My 1st Million At 33 – yes, you can do it too

A reader asks me about some tax advice to save on tax without setting up some complicate business structure. I wish I have more things to tell him and you. But the fact is that even if you have some rental business going on, your passive loss deduction is limited by the rental income, and even with active participation, the loss is limited to $25K, and will be phased out when your modified adjusted gross income reaches more than $150K. Now, $25K is a lot but not much in these days. A conforming loan of $417K at 6% mortgage interest rate will put you over $25K mortgage interest deduction.

My advice is to stuff some money into spousal IRA account, and then Roth IRA account, both of which you should probably do, AFTER you finish your taxes if your total income including all bank interest, capital gain, etc. is near $140K. The reason is that it is possible for you to hit the phase out limits around $150K. I hit that once, and I ended up filing form 8606 so that I can up the basis in my spousal IRA account. When I make a distribution 30 years down the road, I don’t need to claim those after-tax dollars that I put in as before-tax income.

There is really no “magic” way to avoid paying tax (unless you earn all of your income through having a business). Every year when I look at the amount of taxes that I’m paying, I feel a little down. But on the other hand, I actually feel that I am happy to contribute my part to the US treasury chest. Even though government is kind of wasteful, and they don’t spend every dollar according to your wish. But at least you know that some part of your tax money do go to the necessary social welfare programs that pay some elders’ bills and their medical bills. Furthermore, the total tax as a percentage of your total income is actually no where close to your marginal tax bracket. There were a couple of times that I hit a marginal tax bracket of 42% including state and payroll tax. That’s quite a lot, but hey, I was glad that I had those income to be taxed. In fact, I didn’t have any child credits, my exemption amounts are being phased out, and I got hit by alternative minimum tax.

The only tax that quite gets me is the tax on capital gain and dividends. Government inflates which causes everything to go up including your stocks, and you still need to pay tax on their sins. It’s really not that easy to achieve a positive return after-inflation and after-tax. There have been many discussions about tax reforms, and I fully agree that we should change to a consumption tax system. I am fully behind such system, even if the sales tax is more than 30%. Such system will level the playing field between business owners and salary earners.

In any case, I’m sorry that I cannot be more helpful. I’ve heard people setting up business to channel their daily expenses. I would not advise that both on a legal and ethical basis. There are always some gray area for certain expenses, but to spend a majority of personal expenses as business expenses, hmm…. No further comments.