How to Protect Your Income from Taxation?

Discussion in 'Taxes and Accounting' started by adadadog, Jan 25, 2011.

  1. Say annually income is $260k, how to protect it from taxation? what is expected Fed/State tax rate for that kind of income? personal experience will be greatly appreciated.

  2. 1) There's not much you can do to avoid/evade taxes.
    2) You may want to consider trading in a taxable account until you "produce" your living expenses for the year and then trade in a retirement account for the remainder of the year. Instead of the "260" being fully taxable, you could stop trading after making "100" and then the other "160" could be fully deferred. :cool:
  3. Bob111


    protect? it's called tax evasion. extremely serious crime in US. IRS will know your numbers. all of them.specially after 2010.

    as for what to expect-

    you can calculate them yourself. state-we need to know which one. they all have different taxes and some of them don't have them at all.

    trading retirement account-i don't think this is going to work. specially, if large amounts of money involved(for example i need at least 100K on account to trade one of my systems). + you probably can't short on retirement account. and off course you can't withdraw your profits when you are let's say 40yo.:p
  4. TD80


    Disclaimer - As always you should consult a real professional expert on such matters.

    I assume you are a U.S. Citizen.

    Once you get to a certain size, your marginal tax rate is 35% for federal, which is extremely painful (and most certainly to be raised soon) when you are competing against clever traders operating at much lower effective tax rates off-shore.

    It is a disgrace that we provide this financial system to the world, and yet we are by far the most heavily taxed when we try to use it for our own gain, meanwhile my foreign competitor in Monaco/Andorra/Caribbean/etc gets the full benefit of the security I am paying to provide them and they get MASSIVE benefits from compound interest unfettered by tax.

    It is a ridiculous, and in the long term, unsustainable policy. The U.S. cannot be World Cop without either taxing foreigners directly, or taking their resources as payment, otherwise we will go broke (which is now happening).

    If you run some spreadsheet calculations on what a 35% marginal tax rate is doing to your CAGR, it is almost heart-stopping. Particularly when you look out 10 years+.

    So to stay legal, your only real bet is to move to a tax-free jurisdiction (preferably one with a foreign tax credit which will make your first 80-90K of income tax-free as long as you stay out of the States). You're still going to be paying that 35%/year unless you venture into grey or dark areas that are likely best avoided.

    If you want to fix things, convince this country to rid itself of the Socialist mindset, and re-orient our geopolitical stance to either start requiring protection payments from other countries, or we walk away and leave them to fend for themselves.
  5. See john Templeton.
  6. TD80



    There is always the option of giving up your birthright, and switching teams, assuming some attractive tax-haven will take you as a citizen. You get hit with a one-time exit tax and then you are done. Compound away.

    This would have been unthinkable to many Americans in decades past. Now I bet it crosses a number of minds. The numbers are sky-rocketing for the number of expats giving up their citizenship. The number in 2009 was in the 1000's.

    A counterpoint: The late famous investor Sir John Templeton said one of his few regrets in life was giving up his U.S. Citizenship. He left for economic reasons. I would have certainly been interested to hear more about his perspective on this topic.
  7. Bob111


    before you give up US citizenship you have to became a citizen of some other country. and it's ain't easy,unless you pick some shit-hole.and if you pick a shit-hole-make sure you are prepared to receive a shitty treatment at every border of every country+long line for visa in any country and separate line in airport in every country . not to mention,that you are never ever going to see US again. combine this with exit tax to get the full picture
  8. No, it's not tax evasion. It's tax avoidance and it's perfectly legal.

    Trading in a retirement account can defer the taxes (or even reduce them if your tax bracket when the funds are withdrawn are less than your current marginal rate). You can also avoid state taxes in this way by moving to a tax free state like Florida before you begin withdrawals.

    Another way is to trade futures since they still get a 60/40 LT/ST capital gains split instead of all your trading profits being taxed as short term capital gains.

    Finally, see if you can qualify for trader status which at least will allow you to write off some expenses such as hardware depreciation, data fees, Internet, etc.

    Otherwise, smile when you pay your taxes knowing that you only have high taxes because you've been profitable in your trading.
  9. Yes. That's the best strategy I've found. I've been doing it for years under the advice of a top tax attorney. It's perfectly legal as long as your IRA is set up and funded properly. Make sure you follow all the rules. (Technically I use a SEP rather than an IRA beause you can make much larger contributions each year.)

    Last year, about 70% of my profits were in my tax-deferred SEP. The other 30% get taxed as the law dictates (combination of capital gains and ordinary income).

  10. What lobbyist do I have to give a suitcase full of money to grease the wheels so we can trade futures in an IRA? :p
    #10     Jan 25, 2011