Tax question - zeroing out a bit of earned income with IRA

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Topic Author
Lexx
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Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

Since I'm retired, I only have passive income. Because I have no earned income I can not contribute to an IRA.

It is possible to pay myself say $7500 income through an out of state LLC I own, and then turn around and stick the $7500 (catch up amount since I'm over 50). That would in essence zero out my taxable earned income correct? Or is there another catch?

Likewise because I have 3 young kids, our family qualifies for some of the Obamacare supplement. Would the $7500 put into the IRA reduce my AGI and thus, qualify me for an increased Obamacare supplement?
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arcticpineapplecorp.
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by arcticpineapplecorp. »

the catchup amount for IRA for 2021 is $7000 not $7500. Ask me how I know.

i think with an LLC you'd need to set up a SEP IRA or Solo 401(k) or a SIMPLE IRA., not a regular IRA. Read more on the difference here:

https://www.investopedia.com/ask/answers/05/llcira.asp
Last edited by arcticpineapplecorp. on Thu Jan 07, 2021 8:02 pm, edited 2 times in total.
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solar99999
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by solar99999 »

Possibly some federal or state employment tax may be generated
Last edited by solar99999 on Thu Jan 07, 2021 8:50 pm, edited 1 time in total.
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Topic Author
Lexx
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

solar99999 wrote: Thu Jan 07, 2021 7:57 pm Possibly some self-employment tax may be generated
OK so I pay 15.3% self-employment tax on $7000, which would be $1071. That would save me $500/mo in health insurance premiums for a net savings of almost $5k right?

Or if I pay both my wife and I each $7000, and stick it into an IRA, the net savings on health insurance premiums would be $10k.

And since I'm over 59 1/2, I could theoretically turn right around and withdraw that money (and pay income tax on it).
Spirit Rider
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Spirit Rider »

You need IRA compensation which is derived from W-2 wages and or self-employed earned income.

What does this LLC do? If it is for real estate rental income, it is almost certainly not self-employment income and not IRA compensation.

Even if the LLC is qualified as being engaged in a trade or business, payments from you are not business income and would not be considered earned income.

Trying to rinse cash through a business to try to generate earned income smells like a sham transaction and most likely is.

Also, having $7K in income and $7K in adjustments to income has zero effect on AGI.
solar99999
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by solar99999 »

Lexx wrote: Thu Jan 07, 2021 8:03 pm
solar99999 wrote: Thu Jan 07, 2021 7:57 pm Possibly some self-employment tax may be generated
OK so I pay 15.3% self-employment tax on $7000, which would be $1071. That would save me $500/mo in health insurance premiums for a net savings of almost $5k right?

Or if I pay both my wife and I each $7000, and stick it into an IRA, the net savings on health insurance premiums would be $10k.

And since I'm over 59 1/2, I could theoretically turn right around and withdraw that money (and pay income tax on it).
You'll get a deduction for 1/2 of the self employment tax too. Also, check the rules on the state you live in. Massachusetts is one of those states that don't allow an IRA deduction but tax rules can change on a dime, especially if someone is reading this post several years later.

I have nothing to add regarding the other comments because I lack the experience and knowledge, sorry.
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Topic Author
Lexx
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

LLC holds real estate. I am the property manager and thus AFAIK, I'm entitled to compensation for my services. $7000/yr would not be out of line. Is there any particular reason I could not be an employee of the LLC?

$7k in deductions via contribution to an IRA would reduce my AGI would it not? If my LLC normally passes it's profits (rent) to me at say $100k, and I pay myself $7k in income, would my passive income be $93k and my earned income $7k? Then I could contribute my $7k to an IRA which would zero out my earned income and reduce my AGI right? How is this not legal? Trying to learn here.

Spirit Rider wrote: Thu Jan 07, 2021 8:21 pm You need IRA compensation which is derived from W-2 wages and or self-employed earned income.

What does this LLC do? If it is for real estate rental income, it is almost certainly not self-employment income and not IRA compensation.

Even if the LLC is qualified as being engaged in a trade or business, payments from you are not business income and would not be considered earned income.

Trying to rinse cash through a business to try to generate earned income smells like a sham transaction and most likely is.

