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http://custom.yahoo.com/taxes/article-112468-a664918f-23b7-33c4
e3191efe8f39-ge-pay-no-taxes-wsj
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's profits.
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 will come to about $19,000.
However, you can deduct half of that, or $9,500, from 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 goes straight into a sheltered investment account, as with 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.
[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 from 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 not comprehensive either. There are plenty of other
deductions and credits we 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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