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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 38452
Experience:  Retired (mostly)
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Im coming into a large sum of cash ($6 million plus) from

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I'm coming into a large sum of cash ($6 million plus) from an investment, hopefully by years end. My wife and I are looking for as many places as possible to invest this money to lower our tax liability. I am 43 and self employed. My wife is 33 and employed with another company. We have 2 children. Any suggestions?
Investing cannot lower your tax liability, unless your investment produces large immediate expenses, and you materially participate in the business.

If you open a restaurant and you are the Maître d', then your expenses will reduce your income, and that will produce a tax deduction on your return.

But, if you're simply buying stocks, bonds, and CD's, then you won't lower your taxable income at all.

So, unless you're planning on starting a business venture and materially, you really cannot reduce your tax liability in any meaningful way.

Hope this helps.
Customer: replied 6 years ago.
What about investing in Roth Ira's, setting up a couple of 401K's, buying tax free muni bonds, etc?
A Roth IRA does not reduce your current taxable income -- it may reduce future taxable income.

Contributions to an IRA or 401(k) must come from "compensation," as defined in the following table:

Includes ... Does not include ...
earnings and profits from
property.
wages, salaries, etc.
interest and
dividend income.
commissions.
pension or annuity
income.
self-employment income.
deferred compensation.
alimony and separate maintenance.
income from certain
partnerships.
military differential pay.
any amounts you exclude
from income.
nontaxable combat pay.

You stated that your income is from an "investment." If so, then that income is not compensation, and cannot be contributed to an IRA or 401(k).

Purchasing tax-free munis also may reduce future taxable income, but it will not reduce your current income from the investment that you are receiving.

What you may want to consider is that at the moment, the federal capital gains tax and ordinary income tax is set to rise to ordinary income tax rates on Jan 1, 2011. Absent Congressional action, if you can receive your investment prior to year end, then you will almost certainly save at least 5% in taxes, because the current Democratic plan is to limit the capital gains rate to 20%. And, if the battle between Democrats and Republicans continues after the election tomorrow, then that 5% is probably the best that you can hope for. Therefore, receiving the income this year is probably the single most optimal action you could take.

The second most optimal action is to relocate your permanent residence immediately to a U.S. state jurisdiction which has no personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.). You only have to permanently reside in one of these jurisdictions during the tax year in which you receive your income. This could additionally reduce your overall tax liability considerably.

In my view, the most optimal tax arrangement is to live in Washington State, but on the Oregon border, because Washington has no state personal income tax, and Oregon has no state sales tax. Therefore, if you receive income in WA and shop in OR, then you will have a zero state tax liability.

Hope this helps.
Customer: replied 6 years ago.
Ok, last question. I purchased this investment through my LLC, which is based in Nevada. If I use the LLC purchase and return the dividend to the LLC, does that make it exempt?
This issue is extremely complicated.

In general, however, your personal liability for LLC receipts is based upon (1) your right to receive income from the LLC, not whether or not you take actual receipt of that income, and (2) the right to the accruing while you are resident in a particular statet jurisdiction. When both elements are satisfied, you are subject to tax under the laws of your state of residence.

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