Tax News From Yahoo! Finance
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News from Yahoo! Finance http://custom.yahoo.com/taxes/article-112468-a664918f-23b7-33c
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How You Can Pull a GE on Taxes
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There's been a firestorm this week over the news that General Electric (NYSE: GE -
News) will pay no tax -- at least, no federal corporate income tax -- on last year'sprofits.
But if you're like a lot of people, your first reaction was probably: "Hmmm. How can I
get that kind of deal?"
You'd be surprised. You might. And without being either a pauper or a major
corporation.
I spoke to Gil Charney, principal tax researcher at H&R Block's (NYSE: HRB - News)
Tax Institute, to see how a regular Joe could pull a GE. The verdict: It's more
feasible than you think -- especially if you're self-employed.
Let's say you set up business as a consultant or a contractor, something a lot of
people have been doing these days. And, to make this a challenge on the tax front,
let's say you do well and take in about $150,000 in your first year.
First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up
expenses. (In subsequent years it's only $5,000.)
Okay, let's say you claim $7,000. That takes your income down to $143,000.
You can also write off all legitimate business expenses. Mr. Charney emphasizes that
this only applies to legitimate expenses.
He didn't say, but everyone seems to understand, that this can be quite a flexible
term. Even if you buy a computer, a cellphone and a car primarily for business use,
you can use them for personal purposes as well. If you happen to take a business
trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine
or taking a dip in the pool.
So let's say you manage to write off another $10,000 a year in business expenses.
[More from WSJ.com: GE-Whizzes: Everyone's Looking for an Edge on Taxes]
That brings your income, for tax purposes, down to $133,000.
You'll have to pay Medicare and Social Security taxes (just like GE). Because you're
self-employed, you have to pay both sides: the employee and the employer. That w ill
come to about $19,000.
However, you can deduct half of that, or $9,500, f rom your taxable income. So that
brings your total down to $123,500 so far.
Now comes the creative bit. The self-employed have access to terrific tax breaks on
their investment and retirement accounts. The best deal for many is going to be a
self-employed 401(k), sometimes known as a Solo 401(k).
This will let you save $43,100 and write it off against your taxes. That money goesstraight into a sheltered investment account, as w ith a regular 401(k).
Why $43,100? That's because with a Solo 401(k), you're both the employer and the
employee. As the employee you get to contribute a maximum of $16,500, as with
any regular 401(k). But as the employer you also get to lavish yourself with an
incredibly generous company match of up to 20% of net income.
Yes, being the boss has its privileges. (And if you're 50 or over, your limit as an
employee is raised from $16,500 each to $22,000.)
You can save another $10,000 by also contributing to individual retirement accounts
-- $5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a
Roth, that reduces your taxable income as well. If you're 50 or over, the limit rises to
$6,000 apiece.
Brett Arends
Friday, April 1, 2011
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[More from WSJ.com: 30 Last-Minute Tax Tips]
If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings
your income for tax purposes down to just over $70,000.
We haven't stopped there either, says Mr. Charney.
Now come the usual itemized deductions. You can write off your state and local
taxes. Let's say these come to $10,000.
You can write off interest on your mortgage. Call that another $10,000. That's
enough to pay 5% interest on a $200,000 home loan.
That gets us down to about $50,000 And we're not done.
If you're self-employed, health insurance is probably a big headache. But the news
isn't all bad. You can write off the premiums for yourself, your spouse, and your kids.
And if you use a qualifying high-deductible health insurance plan -- there are a variety
of rules to make sure a plan qualifies -- you get another break. You can contribute
$3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family.
You can write those contributions off against your taxable income. The investments
grow sheltered f rom tax. And if you spend the money on qualifying health costs, the
withdrawals are tax-free as well.
So call this $10,000 for the premiums and $6,150 for the HSA contributions. That
gets your income, for tax purposes, all the way down to about $34,000.
If you have outstanding student loans, you can write off $2,500 in interest. And you
can write off $4,000 of your kid's college tuition and fees.
[More from WSJ.com: Help Wanted: Tax-Compliance Gurus]
Then there's a personal exemption: $3,650 per person. If you're married with one
child, that's $10,950.
Taxable income: just under $17,000. That's on a gross take of $150,000. You'd owe
less than $1,700 in federal income tax.
And it doesn't stop there. Because now you can bring in some of the tax credits.
Unlike deductions, these come off your tax liability, dollar for dollar.
GE got big write-offs related to green energy. There are some for you too, although
on a small scale. You can claim credits for things like installing solar panels, heat
pumps or energy-efficient windows or boilers in your home. Let's say you use a
home equity loan to pay for the improvements and take the maximum $1,500
write-off.
That gets your tax liability down to $200.
Can we get rid of that? Sure, says Mr. Charney.
If your spouse spends, say, $1,000 on qualifying adult-education courses or training
programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The
maximum is $2,000.)
That wipes out the remaining liability.
Congratulations. You've pulled a GE. You owe no federal income taxes at all.
OK, it's just an illustration. Few will be quite so fortunate. On the other hand, it's notcomprehensive either. There are plenty of other deductions and credits w e didn't
mention. You could have written off up to $3,000 by selling loss-making investments.
Your spouse may be able to use a 401(k) deduction as well. There are lots of ways
to tweak the numbers.
In this case, you've paid no federal income tax, and meanwhile you've saved $19,000
toward your retirement through Social Security and Medicare, and $53,000 through
your 401(k) and IRAs. You've paid most of your accommodation costs (that is, the
interest and property taxes on your home), covered your health-care costs and quite
a lot of personal expenses through your business account, paid $4,000 toward your
child's college costs and had about $2,000 a month left over for cash costs.
Who says GE has all the fun?
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Write to Brett Arends at [email protected]
0 0BlueWizard 2 minutes ago Report Abuse
It is crap like this that is destroying our country
0 0Running Amok 3 minutes ago Report Abuse
I thought there is alternative minimum tax ,you have to pay. How is this
possible?
0 0Donna Hills 3 minutes ago Report Abuse
Thanks I needed that. Will Keep in Contact.
0 0Pat Walsh 3 minutes ago Report Abuse
Just buy enough politicans.They come cheap.
0 0Joe M 3 minutes ago Report Abuse
Where did I miss living expenses that must come from money made -
say groceries, clothes, travel expenses, etc. Writing off the full 150K is
something maybe a "girl friend", "boy toy", or such could do.--not a
normal person.
"Extremely Unrealistic"
0 0Timmyg 3 minutes ago Report Abuse
Craig, #7 on the list needs to open his eyes and study a little be for
posting...#1 Republicans are looking to lower your taxes...#2 If the
News from Yahoo! Finance http://custom.yahoo.com/taxes/article-112468-a664918f-23b7-33c
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