Transcript Legal Ways to Save Taxes Offshore and Onshore

Legal Ways to
Save Taxes
How to Pay Less Taxes
Offshore And Onshore
By Vernon Jacobs & Richard Duke
Copyright, 2006,
Offshore Press, Inc.
 This presentation is a summary of the
topics included in “Legal Ways to
Save Taxes Offshore and Onshore” by
Vernon Jacobs and Richard Duke
 It is published and copyrighted by
Offshore Press, Inc.
 www.offshorepress.com
CIRCULAR 230 NOTICE

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This report is not a reliance opinion or a marketed opinion. This
report and its contents were not intended or written by the authors
to be used, and cannot be used, by anyone for the purpose of (i)
avoiding U.S. tax penalties, or (ii) promoting, marketing or
recommending to another party any transaction or matter
addressed or stated herein. This report and its contents are not
treated as a marketed opinion because (a) the advice was not
intended or written to be used, and it cannot be used by any
taxpayer, for the purpose of avoiding penalties that may be
imposed on the taxpayer; (b) the advice was not written to
support the promotion or marketing of the transaction(s) or
matter(s) addressed herein; and (c) the taxpayer should seek
advice based on the taxpayer's particular circumstances from an
independent tax advisor. [31 C.F.R. sections 10.35(b)(4)(ii);
10.35(b)(5)(i); and (b)(5)(ii)(a), (b) and (c).]
For an explanation of the Circular 230 requirements to which tax
advisors are subject, see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm
Introduction to Legal Ways to Save
Taxes Offshore and Onshore
 U.S. imposes tax on its citizens and
permanent residents on a worldwide
basis. Most tax saving methods
available onshore are available
offshore.
 The U.S. tax system has dozens of
"loopholes" or tax incentives
 The international tax law is a collection
of exceptions to the general rules
 The focus of this presentation is on
individual income taxes
A Primer on Marginal Tax Rates
 Tax planning is a numbers game based
mostly on marginal tax rates
 Reduced Rates on Long Term Capital
Gains and Dividend Income
 The AMT Rate is either 26% or 28%.
 The FICA and Medicare Tax Rates
 Self-Employment & Medicare Tax Rates
 State Income Taxes
 The Corporate Factor
 Federal Estate Taxes
The Value of Tax Deferral
 Income on deferred taxes may be
equal to the tax that was
originally due.
 The rule of 72
 Sometimes tax deferral may
result in converting ordinary
income into LTCG
 Less current tax equals less
estimated taxes
Compensation (Form W-2)
Tax Favored Employee Benefits
IRA Deduction
Foreign Earned Income Exclusion
Employee Expense
Reimbursement
 Expatriation
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Owner/Employees of a
Controlled Corporation
 Tax Options of Employees
 Trade Current Pay for Capital
Gains
 Medical Expense Reimbursement
Plan
 CFC Foreign Source Income
Deferral
Interest & Dividends – I
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Tax Exempt Interest
Qualified Dividend Income
Tax Qualified Savings Accounts
Annuity or Life Insurance
Interest & Dividends - II
 Convert Interest Income into
Capital Gains or Dividends
 Foreign Business Corporation
with Active Business
 Transfer Investment Income to
Lower Bracket Dependents
 Pay off High Interest Loans
Business Income - I
 Foreign Earned Income Exclusion
 CFC Foreign Source Business
Income
 Non CFC Foreign Business Income
 Income Shifting
 Employ Dependent Children in
Your Business
 Customer Acquisition Costs
Business Income - II
 When to Incorporate
 Operating as a Foreign
Corporation
 Employ Spouse in Business
 Home Office Expenses
 Business Losses vs. Hobby Losses
 Operating an Activity as an
Exempt Entity
Capital Gains - I
 15% rate and 5% rate, 28% rate
and 25% rate
 Cash in Unrealized Capital Losses
 Direct Purchase of Foreign Stocks
 Gift of Appreciated Property to a
Charity
 Defer Capital Gains Tax with
Charitable Remainder Trust
Capital Gains - II
 Defer Capital Gains Tax with a
Private Annuity
 Gift Appreciated Assets to Lower
Bracket Dependents
 Tax Deferral with Like Kind
Exchange
 Tax Deferral with Installment
Notes or SCINS
Pensions & Annuities
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Foreign Pension Trust
An Offshore IRA
Deferred Retirement Annuities
Charitable Retirement Annuity
Income from Real Property
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Personal residence
Home Office Deduction
Vacation home
Rental property
Partnership Income
Benefits of a Flow-through Entity
Family Income Splitting
Benefits of a Taxable Corporation
Formation of a Foreign Based
Corporation
 A Foreign Disregarded Entity
 Passive Income Deductions or
Credits
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Income From Trusts
 The tax brackets for trusts are
very compressed.
 Income Splitting
 Other Tax Saving Methods for
investment income
Social Security Income
 Become Single Taxpayers
 Convert Taxable Income into Capital
Gains
 Convert Investments into an Annuity
 Pay Off or Reduce a Mortgage Loan
 Avoid Tax Exempt Interest
 Convert Taxable Retirement Savings to
a Roth IRA
 Convert Social Security Benefits to a
401(k) Plan
Deductions That Reduce
Your Income
 Hidden deductions reduce income
on page 1 of Form 1040.
