Tuesday, October 28, 2008

A Tax Avoidance Game Plan for an Obama Administration

A while back, I said that in response to a President Obama's redistributive tax policies, it's time to think about how to seriously shelter some income. There are lots of ways and I don't claim to be an expert on this, but here is a good, basic approach for the small business owner. First, I hope you bought a house recently to take that mortgage interest deduction, because that's alot of your juice. Good. Second, if your small business is an LLC, you gotta have a simple IRA. That 's your second biggest juice.

Here is how it works. So let's say your small business is going to throw off $250,000 per year for you in the coming years. Well, that means you're rich according to The One and you're gonna get socked. Well, if you have a simple IRA, you can take $10,500 in deferred compensation and your employer, namely you, can match you up to 3%. So your LLC can pitch in $7,500 and your effective income is reduced to $232,000. Then you have the mortgage deduction. A nice healthy chunk in your house, at least 20% to avoid PMI, but not too much more, can give you major juice. In my case, let's say the mortgage interest deduction is somewhere around $40,000. That would indicate a decent exposure to your home, but as I've said before, I think real estate is a good investment these days. Then HELOCs are going cheap, you can leverage your home equity a little more with a capital addition or an improvement and increase your mortgage interest deduction (hell, you can buy a 6% yielding stock or some munis with a 4% HELOC, just don't tell your bank!). In my case I tack on another $3,000 in deductible mortgage interest thanks to the HELOC. So I've got my taxable income down to $189,000. But wait, it doesn't stop there. I've got a high deductible health care policy that let's me throw $5,800 into an HSA. That money is pre-tax, earns interest and I can spend it anytime in the next few years. With three munchkins, you can bet your keister I'm gonna have those healthcare expenditures eventually, so better to keep it from The One and have it lying around for a broken arm or a sprained ankle. There you have it, $250,000 in income has become $183,200. Granted you have to live a little leaner but your money goes into productive assets (IRA assets, your home, an HSA) that can store that value for after the The One has faded from his public role and is on the lecture circuit. Oh, and please folks, no cheating. That would be wrong, because Obama needs the money!

Like I said, I'm not an expert, so I welcome any suggestions and feedback on how to shelter income from The One. Anyway, Happy Tax Avoidance!

UPDATE: People seem to get it. Mortgage apps are up.


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