Best way to convert cap. gains into earned income?

Discussion in 'Professional Trading' started by funky, Mar 30, 2004.

  1. funky


    what is the best way to convert cap. gains into earned income? i ask this because i am thinking about living offshore and taking advantage of the earned income exemption.

    i can imagine setting up some sort of corporation and then directing all profits to me and my fiancee as income. but then doesn't the corporation pay tax on capital gains? does that then get offset by the payout to the employees?

    i.e. corporation x makes 200k, pays out 50% to me, 50% to my fiancee. both of us living offshore get to exempt 80k each, thus our 'earnings' are only 20k each, or 40k total. the corporation gets taxes on its capital gains, 200k, but then is that offset by the payout to me and my fiancee?

    any help would be appreciated.

  2. File as a full-time trader and take mark-to-market election --converts subsequent capital gains into business income.
  3. funky


    i wish it were that easy :) MTM doesn't convert gains into "earned income".
  4. goes to show how much I know :p perdon
  5. nkhoi


    donate all your gain to non-profit organization and has them pay the trustee in turn, and guess who is their trustee (note: I am thinking out loud here, amazing fact: 50% of my time spending on finding the detour)
  6. funky


    yes, but why wouldn't you just pay yourself through a corporation? same thing right?
  7. MR.NBBO


    Simple- Just trade thru an LLC. Simple as that.......but then you have to pay SS tax. Earned income comes in handy if you want to contribute to a retirement plan, though.
  8. funky


    yes, this makes sense. so it sounds like basically there are 2 options when trading offshore.

    1. trade without an entity, and pay cap gains tax (which would result in 30+% depending on profit)

    2. trade with entity, claim exemption (up to 160k for me and my fiancee plus rent/housing provided by LLC), and then pay FICA/SS tax (7.65%) + income tax (up to 30+% depending of profit).

    some quick math:

    trader 'bob' makes 200k.

    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. On the remaining 20k they pay 15% (20k rate) + additional 7.65% (fica/ss), or 22.65% of 20k: 4.5k.

    am i missing something here? some cons that i'm aware of:

    1. Capital losses would not be recoverable.
    2. Fees for LLC would add additional cost per year.

    we're talking about 50k+ savings each year to go and live on a tropical island. is this a trick question? ;)
  9. Digs


    Whats a LLC, I am a not a USA person...
  10. MR.NBBO


    LLC- Limited liability corporation (for the other poster)

    You must match your comes out to 15.3% (but then deduct part of it) comes out around 12% typically.

    Lots of LLC fees.....many states have corporate or franchise fees on these as well, so there might be more tax yet.

    If you need earned income- do just enough trading thru an LLC to meet your earned income goals.

    The rest I would trade Mark-to-market as a sole proprietor (which has probably the most tax advantages).

    The answer might be a combination of the both. Offshore is a bit of a mess -unless you move there like metoox.

    #10     Mar 30, 2004