 Employee Business Expenses
 Schedule C Expenses
 Schedule D Losses
 Schedule E Expenses
 Schedule F Expenses
Deductions for
Adjusted Gross Income
 Some deductions are more equal
than others
 IRA Deductions
 Bigger Retirement Deductions for
the Self Employed
 Archer Medical Savings Accounts
and Health Savings Accounts
 Self-Employed Health Insurance
 Self-Employed Retirement Plans
Itemized Deductions
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Medical Expenses
Residential Loan Interest
Investment Interest
Charitable Contributions
Miscellaneous Itemized
Deductions
Alternative Minimum Tax
 "The hardest thing in the world to
understand is the income tax."
 Albert Einstein
 That was long before the AMT
The AMT reduces
these deductions
 Accelerated depreciation
 Intangible drilling, circulation, research, experimental,
or mining costs
 Amortization of pollution-control facilities or depletion
 Income or (loss) from tax-shelter farm activities or
passive activities
 Percentage-of-completion income from long-term
contracts
 Net operating loss deduction in excess of the AMT
NOL deduction
The AMT reduces
some income exclusions
 Income from incentive stock
options at the time they are
exercised
 Tax-exempt interest from certain
private activity bonds
 Long term capital gains or
qualified dividend income
The AMT eliminates most of the
itemized deductions
 Medical expenses to the extent of 10% of
adjusted gross income
 State and local taxes with no exceptions
 Interest on a 2nd mortgage for a personal
residence
 Interest on home loans not used to buy, build,
or improve the home
 Miscellaneous itemized deductions
 Investment interest expense reported on Form
4952
 The personal exemption and the standard
deduction.
AMT Exemption & Phase out
 Filing Status
MFJ
S/HH
MFS/ET
 Exemption 62,500
 From
150,000
42,500
112,500
31,275
75,000
 To
247,500
165,000
330,000
 Phase out $1 of exemption for each
$4 of excess modified AMT income
AMT Rates
 The tax rate on the first $175,000 of
AMT income is 26% and on any excess
it is 28%. These rates apply to all
filing categories.
 Lower Rates on Long Term Gains and
Qualified Dividends same as regular
tax
 Incentive Stock Options
 The Kiddie Tax and the AMT exemption $5,850 plus earned income
Possible Solutions
to the AMT Trap - I
 Avoid tax exempt interest on certain
private activity bonds
 The Section 179 deduction is not an
AMT tax preference (N/A offshore)
 Medical reimbursement plan or the S.E.
deduction for health insurance
 The home mortgage interest deduction
if funds are used to buy, build or to
improve a personal residence or
second home.
 Accountable expense reimbursement
for employee
Possible Solutions
to the AMT Trap - II
 Spread out capital gains and
exercise of ISOs
 Dual Basis AMT Assets
 The AMT Credit
 Beware of Other Tax Credits
 Prospects for the AMT
 Elimination or simplification of
AMT seems to be unlikely
The Estate & Gift Tax
Lifetime Estate Tax Exclusion
The lifetime exemption for gifts
Unlimited Marital Deduction
The Marital Trust
Qualified Terminal Interest
Property Trusts
 Reduction of Basis of Stock in
Passive Foreign Investment
Company
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Pre-Death Transfers
 Annual Gift Tax Exclusion
 Gifts of Assets That Are Expected
to Increase In Value
 Gift and Leaseback
 Transfers to an Irrevocable NonGrantor Trust
 Transfers to a Foreign NonGrantor Trust
Valuation Discounts
 Discounts for Closely Held
Business Interests
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Closely Held Corporation
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Family Limited Partnership
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Limited Liability Company
 Problems with retained control of
assets
 Gifts of Discounted Property
Life Insurance Owned
by or for the Heirs
 Life Insurance Owned by the
Insured Requires Gross-up
 Life Insurance Owned by the
Heirs Transfers Tax Free
 The Three Year Rule for Existing
Policies
 Offshore Life Insurance
 Using a Partnership Instead of a
Trust
Gifts or Bequests to Charity
 Charitable Income Trust (CRT,
CRAT)
 Charitable Lead Trust
 Family Charitable Foundations
 Gifts/Bequests of IRA Accounts
Other Estate Tax Strategies
 Business Buy/Sell Agreements
 Business Stock Redemptions
 Installment Sales to heirs with
gifts of payments
 The Private Annuity
 Private Annuity with FC Owned by
Variable Life Contract
The Zero Tax Estate Plan
 Identify the assets that can be
left to heirs free of any estate
taxes
 Increase this amount with
valuation discounts
 Use 50% of balance to fund a
charitable remainder trust
 The rest will be sold to the heirs
in exchange for a private annuity
Copyright, Offshore Press, 2006
 This slide presentation is a summary
of the book, Legal Ways to Save
Taxes Offshore and Onshore by
Vernon Jacobs & Richard Duke
 It is published and copyrighted by
Offshore Press, Inc.
 www.offshorepress.com