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