Timely Rerun: Timeless Moves You Can Make to Maximize Earnings and Minimize Taxes

...as long as Obama doesn't mess with the tax code in a major way. So far, it looks like he'll only ADD to the ways you can minimize taxes--but the other shoe hasn't dropped yet. Article originally written in 2005, then updated in 2008.
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While this is not an exhaustive, complete array of the tax strategy possibilities, it is a small compilation of effective maneuvers available to the stay-at-home spouse, employee, or small-time entrepreneur. These are NOT limited to the 2008 tax year, but good any time (so long as Obama restrains himself, which I'm confident he will--he pays taxes too!).

The obvious:
· Have kids (God’s little tax shelters).

· Open IRAs, 401(k) Accounts, Education Savings Accounts, Health Savings Accounts, Flexible Spending Accounts, and any other savings accounts that will garner you a tax credit/deduction. Accounts in children’s names will not garner YOU a credit/deduction—only them, and against any income they may receive over a certain limit (it changes annually—check the IRS website for specific $$ information).

· Be frugal…be very frugal. Learn to live on one income, avoiding the dreaded AMT trigger and marriage penalty.

·Live in Washington, shop in Oregon—and any other advantageous arrangement such as this one. Washington State has no income tax, and Oregon has no sales tax. Other useful arrangements may include Texas/Mexico (some taxes, but still very low cost) and northern states/Canada (don’t know the details, but someone will fill me in, I’m sure). Other states with no income tax are: South Dakota, Wyoming, Tennessee, Florida, Texas, New Hampshire.

· Negotiate, negotiate, negotiate! Employment contracts, termination agreements, and lateral moves to other companies are all ways to add to your bottom line. Become a “freelancer” in your company and learn to negotiate for more $$ when you deserve it. With the new economy, we all have to become our own freelancers and negotiators—we have to sharpen our spears and fight for what we get. There’s no such thing as job security and automatic raises any more. Read Fire Your Boss and Live Rich by Stephen M. Pollan, and Negotiate This! by Herb Cohen for more in-depth information.

UPDATE: Just got fired? Negotiate for better severance.

· Learn to make close acquaintances with such tomes as How to Pay Zero Taxes 2008 (or whatever year) by Jeffrey Scheppner, or other “lower your taxes” type books. Become familiar with the next years’ tax code changes and apply them if possible. Stay abreast of the tax code and look for hidden treasure troves you can make use of. Also, please read the book Perfectly Legal by David Cay Johnston for more insights into heinous-but-useful tax loopholes. Remember: the tax code was written by LAWYERS for other lawyers and the rich—I see no reason why the rest of us can’t apply these same “new rules” to our tax plans. We have to learn to help ourselves here; they set out the buffet, and we need to grab a plate and make our selections—ever mindful of our “tax code” manners.

The not-so-obvious but perfectly legal:
· Maximizing your W-4 withholding (hint: it needs to go a lot higher than the standard “people in the family” count). For more information, see IRS site.

Take 1 deduction for every IRA, Roth IRA, Individual Health Savings Account, Flexible Spending Account, or Educational IRA you fully fund each year in addition to the standard family member count. Also, add 1 deduction for every $300 you got refunded the prior year (including any stimulus check if you get one).

UPDATE: Don't forget the Earned Income Credit--you DON'T have to have kids to qualify, but you DO have income limits:

As a general rule, eligibility guidelines for the Earned Income Tax Credit require an adjusted gross income of less than:

- $38,646 for an individual with two or more qualifying children, or $41,646 for a married couple with two or more children.

- $33,995 for an individual with one child; $36,995 for a married couple with one child.

- $12,880 for an individual with no children; $15,880 for a married couple with no children.

The maximum credit for a family with two or more children is $4,824; with one child, $2,917; with no children, $438.

People who consistently fail to claim the credit are people whose incomes are so low - below $17,000 - that they are not required to file tax returns. By not filing returns, those people fail to claim the credit, which they could receive as a refund.

