My accountant has it right. When I asked him about being incorporated, he said that as a trader there really is no legal need to do so. For the past two years, he has put me as unemployed and filed all of my trading profits as cap gains and like the previous person wrote, there are no other BS, SS, or other taxes. Which is all great until I wanted to buy health insurance and allply for a mortgage. Read my post above!
Bob111, I wish it was that simple! Because of the tightening of credit, many lenders have told me that if I had applied nine months ago for a mortgage, it would have been a slam dunk. But now everyone is tight about it and us traders are taking it on the chin because we can not prove a stable "employment."
well..every one's situation is different..get a wife with steady job and good health insurance plan. both problems(mortgage and medical insurance) solved!
Your reasoning might be slightly inductive as opposed to deductive. I know tons of people with good credit and decent paying jobs who also can't get credit right now -- and that's sort of the definition of a credit crunch. Its quite possible it has nothing to do with your income or lack of income. However, if having verifiable income is important to you, you always have the choice to setup a legal entity, pay yourself a salary, pay the employment taxes on it, and viola, you have what appears to be a job with verifiable income. But you're paying for the credit because you're paying taxes that you don't have to pay.... although some traders choose to do this anyways so that they can become eligible to establish and contribute to qualified retirement plans like IRA's and SEP's. But keep in mind that this is exactly the opposite of reducing your tax liability. You're increasing your tax liability in exchange for other benefits.
Yes, I am fully aware that setting up a trading entity will cause me to pay additional taxes that I am not paying now. And yes, having a certain amount of verifiable income thru a job is helpful in obtaining other things such as cheaper health insurance and a mortgage. With all that said, wouldn't it be a good idea to set up a legal trading entity AND have my own separate trading account which will be reported as just capital gains?
Your assumption is incorrect. The act of setting up a trading entity does not increase or decrease your tax liability in and of itself, it all depends on what you do from there. If you use it to take extra deductions like health insurance premiums then it will decrease your taxes, but if you choose to pay yourself a salary then your taxes will increase. I think many traders set up the entity and then simply pass through the capital gains so they pay exactly the same taxes as they would if there was no entity.
First of all, for young healthy individuals, its almost always cheaper to buy insurance directly as an individual than to do it through a business group plan. Because group plans are rated on the health and age of the entire group, typically the people who are less healthy end up benefiting from lower premiums while those who are relatively young and healthy end up paying higher premiums since the unhealthy or older people in the group end up dragging down the entire group. Second of all, IRS tax code levies taxes based on the source of the revenue... not the status of the entity. With a few exceptions, legal entities are taxed at exactly the same rate as individuals would be. If you trade futures as an individual, you get 60/40 treatment and its not subject to employment tax; if you trade futures as a corporation, you still get 60/40 treatment and its still not subject to employment tax. If you trade equities as an individual, you can count your profits/losses as either capital gains/losses or you can choose to count them as earned income; if you trade securities as a corporation you can count your profits/losses as either capital gains/losses or you can choose to count them as corporate profits (essentially the same as earned income). As a matter of fact, if you compare the 2009 federal tax rates for corporations compared to the 2009 tax brackets for individuals, you'll see that the brackets for individuals are actually much more advantageous and cheaper than for a corporation. Now if you're talking about an LLC, its even more of a moot point, because as far as the IRS is concerned, the LLC has no tax liability whatsoever and all gains/losses flow directly through to the members' individual tax return. So in the eyes of the IRS tax code, an LLC is no different than an individual... so almost no tax advantage there (although if you do it right you could certainly get asset protection... but thats a legal issue not a tax issue). So overall, setting up a legal entity just for trading is almost never cheaper than just filing as an individual... you almost always pay more. The real reason to consider doing it is because the benefits you get are worth the additional expense. If you have trouble getting individual health insurance because of your age or health issues, then it may be worth it, although most group plans need at least 3 employees to start up so even that may not be a good reason unless you have 1 or 2 employees. If you need earned income so you can apply for credit and get mortgages... then it may or may not be worth it... thats a personal call. The only time I could actually see you paying less in taxes by setting up a legal entity would be if you made enough money that its worth paying yourself earned income, thus paying employment taxes, just so that you could be eligible to contribute to tax deferred retirement plans. In that case, the lower tax rate you'd pay when you retire might justify paying the extra employment taxes on it.
Finally I have read the complete thread. I was curious in regards if I should have opened a corporation or LLC in order to deduct regular expenses associated with the "trading business" such as computers, paper, computer parts, IBD subscription, any other subscription, books, seminars, DSL,backup internet, cable tv to watch CNBC, maybe even my mortgage, meals, gasoline, etc... I still have not found anything that could answer if a corporation would have any benefit in deducting these things or could I deduct that some other way? After reading the thread, I have determined it is pretty useless to open a corp or llc if you are a trader unless it comes to a point where you make enough money trading that you can afford to pay some extra taxes in exchange for health insurance and an IRA plus a "face" as described by MJ888 in order to apply for mortgages which I think will probably be easy to get after this whole credit crisis lightens up. Is there an easier way to deduct all those expeses if one trades for a living? Could it be possible to claim all of this through an LLC and claim most of your profits as individual capital gains? phew... Thanks, JR
I'm not being a wise ass and suggesting to put Lassie into the deal... I'm just asking if another entity that you own couldn't own 1% of the LLC or whatever. The idea about giving the GF 1% is a bad idea on so many levels.