setting up an entity

Quote from m22au:

Scientist,

I think from memory you're from WA, I'm over here in Melbourne.
More...
Yeah, seems like we're the only people up this time of the day. How is it with the markets over there? Does anybody actually trade Australian markets, like SPI, and what is it like? Any good? I mean they'd just be opening this time of the day wouldn't they? Any action? Good scalping? Trends?

I was thinking of setting up a US company to avoid the (47% + 1.5%) 48.5% tax on income above 62,500.

From an old form i1120 (tax return for corporation) on my hard drive, the marginal tax rates up to $75k are 15% and 25%, and thereafter 34% to 39%.

An Aussie company (with tax @ 30%) will become cheaper with income of $186,111, however I think it would be liable for US tax because of "trade or business in the US".

I found this link http://www.bizfilings.com/international/index.html

which suggests that a non-citizen, non-resident can set up a US corporation, although I was hoping someone on the board can confirm this, and maybe provide a link that explains who can and can't be a director.

The tax savings by being taxed as a US company (instead as an individual earning more than $62,500) are about $21k for the first $75k of income, then 10% to 14% of income after that.

However there are set-up costs and ongoing costs that should be factored in.
More...
You are of course right here. I wonder about US tax, and how much we'd have to pay them under these circumstances. You possibly can't be avoiding all Australian tax and then live here in Australia (just from a logical point of view), and it might bring complications either way, not to name the mentioned setup costs. And then the question would you want to give all your money to the US government?

Either way, from what I know I think that once you're making good money in America, there's a hell of a lot of tax breaks and loopholes for rich people. Rich people in the US live like god in France, because that's the way the Republicans have continuously set up the system, to take from one and give to the other. Given you're in the US tax system though I'd say.

In Australia it's kind of similar, but not nearly as extreme. There are hardly loopholes, and you can get taxed boat-loads. But then, you know, 30% corporate tax is pretty nice.

It would be interesting to find out more about this. Thanks for the link.

Scientist.
 
Quote from lindq:

If you are simply trading for yourself, there is no reason to set up a corporate entity. You can gain nearly all the benefits with none of the hassle by simply filing as a "Trader in Securities".

Go to http://www.greencompany.com and you'll find much more information related to trader tax issues.
More...
I knew this thread would soon get flooded with junk which the later posts confirm. In answer your question, there are good reasons for an individual trader to create an entity.

One is that you get earned income and can offset healthcare and insurance expenses which you can't do just by declaring trader status.

The second is that you get fund a mini 401K because you have earned income. The contribuion limits are very high for this type of plan and its a really good deal.

The third reason is you'll be able to max out Social Security which you won't get with just trader status. I know SS does not have a good return, but I wouldn't skip it.

http://www.greencompany.com/Traders/TraderRetirement.shtml
 
Puffy,

Unfortunately, if you do it that way, you'll wind up paying self employment tax, a hefty 15% up to some limit (around $70k I believe). You'd need a lot of deductions and health expense to cover an extra 15%.
 
Bundle,

Can you describe the self employment tax in more detail?

Who does it apply to - the company or the individual?

Under what circumstances?

Thanks in advance


Quote from bundlemaker:

Puffy,

Unfortunately, if you do it that way, you'll wind up paying self employment tax, a hefty 15% up to some limit (around $70k I believe). You'd need a lot of deductions and health expense to cover an extra 15%.
More...
 
m22,

In the case of an individual filing a a schedule c, the company is the same thing as the individual. (Even if you are an LLC or a subchapter S corp, those are essential pass throughs just to protect your assets, no tax advantage)

It is my understanding (after much study and discussion with a tax attourney) that if you just file a shed C to deduct direct trading expenses that you're not responsible for self employment tax. If you do anything (like creating an entity) to convert the trading gains into earned income, then you're liable for the self employ tax.

And if you try to get real fancy, incorporate, and have the corporation hire you; then the corporation is responsible for fica and medicare to the tune of roughly 7.5% and you personally match this (just like with a regular job).

The only way that I can figure out around this, legally, is if you reside outside the US, are an employee of a foreign corporation which you control, then you can claim an exemption of $70,000 from your total income. This gets hairy and a bit gray. And you MUST really reside outside the US. And there's all kinds of other ramifications of doing this.

To my way of thinking, the best way to pay minimum taxes is to: live in the nicest home you ever plan to and mortgage it to the hilt (thus benefiting from interest deduction) and keep your capital for trading. Then, whatever you do for fun or hobby, turn that into a legitamate business to deduct the major expenses for your toys. In the end, this is easier, safer, and more fun.
 
