Tax Strategy for Self-Employment Income, Part 2: The Framework
Now that I disclosed the tax situation I'm in, let's start the analysis by putting together a framework of how, conceivably, we can improve our tax landscape.
In short, I'm looking at four avenues:
• Tax Deduction: Less tax by legitimately claim more expenses in the tax return.
• Income Deferral: Less or later tax by contributing to lawful vehicles that are similar to IRA and 401(k).
• Transfer of Income: Less tax by lawfully moving the income between me and my wife. (To explain this a little bit more, an extra dollar of sideline income to me is not subject to the 12.4% social security tax, and an extra dollar in foreign earned income to my wife is not subject to US taxation thanks to foreign earned income exclusion clause.)
• Shift of Income Timing: Less tax by legitimately shifting income between different tax years, in anticipation of the significant changes of our household's marginal tax rates between 2005 and 2006.
You might have noticed that I included "lawfully" or "legitimately" in all bullets; I intend to play fairly to the full extent of law, but not an inch more. Frankly, I'm very mindful that if I don't play safe, anything I write in this blog can be evidence that puts me in an undesirable situation.
In the next part, I'll discuss the top level options I have. Read it here.
This post is part of the Tax Strategy for Self-Employment Income Series, please also read the rest of the series:
Part 1: The Tax Exposure
Part 2: The Framework
Part 3: The Major Options
Part 4: Individual 401(k) Introduction
Part 5: Individual 401(k) Analysis & Resources
Part 6: SEP IRA and SIMPLE Plans
Part 7: Forms of Doing Business
Part 8: LLC and S Corporation
Part 9: C Corporation
Part 10: The Conclusion
Let's begin our option-by-option analysis of best tax strategies for our household's self employment income at Individual 401(k). Individual 401(k), or so-called Solo 401(k), is a hidden gem in Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that hasn't been fully appreciated yet ... Read
So far I have explained the tax situation I am expecting to improve, and the four conceivable strategies I can consider, namely tax deduction, income deferral, income transfer, and shift of income timing. It is time to find out what are the available tactics I ... Read
I thought I pretty much mastered income tax after I built out my 2005 tax projection back in February. I am wrong. My life is taking an interesting turn, which requires me to upgrade my tax knowledge to the next level. Specifically, my wife is ... Read
Finally, I electronically filed my 2004 tax return today. For some factors out of my control, I had to request an automatic tax filing extension (and it is actually really easy), which gave me until August 15 to file my 2004 return. The tax preparation ... Read
