Legal Ways to Save Taxes

How to Pay Less Taxes Offshore And Onshore

By Vernon Jacobs & Richard Duke

Copyright, 2006, Offshore Press, Inc.

This presentation is a summary of the topics included in “Legal Ways to Save Taxes Offshore and Onshore” by Vernon Jacobs and Richard Duke

It is published and copyrighted by Offshore Press, Inc.

www.offshorepress.com

CIRCULAR 230 NOTICE This report is not a reliance opinion or a marketed opinion. This

report and its contents were not intended or written by the authors to be used, and cannot be used, by anyone for the purpose of (i) avoiding U.S. tax penalties, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed or stated herein.  This report and its contents are not treated as a marketed opinion because (a) the advice was not intended or written to be used, and  it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer; (b) the advice was not written to support the promotion or marketing of the transaction(s) or matter(s) addressed herein; and (c) the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. [31 C.F.R. sections 10.35(b)(4)(ii); 10.35(b)(5)(i); and (b)(5)(ii)(a), (b) and (c).]

For an explanation of the Circular 230 requirements to which tax advisors are subject, see http://www.offshorepress.com/vkjcpa/disclosurerules.htm

Introduction to Legal Ways to Save Taxes Offshore and Onshore

U.S. imposes tax on its citizens and permanent residents on a worldwide basis. Most tax saving methods available onshore are available offshore.

The U.S. tax system has dozens of "loopholes" or tax incentives

The international tax law is a collection of exceptions to the general rules

The focus of this presentation is on individual income taxes

A Primer on Marginal Tax Rates Tax planning is a numbers game based

mostly on marginal tax rates Reduced Rates on Long Term Capital

Gains and Dividend Income The AMT Rate is either 26% or 28%. The FICA and Medicare Tax Rates Self-Employment & Medicare Tax Rates State Income Taxes The Corporate Factor Federal Estate Taxes

The Value of Tax Deferral Income on deferred taxes may be

equal to the tax that was originally due.

The rule of 72 Sometimes tax deferral may

result in converting ordinary income into LTCG

Less current tax equals less estimated taxes

Compensation (Form W-2)

Tax Favored Employee Benefits IRA Deduction Foreign Earned Income Exclusion Employee Expense

Reimbursement Expatriation

Owner/Employees of a Controlled Corporation

Tax Options of Employees Trade Current Pay for Capital

Gains Medical Expense Reimbursement

Plan CFC Foreign Source Income

Deferral

Interest & Dividends – I

Tax Exempt Interest Qualified Dividend Income Tax Qualified Savings Accounts Annuity or Life Insurance

Interest & Dividends - II

Convert Interest Income into Capital Gains or Dividends

Foreign Business Corporation with Active Business

Transfer Investment Income to Lower Bracket Dependents

Pay off High Interest Loans

Business Income - I

Foreign Earned Income Exclusion CFC Foreign Source Business

Income Non CFC Foreign Business Income Income Shifting Employ Dependent Children in

Your Business Customer Acquisition Costs

Business Income - II

When to Incorporate Operating as a Foreign

Corporation Employ Spouse in Business Home Office Expenses Business Losses vs. Hobby Losses Operating an Activity as an

Exempt Entity

Capital Gains - I

15% rate and 5% rate, 28% rate and 25% rate

Cash in Unrealized Capital Losses Direct Purchase of Foreign Stocks Gift of Appreciated Property to a

Charity Defer Capital Gains Tax with

Charitable Remainder Trust

Capital Gains - II

Defer Capital Gains Tax with a Private Annuity

Gift Appreciated Assets to Lower Bracket Dependents

Tax Deferral with Like Kind Exchange

Tax Deferral with Installment Notes or SCINS

Pensions & Annuities

Foreign Pension Trust An Offshore IRA Deferred Retirement Annuities Charitable Retirement Annuity

Income from Real Property

Personal residence Home Office Deduction Vacation home Rental property

Partnership Income

Benefits of a Flow-through Entity Family Income Splitting Benefits of a Taxable Corporation Formation of a Foreign Based

Corporation A Foreign Disregarded Entity Passive Income Deductions or

Credits

Income From Trusts

The tax brackets for trusts are very compressed.

Income Splitting Other Tax Saving Methods for

investment income

Social Security Income Become Single Taxpayers Convert Taxable Income into Capital

Gains Convert Investments into an Annuity Pay Off or Reduce a Mortgage Loan Avoid Tax Exempt Interest Convert Taxable Retirement Savings to

a Roth IRA Convert Social Security Benefits to a

401(k) Plan

Deductions That Reduce Your Income

Hidden deductions reduce income on page 1 of Form 1040.