Also, having $7K in income and $7K in adjustments to income has zero effect on AGI.
nalor511
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by nalor511 »

Lexx wrote: Thu Jan 07, 2021 8:32 pm LLC holds real estate. I am the property manager and thus AFAIK, I'm entitled to compensation for my services. $7000/yr would not be out of line. Is there any particular reason I could not be an employee of the LLC?

$7k in deductions via contribution to an IRA would reduce my AGI would it not? If my LLC normally passes it's profits (rent) to me at say $100k, and I pay myself $7k in income, would my passive income be $93k and my earned income $7k? Then I could contribute my $7k to an IRA which would zero out my earned income and reduce my AGI right? How is this not legal? Trying to learn here.

Spirit Rider wrote: Thu Jan 07, 2021 8:21 pm You need IRA compensation which is derived from W-2 wages and or self-employed earned income.

What does this LLC do? If it is for real estate rental income, it is almost certainly not self-employment income and not IRA compensation.

Even if the LLC is qualified as being engaged in a trade or business, payments from you are not business income and would not be considered earned income.

Trying to rinse cash through a business to try to generate earned income smells like a sham transaction and most likely is.

Also, having $7K in income and $7K in adjustments to income has zero effect on AGI.
Pay $22 for hr block deluxe download (online version will not do it) and run a few sample tax returns and see.
solar99999
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by solar99999 »

Lexx wrote: Thu Jan 07, 2021 8:32 pm LLC holds real estate. I am the property manager and thus AFAIK, I'm entitled to compensation for my services. $7000/yr would not be out of line. Is there any particular reason I could not be an employee of the LLC?

$7k in deductions via contribution to an IRA would reduce my AGI would it not? If my LLC normally passes it's profits (rent) to me at say $100k, and I pay myself $7k in income, would my passive income be $93k and my earned income $7k? Then I could contribute my $7k to an IRA which would zero out my earned income and reduce my AGI right? How is this not legal? Trying to learn here.

Spirit Rider wrote: Thu Jan 07, 2021 8:21 pm You need IRA compensation which is derived from W-2 wages and or self-employed earned income.

What does this LLC do? If it is for real estate rental income, it is almost certainly not self-employment income and not IRA compensation.

Even if the LLC is qualified as being engaged in a trade or business, payments from you are not business income and would not be considered earned income.

Trying to rinse cash through a business to try to generate earned income smells like a sham transaction and most likely is.

Also, having $7K in income and $7K in adjustments to income has zero effect on AGI.
A single member LLC cannot pay wages to it's sole owner since it is a disregarded entity.

A multi-member LLC taxed as a partnership can pay a guaranteed payment to its members for services rendered and that qualifies as compensation.

A LLC taxed as a corporation can pay wages to it's owner as an employee.
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Topic Author
Lexx
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

Then since I'm the sole owner, can my wife be classified as an employee and thus receive earned income from the LLC? She is not on the title an owner. If possible, then she could take $7k in earned income and deposit that into an IRA and thus receive the break correct?
solar99999 wrote: Thu Jan 07, 2021 8:49 pm
A single member LLC cannot pay wages to it's sole owner since it is a disregarded entity.

A multi-member LLC taxed as a partnership can pay a guaranteed payment to its members for services rendered and that qualifies as compensation.

A LLC taxed as a corporation can pay wages to it's owner as an employee.
Soon2BXProgrammer
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Soon2BXProgrammer »

Lexx wrote: Thu Jan 07, 2021 9:05 pm Then since I'm the sole owner, can my wife be classified as an employee and thus receive earned income from the LLC? She is not on the title an owner. If possible, then she could take $7k in earned income and deposit that into an IRA and thus receive the break correct?
solar99999 wrote: Thu Jan 07, 2021 8:49 pm
A single member LLC cannot pay wages to it's sole owner since it is a disregarded entity.

A multi-member LLC taxed as a partnership can pay a guaranteed payment to its members for services rendered and that qualifies as compensation.

A LLC taxed as a corporation can pay wages to it's owner as an employee.
i'm really confused, are you trying to raise or lower your income?
nalor511
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by nalor511 »

Soon2BXProgrammer wrote: Thu Jan 07, 2021 9:14 pm
Lexx wrote: Thu Jan 07, 2021 9:05 pm Then since I'm the sole owner, can my wife be classified as an employee and thus receive earned income from the LLC? She is not on the title an owner. If possible, then she could take $7k in earned income and deposit that into an IRA and thus receive the break correct?
solar99999 wrote: Thu Jan 07, 2021 8:49 pm
A single member LLC cannot pay wages to it's sole owner since it is a disregarded entity.

