Monthly Archives: August 2015

Giving Yourself a Pay Raise

The way to get a substantial pay raise in 2015 is to focus on your net income — not your gross income — by reducing your income tax liability.

Small Business
The first step is to understand how the tax system works. The current system is set up to benefit business owners at the expense of salaried or hourly employees. The only d eductions the average family receives are for having children and interest and other expenses incurred for home-ownership.

On the other hand, small business owners receives dozens of legal deductions, with many personal expenses recategorized as a business purpose. For example, automobiles used for personal use are not deductible in any way (except for moving, medical and charity miles) — but the part of the automobile use for your small business becomes a legitimate deduction. Say you drive 30,000 miles a way (yes, that’s a lot), and 15,000 were used for business. You could write off half of the expenses on the car. Most people use the government’s mileage calculation — in 2014, 56 cents per mile — meaning $8,400 of expenses deducted off of the business gross income.

What If I Don’t Have a Small Business?

Start one immediately and have the intent to make a profit. Many things then may be deductible, such as:

  • Automobiles.
  • Meals and entertainment.
  • Business trips and travel.
  • Catering.
  • Salaries paid to qualifying children.
  • Medical expenses.
  • Small business equipment.
  • Utilities used in conjunction with running a business even if using your home as place of business.

Be warned: If your intent is just to create tax deductions — and you have no real intent to transact business or try to make a profit — then you are creating fraud.

You don’t need to rent office space and incur thousands of dollars of expenses for your new venture. Your venture could be started at your kitchen table on a shoestring. Think of all the legendary businesses that started out this way.

Be Like Dell or Gates

Michael Dell started Dell computers out of his dorm room, and Bill Gates started Microsoft (MSFT) from his parents’ garage. Millions of other businesses started this way, creating billions of dollars in salaries and benefits for employees and profits for the business owners. This is why the tax system is set up to benefit small business — which can create jobs and wealth. Some sample businesses that could be launched on a shoestring:

  • Consulting on an area where you have expertise.
  • Internet sales and marketing. You can have an Internet store running in a few hours.
  • Network marketing companies. Gone are the days of ordering loads of stuff and trying to resell to friends and family members. Most companies handle all the shipping and order taking themselves and ship directly (assuming there is a physical product for sale) to your customer.
  • Being a referral agent for an existing business. Many businesses will be happy to pay you a referral commission if you send them business. Depending on the type of business, some licensing may be required.

Nobody will ever care more about your money than you so find a tax preparer/ accountant who understands these concepts who you can work with for years to come.

The Secret IRA

Types of IRA's

Do you know which kind of IRA you have?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options with your IRA, including:

  • Rental real estate.
  • Fixer uppers to resell at a profit (flip).
  • Private loans made at higher interest rates to other investors.
  • Discounted private notes.
  • Tax liens or tax deeds.
  • Privately held companies and startups.
  • Precious metals.
  • Leases and lease options.
  • Straight options (real estate options, not stock options).
  • Partnerships.

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.