decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

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dhaffner
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decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by dhaffner » Tue Mar 12, 2019 12:14 pm

Hello Bogle Community. I live in California, am married with no dependents, we own no property...our only real asset is both of our 401k Plans which are moderately healthy. Our expenses are okay for this area but of course we could improve in some areas - majore expenses like rent are unspeakably low. For the last few years, since I finished college, my husband and I have owed between $4k - $6k in taxes in addition to claiming zero and maxing out deferred tax accounts to reduce our tax bracket. I know you maybe tempted to say it's the high taxes of CA however the majority is owed to the Feds. This expense is budgeted however I just read Rich Dad/Poor Dad where he explains we're basically working several months at the beginning of every year to simply pay taxes! Mind Blown! Unacceptable! I am also curious if another idea presented in Rich Dad/Poor Dad that I could create a corporation to shelter "business related" expenses and reduce my tax burden sounds too good to be true. Is that legal? Any suggested reading on this would be appreciate.

This leads me to my request for books or any other legitimate researched documentation on decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income. If you've been in a similar situation and found a way to reduce your tax burden I'd love to hear it.

niceguy7376
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by niceguy7376 » Tue Mar 12, 2019 4:33 pm

Welcome to the forum.
One of the reason you might be paying a lot to feds when you file the returns is that you do not have an updated W4 with your employers. Thus you might be getting more on your paycheck than supposed to and then paying that at the end of the year. You also might be paying interest on the amount that was due from you.

I am not rich enough to think about legal tax havens outside of the usual 401k, HSAs, I bonds and such.

livesoft
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by livesoft » Tue Mar 12, 2019 4:36 pm

If you go to IRS.gov, there is a ton of information there on how to avoid any income taxes. The problem is: You have to read it. Most people don't want to read it, so they end up paying lots of taxes.

See also: viewtopic.php?t=79510 but you don't match the demographic.

I suppose if you create a corporation that your corporation will pay income taxes. RichDadPoorDad is great if you are selling books and advice. Not so great if you are buying books and paying for advice.
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megabad
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by megabad » Tue Mar 12, 2019 6:38 pm

dhaffner wrote:
Tue Mar 12, 2019 12:14 pm
Hello Bogle Community. I live in California, am married with no dependents, we own no property...our only real asset is both of our 401k Plans which are moderately healthy. Our expenses are okay for this area but of course we could improve in some areas - majore expenses like rent are unspeakably low. For the last few years, since I finished college, my husband and I have owed between $4k - $6k in taxes in addition to claiming zero and maxing out deferred tax accounts to reduce our tax bracket. I know you maybe tempted to say it's the high taxes of CA however the majority is owed to the Feds. This expense is budgeted however I just read Rich Dad/Poor Dad where he explains we're basically working several months at the beginning of every year to simply pay taxes! Mind Blown! Unacceptable! I am also curious if another idea presented in Rich Dad/Poor Dad that I could create a corporation to shelter "business related" expenses and reduce my tax burden sounds too good to be true. Is that legal? Any suggested reading on this would be appreciate.

This leads me to my request for books or any other legitimate researched documentation on decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income. If you've been in a similar situation and found a way to reduce your tax burden I'd love to hear it.
I think that the Bogleheads wiki is a great place to start reading (other than the Tax publications). I find that most folks are not using anywhere near the simple tax deferred/advantaged space available to them so I wouldn't think much complexity would be required for most. In a 2 income family, $38k-112k can be put away in 401ks; $12k in IRAs; $7k in HSA; $20k in i-bonds. This is $77k-151k every year excluding things like a 529. And quite honestly, taxable investing is very tax efficient.

I don't think a business is necessarily a good tax strategy in and of itself. It doesn't seem like you have a business so it seems like this would be of limited value until you were able to start a legitimate enterprise and this may or may not be better than your current W2 job. With QBI deduction, you might theoretically be able to create a favorable circumstance if you owned a specific type of business in a specific situation. Additionally, a real estate business can be very tax efficient since real estate receives preferential tax treatment (extremely preferential). I have known many Schedule E filers that drive around in $100k+ cars and claim close to zero taxable income for many many years. Other than that, I can't see a huge tax benefit to owning your own business (assuming the overall income was the same). You already have pretty low taxes for a family in CA in my opinion so good job.

suemarkp
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by suemarkp » Tue Mar 12, 2019 10:45 pm

I can't tell from your post what magnitude your tax burden is. Are you paying a total of $3K to $6K in federal taxes, or are you not withholding enough and have to pay that much on top of what was already withheld?

For your total federal tax due (withholding plus anything extra you have to pay), are you paying 10% of your income? 20% of your income? 40% of your income?

What are your taxable income sources? Just W2 wages? Significant bank interest?

When you say you're maxing out your tax deferred accounts, how much are you putting in them each year (and I take it you are under 50 years old so you don't get catch up contributions)? Are these 401K's or something else?

