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Old 07-31-2011, 02:21 PM
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minimizing impact of taxes

Hello all,

I'm currently a college student who's going to be working in the finance industry after college. My salary will be $100k base + $30-40k in bonus. According to tax bracket references, my federal tax would be 28%, and my state tax will probably be 5%. To be conservative, I'm estimating a 33% tax in total, which would leave me with around 90k post tax.

I've heard of people starting corporations to avoid excessive taxation, as well as investments. I consider myself a skilled investor and I definitely plan on investing some of my income, but I wanted to understand how that would affect my AGI.

For example, if I'm paid biweekly, I think federal and state taxes are directly deducted and I receive the post-tax amount. This means that I can't invest over 90k (roughly) because I'll never have that money, correct? (ignoring living expenses, etc).

Also, could someone explain how I could start a corporation to minimize taxation? I definitely don't want to do anything illegal, but I'd like to retain my income if I can.

Thanks.



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Old 07-31-2011, 08:52 PM
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“My salary will be $100k base + $30-40k in bonus. According to tax bracket references, my federal tax would be 28%, and my state tax will probably be 5%. To be conservative, I'm estimating a 33% tax in total, which would leave me with around 90k post tax.”---> More than 33%;I assume that you are an EE, NOT a self employer or an Independent Contractor, then you need to pay FICA Tax. Any person who is in a standard employee/employer relationship is required to pay tax on all taxable income, in your case on your salary and bonus. The income limit for Social Security tax is $106,800; this means that if you have a higher income than $106,800 you will only be taxed on the $106,800. This limit is the same limit that was in place in 2010. At this time, there is no limit to the wages subject to the Medicare tax. All wages are still subject to the 1.45% tax.The total FICA tax rate is 5.65%,NOT 7.65%, for 2011 which includes the Social Security tax rate of 6.2% and the Medicare tax rate of 1.45%. The maximum amount of Social Security tax employees and employee will each pay is $6,034.20 in 2011; 4.2%*$106,800=$4485.60+$106,800*1.45%(Medicare part)=$1548.60=$4485.60+$1548.60=$6,034.20. I guess You control how much is withheld from your paycheck. When you started your job, you completed a W-4 form, which tells your employer how much to withhold for the IRS on your behalf.
Please visit the IRS WEbsite here for more info; 2011 Withholding Calculator
“I've heard of people starting corporations to avoid excessive taxation, as well as investments. I consider myself a skilled investor and I definitely plan on investing some of my income, but I wanted to understand how that would affect my AGI.”--->It depends on your financial situation;for example, taking a long-term capital gain affects your AGI. On your Form 1040, AGI is the number at the bottom of page 1, on line 37. Capital gains come in on line 13, which means they are one of the things you add up to get total income on line 22. Line 37 is line 22 minus the "above the line" deductions on line 36, so capital gain is in there.As long you have any capital losses in your investments, you can take losses to soften the impact to your AGI. For year 2010, Long-Term Capital Gains and Qualified Dividend (LTCG/QD) Rate is 0% if you are in 10% or 15% federal income tax brackets and LTCG/QD Rate is 15% if you are in 25%, 28%, 33% or 35% federal income tax brackets. Through 2012, LTCG/QD Rate will remain same. You need to Separate your capital gains and losses according to how long you held or owned the property. The holding period for short-term capital gains and losses is 1 year or less. The holding period for long-term capital gains and losses is more than 1 year. Capital gains are taxed differently depending on whether your investment is considered a long-term or a short-term investment. STCG/STCL is either ordinary gain or ordinary loss, NOT LTCG/LTCL. Short-term capital gains are taxed at ordinary income tax rates, I mean your tax bracket, 28% as you said.So, you need to hold your investments for over one year topay less CG taxes. Long-term capital gains are taxed at discounted long-term capital gains rates.
Please visit the Website here; Capital gains tax in the United States - Wikipedia, the free encyclopedia
“For example, if I'm paid biweekly, I think federal and state taxes are directly deducted and I receive the post-tax amount. This means that I can't invest over 90k (roughly) because I'll never have that money, correct? (ignoring living expenses, etc).”---->Also FICA taxes are withheld from your paychecks as said above; correct, after withholding taxes, you get less than $90,000 for your investment.
“Also, could someone explain how I could start a corporation to minimize taxation? I definitely don't want to do anything illegal, but I'd like to retain my income if I can.”-I guess it also depends; while incorporating cannot eliminate taxes (unless you make no money!), choosing the right entity can have a dramatic impact on the amount of tax you pay. for instance, for a small business person, an S Corporation is a powerful tool with distinct advantages over other business structures. If used properly an S Corp will leave you with more cash in your pocket when compared to sole proprietorships, partnerships or C Corporations. However, Reducing taxes and limiting personal liability are the two primary reasons for forming an LLC. Unlike C corp, they , LLC,S corp, are NOT subject to double taxation; For U.S. Federal income tax purposes, LLCs are treated by default as a pass-through entitylike S corp If there is only one member in the company, the LLC is treated as a "disregarded entity" for tax purposes, and an individual owner would report the LLC's income on his or her individual tax return. For LLCs with multiple members, the LLC is treated as a partnership and must file the IRS Form 1065. The members of the LLC would be treated as partners and each would receive a K-1 reporting the share of the LLC's income or loss to be reported on that member's tax return. S corporations do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders like LLC as sasid previously. The shareholders must then report the income or loss on their own individual income tax returns. This concept is called single taxation; if the corporation is taxed as a C corporation, it will face double taxation, meaning both the corporation's profits, and the shareholders' dividends, will be taxed.
Please visit the IRS Website here; Limited Liability Company (LLC)
S Corporations



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Old 08-09-2011, 11:08 AM
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Thank you very much for the terrific reply. This is REALLY helpful! How did you come to be so knowledgeable about taxes/the tax code? I'd like to build some expertise in this area, so if you had any suggestions, I'd really appreciate it.



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Old 08-22-2011, 03:07 AM
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Quote:
Originally Posted by Anonymoose View Post
Hello all,

I'm currently a college student who's going to be working in the finance industry after college. My salary will be $100k base + $30-40k in bonus. According to tax bracket references, my federal tax would be 28%, and my state tax will probably be 5%. To be conservative, I'm estimating a 33% tax in total, which would leave me with around 90k post tax.

I've heard of people starting corporations to avoid excessive taxation, as well as investments. I consider myself a skilled investor and I definitely plan on investing some of my income, but I wanted to understand how that would affect my AGI.

For example, if I'm paid biweekly, I think federal and state taxes are directly deducted and I receive the post-tax amount. This means that I can't invest over 90k (roughly) because I'll never have that money, correct? (ignoring living expenses, etc).

Also, could someone explain how I could start a corporation to minimize taxation? I definitely don't want to do anything illegal, but I'd like to retain my income if I can.

Thanks.
The answer that has been given to you is really adorable and pretty informative for others too.. This is just the experience that spoken out in here.. I hope when you would be proficient enough in this field, You would be able to know and judge the things deeply!!



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