So-called ‘tax shelters’

Actually the tax consultants suggest and create tax shelters for the rich so that most of their income is sheltered. And the results are obvious. The latest statistics shows that there are 5610 returns declaring an income of $200,000 but not being a single cent in taxes!

This looks good as the end result, but how is it achieved? Some ‘plans’ can invite trouble for you. I am providing you five suggestions which can minimize your exposure to IRS.

1.      Go for some obvious distribution alternatives

If you’re making an income of $100,000 or more in a year, your risk of getting an audit has already increased. So you’ll need to check your deductions. Also it is time to consider the benefits of allocation of income. You can allocate income from a family member who is presently in a higher bracket tax to a member who is in a lower bracket. So making investments in the name of a child will transfer the income from those investments to the child. Of course you need to keep in mind the provisions of Kiddie tax rules and the connecting initials so that the tax is kept at the minimum.

If the situation demands, it is better to find your return separately. This can keep you away from the threshold of $100,000.

2.      Try to keep money within the country

IRS always looks suspiciously at offshore users. So if you open an account in a tax haven country to hide some unreported income and attach to it with a foreign bank, then obviously you are inviting IRS for a tax audit. IRS is trying hard to identify these people who are using those offshore cards to evade their taxes. So get your house in order.

3.      Be cautious about secret vehicles to insulate your taxes

If some consultant suggests you a secret structure which will reduce your income, then please keep away from him. Such plans are rejected in the courts very often. In addition you may be slapped with a penalty of $25,000! The courts cannot allow you to waste their limited and valuable time.

4.      Keep away from family trust schemes

They are based on a presumption like if you put your assets in a business trust then they are business assets and you can make business deductions on investment deductions are out of them! All these claims are just half truths and full of lies.

5.      Don’t play with business expenses

Try to be away from schemes which advise you to convert your personal expenses into business expenses for deductions from your income just by calling them business expenses! If you are in business, then you’ll need to have a profit motive which can legally allow you to legally do so. So you have to be in business in real terms.

The logic of IRS is very clear – if it identifies $100 from a person who is in 35 per cent tax bracket range, it produces $35.00. However identifying the same amount from a taxpayer in 10 per cent bracket will produce only $10. So if your income is above $100,000 then run away from so-called ‘loopholes’