Tips for Minimizing Taxes

[Mephistopheles]

I am creating this thread so that we can share information with each other in regards to minimizing federal, state, local taxes, creating tax shelters, or whatever other strategies you'd like to share to achieve this goal. I live in NYC, which along with the Federal and State government, steals like 40-50% of everything I earn. After receiving a bullshit $115 parking ticket today, I became motivated to do everything I can to minimize the amount of money the government confiscates from me.

 

I'll start things off with this question - does anyone here use an LLC to purely for the purpose of tax saving? It's something I am looking into but I know very little about. If you can share guidance that would be great. Thanks

[Parsad]

I'm ok with you minimizing your tax burden, but I always say that everyone should pay their fair share.  After that, if you want to use legal means and tools to reduce your taxes, that's perfectly fine.  How do I do it?

 

- Max out RRSP

- Max out TFSA

- Reinvest RRSP refund

- Donate through personal contributions so I get tax credits to reduce personal income.

- Created a personal corporation for my personal business (COBF) by transferring assets into it...pay corporate tax rate in Canada for small business...15% on first $500,000 of business income each year or first $150,000 of passive income

- Run COBF related deductible expenses through personal corporation

- Non-deductible expenses through personal income

- 95% of my investments are in RRSP, TFSA, personal corporation, Corner Market Capital (and it's entities)...so I do not take money out in additional salary and simply keep compounding it

- I live on $50-70K a year from my personal income like I could go broke tomorrow!

 

Cheers!

 

 

[TwoCitiesCapital]

It's easy, but simply requires forward thinking.

 

I max out HSAs, 401(k)s, and IRAs to maximize my tax-free/tax-deferred savings while I'm still eligible to do so.

 

When you can, in favorable tax years, take the tax hit to convert more of the tax-deferred to tax-free. For instance, I'm expecting that I may be married in the near future which will drop my tax rate by filing jointly. Therefore, I'm maxing contributions to a standard 401(k) and IRA with the intent of converting both to Roth after the marriage when my tax rates are lower.

 

For taxable savings, I'm of the belief that it doesn't belong in stocks/bonds. My taxable savings will be investes almost exclusively in real estate for the foreseeable future. Depreciation, mortgage interest deduction, favorable rules on property sales/exchanges, QOZs, etc. all exist to make real estate a tax efficient investment that you lever 3-5x.

 

With the leverage, and the tax sheltering, it doesn't take more than 2-3% gains on principal value of the property for you to come out well ahead of stocks on an after tax basis. Further, you can get that through property appreciation OR via rents giving you flexibility in how it's achieved.

 

[gokou3]

The tax minimizing strategy is different for each country, so I suggest having separate threads for each.

[james22]

Foreign Earned Income Exclusion...

[Cigarbutt]

I am creating this thread so that we can share information with each other in regards to minimizing federal, state, local taxes, creating tax shelters, or whatever other strategies you'd like to share to achieve this goal. I live in NYC, which along with the Federal and State government, steals like 40-50% of everything I earn. After receiving a bullshit $115 parking ticket today, I became motivated to do everything I can to minimize the amount of money the government confiscates from me.

 

I'll start things off with this question - does anyone here use an LLC to purely for the purpose of tax saving? It's something I am looking into but I know very little about. If you can share guidance that would be great. Thanks

Your question could go in many directions. My example is Canadian but am trying to use your terminology.

I started with a sole proprietorship, added an expense partnership and ended up with a C-type corporation.

The underlying design can have a significant snow-balling effect on taxes, the idea being not to avoid them but to minimize them. Long-term planning is essential, especially when starting out.

 

The first question is to figure out if you're an employee, self-employed or if you qualify as an incorporated entity (partnership or corporation). If your parking ticket anger does not wear off, you may want to do some research or even consult specific professionals. It's basically an NPV decision. When I started, I did all the research and paperwork myself (government entities and tax authorities have good resources and even people you can talk to). There are a lot of rules, forms to fill etc. If it's worth it ($), you can outsource some or all of the administrative work but I would suggest that you understand the underlying principles in order to maximize the outcome and limit negative surprises. Your question about the LLC form indicates that perhaps the low-hanging fruit is to include expenses to offset revenues such as car use, cell phone, computer, home office etc). But the key is to understand what is possible and allowed in your jurisdiction. If you go that route, be ready for audits and keep records.

 

After a 2 min search:

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

https://www.investopedia.com/articles/personal-finance/102815/taxes-new-york-small-business-basics.asp

https://www.tax.ny.gov/pdf/publications/multi/pub20.pdf

https://www.cnbc.com/2018/01/25/one-way-to-play-the-new-tax-law-start-an-llc.html

 

[DooDiligence]

Changes in latitude, can lower tax magnitude,

keep you from slipping in snow.