Employee Business Expenses Schedule C Expenses Schedule D Losses Schedule E Expenses Schedule F Expenses

Deductions for Adjusted Gross Income

Some deductions are more equal than others

IRA Deductions Bigger Retirement Deductions for

the Self Employed Archer Medical Savings Accounts

and Health Savings Accounts Self-Employed Health Insurance Self-Employed Retirement Plans

Itemized Deductions

Medical Expenses Residential Loan Interest Investment Interest Charitable Contributions Miscellaneous Itemized

Deductions

Alternative Minimum Tax

"The hardest thing in the world to understand is the income tax."

Albert Einstein

That was long before the AMT

The AMT reduces these deductions

Accelerated depreciation Intangible drilling, circulation, research, experimental,

or mining costs Amortization of pollution-control facilities or depletion

Income or (loss) from tax-shelter farm activities or passive activities

Percentage-of-completion income from long-term contracts

Net operating loss deduction in excess of the AMT NOL deduction

The AMT reduces some income exclusions

Income from incentive stock options at the time they are exercised

Tax-exempt interest from certain private activity bonds

Long term capital gains or qualified dividend income

The AMT eliminates most of the itemized deductions

Medical expenses to the extent of 10% of adjusted gross income

State and local taxes with no exceptions Interest on a 2nd mortgage for a personal

residence Interest on home loans not used to buy, build,

or improve the home Miscellaneous itemized deductions

Investment interest expense reported on Form 4952

The personal exemption and the standard deduction.

AMT Exemption & Phase out Filing Status MFJ S/HH MFS/ET

Exemption 62,500 42,500 31,275 From 150,000 112,500 75,000 To 330,000 247,500 165,000

Phase out $1 of exemption for each $4 of excess modified AMT income

AMT Rates The tax rate on the first $175,000 of

AMT income is 26% and on any excess it is 28%. These rates apply to all filing categories.

Lower Rates on Long Term Gains and Qualified Dividends same as regular tax

Incentive Stock Options The Kiddie Tax and the AMT -

exemption $5,850 plus earned income

Possible Solutions to the AMT Trap - I

Avoid tax exempt interest on certain private activity bonds

The Section 179 deduction is not an AMT tax preference (N/A offshore)

Medical reimbursement plan or the S.E. deduction for health insurance

The home mortgage interest deduction if funds are used to buy, build or to improve a personal residence or second home.

Accountable expense reimbursement for employee

Possible Solutions to the AMT Trap - II

Spread out capital gains and exercise of ISOs

Dual Basis AMT Assets The AMT Credit Beware of Other Tax Credits Prospects for the AMT Elimination or simplification of

AMT seems to be unlikely

The Estate & Gift Tax Lifetime Estate Tax Exclusion The lifetime exemption for gifts Unlimited Marital Deduction The Marital Trust Qualified Terminal Interest

Property Trusts Reduction of Basis of Stock in

Passive Foreign Investment Company

Pre-Death Transfers

Annual Gift Tax Exclusion Gifts of Assets That Are Expected

to Increase In Value Gift and Leaseback Transfers to an Irrevocable Non-

Grantor Trust Transfers to a Foreign Non-

Grantor Trust

Valuation Discounts

Discounts for Closely Held Business Interests

Closely Held Corporation Family Limited Partnership Limited Liability Company Problems with retained control of

assets Gifts of Discounted Property

Life Insurance Owned by or for the Heirs

Life Insurance Owned by the Insured Requires Gross-up

Life Insurance Owned by the Heirs Transfers Tax Free

The Three Year Rule for Existing Policies

Offshore Life Insurance Using a Partnership Instead of a

Trust

Gifts or Bequests to Charity Charitable Income Trust (CRT,

CRAT)

Charitable Lead Trust

Family Charitable Foundations

Gifts/Bequests of IRA Accounts

Other Estate Tax Strategies

Business Buy/Sell Agreements Business Stock Redemptions Installment Sales to heirs with

gifts of payments The Private Annuity Private Annuity with FC Owned

by Variable Life Contract

The Zero Tax Estate Plan Identify the assets that can be

left to heirs free of any estate taxes

Increase this amount with valuation discounts

Use 50% of balance to fund a charitable remainder trust

The rest will be sold to the heirs in exchange for a private annuity

Copyright, Offshore Press, 2006

This slide presentation is a summary of the book, Legal Ways to Save Taxes Offshore and Onshore by Vernon Jacobs & Richard Duke

It is published and copyrighted by Offshore Press, Inc.

www.offshorepress.com