How to Pay Zero Taxes, 2018 by Jeff A. Schnepper

Author:Jeff A. Schnepper
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2018-01-14T05:00:00+00:00

A Family Shifts

The first rule of income taxation is that a tax liability for personal service income may not be avoided by the earner of that income by assignment or other transfer before the income is realized. If you perform services that earn monetary reward, that income will be taxed to you. The second law of income taxation, however, is that income earned from property belongs to the owner of that property. Therefore, the first key to reducing your taxes is to transfer income-producing property to a family member in a lower bracket. If you make a bona fide transfer of income-producing property that you own, you have effectively shifted all future income from that property. After the transfer, the future income and all income tax due on that income will belong to the new owner in the lower tax bracket.

Part of your solution to the problem of reducing your tax, therefore, is to get your current income taxed to lower-bracketed family members. This strategy is based on the premise that a family is an economic and social unit and that it is immaterial to the welfare of the family as a whole which member derives income or owns property. From a tax perspective, however, it is extremely material.

For example, assume you are in the 28 percent bracket and transfer $1,000 of annual income to your son so that it is taxable to him instead of to you. Immediately you save $280 in taxes. Furthermore, the whole $1,000 will come tax-free to a child who has no other income, even if the $1,000 represents unearned income (for instance, interest, dividends, or rents). Moreover, not only can the savings be multiplied by the number of children involved, but if your son is under age 19 or is a full-time student under age 24, you can still claim the personal exemption for him on your tax return as long as you supply more than one-half of his total support.

The shift does not have to be made to a child. Suppose you are supporting a parent out of your current income. You might save an enormous amount of taxes if you could transfer some of that income so that the tax would be shifted from you directly to your lower-bracketed parent. For 2017, your parents, if over age 65, get personal exemptions of $4,050 × 2 and a standard deduction of $12,700 + ($1,250 × 2). Thus, if you are paying $23,300 a year of your after-tax income to your parents, you could save $6,524 a year in taxes if you are in the 28 percent bracket. Such a shift of income can be accomplished through a direct gift of income-producing property or by using one of a number of trusts that will be examined later in this chapter.

The standard deduction now permits the tax-free transfer of $1,050 of investment income to a child or other member of your family who has no other income. Alternatively, if the child is of sufficient age

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