the STATE income tax deduction: All Georgia taxpayers, regardless of income, may deduct up to $2,000 in contributions per year, per beneficiary. So from the STATE TAX perspective, it's tax free all the way around; grows tax free and no tax es when you pull it out.

In terms of federal taxes, the contributions(something people don't typically think about until it's too late) reduce the taxable value of your estate - it provides for Federal Estate and Gift tax purposes. ... an annual federal gift tax exclusion of $14,000 per donor ($28,000 for married contributors), per beneficiary.

Then at the Federal INCOME TAX level (although there's no immediate deduction for the contribution), distributions from a Sec. 529 plan are not included in the income of the donor or the designated beneficiary, as long as the distributions do not exceed the beneficiary's qualified higher education expenses (Code Sec. 529(c)(3)(B)). So the money grows tax free and then if used for qualified higher education expense (college or vocational school) its a tax free distribution.

Two last things on the 529 plan. (1) You have to use GA's plan to get the state tax deduction, and (2) It's one of the best plans out there in terms of return AND costs. Investments are provided by TIAA-CREF.





3) How many tax deductions can I take before I am at risk for an audit?

If the deductions are legitimate, the number of them won't make any difference. IRS's audits return randomly, and deduction that aren't clearly deductible catch their eye, but if you're one of those who has planned carefully, and uses everything they can (for legitimate reasons - such as the business we'll discuss below, not being something created JUST for the tax deduction, but rather something you're trying to succeed at) and you have enough LEGITIMATE deductions to completely eliminate your taxable income (and then some Net Operating Losses to carry forward for the next 20 years as well) then it is what it is.

Look back at that exhaustive list link and then think about having a business (a real business that will make a profit in a few years) generating losses as well. BUT remember what I said before about not letting the tax tail wag the dog ... once the business is profitable SO WHAT, you give some of it to uncle Sam and keep the rest.





Another scenario, my partner & I want to start our own business which is separate from my main income. She feels a S corporation would be good and provide us with a tax break. This is a legit business, not created just for a tax break. How would this work? What deductions can I take and how do I keep it separate from my main income? What happens when there are losses? I am told that it may take 4-5 years before the new business may break even or profit...depending on initial investment and overhead.

OK, first if you do use either (1) an S-Corp, (2) a partnership or (3) an LLC, these business entities are tax pass-throughs. They have their own income statements, but any profits or losses generated on that business income statement flows through to line 12 on your personal 1040 on line 12 (Business income or loss).

Th only reason an S-Corp is preferable purely from a tax perspective (raising capital, adding shareholders, and separating business assets from personal assets are also S-Corp benefits) relates to self-employment income. Again all three of the entities above will let you carry business losses to your personal tax return to offset personal income (again, line 12 on the front of your 1040), but because with the S-Corp you pay yourself wages, you will save on self employment taxes.

My own recommendation would be to use an LLC at first, when it's just the two of you and the business is still at a loss (maybe the first two or three years). The LLC gives you the separation and protection of a corporation, the simplicity of a partnership (no quarterly S-Corp returns, etc) and is still a pass through that will allow as much loss as the other two to flow through to your 1040.

In terms of your question about deductions? Any reasonable business expenses for the business you're in are deductions, because they contribute to that loss that passes through on line 12 of your personal tax return. If your business, in the first year, has revenues of say, 15,000, and expenses of 35,000, then your business had a loss of 20,000. If you and your partner and you own the business 50/50, then you each carry a 10,000 loss to line 12 and it is deducted from your AGI, hence taxable income.

Then, as I mentioned before about the carry-forward (and actually, you carry it back two years and forward 20, unless you make a special election) if you had enough personal deductions that year, that the 10,000 would take you BELOW your taxable income, you get to carry it back and/or forward against past and/or forward years' income - depending on whether you want to go to the trouble of going back and amending past year returns for a refund if applicable.


Here's an excellent article on NOL carryback and forward:

http://taxation.lawyers.com/business-taxation/What-You-Should-Know-About-Carryback-and-Carryforward-Rules.html





As you can see this is fairly complicated stuff, but spend a little time with my overview and the linked articles/sites/documentation and I believe you'll be able to make some informed decisions about where to go next.




Hope this helps

Lane


Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you have QUESTIONS, or need clarification, COME BACK here.

Also, feel free to bookmark this page to come back for reference.

Customer: replied 1 year ago.


My partner thinks a "S" corporation would be cheaper to start and later we can form a LLC. Is that true? Also, is there a way where she and I can be separate so our deductions are separate. The current situation would be that she and I share office space. We are just starting, so we have no staff. We may lease equipment later. We will start by purchasing cosmetic products...ie botox and dermal filler.

Expert:  Lane replied 1 year ago.

No,should be about the same,in terms of setting them up And the S-corp most definitely costs more in time, because of the REQUIREMENT of corporate formalities like annual meetings and the requirement to keep minutes for important corporate decisions (even there were only ONE shareholder.

S-Corp also has to file a separate corporate return, 1120-S.

The LLC is simpler, can still elect to be treated as a S-Corp or C-Corp later.

But from a tax perspective, the only difference will be payroll taxes.

Here's a good comparison:

http://www.legalzoom.com/business/business-types/compare-business-structures.html




On the deductions, again, unless you use a C-Corp, the losses from the business pass through to your individual tax returns based on how you set up the sharing (50/50 is typical)

A C-corp pays its own taxes, at the c-corp rate, but an LLC, S-Corp and partnership PASS THROUGH to your personal return.

And on ANY business entity, the business has its own income and its own expenses before affecting the owners.



So, your PESONAL deductions go on front of the 1040 for SOME things like contributions to qualified plans, etc ... and some of them go on your schedule A if they're itemized deductions, BUT the business' expenses go on ITS own income & expense (P&L) statement then ....

(1) net income or loss flows through to line 12 of your return (if it's a pass-through

OR

(2) gets paid on the tax forms of the corporation if its a C-Corp



Again, take a look at the Legal-Zoom comparison chart (I have no association with them, other than using them to set up my own LLC)



Hope this Helps

Lane



Positive feedback (or an “accept”) is highly appreciated. That’s the only way we’re paid. BUT, if you have QUESTIONS, or need clarification, COME BACK here.

Feel free to bookmark this page to come back for reference.


Expert:  Lane replied 1 year ago.

As a quick follow-up, remember that I mentioned that your employer group could adopt a type of plan that would allow for more than is allow (as a deduction) in then typical conventional 401(k) plan.

Maybe stating the obvious here, but the new business you mention allows for a very simple plan called a SEP (Simplified Employee Pension) that allows for a deduction of 25% of your self employment income, up to $50,000 per year. ... a direct one for one deduction of the first 25% of your income, the dollars of, which of course, accrues completely to you..


Positive feedback appreciated! (That's the ONLY way I'm paid for my time and expertise. i;m sure you understand this concept.
Lane, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 3705
Experience: Providing Financial & Tax advice since 1986
Lane and 3 other Finance Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks you so much!



To ask for me again, say “For NPVAdvisor” at the beginning of your question

OR

Go here: http://www.justanswer.com/finance/expert-npvadvisor/
and enter your question in the box.

Thanks,
Lane

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