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. 

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

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  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, ,500 75,000  To 330, , ,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. 