You can only get your tax rate so low with wage income. But if you're making $30K a year you could pay no tax. If you're making $400K, you're most likely going to have to pay something and maybe significant taxes. There are solutions to get more income that is tax free or reduced from ordinary rates. But it will take time to accumulate those piles of money.
Mark | Kent, WA

ralph124cf
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by ralph124cf » Wed Mar 13, 2019 6:42 am

File a new W-4 for one of you. On line five enter 0. On line six, enter $500.

This should close to zero out your tax liability at the end of the year by spreading out the withholding.

Ralph

ohai
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by ohai » Wed Mar 13, 2019 7:36 am

Hi, OP. If all you have is W4 income, there's not much you can do. You need to form some kind of LLC business to deduct "expenses". Let's say you have a side business and your whole family was "working" on some project there for one day. You had to buy food for them as a result. Boom, food is now a tax deduction.

Jack FFR1846
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by Jack FFR1846 » Wed Mar 13, 2019 8:02 am

Off the top of my head......

iBonds. Won't help much for this year's taxes, but will yield zero in taxable income going forward.
Non-Dividend-paying stock like BRK/B. Again, won't help for this year's income, but moving forward, throws off nothing taxable while held.
529s. Do you have kids? If so, the 529 is yet another place where you can put money where its gains aren't taxed.
Are you itemizing deductions? If no because the standard deduction is higher, if you have a mortgage, pay it down. Again, that doesn't help with reducing income, but it reduces interest from wherever you would have been saving. Take out a no cost HELOC so you can get to the money tied up in your house if needed.
Other loans...like cars or student loans. Same idea. Paying these off takes interest bearing accounts out of sight.
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LFS1234
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by LFS1234 » Wed Mar 13, 2019 9:26 am

dhaffner wrote:
Tue Mar 12, 2019 12:14 pm
I am also curious if another idea presented in Rich Dad/Poor Dad that I could create a corporation to shelter "business related" expenses and reduce my tax burden sounds too good to be true. Is that legal? Any suggested reading on this would be appreciate.
Maintaining a separate entity (corporation or LLC) always costs time and money - you have to set up and maintain the corporate structure and you have to periodically make the required government filings. If you're not serious about building a viable business of a certain scale, then your time could probably be better spent doing something else. If your business idea can't pass the "red face test", then you probably shouldn't pursue it. If the primary purpose of the "business" is to obtain tax write-offs then you would be skating on thin ice with the IRS.

If it looks to the IRS that your "business" may actually be your hobby, there may be some additional tests you have to pass. You can write off business expenses but you cannot write off hobby expenses.

Even if you have a legitimate business and are able to write off business expenses, your ability to write them off against income other than income from that same business is not assured. Sometimes this is doable and sometimes it is not, depending on the facts and circumstances.

I wouldn't consider running a business without access to a good CPA or tax attorney.


surfstar
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by surfstar » Wed Mar 13, 2019 9:42 am

dhaffner wrote:
Tue Mar 12, 2019 12:14 pm
This expense is budgeted however I just read Rich Dad/Poor Dad where he explains we're basically working several months at the beginning of every year to simply pay taxes! Mind Blown! Unacceptable! I am also curious if another idea presented in Rich Dad/Poor Dad that I could create a corporation to shelter "business related" expenses and reduce my tax burden sounds too good to be true. Is that legal?

Maybe the title should be changed to "Tax evasive Dad, Poor Dad"?

Topic Author
dhaffner
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by dhaffner » Wed Mar 13, 2019 4:22 pm

Thank you to all those that have replied! I appreciate the feedback. I didn't really want to get into specific income numbers but our averaged AGI is between $150-$175k. Our 2017 FED Tax Rate was 16.27% and I think I must be calculating this incorrectly because my initial pass says 2018 FED Tax Rate is now down to 12%! We did have some exponential medical expense which I care not to get into. It rang in around $22k and I have been making adjustments to try and lower our tax burden so maybe possible?! I do have an appointment with a CPA on 4/2 to ensure my filings are accurate. Regardless I believe we've seen a reduction.

Our 2017 CA Tax Rate was 5.66% and again, if I ran this correctly, has decreased to 4.60% for 2018. I'm just disturbed that we owe, I'd rather owe than get a fat refund but it's just hard to re-program after hearing many people around me talk about their big refunds that they usually blow on fancy luxuries. (joking- sort of) Also I'm constantly evaluating the spend to see where our expense can be decreased, like taxes.

Some responses, not sure I caught all the questions....I' am currently maxing my 401k, isn't $19k the max? So total combined to $38k, @megabad how did you get up over $100k? Actually I have slowly been creeping up my husbands 401k% to max because he's not really into finance, his will hit $19k next year but he's close. I haven't gotten into IRA's yet, I'm still reading and learning about them but what I do know says the Roths are post tax right/wrong? I don't know. The HSA max here is $3500 which I contribute.

I am definitely open to book/blog. suggestions so thank you! What finance books/blogs have blown your mind? I'm just a few years into learning about personal finance, investing, saving, in general being responsible so I'd love to hear.

livesoft
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by livesoft » Wed Mar 13, 2019 4:36 pm

So when are you moving away from California to a lower-tax locale?
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ralph124cf
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by ralph124cf » Wed Mar 13, 2019 11:54 pm

It is usually better to think about taxes with your marginal tax rate in mind, rather than your total average tax rate. This is because the changes you make are usually at the margin. You want to think about "how much will putting another $100 into my 401(k) save me", rather than how much your average tax rate goes down with that $100 contribution.