Two other groups that often fail to claim the credit are people who work but don't have children and older people who are raising grandchildren. People older than age 65 are generally not eligible, but can be eligible if they are raising grandchildren.

· There are three types of income, all subject to different taxes:
ACTIVE income (wages/tips/salaries taxed at roughly 40% with all possible payroll taxes included). This is income you worked for—money paid to you by your employer.

PASSIVE income (rental real estate, loan/lease payments, commissions, etc. taxed at 20% with no payroll taxes). This is income you didn’t have to work for—paid to you by others for use of your belongings.

PORTFOLIO income (interest/dividends/capital gains taxed at 15% with no payroll taxes). This is investment income—money paid to you by the markets.

Changing your TYPE of income from wages/tips/salaries to something else (commissions, dividends and interest, real estate rental income, royalty payments, equipment rental/lease payments--can be any equipment at all—even a spare car), being a “shadow merchant” (selling things at a non-traditional place such as yard sales and flea markets), etc. Another way of maximizing income while minimizing taxes is to negotiate collecting the equivalent of your excess work pay (overtime, raises and bonuses) in things--like health benefits, temporary use of the company car/truck/van, or time off—as opposed to cash. These things cannot be taxed, and your employer will enjoy a $$ break. Labor is the #1 highest recurring business cost.

· Go into business and stay there ALONE or WITH IMMEDIATE FAMILY MEMBERS. Learn about the many ways of getting money out of your business without incurring any taxes for yourself (reimbursements to loans you made to the business, life insurance policy proceeds, KEOGHs and SEP-IRAs, spousal paychecks, checks to kids under 16 (there is a current income limit of about $3000 per year--it changes every year, so do check up--before taxes are incurred, and the checks don’t ACTUALLY have to go to the kids), ESOPs (employee stock ownership plans), etc. Read the Rich Dad, Poor Dad book Loopholes of the Rich for a clear, easy-to-understand diagram and explanation of how businesses flow, and how the money flows from them to you. Regular standard business deductions and credits also kick in, further reducing total tax burden.

UPDATE: Protest your property tax bill when real estate is in down markets--demand a reassessment based on new (lower) market values. The lower the market, the bigger your savings.

· Convert to Amish (officially join their church) and avoid paying any FICA and Medicare payments at all (they are officially exempt from these taxes) while employed by other Amish. You will still be subject to federal/state income taxes, and sales taxes.

The questionable:
· If going Amish isn’t your thing (and I suspect it isn’t), think about participating in the Underground Economy while still holding your “above ground” job. People who sell goods and services for cash without collecting sales tax (or paying income tax on that money), are part of that economy. Simple things like babysitting or holding yard sales qualifies. UE members have also been known to sell used cars (one at a time) or even diamonds (purchased cheaply from a pawn-shop, then re-set) discreetly for cash profit with no documentation, and no IRS attention (the IRS only looks at your lifestyle vs. declared income and tax filings from your legitimate job). As long as you lead a lifestyle that is commensurate with your known (reported) pay, you have a very good chance of going unnoticed and virtually doubling your income (or more) tax-free. For more information, consult the book Deep Inside the Underground Economy by Adam Cash, because there is FAR more to this than I could put here—and there are a few caveats you need to be aware of. I urge you to read the book and getting ALL the information before taking the plunge, because I will not be held responsible for any legal, moral, or ethical liabilities resulting from this activity.

Congress creates and passes the tax code, and usually Congress will make changes that enhance themselves and the rich. We simply need to figure out how to decipher what the changes are, and how to apply them to our own tax burdens to benefit the most from them. It doesn’t matter what income or tax bracket you’re in…there’s always something you can take advantage of, provided you make saving a priority instead of spending. For even more benefits, you need to get off the “wages, tips, and salaries” radar—what is currently considered taxable income and scrutinized the hardest by the IRS.