Bundle,

Thanks for the detailed reply.

Not sure if you read my previous posts, but I am interested in setting up some type of US corporation (not yet sure of the type such as S corp, LLC etc.) because the Federal tax on US corporations is less than the marginal tax on Aussie individual incomes above $62,500.

Can you explain the difference between trading gains and earned income? And why would one want to convert the former to the latter?

Quote from bundlemaker:

m22,

In the case of an individual filing a a schedule c, the company is the same thing as the individual. (Even if you are an LLC or a subchapter S corp, those are essential pass throughs just to protect your assets, no tax advantage)

It is my understanding (after much study and discussion with a tax attourney) that if you just file a shed C to deduct direct trading expenses that you're not responsible for self employment tax. If you do anything (like creating an entity) to convert the trading gains into earned income, then you're liable for the self employ tax.

And if you try to get real fancy, incorporate, and have the corporation hire you; then the corporation is responsible for fica and medicare to the tune of roughly 7.5% and you personally match this (just like with a regular job).

The only way that I can figure out around this, legally, is if you reside outside the US, are an employee of a foreign corporation which you control, then you can claim an exemption of $70,000 from your total income. This gets hairy and a bit gray. And you MUST really reside outside the US. And there's all kinds of other ramifications of doing this.

To my way of thinking, the best way to pay minimum taxes is to: live in the nicest home you ever plan to and mortgage it to the hilt (thus benefiting from interest deduction) and keep your capital for trading. Then, whatever you do for fun or hobby, turn that into a legitamate business to deduct the major expenses for your toys. In the end, this is easier, safer, and more fun.
More...
 
Quote from bundlemaker:

m22,

In the case of an individual filing a a schedule c, the company is the same thing as the individual. (Even if you are an LLC or a subchapter S corp, those are essential pass throughs just to protect your assets, no tax advantage)

It is my understanding (after much study and discussion with a tax attourney) that if you just file a shed C to deduct direct trading expenses that you're not responsible for self employment tax. If you do anything (like creating an entity) to convert the trading gains into earned income, then you're liable for the self employ tax.

And if you try to get real fancy, incorporate, and have the corporation hire you; then the corporation is responsible for fica and medicare to the tune of roughly 7.5% and you personally match this (just like with a regular job).

The only way that I can figure out around this, legally, is if you reside outside the US, are an employee of a foreign corporation which you control, then you can claim an exemption of $70,000 from your total income. This gets hairy and a bit gray. And you MUST really reside outside the US. And there's all kinds of other ramifications of doing this.

To my way of thinking, the best way to pay minimum taxes is to: live in the nicest home you ever plan to and mortgage it to the hilt (thus benefiting from interest deduction) and keep your capital for trading. Then, whatever you do for fun or hobby, turn that into a legitamate business to deduct the major expenses for your toys. In the end, this is easier, safer, and more fun.
More...
Some great words indeed.

I would say that the best way to figure it out is by getting some serious advice by some people who seriously know their stuff around this. Get somebody who's really familiar with taxation, business and entities, preferably a professional in the field.
It could save you a lot of hassles and a lot of money later on in the progress.

Just think about the task of becoming a semi-pro day trader. How long does it take? Well, how long does it take to become really good at tax law and loopholes? Do you think a little bit of reading and research is going to get you the best picture and solution? I doubt it! That's why you need specialists.

Don't forget there are always loopholes. The tax system isn't that simple. There are many things you can do to legally pay little tax. Like me putting two businesses, jewellery design / manufacture / retail and a trading business basically under one entity. By the coincidence of application, almost everything in my life is tax-deductible. Beautiful. I can relocate money into gold, platinum, precious gems and then tax-deduct/defer some things as business expenses.

There are many things you can do to 100% legally exploit the tax system. The trick is to always stay 100% clean and legal.
Once you break the law, you're in the tax file and will be hawked over for the rest of your life.

Be smart about it, and many previously hidden doors will open.

Scientist.
 
Has anyone used Green? Would you recommend them?

Their site looks great, but before signing them up I'd like to get a few positive references.
 
GreenTrader Tax is great, they set up "entities" for our traders regularly and Robert is nothing but a gentleman to deal with. He also has helped me personally ...I was going to mention him in this thread anyway......

rttrader1 -
 
You must log in or register to reply here.
Back
Top