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Author: HunterFamily Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Tax Deferral Ideas Date: 8/13/2003 11:12 PM
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Greetings,

This is my first post here. I was curious what options some may be using to set aside money tax deferred, for either retirement, or just to shelter their money in general.

We're a one income family, maxing our 401(k) each year, and due to income limitations cannot contribute to any type of IRAs. We're contributing to a 529i plan for each of our children, since this will at least shelter interest gain. We also purchase stock each month, by whatever Tom and Dave recommend on the fooladvisor each month.

Anyway, I guess I was thinking along the lines of starting a Sch. C activity, that may qualify as an active interest, or even buying an interest in a farm (doing the bookkeeping to keep it as active interest) .... something along that idea.

I'd be interested in any comments or ideas. Thanks.

dh
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Author: pmarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66490 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 9:28 AM
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We're a one income family, maxing our 401(k) each year, and due to income limitations cannot contribute to any type of IRAs.

Not true. As long as one of you has earned income, you are both under 70 1/2, and you file a joint return, both you and your spouse can make nondeductible contributions to traditional IRAs at any income level. It doesn't affect current taxes, but earnings aren't taxed until withdrawn. See IRS Publiction 590.

If you can find legitimate work to pay them for, you can employ your children around the house, do the paperwork, and they can have earned income with which to fund Roth IRAs. (There's an article on this in the FAQ IIRC.) You don't get a tax deduction, but they get nice appreciation tax-free between now and their retirements.

Be careful with this business stuff. You sound at least susceptible to scams, and there are plenty of them out there. Before you invest in something, make sure you're investing in it to make money, not to save on taxes. IRS is once again cracking down on shelters, and when they catch a bad one, it isn't pretty.

Phil Marti
VITA Volunteer

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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66491 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 10:20 AM
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As long as one of you has earned income, you are both under 70 1/2, and you file a joint return, both you and your spouse can make nondeductible contributions to traditional IRAs at any income level.

I was going to mention this myself last night - that OP could still contribute to nondeductible, traditional IRAs. But then I figured, why bother? - since there doesn't appear to be a good reason to have such an IRA these days. Granted, your non-zero basis means that a small part of your future withdrawals will be tax-free. But the earnings will be taxed as ordinary income. In the meantime, both capital gains and most ordinary dividends are taxed at a much lower rate, so you're better off holding such assets in a regular, taxable account. And I can't think of much else that would sensibly go in a traditional IRA.

Lorenzo (who has a sizeable, nondeductible, traditional IRA...)

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Author: HunterFamily Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66492 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 10:36 AM
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I really haven't looked at the traditional IRAs, I figured if I couldn't deduct it (which I felt was the real advantage)money was better invested elsewhere.

Thanks for the heads up for the kids idea. I'll look into that. Putting Roth's away for them now at a young age would be great.

I try to be pretty careful where money is invested. I mentioned farms, only because of the bizarre tax laws as it relates to farms ... which just goes to show that tax laws have nothing to do with what makes sense. Unless this has changed in the last few years, it used to be that farmers could prepay expenses before either tax year end or 4/15 (I don't remember which) turning profits into losses …. unless I misunderstood that?




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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66493 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 11:23 AM
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Considering tax implications is always a good idea. Looking for tax shelters specifically is usually not.

Have you considered a vacation home ?

rad

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Author: HunterFamily Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66498 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 1:44 PM
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Vacation home is a good idea. I've gone back and forth on that idea, only because our family has two vacation homes already which I'm able to use which doesn't cost me anything. I've even asked to buy one from my folks, but they just tell me to use it for nothing instead ... which we've been doing this summer.

Our taxes are really high, AMT kills us each year, which is why I posted this question. I just wasn't sure if there was something obvious that I was missing that I should be doing.




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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66502 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 2:17 PM
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Our taxes are really high, AMT kills us each year, which is why I posted this question. I just wasn't sure if there was something obvious that I was missing that I should be doing.

Our taxes are high but now that my daughter's in the USAF, I just hink of it as paying her salary.:)

rad


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Author: HunterFamily Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66503 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/14/2003 3:48 PM
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Yeah, it doesn't feel so bad when you feel like you're supporting family members! I just wish I didn't have to support them so much! :)

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Author: wdove511 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66697 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/28/2003 11:22 PM
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Because of your predicament with AMT and taxes, it seems that a Schedule C activity would only benefit you if you have a net loss (for taxes, at least). However, the only real way to accomplish it on an economic level is to use depreciation (which is itself a possible source of AMT tax) to generate the loss. Even then, the hassle associated with generating income - when compared to your "real" source of income - could make you wonder why you bothered with it.

Another way is to convert one of your hobbys into a business, and try to shift nondeductible personal expenses into a business expense. Good luck trying to do that.

Or you could do real estate.

A client ar the firm has a property at a resort. When it rents, the client gets $30,000 per month. It usually rents for two or three months during the year (sometimes four - the minimum rental period the client allows is one month).

However, the client has certain discriminating tastes, and it seems that every year, the client finds "repairs" that are needed. Last year, the repairs (which included landscaping) were over $100,000. with depreciation, property taxes and the rental commission to the realtor, the property generated a $50,000 loss last year. It's gone on like that for years. The property is currently on the market. This client is wealthy enough that we wonder why they even permit somebody to rent it. . . they certainly don't need the money.

You're going to find that any enterprise - whether it generates income or losses - is going to be a hassle. Is it really worth your time? Obviously, your time is very valuable, and your time generates a substantial income. Why do you want to subject yourself to the extra stresses and strains? And for what - 40 to 50 or even 60 cents on the dollar (in tax savings, or net profit after taxes).

If discretionary funds are available (and they certianly seem to be), why not invest in (boring) municipal bonds with a tax free yield? It's small, but small compared to what?

Or how about a Fool hidden gems or motley fool stock advisor subscription, do a little research, and sock some shares of these (hopefully) profitable investments away. Appreciation in your security portfolio has a ZERO income tax rate - for both the REGULAR tax and AMT tax! That's REAL TAX SAVINGS! And when you sell them more than 12 months from now - your tax rate is 15% federal, plus 9.3% in CA or about 8% in New York (higher if you live in NYC, though). Not too shabby.

Anyway - just my $.02

Good luck.
BILL (wdove511)






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Author: HunterFamily Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 66707 of 121061
Subject: Re: Tax Deferral Ideas Date: 8/29/2003 12:01 PM
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Bill,

I can see how the extra hassles of the tax breaks may not be worth the time involved.

A buddy of mine has been trying to convince me to buy rental properties; commercial and residential apartments. He actually quit his job three years ago, and now cash flows $200,000+ a year from these properties. I wouldn't mind doing it, but my wife can't stand having any debt, even when it cash flows profitably ... just the idea of having large outstanding notes payable like that would drive her insane.

Like you said, nothing wrong with putting money away in stocks and watching it grow .... debatable, (although my buddy doesn't feel so) and arguably a better return than real estate, and without the headaches.

I liked your comments on the "rental property". Funny the lengths will some go for a tax break or profitability. I worked on an audit once when they were borderline profitable .... the CFO actually wanted us to include $20K of promotional material as a prepaid expense, to turn his loss into income. We didn't do it of course, just sad what some will do ...

Thanks for your comments.

Doug

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