I have come to the conclusion that I’ve been a chump for many years. You see, I used to view paying taxes as a patriotic duty – I didn’t like it, but felt it was necessary to pay my fair share. Clearly that has made me a bad businessperson.
So help me minimize my tax bill. Some background:
I am self-employed and now semi-retired. I take deductions for business use of my home. My business miles are minimal so I take mileage for them.
Due to inheritances we have amassed a pretty nice portfolio of nonqualified investments.
My husband is employed full-time and expects to be for the next three years or so.
We own our home outright – we paid off our mortgage in 1993. Because of this, most years we don’t have enough expenses to itemize our deductions.
So what can I do to minimize my taxes?
One idea I had was to incorporate as an investment firm and move our nonqualified investments into the privately held corporation, with my husband and I each 50% owners. If I did this, it seems I could take some deductions that wouldn’t otherwise be available. For instance, the tax software I use doesn’t ask what I pay in investment advice, so I assume I can’t deduct that, but that The Middon Organization could.
Also, I get invited to a bunch of annual meetings for companies in which I own stock. I don’t believe any expense I’d occur in attending such meetings would be deductible. I have a sister who lives in Washington State, and I own a few shares of Microsoft stock. If The Middon Organization owned the stock, couldn’t I travel to the annual meeting, visit my sister, and deduct all the expenses except those related to the personal portion of the trip?
My husband and I play competitive bridge. It seems to me that I could find a regional tournament or two at the right time and in the right city that I could combine attending the tournament with attending an annual meeting of some company. I would buy a few shares of the relevant stock if necessary. Our airfare would be tax deductible, no?
So, what do you think? Is this doable?
Again, are there other steps I could take so I’m no longer such a chump when it comes to taxes?
You really need to talk to someone in person who can look at the whole picture. At your age, estate planning might be part of the process.
Anyway, investments in a corporation is a losing idea. What you’re describing is a PHC - personal holding company and there are special taxes to discourage you from doing that.
Investment expenses are deductible for an individual, but they are part of itemized deductions. Maybe that’s why your software doesn’t ask or maybe you’re just skipping the appropriate section.
If you want a better deduction investment-related expenses, you can always make a mark-to-market election and expense those things on Sch C. Of course, there’s a lot more to it than the deduction.
Real estate is a good investment if you’re looking for deductions. Sch E expenses are deductible from the real estate income without needing to itemize your deductions.
dracoi gave good advice, I just wanted to say that paying your fair share of taxes is indeed a duty, AKA a legal requirement. Your ‘fair share’ is set forth by the rules of the existing tax code as enacted by your elected representatives. Using the tax code to pay the minimum amount considered your fair share is just plain smart. Neither really has anything to do with patriotism.
We are maxing out our HSA and my husband’s 401k. I make the max deposit to my retirement account each year.
The only time in recent history we itemized our deductions was the year we had large medical expenses.
I figured the “incorporate and get those juicy corporate tax breaks” strategy wasn’t going to work. The system is rigged against common tax payers.
I’ll look into the other suggestions.
How many years can you have a Schedule C company that loses money before the IRS hammers down on you? Because maybe I should think about putting together another company, designed to lose money, to offset some other income.
Well, you have to have a profit motive. And a auditor can disallow start up expenses as well- "start up expenses’ which mean you dont get them until you have a real income, and then you amortize them.
And since the expenses have to be real business expenses, I dont see the profit in, for example, buying $500 of business cars, stationary, flyers and legal expenses, just to get a $500 write off which saves you …$200 maybe?
The IRS is wise to this, and can & will disallow everything that is really personal.
In fact the Op put a BIG RED FLAG on her return by deducting Office in the Home expenses, which most people do wrong.
(OIH cant make or increase a business loss, for example)
As dracoi says, there’s a lot more to consider with mark-to-market. You lose the ability to defer tax on unrealized gains. If you maintain substantial unrealized and untaxed gains on stock positions, you are in a much better position if the market crashes.
Can you buy a few congressmen or senators? If so you can put forth the Anny Middon tax relief and job creation bill. That seems to be the traditional way that the wealthy redefine their fair share as $0.00
Yeah: the two ways to seriously reduce your tax bill profitably are to:
A) Lose a lot of other people’s money but be allowed to keep the tax deduction for yourself.
or
B) Make a lot of money in a specific manner that’s got pre-approval to be not-taxed. Profitable non-profit foundations are an example that fits this description.
Well yeah, (actually I have no clue) but… you’re losing money those three years. Is the tax savings on the loss going to completely offset the loss itself? If not, then it’s not the best way to save yourself money. If all you care about is minimizing the IRS’s cut, then it might well accomplish that.
If you have any traditional IRAs you could consider converting them to Roth IRAs. That means you have to pay income taxes on the converted amount right now (which means this year’s gonna suck) but down the line might mean lower taxes all in all.
If your husband’s job offers a Roth 401(k), you can consider taking the tax bite on his contributions right now and saving the taxes in the future. I have no clue whether this makes sense financially for you - but if you expect your income to remain roughly the same once you retire, it could be a good idea (same thing with the possible traditional-to-Roth IRA conversion).
It’s possible you’d get away with this, but, no, you can’t do this legally. You are allowed to deduct reasonable travel expenses that are required for your business. But, as we know from the start of your paragraph, the purpose of your travel wasn’t to attend the annual meeting of some company, it was to engage in the hobby of playing bridge. Buying some shares as a pretext doesn’t change that. Now, if you actually buy enough shares that it is reasonable for you to travel to the company meeting, and the meeting happens to coincide with a bridge tournament in that city, that’s another thing. But I imagine it would have to be a fairly large investment.
It’s not like you can justify, say, a $1000 annual weekend trip somewhere to oversee your $10k stake in some company.
Presumably, this idea would be associated with something like the above Competitive Bridge Business. If you can take expenses that you would just incur as a part of your normal life and transmute them into expenses of the business, then you manage to get a deduction on expenses you’d have anyway.
I believe it’s quite unlikely that this scheme would survive an audit.