Thus, the idea of personal tax shelter, the thing is, how can you tell which ones are the good ones, and which ones are the bad ones. - Tax shelters can certainly 'keep your money out of the hands of the IRS' - but some of them can cost you dearly as well.
Generally, all real estate purchases have definite tax advantage. In even the simplest kind of transaction such as buying a better home for your family, you'll be able to deduct from your gross income the amount you pay in mortgage interest and property taxes.
If you rent out your old house, or buy a house as a rental property, you'll be allowed to deduct all your expenses from the rent you receive. You can also deduct the depreciation on the house, based on the cost or on the market value at the time the house was converted to a rental property, whichever is lower.
You also have the option to compute your depreciation over 15-years, which would probably give you a tax loss even though the property is producing a cash income for you. Remember though, you cannot claim a depreciation on the value of the land, only for the cost of the house.
Until 1981, you could not deduct losses on a property rented to relatives - however that rule has been repealed and now makes family tax savings available in certain situations when you rent to relatives. Be sure to check with your local IRS office for complete details.
So-called Clifford Trusts are tax shelters that shift the gross income of a company or family bread-winner to other family members in lower tax brackets. An income-producing property is transferred to a trust which must be set up to last 10 years and a day. The beneficiary receives the income during this period, and then the property reverts back to the grantor.
This type of trust is often used to accumulate money for children, who can use it for higher education or for a start in a career or business of their own. You should bear in mind when setting up such a trust however, that parents have a legal duty to support their minor children and thus, a trust cannot be set up to be used for that purpose.
Equipment Leasing Programs are another common income-sheltering method. Most of these programs can be combined with a trust. Here's how they work: The owner of a business sets up a trust for a family member. Business property or equipment is transferred to the trust, and then leased back to the business. The trust gets the income, and the business gets a deduction for the rental fees it pays.
From another angle, the trust could buy equipment for lease to the business and get deductions for interest and other expenses involved. Investment tax credit can also sometimes be claimed in non-net-lease situations.
Making interest-free loans is another method of sheltering one's income. Say you lend several thousand dollars to a son or daughter who invests the money. The borrower gets the income, and you eventually get your money back. If you're in the 50% tax bracket and the borrower is in the 25% bracket, your tax savings can be considerable.
Investing in municipal bonds is very definitely a means of sheltering your income. Income from these bonds is tax free, but it's generally lower than from other types of investments. Municipal bonds pay at a fixed rate of interest. Relative to other kinds of investments you could make, you'll lose on Municipals if interest rates go up, and win only if the interest rates on other investments go down.
By now, everyone knows about IRA's and Keogh plans for the self-employed. You put money into a personal retirement trust and pay no taxes on it until you actually withdraw from it. Some companies give their employees a chance to set up their own retirement accounts, thereby deferring part of their gross incomes until after they retire.
However, deferring income until after one retires is no longer as attractive as it used to be, particularly if your tax rate is not expected to change after retirement. If you don't anticipate a lower tax bracket after you retire, it's generally better to take all your income now and invest it in high yield growth funds that will mean more money for you in your retirement years.
There are innumerable ways and methods to shelter your gross income from the tax collectors, all of them legal. The important thing is to check them out with your tax preparer and decide which would be best for you.
The often advertised advantage of incorporating, that you can manipulate your salary in order to save on tax dollars, is real because of corporation laws. However, the IRS frowns on this practice. When your businesses are successful and making a lot of money, definitely check with your accountant on the advantages of incorporating.
As a corporation, you'll be subject to a number of other drawbacks as well: generally higher state taxes, stricter laws concerning the operation of your business, more elaborate accounting procedures, and legal papers that are required just about every time you make a major move or sign almost any contract. Thus, your legal and accounting fees will be much higher as a corporation than will those required for a sole proprietorship type of business.
As a sole proprietor or partnership, you'll find many areas require the registration of your business name. The cost however, is minimal, ranging from $5 to $100. About the best way to find out what laws apply in your area, is to call your bank and ask if they need a fictitious name registration card or certificate in order for you to open a business account.
Selecting a name for your business is quite important to you and particularly relative to advertising. Your business name should describe the product or services you offer. Fancy names such as, Linda's Clipping Service will lose potential "walk-in and passing" customers to the beauty shop across the street that calls itself, Patti's Beauty Salon or Jane's Hair Styling shop.
The advantage of using your full name in the title of your business, such as Johnny Jones' Meat Lockers, has the advantage of making credit somewhat easier to come by - provided you pay your bills on time - but it also includes the disadvantage of confining your services to a local or at most, a regional area.
Should you buy, lease, or rent space for your business? Think twice before you make any decision along these lines. Most businesses tend to grow quickly or they never get off the ground. There are a few exceptions, but only a very few, that tend to grow at a modified rate.
So, buying a piece of property and setting up your business on or within that property obligates you to ownership regardless of what happens to your business.
Leases are almost always very strong contracts written by attorneys to the advantage of the property-owner. When you sign an agreement to pay someone for the use of their space over any length of time, you're "nailed in" to paying for that space regardless of what happens to your business.
In the beginning, it's wise to either get the shortest-term lease possible, or arrange to rent with an option to lease at a later date. This does not apply to a retail business, unless your particular business happens to be an untried one.
Definitely, you should open a business bank account. In selecting a bank for your business, scout around and look for one that can, and will help you. Determine what your banking needs will be, and then via telephone, interview the managers of the banks in your area. The important thing is to be discretionary and not select just the most convenient bank to your business location.