loopholes of the rich

8/6/2019 Loopholes of the Rich

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LOOPHOLESOF THE RICH

Loopholes of the Rich1


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Types of Income

} Earned Income What you earn when you workfor money

} Self-employment income Income you make

when working for yourself e.g. Sole proprietor,partnership, corporation or Limited Liability income

} Passive Income Income you have earned fromassets you own such as real estate or a business

} Portfolio Income consists of interests anddividends derived from investments such as papersecurities and royalties

Saturday, May 07, 2011

Loopholes of the Rich

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Earn-Tax

Syndrome ofthe AverageTax Payer

The governmentbeganwithholding taxesfrom employees

in 1943.



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L

l s

f t

Earn

Taxes

Spend


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5

Company

Government

YourExpenses

GovernmentL

l s f t

The business OwnerSystem to wealthEarn

Detour

Spend

Tax


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Picking up the right Business

Structure} Sole proprietorship

is taxed at yourpersonal incometax rate, in additionto your federal andstate income tax

} Partnership incomeis taxed at thepartners level.

(Phantom income)for limited partner.-General partnerpays selfemployment tax

on their income, inaddition to federalor state income tax



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Picking up the right Business

StructureContd} Limited Liability

Company (LLC)

Can be used forany type of entity.LLC can be taxedand treated similarto, a partnership, S

corporation or a Ccorporation

} S corporation acts likea regular corporation,the difference is that

you make a specialelection to be taxed asan S corporation.Income from an Scorporation is neversubject to self-

employment tax.} S corporation is taxed

at shareholdersincome tax levels.



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Picking up the right BusinessStructureContd

}C corporation is taxed at its own tax rateschedule. The corporation allows you toprovide the greatest number ofdeductible employee benefits tax-free



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Saturday, May 07, 20119Example: You pay taxat 28% marginal tax

rate and you invest$1000 per year

After taking out

taxes, you onlyhave $720

available forfuture investments

eing ableto defer

will meanan

additional$6456 in

wealth

If invest for10 yrs the

differenceis only$1179

Invest

$1000per year@12% for

20yrs

Moremoney,more

growth!Loopholes of the ich

Tax-deferred Income

Tax-deferred Income: Putoff paying taxes until alater date.

Your money grows faster!

Benefit


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INCOME EXPENSES

TAXABLE

INCOME

TAX

RATE

TAX

L

l s f t

R

Tax Free Income

Allows your investment togrow without taxes andcan liquidate theinvestment take valuewithout paying tax on it.

E.G : Tax free gainallowed through the saleof your home you havelived in for two of thepast five years and

investing in entities suchas life insurance plans


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Expenses}

There shall be allowed as a deduction, all theordinary and necessary expenses paid or

incurred during the taxable year in carrying onthe trade of business. Employees have nodeductions available to them.

} Deductions include: Auto Expense, Bad debt,business start up expenses, educationexpenses, entertainment expenses, travelexpenses, legal and professional fees, interest,

moving expenses, software, charitablecontributions, retirement plans, group term lifeinsurance



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Business Structures

Partnership

FORM 1065

No Tax

Individual

FORM 1040

Individual Rate

If General Partner + S/E Tax

S Corporation

FORM 1120S

No Tax

IndividualFORM 1040

Individual Rate

No S/E Tax

C CorporationFORM 1120

Corporate Tax

Individual

FORM 1040

No tax on corporationsincome



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Withor

without

cash


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Other forms of paying less on

taxes legally using entities:You earn$59,000Income TaxBracket:39.6%

You make$59,000Tax Bracket for

a Ccorporation:15%

Employdependents oryour children Zero taxbrackets

$5900039.6%=$23,364

$50,00015%=$7500

child$45000%= $0

$45000%=$0

Total: $7500

Tax savings :

$23,364-$7500=$15,864

Additional income:$40,000



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Deferring sometimes meansnever

}With real estate you can apply the 1031exchange roll over gains(untaxed) intoanother property

}Wealthy people roll over their gains untilthey die thus avoiding paying taxes.

}Donate the building for a cause - no taxes

paid!



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Downside of C-Corps isDOUBLE TAXATION!

} Both corp and individual owner taxed.

Ways to go around it

}Most expenses a corporation pays arededucted against the income of thecorporation.

} Dividends are taxable to the shareholder

}Can avoid this taxation by not payingdividends and paying more in salary orbenefits which are tax deductible



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HOW TO AVOID DOUBLETAXATION} Dont pay dividends} Careful tax planningYEAR 1:

Taxable income $50,000Federal income tax @15% $7500YEAR 2: YEAR 2:

Corporation Individual

Income: $50,000 Income $30,000

Salary: ($30,000) Taxable income $30,000Taxable Income $20,000



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OWN YOURBUSINESS, IT

GIVES YOUMORE

LEVERAGE!



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