Legal Ways to Save Taxes How to Pay Less Taxes Offshore And Onshore By Vernon Jacobs & Richard Duke.
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Transcript of Legal Ways to Save Taxes How to Pay Less Taxes Offshore And Onshore By Vernon Jacobs & Richard Duke.
Copyright, 2006, Offshore Press, Inc.
This presentation is a summary of the topics included in “Legal Ways to Save Taxes Offshore and Onshore” by Vernon Jacobs and Richard Duke
It is published and copyrighted by Offshore Press, Inc.
www.offshorepress.com
CIRCULAR 230 NOTICE This report is not a reliance opinion or a marketed opinion. This
report and its contents were not intended or written by the authors to be used, and cannot be used, by anyone for the purpose of (i) avoiding U.S. tax penalties, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed or stated herein. This report and its contents are not treated as a marketed opinion because (a) the advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer; (b) the advice was not written to support the promotion or marketing of the transaction(s) or matter(s) addressed herein; and (c) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. [31 C.F.R. sections 10.35(b)(4)(ii); 10.35(b)(5)(i); and (b)(5)(ii)(a), (b) and (c).]
For an explanation of the Circular 230 requirements to which tax advisors are subject, see http://www.offshorepress.com/vkjcpa/disclosurerules.htm
Introduction to Legal Ways to Save Taxes Offshore and Onshore
U.S. imposes tax on its citizens and permanent residents on a worldwide basis. Most tax saving methods available onshore are available offshore.
The U.S. tax system has dozens of "loopholes" or tax incentives
The international tax law is a collection of exceptions to the general rules
The focus of this presentation is on individual income taxes
A Primer on Marginal Tax Rates Tax planning is a numbers game based
mostly on marginal tax rates Reduced Rates on Long Term Capital
Gains and Dividend Income The AMT Rate is either 26% or 28%. The FICA and Medicare Tax Rates Self-Employment & Medicare Tax Rates State Income Taxes The Corporate Factor Federal Estate Taxes
The Value of Tax Deferral Income on deferred taxes may be
equal to the tax that was originally due.
The rule of 72 Sometimes tax deferral may
result in converting ordinary income into LTCG
Less current tax equals less estimated taxes
Compensation (Form W-2)
Tax Favored Employee Benefits IRA Deduction Foreign Earned Income Exclusion Employee Expense
Reimbursement Expatriation
Owner/Employees of a Controlled Corporation
Tax Options of Employees Trade Current Pay for Capital
Gains Medical Expense Reimbursement
Plan CFC Foreign Source Income
Deferral
Interest & Dividends – I
Tax Exempt Interest Qualified Dividend Income Tax Qualified Savings Accounts Annuity or Life Insurance
Interest & Dividends - II
Convert Interest Income into Capital Gains or Dividends
Foreign Business Corporation with Active Business
Transfer Investment Income to Lower Bracket Dependents
Pay off High Interest Loans
Business Income - I
Foreign Earned Income Exclusion CFC Foreign Source Business
Income Non CFC Foreign Business Income Income Shifting Employ Dependent Children in
Your Business Customer Acquisition Costs
Business Income - II
When to Incorporate Operating as a Foreign
Corporation Employ Spouse in Business Home Office Expenses Business Losses vs. Hobby Losses Operating an Activity as an
Exempt Entity
Capital Gains - I
15% rate and 5% rate, 28% rate and 25% rate
Cash in Unrealized Capital Losses Direct Purchase of Foreign Stocks Gift of Appreciated Property to a
Charity Defer Capital Gains Tax with
Charitable Remainder Trust
Capital Gains - II
Defer Capital Gains Tax with a Private Annuity
Gift Appreciated Assets to Lower Bracket Dependents
Tax Deferral with Like Kind Exchange
Tax Deferral with Installment Notes or SCINS
Pensions & Annuities
Foreign Pension Trust An Offshore IRA Deferred Retirement Annuities Charitable Retirement Annuity
Partnership Income
Benefits of a Flow-through Entity Family Income Splitting Benefits of a Taxable Corporation Formation of a Foreign Based
Corporation A Foreign Disregarded Entity Passive Income Deductions or
Credits
Income From Trusts
The tax brackets for trusts are very compressed.
Income Splitting Other Tax Saving Methods for
investment income
Social Security Income Become Single Taxpayers Convert Taxable Income into Capital
Gains Convert Investments into an Annuity Pay Off or Reduce a Mortgage Loan Avoid Tax Exempt Interest Convert Taxable Retirement Savings to
a Roth IRA Convert Social Security Benefits to a
401(k) Plan
Deductions That Reduce Your Income
Hidden deductions reduce income on page 1 of Form 1040.
