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so today we're going to be talking about how to legally legally lower your tax liability as a trader but before I get into this let me give you a quick disclaimer I am NOT a registered tax professional a CPA or anything of that sort and thus this video and anything and everything in it is for entertainment purposes only but with that being said let's go ahead and get into it so the major factor when it comes to paying taxes is how the IRS sees your trading activity does it see it as investing or does it see it as a business and classifying it as a business basically allows you to deduct all of your expenses and most importantly allows you to surpass the $3,000 capital loss limit for your write-offs moreover you could take this a step further and structure your business in a way that allows you to take advantage of the 21% corporate tax rate instead of paying the high individual tax rate on your personal income tax returns but anyways with the IRS watching us all I ask of you in return for this video is that you hit that beautiful and ravishing like button and also don't forget to subscribe if you see value in the following video so to start one of the biggest mistakes that you can make as a trader is to simply just trade and then at the end of the year then figure out your tax liability that's because if you know that you're going to make a consistent profit if you've already established that you're making consistent profit or at least a tangible amount of income you need to take steps to ensure that the IRS properly classifies your business and again if you fall into the active trader category or LLC category the IRS will then deem any activity or revenue that you generate from trading to be business revenue whereas if you don't do it what happens is that they just end up using it as ordinary income if you are classified in the business category that means that you can deduct things such as your home office margin fees education subscription services chat room fees new computers that you purchased for trading and anything else that is reasonably required for you to earn an income as a trader and if you structure a trading company to be taxed as an S corp which LLC's can now designate for tax purposes you will also be able to deduct your health insurance premium which is great if trading is your full-time income another thing that you can deduct is the full extent of your losses if you are a regular trader you can only deduct up to three thousand of your losses which is really a shame because a lot of traders they lose a lot more than that so this deduction can needless to say make a huge difference and makes it worth it for a lot of people to simply form an see now this is where it gets a little bit more interesting because classifying your trading income as a business activity allows you an exemption from a little regulation that's very pesky culty wash sale rule this rule makes it so that you can't claim a loss on a stock if you buy it back within 30 of the original days of that sale and obviously this is meant to curtail investors from kind of churning losses for tax purposes example if Charlie decides that he's going to sell 2,000 worth of Tesla on Monday and sells it for a $1,000 loss he gets to claim that $1,000 tax deduction then if the sale price is approximately the same the next day he could then hypothetically just buy back the 2000 and also keep the $1,000 loss that he just accrued in other words Charlie still owns the same amount of Tesla shares on Tuesday that he did on Monday but now he also has a $1,000 capital loss and basically this rule will protect against this but if you're under business activity then you don't have to worry about it now there is one more step that you could take to further decrease your tax liability and this one's going to make more sense if you make more money from trading this one's quite complex so I remind you to see a tax professional before you go into any of these things but let's say that you start making say several times the average household income in the United States well we have a progressive tax system so that means that every marginal dollar will be taxed at a higher rate once you could do a certain point if you live in a high tax state like California like I do you could potentially lose half your income in the higher brackets so instead of working half your year for the United States government you can take advantage of a little thing called a holding company and this is 100% legal and this is how a lot of people do it so a holding company basically allows you to take advantage of the corporate tax rate of 21 percent so instead of paying a marginal tax rate around 50 percent you're now only paying a 21 percent tax rate and essentially how it works is you set up two different business entities one is the LLC where you're trading activity occurs they pass-through entity so that the profits passed through the LLC and then the other is the S corp holding company which then receives your profits so the difference between this and many other strategies is that instead of the LLC your LLC passing through the profits to you it's now passing it in to your holding company since the holding company is receiving the profits the holding company is the one that has to pay the taxes on it and because for tax purposes it's an S corp you're able to take advantage of the corporate tax rate instead of the high marginal tax rate so you only have to pay twenty one percent versus potentially fifty percent or more now the only catch with this is that in some situations and mostly based on how you structure the company you will need to pay yourself what the IRS considers a reasonable salary and the normal salary will then pass through to you and will be taxed at the normal rates but the reasonable salary is sort of a gray area where you have a lot of personal freedom in terms of how you set that hypothetically if you made say three hundred thousand a year from parading you could just say well you know I'm only worth fifty thousand a year so I'm only gonna pay myself a fifty thousand dollar a year salary and then that amount would be the amount that's taxed on your personal income tax return and then everything else gets taxed on the corporate rate of twenty one percent but because only that fifty thousand is being taxed on your personal income tax return that means that you get to save on all the higher marginal rates because fifty thousand doesn't make it to the higher brackets and then the rest of the two hundred fifty thousand gets taxed at the twenty one percent rate with that in mind you might ask yourself okay well why wouldn't I want to set the salary to say zero dollars well that's not considered a reasonable salary for IRS purposes you do have to set a salary that's reasonable and they will fight you on that if you try to go too low so again see a tax professional because they'll help you figure out what a reasonable salary is but the key here is that if you paid yourself that fifty thousand under the three hundred that you made you can then put that two hundred fifty thousand in your hol
Thanks for your comment Eda Malmgren, have a nice day.
- Myong Meetze, Staff Member
with profit sharing companies can make a decision each year whether or not they're even going to make contributions to your retirement plan what's up guys sean here and today we're answering the question what is it profit sharing plan how does it work and what the contributions even look like you're probably here because your company is offering you a profit sharing plan but you're a little bit confused on why profit sharing plan actually is a profit sharing plan it's just a defined contribution plan that allows companies to help employees save for retirement but with this type of retirement plan contributions from your employer is discretionary this means your employer can decide each year how much we're going to be contributing and whether or not they're even going to be contributing to your retirement plan and if the company doesn't make a profit they'll have to contribute to your plan this flexibility makes a great retirement plan option for small businesses or businesses of any size plus a lousy financial well-being of the employees to the company's success so the first thing we're going to talk about is how this profit sharing even work unlike a 401k plan employees with profit sharing plans do not make their own contributions but employers can offer other retirement plans such as the 401k along with the profit sharing plan employees can get their profit shares in the form of cash or company stocks typically these contributions are made to tax deferred retirement plans which allow penalty-free distributions after the age of 59 and a half some plans offer a combination of retirement contributions and cash payouts if you take a cash payout this will be taxed at your normal income rate and if you leave the company you can move your money from a profit sharing plan into a rollover IRA but distribution is taken before the age of fifty nine and a half are subject to a 10% penalty and the second thing we're going to talk about is what is the maximum contribution that can be made to a profit sharing plan so while there's a set amount that has to be contributed to profit sharing plan there is a maximum contribution amount for each employee and that amount fluctuates with inflation the maximum contribution amount is 25 percent of your income up to fifty seven thousand dollars a year and the salary cap for this is two hundred and eighty-five thousand dollars and the thing we're gonna talk about is who makes contributions to a profit-sharing plan with a profit sharing plan employees don't really have to do anything but the company does have to do some calculations planning in paperwork if an employer does decide to do profit sharing for a given year they will simply take a percentage of your annual salary and contribute that to your plan an employer who does profit sharing has to set up a system that tracks contributions investments distributions and files annual returns with the government but that's all I have for today guys smash that like button and subscribe to my channel cheerio
Thanks Taylor your participation is very much appreciated
- Myong Meetze
About the author
I've studied epidemiology at Principia College in Elsah and I am an expert in combinatorics (outline). I usually feel bored. My previous job was industrial engineer I held this position for 3 years, I love talking about rugby league football and power lifting. Huge fan of Jack Nicholson I practice snow skiing and collect for sports cards.
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