This question is for the CPA’s on the fourm. I am going to contact my tax professional, but for sake of discussion, how would one go about legally paying as little tax on interest income as possible?
Here’s the scenario: A person uses 250k equity in their home as a loan and secures 800k. The 250k HELOC needs to be repaid, and the business partner receives 200k for brokering the deal. That leaves 450k profit.
I realize the tax has to be paid on the full amount, but what kind of credits / deductions can be made to pay as little tax on the amount as possible? Can the 250k HELOC repayment and 200k broker fee count as deductions? What can be done with the remaining 450k? An LLC was formed in March, but the tax ID has not been received yet, so this deal has been done privately.
what does “secures 800k” mean exactly?
debt is not income.
if you used the 250 to buy a property that you sold for 800, your gain on the sale is 550. minus the 200 deductible sales commission leaves 350 taxable. Now that the door is open, you need to throw as much deductible business expenses as possible through it (mileage, meals, telephone, print cartridges, selling expenses, repairs, you name it, etc).
Assuming that it’s a flip, pay your 45% and be happy that you are keeping 228k. that’s not a bad payday.
broker will pay 45% on his taxable 200 (minus expenses) also.
This was 800k cash, not property…repayment for loaning the 250k. These were hard money, short term loans where the ROI is 550k, minust the broker fee of 200k to the broker. Net ROI after paying of the HELOC and broker is 350k.
I don’t think you have any special tricks for saving money on interest income… other than using tax-exempt interest (which you already know about)…
Here’s what tax planning is all about (at least in a general sense)… Whenever possible, you’re simply trying to
- Delaywhen you pay income taxes.
- Turn losses into ordinary losses so they’re fully deductible.
- Turn income into capital gains so they’re taxed at preferential rates.
- Take advantage of any statutory exclusions like Sec. 121.
sounds to me like ordinary interest (or business) income.
Anything that can be done to minimize taxes paid? I’m not talking illegal…but “tricks of the trade”, legal tax saving ideas on interest income, like the #1 - #4 seattlecpa mentioned? I think this will be 33% tax bracket (ouch)…
Another option is to turn personal expenses into deductible expenses. Your company can set up a defined benefit retirement plan and use this interest income to fund it. The funding is tax deductible and immune from creditor attack. You can create your own health plan that doesn’t have a deductible for co-pay and covers OTC medicine, holistic medicine, and experimental treatments. Research the VEBA and see how you can make a yacht or ski lodge a tax deductible expense.
Can anyone touch on BLL’s post in more detail for me?
He’s giving examples of statutory exclusions. And good ones, BTW.
But can I make a general observation?
I’m not saying, mw, that you’re making this mistake… but I observe that some people (and often real estate investors) get so entangled in the “save taxes” issue that they lose site of the bigger picture–which is probably something like maximizing your after-tax cash flow… or building wealth… or (even bigger) keeping your financial affairs manageable and in sync with the rest of your life.
I regularly encounter pseudo-clients who come in and tell me they need my help to pay the absolute minimum in taxes. These guys are almost always terrible clients… and I decline to help them. Should you minimize the taxes you pay? Of course! But one shouldn’t so focus on minimizing taxes that one overcomplicates one’s finances… And one shouldn’t so focus on minimizing taxes that one forgets the real (economic) goal is to create value and wealth.
Very good advice, seatlecpa. I agree wholeheartedly. This intent of this thread was to hear tax saving ideas from those who earn 300k+ a year, and the CPA’s with clients earning this figure.
Can you supply a link or source where I can go to see all statutory exclusions?
pick up instructions for the 1120 or whatever IRS publication deals with business expenses.
The problem with BLL’s ideas is that they all COST CASH. You have to sock away $1,000 of cash in the retirement account to save $450 of taxes. You have to provide $1,000 of medical benefits to save $450 of taxes. Now, these are good ideas if, like BLL suggests, you have already spent the cash - you might as well save the taxes. But don’t get caught in Steve’s trap of spending more money than the taxes you’ll save from additional deductions.
Mark is correct. My assumption is that excess cash exists and mw doesn’t want to pay taxes on it. These suggestions are means to avoid taxes. They are not a means to increase wealth.
You aren’t suggesting that CPAs can’t make $300K a year, are you? :biggrin
I thought that was a given :biggrin