 

With all of your cunning, and all of your running,

buy a beach house and save lots of dough.

 

---

 

I suggest Florida

[KCLarkin]

I became motivated to do everything I can to minimize the amount of money the government confiscates from me.

 

My general tax recommendation is to avoid the "government confiscation" mindset trap. I consider taxes my civic duty. I pay my fair share and don't waste my precious life stressing over tax minimization strategies. Especially those near the grey line.

 

To minimize your taxes, you will need to spend your time hanging out with lawyers and accountants. I'd rather just write the cheque to the taxman.

 

Also, I choose to be happy about paying taxes. In Canada, my taxes go to pay for healthcare, education, police, etc. They pay government workers who support their families. These are all good and noble professions. I guess if I was American, I'd be wary about how much of my taxes was being spent on guns, bombs, and prisons.

 

To compensate for paying more than my fair share of taxes, I choose to be less charitable. I expect to have money left when I die. That money will either go to my heirs, "philanthropy", or taxes. I'm not sure any of those three is clearly more "worthy". I can save time and stress now by not over-optimizing my tax returns. And the only tradeoff is that my heirs and "charities" will receive less than if I had optimized my taxes.

[valueinvestor]

I became motivated to do everything I can to minimize the amount of money the government confiscates from me.

 

My general tax recommendation is to avoid the "government confiscation" mindset trap. I consider taxes my civic duty. I pay my fair share and don't waste my precious life stressing over tax minimization strategies. Especially those near the grey line.

 

To minimize your taxes, you will need to spend your time hanging out with lawyers and accountants. I'd rather just write the cheque to the taxman.

 

Also, I choose to be happy about paying taxes. In Canada, my taxes go to pay for healthcare, education, police, etc. They pay government workers who support their families. These are all good and noble professions. I guess if I was American, I'd be wary about how much of my taxes was being spent on guns, bombs, and prisons.

 

To compensate for paying more than my fair share of taxes, I choose to be less charitable. I expect to have money left when I die. That money will either go to my heirs, "philanthropy", or taxes. I'm not sure any of those three is clearly more "worthy". I can save time and stress now by not over-optimizing my tax returns. And the only tradeoff is that my heirs and "charities" will receive less than if I had optimized my taxes.

 

Flip side by minimizing one's taxes, one could shoose to be more chartiable. It really depends on the circumstance, however here's a video that may apply to your circumstance:

 

[Cigarbutt]

I became motivated to do everything I can to minimize the amount of money the government confiscates from me.

 

My general tax recommendation is to avoid the "government confiscation" mindset trap. I consider taxes my civic duty. I pay my fair share and don't waste my precious life stressing over tax minimization strategies. Especially those near the grey line.

 

To minimize your taxes, you will need to spend your time hanging out with lawyers and accountants. I'd rather just write the cheque to the taxman.

 

Also, I choose to be happy about paying taxes. In Canada, my taxes go to pay for healthcare, education, police, etc. They pay government workers who support their families. These are all good and noble professions. I guess if I was American, I'd be wary about how much of my taxes was being spent on guns, bombs, and prisons.

 

To compensate for paying more than my fair share of taxes, I choose to be less charitable. I expect to have money left when I die. That money will either go to my heirs, "philanthropy", or taxes. I'm not sure any of those three is clearly more "worthy". I can save time and stress now by not over-optimizing my tax returns. And the only tradeoff is that my heirs and "charities" will receive less than if I had optimized my taxes.

Thanks for the ethics class.

It's possible to reconcile the apparent contradiction. Mr. Buffett genuinely (I think) would support paying higher taxes (in principle) but would actively use all possible (within the spirit of the law) mechanisms in order to pay less taxes. This has been particularly significant (the label creative is too strong but unusually sophisticated may be more adequate) in the way he has set up (or criticized when not adequately done by others) tax-efficient transaction terms, when dealing with shareholders' funds. Interesting because Mr. Buffett's compounding of capital does indicate that he will maximize his output to others through philanthropy in due course.

If you run a business, tax paid is simply a cost line item and controlling costs will increase the bottom line. Adam Smith would suggest that doing your best (within the rules) to minimize taxes is likely to be the best way to maximize outcome for the collectivity.

I think we likely agree on the foundation but not on exactly about where a line should be drawn between fair share and charity.

 

Changes in latitude, can lower tax magnitude,

keep you from slipping in snow.

 

With all of your cunning, and all of your running,

buy a beach house and save lots of dough.

 

---

 

I suggest Florida

FWIW, I may become a Canadian Snowbird when the time comes but Florida would not be a fiscally efficient permanent destination.

