2. #1: Failing to Plan
“There is nothing wrong with a
strategy to avoid the payment of
taxes. The Internal Revenue Code
doesn’t prevent that.”
William H. Rehnquist
Copyright 2009
4. Taxable Income
Earned income
Interest/dividends
Add Taxable Income Capital gains
minus Adjustments to Income Pension/IRA/Annuity
Rent/royalty
minus Deductions
Alimony
times Tax Bracket
Gambling winnings
minus Tax Credits Illegal income
Copyright 2009
5. Adjustments to Income
IRA contributions
Moving expenses
Add Taxable Income ½ SE tax
minus Adjustments to Income SE health insurance
Keogh/SEP
minus Deductions
Alimony
times Tax Bracket
Student loan interest
minus Tax Credits
Copyright 2009
6. Deductions/Exemptions
Medical/dental
State/local taxes
Add Taxable Income Foreign taxes
minus Adjustments to Income Interest
Casualty/theft losses
minus Deductions/Exemptions
Charitable gifts
times Tax Bracket
Miscellaneous itemized
minus Tax Credits deductions
Copyright 2009
7. Tax Brackets
Rate Single HoH Joint
10% 0 0 0
Add Taxable Income
15% 8,351 11,951 16,701
minus Adjustments to Income
25% 33,951 45,501 67,901
minus Deductions
28% 82,251 117,451 137,051
times Tax Bracket
33% 171,551 190,201 208,851
minus Tax Credits
35% 372,951 372,951 372,951
Copyright 2009
8. Tax Credits
Family credits
Education credits
Add Taxable Income Foreign tax
minus Adjustments to Income General business
Low-income housing
minus Deductions
Renovation
times Tax Bracket
minus Tax Credits
Copyright 2009
9. Two Kinds of Dollars
Add Taxable Income
minus Adjustments to Income Pre-Tax Dollars
minus Deductions
times Tax Bracket
minus Tax Credits
After-Tax Dollars
Copyright 2009
10. Keys to Cutting Tax
“You lose every time you spend after-tax
dollars that could have been pre-tax dollars.”
1. Earn nontaxable income
2. Maximize deductions and credits
3. Shift income: later years, lower brackets
Copyright 2009
12. #3: Wrong Business Entity
C-Corp?
S-Corp?
LLC?
Sole Prop?
Copyright 2009
13. Sole Proprietorship
Report net Pay income
income on tax on net
Schedule C income
Pay SE tax up
to 15.3% on
income
Copyright 2009
14. S-Corporation
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to Avoid FICA/SE
15.3% on salary tax on income
Copyright 2009
15. Employment Tax Comparison
S-Corp FICA Proprietorship SE
Salary $40,000 Income $80,000
FICA $6,120 SE Tax $11,304
Net $73,880 Net $68,696
S-Corp Saves
$5,184
Copyright 2009
17. Simplified Employee Pension
“Turbocharged” IRA
Contribute up to 25% of 30000
income 25000
Max. contribution: $49,000 20000
Must contribute for all 15000
eligible employees
10000
Contributions directed to
5000
employee IRAs
0
No annual administration 30,000 60,000 90,000 120,000
SEP Contribution
Copyright 2009
18. SIMPLE IRA
Defer 100% of income up to
$11,500 16000
Age 50+ add $2,500 “catch 14000
up” 12000
10000
Business “match” or “PS”
8000
Contribute to IRAs 6000
No annual administration 4000
2000
0
30,000 60,000 90,000 120,000
SIMPLE Contribution
Copyright 2009
19. 401(k)
Defer 100% of income up to
$16,500 45000
Age 50+ add $5,500 “catch 40000
up” 35000
Employer contributes up to 30000
25000
25% of “covered comp”
20000
Max. contribution: $49,000 15000
Loans, hardship withdrawals, 10000
rollovers, etc. 5000
Simplified administration for 0
30,000 60,000 90,000 120,000
“individual” 401(k)
401(k) Contribution
Copyright 2009
20. Defined Benefit Plan
Guarantee up to $185,000
Age Regular 412(i)
Contribute according to
age and salary 45 $80,278 $164,970
Required contributions
“412(i)” insured plan 50 $133,131 $258,019
“Dual” plans
55 $211,448 $395,634
60 $236,910 $450,112
Projections based on retirement at age 62
with $165,000 annual pretax income.
Copyright 2009
21. #5: Missing Family Employment
Children age 7+
First $5,700 tax-free
Next $8,350 taxed at 10%
“Reasonable” wages
Written job description, timesheet, check
Account in child’s name
FICA/FUTA savings
Copyright 2009
22. #5: Missing Family Employment
Children age 7+
First $5,700 tax-free
Next $8,350 taxed at 10%
“Reasonable” wages
Written job description, timesheet, check
Account in child’s name
FICA/FUTA savings
Copyright 2009
23. #6: Missing Medical Benefits
Employee benefit plan
– Married: Hire spouse (no salary necessary)
– Not married: C-corp
Reimburse employee for medical expenses
incurred for self, spouse, and dependents
Works with any insurance
– Use your own insurance
– Supplement spouse’s coverage
Copyright 2009
24. MERP/105 Plan
Major medical, LTC, Medicare, “Medigap”
Co-pays, deductibles, prescriptions
Dental, vision, and chiropractic
Braces, fertility treatments, special schools
Nonprescription medications and supplies
Copyright 2009
25. MERP/105 Plan
Written plan document
No pre-funding required
– Reimburse employee
– Pay provider directly
Bypass 7.5% floor
Minimize self-employment tax
Copyright 2009
26. Health Savings Account
1. “High deductible health plan”
- $2,000+ deductible (individual coverage)
- $4,000+ deductible (family coverage)
Plus
2. Tax-deductible “Health Savings Account”
- Contribute & deduct up to $3,000/$5,950 per year
- Account grows tax-free
- Tax-free withdrawals for qualified expenses
Copyright 2009
27. #7: Missing Home Office
Determine “BUP” of home
– Divide by rooms
– Square footage 1500
– Eliminate “common areas”
100
144
Copyright 2009
28. #7: Missing Home Office
Deduct “BUP” of expenses:
– Mortgage/property taxes
(better than Schedule A)
– Utilities/security/cleaning
– Office furniture/decor
– Depreciation (39 years)
Increase business miles
Copyright 2009
29. #7: Missing Home Office
When you sell:
– Recapture depreciation
– Keep tax-free exclusion
Copyright 2009
30. #8: Missing Car/Truck Expenses
AAA Driving Costs Survey (2008)
Vehicle Cents/Mile
Small Sedan 42.1
Medium Sedan 55.2
Large Sedan 65.1
4WD SUV 69.7
Minivan 57.6
Figures assume 15,000 miles/year; $2,941/gallon gas
Copyright 2009
31. #9: Missing Meals/Entertainment
Bona fide business discussion
– Clients
– Prospects
– Referral Sources
– Business colleagues
50% of most expenses
Home entertainment
Associated entertainment
Copyright 2009