A multi-member LLC taxed as a partnership can pay a guaranteed payment to its members for services rendered and that qualifies as compensation.

A LLC taxed as a corporation can pay wages to it's owner as an employee.
i'm really confused, are you trying to raise or lower your income?
They are trying to get said income out of AGI and into IRA by manufacturing "earned" "income"
Spirit Rider
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Spirit Rider »

Lexx wrote: Thu Jan 07, 2021 8:32 pm LLC holds real estate. I am the property manager and thus AFAIK, I'm entitled to compensation for my services. $7000/yr would not be out of line. Is there any particular reason I could not be an employee of the LLC?
This is a common misconception. Simply being a property manager does not entitle you to compensation on a Schedule C/SE. It only entitles you to unearned income from Schedule E profits. The IRS has made it very clear that it is a very high hurdle to be considered engaged in the business of Real Estate from just rental income.

Even if you met the requirements to be considered a Real Estate Professional (which seems unlikely if out-of-state), that only entitles you to deduct losses and take certain other deductions. It does not begin to rise to the level of being engaged in the business of Real Estate.
$7k in deductions via contribution to an IRA would reduce my AGI would it not? If my LLC normally passes it's profits (rent) to me at say $100k, and I pay myself $7k in income, would my passive income be $93k and my earned income $7k? Then I could contribute my $7k to an IRA which would zero out my earned income and reduce my AGI right? How is this not legal? Trying to learn here.
This is additional information, but doesn't change what I stated above. You can not just file a Schedule C/SE instead of a Schedule E, because you want to "find" some IRA compensation.

You must be actively engaged in the business of Real Estate. This determination is based on facts and circumstances of specific activities. Simple rental income does not generally meet the burden.

It may be possible to take steps during 2021 to be engaged in the business of Real Estate. It is not something you can generally do after the fact, by just changing filing status.

Get a competent CPA with specific knowledge, skills and experience in businesses engaged in the business of Real Estate. Maybe you are doing some of the necessary steps, and can makes some changes for the future which would result in them putting a signature to such a return.

It is not something for an internet forum. I just want to make sure you understand that rental income filing status is not a choice, but based on facts and circumstances.
Topic Author
Lexx
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

It's complicated but I am actually active in the business of real estate. I have the sole member LLC. I also have a management company that administers real estate for some trusts that I am the beneficiary of. As the director of the management company I am responsible maintenance and administration of the property. For example, we just leased out a vacant retail commercial space.

I guess it comes down to how my occupation is classified on my tax return. I will speak to my CPA about this and see if I can find a way to reduce my AGI via the method I outlined above.
Spirit Rider wrote: Thu Jan 07, 2021 9:20 pm This is a common misconception. Simply being a property manager does not entitle you to compensation on a Schedule C/SE. It only entitles you to unearned income from Schedule E profits. The IRS has made it very clear that it is a very high hurdle to be considered engaged in the business of Real Estate from just rental income.

Even if you met the requirements to be considered a Real Estate Professional (which seems unlikely if out-of-state), that only entitles you to deduct losses and take certain other deductions. It does not begin to rise to the level of being engaged in the business of Real Estate.

This is additional information, but doesn't change what I stated above. You can not just file a Schedule C/SE instead of a Schedule E, because you want to "find" some IRA compensation.

You must be actively engaged in the business of Real Estate. This determination is based on facts and circumstances of specific activities. Simple rental income does not generally meet the burden.

It may be possible to take steps during 2021 to be engaged in the business of Real Estate. It is not something you can generally do after the fact, by just changing filing status.

Get a competent CPA with specific knowledge, skills and experience in businesses engaged in the business of Real Estate. Maybe you are doing some of the necessary steps, and can makes some changes for the future which would result in them putting a signature to such a return.

It is not something for an internet forum. I just want to make sure you understand that rental income filing status is not a choice, but based on facts and circumstances.
Topic Author
Lexx
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Re: Tax question - zeroing out a bit of earned income with IRA

Post by Lexx »

Update:

I spoke to my CPA today. He stated that indeed I could have my LLC pay my management company which would then pay me. I would thus have $7k of earned income which I could then deposit into a retirement account. That would effectively reduce my AGI, and thus increase whatever supplement I get get from Obamacare.
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