Jimmy Buffett apparently has something to offer in Florida but Wikipedia says he is not a direct beneficiary (the company is registered as an LLC). :)

https://www.latitudemargaritaville.com/

[DooDiligence]

Changes in latitude, can lower tax magnitude,

keep you from slipping in snow.

 

With all of your cunning, and all of your running,

buy a beach house and save lots of dough.

 

---

 

I suggest Florida

FWIW, I may become a Canadian Snowbird when the time comes but Florida would not be a fiscally efficient permanent destination.

Jimmy Buffett apparently has something to offer in Florida but Wikipedia says he is not a direct beneficiary (the company is registered as an LLC). :)

https://www.latitudemargaritaville.com/

 

I'm not a huge Parrot Head but thought the lyrical reference would be appropriate.

 

I've noticed the Margaritaville moniker popping up a lot lately but don't think I'd ever buy into one of these properties.

 

Northwest Florida beats the crap out of anything else in the state (I am biased.)

 

Florida man is a hoot.

 

Florida Man Arrested for Assaulting his Mom with a Corncob

[KCLarkin]

Thanks for the ethics class.

 

Not meant to be ethical advice. It is about optimizing the right things in life.

 

A good example of this is Buffett and KO. In 1998, KO was trading over 50 times earning. Buffett surely knew it was overpriced. But instead of taking the cap gains hit, he decided to hold onto KO and merge with General RE. Then he spent several years fixing General RE.

 

Writing checks to the IRS that include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I'm sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us -- say, because we are disabled or unemployed.

 

Here Buffett isn't giving ethical advice. He clearly believes in minimizing taxes. But he approaches the whole unpleasant business with a positive outlook. Starting with the premise that taxation is confiscation and all government spending is wasteful is unlikely to lead to a happier life.

[Cigarbutt]

Thanks for the ethics class.

Not meant to be ethical advice. It is about optimizing the right things in life.

 

A good example of this is Buffett and KO. In 1998, KO was trading over 50 times earning. Buffett surely knew it was overpriced. But instead of taking the cap gains hit, he decided to hold onto KO and merge with General RE. Then he spent several years fixing General RE.

 

Writing checks to the IRS that include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I'm sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us -- say, because we are disabled or unemployed.

 

Here Buffett isn't giving ethical advice. He clearly believes in minimizing taxes. But he approaches the whole unpleasant business with a positive outlook. Starting with the premise that taxation is confiscation and all government spending is wasteful is unlikely to lead to a happier life.

Fair enough and the argument about fair share or confiscation can be avoided. But I re-read your post and it's still unclear if you pay your fair share or more than your fair share. :)

Individually, we have to choose the intensity of the exercise.

In 1944, Mr. Buffett reported net revenue of 364$ from his newspaper routes business, net of expenses (watch repair and bicycle misc) for 45$.

https://www.insidehook.com/article/news-opinion/warren-buffett-1944-tax-return

He was 14 years old and I wonder if he allocated expenses for personal use.

 

[longtermdave]

In my case (US based), I try to maximize for the family:

 

-401(k)

-403b

-457b

-HSA

-DCFSA

-Back-door Roth

-Tax loss harvesting in taxable accounts

 

I haven't been good about putting the dividend payers into tax shelters and the non-payers into taxable accounts. That's now a significant inefficiency for me, and something I'd like to find a way to fix.

[Guest Schwab711]

HSA Accounts

 

They are nearly equivalent to IRAs, but you can access the money early, penalty-free, for health expenses.

[Munger_Disciple]

HSA qualified insurance premiums used to be a lot cheaper than that of conventional plans pre-Obamacare due to their high deductibles. They are now more expensive than non-HSA plans for the same level of benefits, deductibles, etc. in California where I live. I used to contribute to HSA and buy HSA qualified plan for healthcare. Now I buy a cheaper non-HSA qualified plan, so I can no longer contribute to HSA.

 

I am self employed, and the situation may be different for people working for large companies where the employer pays most of the cost of employee insurance premiums.

[fareastwarriors]

HSA qualified insurance premiums used to be a lot cheaper than that of conventional plans pre-Obamacare due to their high deductibles. They are now more expensive than non-HSA plans for the same level of benefits, deductibles, etc. in California where I live. I used to contribute to HSA and buy HSA qualified plan for healthcare. Now I buy a cheaper non-HSA qualified plan, so I can no longer contribute to HSA.

 

I am self employed, and the situation may be different for people working for large companies where the employer pays most of the cost of employee insurance premiums.

 

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

[Munger_Disciple]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

 

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

[Parsad]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

 

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

 

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers! 

[Guest longinvestor]

Thanks for the ethics class.

 

Not meant to be ethical advice. It is about optimizing the right things in life.

