Best way to convert cap. gains into earned income?

Quote from MR.NBBO:

You'll still pay roughly 12% on it, even after inviting mom & pop in.
You don't have to pay FICA on all your profits -if structured correctly & distributed correctly. Fica only on your salary at
12%ish.

By the way......why the burning desire to have "earned income"?

I haven't had any of that for about 5 years now! :eek: :p
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"earned income" gets the "foreign earned income exclusion". :D

further investigation looks like the 12% would be taxed BEFORE the exemption, not AFTER. so gms was indeed correct....

so the revised scenario:

option 1. bob pays 35% (155k+ rate), or 70k.
option 2. bob and his spouse are paid 100k each by their LLC. Together they take the 160k foreign earned income credit plus 20k in rent/housing provided by LLC.

CHANGE:
On the remaining 20k they pay 15% (20k rate) = 3k.
+ additional FICA/SS (12%) on 200k = 24k.

so basically, living offshore can buy you about 20% in taxes, or your normal tax % minus the FICA/SS %.
 
"If you are self–employed, and both capital investment and personal services are factors in producing your income, your earned income is the smaller of the value of your personal services or 30% of net profits"

anyone care to comment on this? this is from the IRS. sounds like trouble for this setup....what is "capital investment"? does this mean if i made income from investing in the LLC?

don't all of you tax advice guys/gals respond at once now!! (funky sighs and admits how greedy tax professionals are)
 
is there a way to avoid self-employment taxes, paying them instead as regular FICA/SS taxes? if i had a relative own a corporation and it paid me, i wouldn't be paying SE taxes right?

i ask this because SE taxes get applied to earned income BEFORE the foreign earned income exemption, and regular FICA/SS taxes get applied AFTER the foreign earned income exemption.

i think.... :confused:
 
Once again, depends on payout/salary structure of the corp/LLC & how much you actually make. I don't think this IRS (exerpt?) would cause you any problems.....because you seem to want to generate "earned income". The 30% rule seems like an IRS attack on those who try to "re-characterize" "earned income" as something else where FICA is not paid. Again, it all comes down down to your profits.

PM me & I can help you more without letting the world know your
income. I've looked into everything over the years & found that I've actually lucked out in my tax situtation, as far as business & location go.







Quote from funky:

"If you are self–employed, and both capital investment and personal services are factors in producing your income, your earned income is the smaller of the value of your personal services or 30% of net profits"

anyone care to comment on this? this is from the IRS. sounds like trouble for this setup....what is "capital investment"? does this mean if i made income from investing in the LLC?

don't all of you tax advice guys/gals respond at once now!! (funky sighs and admits how greedy tax professionals are)
More...
 
"Is there a way to avoid self-employment taxes, paying them instead as regular FICA/SS taxes? if i had a relative own a corporation and it paid me, i wouldn't be paying SE taxes right?"

YEA, have your relative pay the other half of your FICA ......as they should -since they may well be your employer!

What your getting at is- IS THERE ANYWAY AROUND THE FICA? No, for all practical puposes. Someone always ends up paying it, whether its you 100%, or your "employer" & you 50%/50%.
 
Quote from funky:

gms, thanks for your input....some corrections though... income is taxed in the country you live in...oh by the way, the bahamas doesn't have personal income tax
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Don't shoot me. You didn't write that where you had in mind to live did not have income taxes, unless I missed it.

now what you are saying is that the FICA is applied BEFORE the exemption...i don't think this is the case... here is the form: http://www.irs.gov/pub/irs-pdf/f2555.pdf (look at line 43, and then 1040 line 22 and 23)
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But go to 1040 line 56, where you have to add in the SE tax. Schedule SE, where you figure the SE tax, takes your net profit from Schedule C (Schedule C is the wage you paid yourself, less your employee out of pocket expenses), and I believe also your distribution from your Schedule K-1 as well (form 1065) come to think of it, and undetered by tax credits or exemptions such as those you've discussed, merrily plows straight ahead with tabulating a bonafide self-employment tax for you to pay.

The gov't is like a 200 year old person. A 200 year old person who has seen lots of people over many years try many things to get around paying taxes. The 200 year old knows what all the tricks are, and has plugged up all the routes on you to make sure it gets its money.

So if you have to report your complete net (wages and Sch. K-1) of $130K, (as per the figures in my example before), then actually your SE tax will be $14,009.19, and you'll get to deduct 7,004 off your AGI (but not from your SE payment).
 
Quote from MR.NBBO:

"Is there a way to avoid self-employment taxes, paying them instead as regular FICA/SS taxes? if i had a relative own a corporation and it paid me, i wouldn't be paying SE taxes right?"

YEA, have your relative pay the other half of your FICA ......as they should -since they may well be your employer!

What your getting at is- IS THERE ANYWAY AROUND THE FICA? No, for all practical puposes. Someone always ends up paying it, whether its you 100%, or your "employer" & you 50%/50%.
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yes, i think this is the best way in this scenario. have a relative OWN the LLC, and they will then pay you a salary. FICA/SS is then taken out on each paycheck (half paid by relative, half paid by employee). then when you file taxes, there is NO SE.

the effect of this is that you will apply FICA/SS to the income AFTER 2555 DEDUCTIONS, instead of BEFORE (huge difference!). you are right, there is no way around FICA/SS, BUT there IS a way around how MUCH you pay.
 
thanks for the few that responded to this thread ... this has given me alot to chew on and i appreciate it!!!

those of you who see my conclusion and think there is still something wrong, please post! this can really help me and many other traders out :D

thanks !!!!
 
ahh, another thing to think about: HOW to get the profits paid out BACK into the LLC!!! hehehehe

do you just 'invest' in the llc through stock? and then this gets back around to the 30% capital investment rule maybe? arrrghhh headache.....

one idea is that me and my spouse could GIFT the money back to my relative(s). that will work only up to a certain point (unified credit: see http://www.irs.gov/publications/p950/ar02.html). theoretically, if you had enough relatives owning the LLC, it would work without tapping the unified credit, since you are allow up to 11k in gifts to any person. i.e. if i had 20 relatives owning 'interest' in the LLC, and i gifted each of them 11k, this would be ALL tax-free.

alternatively, if only a few relatives could be the 'interest' owners of the LLC, then you could tap into the unified credit. this allows up to $1 million of gifts over the course of your lifetime. $2 million for you and your spouse.

so, for example, say the LLC makes 200k profit, and is paid out as earned income to me and my spouse. we can then take the leftover profits and gift them back to the relatives who own the LLC and start the process all over again. we can do this until we have given over $2 million back. :D
 
It seems to me all these #^&@!& IRS rules are designed to do 2 things...

1. Collect your money.
2. Keep millions of accountants, lawyers, etc all "working" to collect the portion left that the IRS did not!





Quote from funky:

ahh, another thing to think about: HOW to get the profits paid out BACK into the LLC!!! hehehehe

do you just 'invest' in the llc through stock? and then this gets back around to the 30% capital investment rule maybe? arrrghhh headache.....
More...
 
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