Ralph

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celia
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by celia » Thu Mar 14, 2019 1:26 am

dhaffner wrote:
Tue Mar 12, 2019 12:14 pm
This leads me to my request for books or any other legitimate researched documentation on decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income.
The major way people can reduce their taxes is to have less income! But that's probably not what you have in mind.

And "passive income" does not decrease your taxes, but increases them. Passive income is just money that comes in where you don't have to put in much work. For example, if you wrote a best seller, you would get royalties for many years, without doing much, except maybe promoting the book at the beginning. Or you could buy an apartment building and have a property management company manage it and send the rents minus expenses to you. Or you could invest in stocks and bonds that make money for you.

Here are some other ideas for Passive Income.

dhaffner wrote:
Wed Mar 13, 2019 4:22 pm
I didn't really want to get into specific income numbers but our averaged AGI is between $150-$175k. Our 2017 FED Tax Rate was 16.27% and I think I must be calculating this incorrectly because my initial pass says 2018 FED Tax Rate is now down to 12%!

Our 2017 CA Tax Rate was 5.66% and again, if I ran this correctly, has decreased to 4.60% for 2018.
I don't think you are calculating your tax rate correctly, because there are no tax rates as I highlighted (except for 12%, which seems like a coincidence). You are probably comparing your tax liability (or the amount you still owe) to your total income, which is not correct. Basically you add up all your incomes for the year (although Long Term Capital Gains and Qualified Dividends are taxed lower than other income). Don't include your 401K contributions if they were contributed as pre-tax. In general, this gives you your AGI (Adjusted Gross Income.)

Then look at your itemized expenses, such as state and local taxes (property tax), medical expenses you paid out of pocket (that are over 10% of your AGI) and either subtract these itemized deductions or the standard deduction for Marrieds ($24,000), whichever is higher, from your AGI. [That part of your income--itemized or standard deduction--is taxed at zero.] Then look in the 2018 Tax Tables, Table 1 for Married Filing Joint to see where your REMAINING income falls. If you have $1 to $19,050, that part of your money is taxed at 10%. If your remaining income is higher, the amount from $19,051 to $77,400 is taxed at 12%. Continue down the column until you see where your income (that is over your itemized or standardized deduction) stops. That is your "marginal tax rate". It also means that if you had an additional $100 in income, that is how much more in taxes you would pay. (For example, if you stop on the line that says 24%, if you had received another $100, another $24 would be owed.)

For California, after you subtract your itemized or standard deduction, if your remaining income falls between $56,086 to $286,492 , it is taxed at 9.3%.
I'm just disturbed that we owe, I'd rather owe than get a fat refund but it's just hard to re-program after hearing many people around me talk about their big refunds...
The amount you owe or the amount of your refund is irrelevant. What matters is your Tax Liability, the calculated amount of the taxes you owe, whether you paid them all with withholding or not. It seems you are mixing up the remaining tax you owe with the tax liability.

You and someone else who has the exact same income sources and deductions will have the same Tax Liability, although you will likely have had different withholdings (or estimated taxes paid) throughout the tax year, that cause different refunds or remaining taxes owed. Those who get large refunds just foolishly withheld too much from their paychecks. They gave Uncle Sam an interest-free loan and are now getting their own money back.

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mhadden1
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by mhadden1 » Thu Mar 14, 2019 4:23 am

The language of your post leads me to believe that you are a little under-educated about your tax situation. My suggestion is to first figure out how to do your taxes on paper. This will require you to learn and understand how your income is taxed. You appear to have mostly wage income which makes things a bit simpler. Through the years your financial life may get more complicated so staying on top of your situation will be an ongoing process. With the right knowledge you can arrange your affairs to manage your taxes in the way that works best for you.
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by SRenaeP » Thu Mar 14, 2019 7:19 am

ohai wrote:
Wed Mar 13, 2019 7:36 am
Hi, OP. If all you have is W4 income, there's not much you can do. You need to form some kind of LLC business to deduct "expenses". Let's say you have a side business and your whole family was "working" on some project there for one day. You had to buy food for them as a result. Boom, food is now a tax deduction.
Let's not recommend tax evasion. :annoyed

ohai
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Re: decreasing personal tax burden, legal tax havens, and/or ideas for creating passive income

Post by ohai » Thu Mar 14, 2019 7:49 am

SRenaeP wrote:
Thu Mar 14, 2019 7:19 am
ohai wrote:
Wed Mar 13, 2019 7:36 am
Hi, OP. If all you have is W4 income, there's not much you can do. You need to form some kind of LLC business to deduct "expenses". Let's say you have a side business and your whole family was "working" on some project there for one day. You had to buy food for them as a result. Boom, food is now a tax deduction.
Let's not recommend tax evasion. :annoyed
It's legal though. It's just like Google deducting employee meal plan expenses, rather than have employees pay for the same food with after tax income.

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