 

A good example of this is Buffett and KO. In 1998, KO was trading over 50 times earning. Buffett surely knew it was overpriced. But instead of taking the cap gains hit, he decided to hold onto KO and merge with General RE. Then he spent several years fixing General RE.

 

Writing checks to the IRS that include strings of zeros does not bother Charlie or me. Berkshire as a corporation, and we as individuals, have prospered in America as we would have in no other country. Indeed, if we lived in some other part of the world and completely escaped taxes, I'm sure we would be worse off financially (and in many other ways as well). Overall, we feel extraordinarily lucky to have been dealt a hand in life that enables us to write large checks to the government rather than one requiring the government to regularly write checks to us -- say, because we are disabled or unemployed.

 

Here Buffett isn't giving ethical advice. He clearly believes in minimizing taxes. But he approaches the whole unpleasant business with a positive outlook. Starting with the premise that taxation is confiscation and all government spending is wasteful is unlikely to lead to a happier life.

Agree that sweating over tax consequences after doing well in life is not worth it. I have another reason that is not readily appreciated in the developed economies. Just go and see what poor tax regimes, especially outright evasion is doing to the developing economies! I was 28 when I immigrated to the US, and have personally experienced the devastating effects of poor tax collection.

Believe me, we’re  blessed with the state of affairs with taxes being a key part.

[mcliu]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

 

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

 

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

 

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

[Cigarbutt]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

 

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

 

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

 

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

Your statement is correct on a first-level of thinking.

Tax authorities allow different formulas based on the integration principle, ie whatever formula chosen, in theory, the result for owed taxes should be the same at the individual level. The key here is the deferral advantage. The small business deduction can be used on top of lower corporate tax rates for "active" business income and the amount of taxes to be paid eventually can be deferred and another second generation layer of money can be made from passive income. There have been modifications and the idea now is that a business loses its small business deduction advantage progressively when passive income reaches 50K and disappears above 150K. Conceptually, like reference three of the first link shows: "Why is the CCPC deferral advantage significant? The answer lies in a well-known principle dealing with the deferral of the taxation of income (the “deferral principle”). The deferral principle holds that the deferral of the taxation of income is the equivalent of not allowing a deferral, but instead exempting from tax the income earned by investing the income.[3] In other words, allowing a tax deferral is the same as allowing an exemption from tax for investment income."

 

https://wolterskluwer.ca/blog/ccpc-passive-investment-income-saga-comes-end/#referenceS2PCIe110

https://www.advisor.ca/sun-life-retirement/practice-advice/dont-be-passive-about-canadas-new-passive-income-rules/

[mcliu]

As self-employed person, there are many more options available to minimize taxes than a W-2 person.

 

Agree. For instance you can contribute bigger amount to tax deferred plans thus reduce your taxable income.

 

Yes, in Canada too.  Other benefits...very low tax rates for first $500K of business income each year or $150K in passive (investment) income...15% rate.  Money can be sheltered in there at low rates for decades.  Plus all allowable business exemptions can be written off against income.  There are more esoteric borrowing strategies with corporations as well, but I avoid anything that starts to get too complicated.  You just do the available simple things and you can reduce your tax burden considerably while paying your fair share.  Cheers!

 

Isn't passive income in CCPCs taxed at the highest marginal tax rates..?

Your statement is correct on a first-level of thinking.

Tax authorities allow different formulas based on the integration principle, ie whatever formula chosen, in theory, the result for owed taxes should be the same at the individual level. The key here is the deferral advantage. The small business deduction can be used on top of lower corporate tax rates for "active" business income and the amount of taxes to be paid eventually can be deferred and another second generation layer of money can be made from passive income. There have been modifications and the idea now is that a business loses its small business deduction advantage progressively when passive income reaches 50K and disappears above 150K. Conceptually, like reference three of the first link shows: "Why is the CCPC deferral advantage significant? The answer lies in a well-known principle dealing with the deferral of the taxation of income (the “deferral principle”). The deferral principle holds that the deferral of the taxation of income is the equivalent of not allowing a deferral, but instead exempting from tax the income earned by investing the income.[3] In other words, allowing a tax deferral is the same as allowing an exemption from tax for investment income."

 

https://wolterskluwer.ca/blog/ccpc-passive-investment-income-saga-comes-end/#referenceS2PCIe110

https://www.advisor.ca/sun-life-retirement/practice-advice/dont-be-passive-about-canadas-new-passive-income-rules/

 

Ok thanks, that makes sense.

[lnofeisone]

Anyone happens to live in DC (the actual DC) and owns muni bond funds/etfs? Just curious what my tax forms will look like given that (based on my research last Feb) interest from individual securities (completely onboard with ST/LT gains) are exempt from Federal tax and DC doesn't charge tax either on any muni in the US.