Employee Business Expenses Schedule C Expenses Schedule D Losses Schedule E Expenses Schedule F Expenses
Deductions for Adjusted Gross Income
Some deductions are more equal than others
IRA Deductions Bigger Retirement Deductions for
the Self Employed Archer Medical Savings Accounts
and Health Savings Accounts Self-Employed Health Insurance Self-Employed Retirement Plans
Itemized Deductions
Medical Expenses Residential Loan Interest Investment Interest Charitable Contributions Miscellaneous Itemized
Deductions
Alternative Minimum Tax
"The hardest thing in the world to understand is the income tax."
Albert Einstein
That was long before the AMT
The AMT reduces these deductions
Accelerated depreciation Intangible drilling, circulation, research, experimental,
or mining costs Amortization of pollution-control facilities or depletion
Income or (loss) from tax-shelter farm activities or passive activities
Percentage-of-completion income from long-term contracts
Net operating loss deduction in excess of the AMT NOL deduction
The AMT reduces some income exclusions
Income from incentive stock options at the time they are exercised
Tax-exempt interest from certain private activity bonds
Long term capital gains or qualified dividend income
The AMT eliminates most of the itemized deductions
Medical expenses to the extent of 10% of adjusted gross income
State and local taxes with no exceptions Interest on a 2nd mortgage for a personal
residence Interest on home loans not used to buy, build,
or improve the home Miscellaneous itemized deductions
Investment interest expense reported on Form 4952
The personal exemption and the standard deduction.
AMT Exemption & Phase out Filing Status MFJ S/HH MFS/ET
Exemption 62,500 42,500 31,275 From 150,000 112,500 75,000 To 330,000 247,500 165,000
Phase out $1 of exemption for each $4 of excess modified AMT income
AMT Rates The tax rate on the first $175,000 of
AMT income is 26% and on any excess it is 28%. These rates apply to all filing categories.
Lower Rates on Long Term Gains and Qualified Dividends same as regular tax
Incentive Stock Options The Kiddie Tax and the AMT -
exemption $5,850 plus earned income
Possible Solutions to the AMT Trap - I
Avoid tax exempt interest on certain private activity bonds
The Section 179 deduction is not an AMT tax preference (N/A offshore)
Medical reimbursement plan or the S.E. deduction for health insurance
The home mortgage interest deduction if funds are used to buy, build or to improve a personal residence or second home.
Accountable expense reimbursement for employee
Possible Solutions to the AMT Trap - II
Spread out capital gains and exercise of ISOs
Dual Basis AMT Assets The AMT Credit Beware of Other Tax Credits Prospects for the AMT Elimination or simplification of
AMT seems to be unlikely
The Estate & Gift Tax Lifetime Estate Tax Exclusion The lifetime exemption for gifts Unlimited Marital Deduction The Marital Trust Qualified Terminal Interest
Property Trusts Reduction of Basis of Stock in
Passive Foreign Investment Company
Pre-Death Transfers
Annual Gift Tax Exclusion Gifts of Assets That Are Expected
to Increase In Value Gift and Leaseback Transfers to an Irrevocable Non-
Grantor Trust Transfers to a Foreign Non-
Grantor Trust
Valuation Discounts
Discounts for Closely Held Business Interests
Closely Held Corporation Family Limited Partnership Limited Liability Company Problems with retained control of
assets Gifts of Discounted Property
Life Insurance Owned by or for the Heirs
Life Insurance Owned by the Insured Requires Gross-up
Life Insurance Owned by the Heirs Transfers Tax Free
The Three Year Rule for Existing Policies
Offshore Life Insurance Using a Partnership Instead of a
Trust
Gifts or Bequests to Charity Charitable Income Trust (CRT,
CRAT)
Charitable Lead Trust
Family Charitable Foundations
Gifts/Bequests of IRA Accounts
Other Estate Tax Strategies
Business Buy/Sell Agreements Business Stock Redemptions Installment Sales to heirs with
gifts of payments The Private Annuity Private Annuity with FC Owned
by Variable Life Contract
The Zero Tax Estate Plan Identify the assets that can be
left to heirs free of any estate taxes
Increase this amount with valuation discounts
Use 50% of balance to fund a charitable remainder trust
The rest will be sold to the heirs in exchange for a private annuity