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Don’t Try This At Home But, How You Can Pull A General Electric On Taxes

There’s been a firestorm this week over the news that General Electric will pay no tax—at least, no federal corporate income tax—on last year’s profits.

But if you’re like a lot of people, your first reaction was probably: “Hmmm. How can I get that kind of deal?”

If General Electric pays close to zero in Federal Income taxes, can you? Brett Arends tells Kelsey Hubbard how even a “regular Joe” can lower their tax bill, especially if they are self-employed.

You’d be surprised. You might. And without being either a pauper or a major corporation.

I spoke to Gil Charney, principal tax researcher at H&R Block‘s Tax Institute, to see how a regular Joe could pull a GE. The verdict: It’s more feasible than you think—especially if you’re self-employed.

Let’s say you set up business as a consultant or a contractor, something a lot of people have been doing these days. And, to make this a challenge on the tax front, let’s say you do well and take in about $150,000 in your first year.

First off, says Mr. Charney, for 2010 you can write off up to $10,000 in start-up expenses. (In subsequent years it’s only $5,000.)

Okay, let’s say you claim $7,000. That takes your income down to $143,000.

You can also write off all legitimate business expenses. Mr. Charney emphasizes that this only applies to legitimate expenses.

He didn’t say, but everyone seems to understand, that this can be quite a flexible term. Even if you buy a computer, a cellphone and a car primarily for business use, you can use them for personal purposes as well. If you happen to take a business trip to Florida in, say, January, no one is going to stop you from enjoying the sunshine or taking a dip in the pool.

So let’s say you manage to write off another $10,000 a year in business expenses.

That brings your income, for tax purposes, down to $133,000.

You’ll have to pay Medicare and Social Security taxes (just like GE). Because you’re self-employed, you have to pay both sides: the employee and the employer. That will come to about $19,000.

However, you can deduct half of that, or $9,500, from your taxable income. So that brings your total down to $123,500 so far.

Now comes the creative bit. The self-employed have access to terrific tax breaks on their investment and retirement accounts. The best deal for many is going to be a self-employed 401(k), sometimes known as a Solo 401(k).

This will let you save $43,100 and write it off against your taxes. That money goes straight into a sheltered investment account, as with a regular 401(k).

Why $43,100? That’s because with a Solo 401(k), you’re both the employer and the employee. As the employee you get to contribute a maximum of $16,500, as with any regular 401(k). But as the employer you also get to lavish yourself with an incredibly generous company match of up to 20% of net income.

Yes, being the boss has its privileges. (And if you’re 50 or over, your limit as an employee is raised from $16,500 each to $22,000.)

You can save another $10,000 by also contributing to individual retirement accounts—$5,000 for you, $5,000 for your spouse. If you use a traditional IRA, rather than a Roth, that reduces your taxable income as well. If you’re 50 or over, the limit rises to $6,000 apiece.

If you contribute $43,100 to your Solo 401(k), and $10,000 to two IRAs, that brings your income for tax purposes down to just over $70,000.

We haven’t stopped there either, says Mr. Charney.

Now come the usual itemized deductions. You can write off your state and local taxes. Let’s say these come to $10,000.

You can write off interest on your mortgage. Call that another $10,000. That’s enough to pay 5% interest on a $200,000 home loan.

That gets us down to about $50,000 And we’re not done.

If you’re self-employed, health insurance is probably a big headache. But the news isn’t all bad. You can write off the premiums for yourself, your spouse, and your kids.

And if you use a qualifying high-deductible health insurance plan—there are a variety of rules to make sure a plan qualifies—you get another break. You can contribute $3,050 a year into a tax-sheltered Health Savings Account, or $6,150 for a family. You can write those contributions off against your taxable income. The investments grow sheltered from tax. And if you spend the money on qualifying health costs, the withdrawals are tax-free as well.

So call this $10,000 for the premiums and $6,150 for the HSA contributions. That gets your income, for tax purposes, all the way down to about $34,000.

If you have outstanding student loans, you can write off $2,500 in interest. And you can write off $4,000 of your kid’s college tuition and fees.

Then there’s a personal exemption: $3,650 per person. If you’re married with one child, that’s $10,950.

Taxable income: just under $17,000. That’s on a gross take of $150,000. You’d owe less than $1,700 in federal income tax.

And it doesn’t stop there. Because now you can bring in some of the tax credits. Unlike deductions, these come off your tax liability, dollar for dollar.

GE got big write-offs related to green energy. There are some for you too, although on a small scale. You can claim credits for things like installing solar panels, heat pumps or energy-efficient windows or boilers in your home. Let’s say you use a home equity loan to pay for the improvements and take the maximum $1,500 write-off.

That gets your tax liability down to $200.

Can we get rid of that? Sure, says Mr. Charney.

If your spouse spends, say, $1,000 on qualifying adult-education courses or training programs, you can claim $200, or 20% of the cost, in Lifetime Learning Credits. (The maximum is $2,000.)

That wipes out the remaining liability.

Congratulations. You’ve pulled a GE. You owe no federal income taxes at all.

OK, it’s just an illustration. Few will be quite so fortunate. On the other hand, it’s not comprehensive either. There are plenty of other deductions and credits we didn’t mention. You could have written off up to $3,000 by selling loss-making investments. Your spouse may be able to use a 401(k) deduction as well. There are lots of ways to tweak the numbers.

In this case, you’ve paid no federal income tax, and meanwhile you’ve saved $19,000 toward your retirement through Social Security and Medicare, and $53,000 through your 401(k) and IRAs. You’ve paid most of your accommodation costs (that is, the interest and property taxes on your home), covered your health-care costs and quite a lot of personal expenses through your business account, paid $4,000 toward your child’s college costs and had about $2,000 a month left over for cash costs.

Who says GE has all the fun?

By: Brett Arends, The Wall Street Journal, April 1, 2011

April 4, 2011 Posted by | Big Business, Corporations, General Electric, Medicaid, Medicare, Politics, Tax Credits, Tax Evasion, Tax Liabilities | , , , , , , , , | Leave a comment

From Memphis To Madison: A Dream For The Middle Class That Cannot Be Allowed To Die

“I Am a Man” read the sandwich board posters worn by public sanitation workers in Memphis. Their strike in 1968 came at a time when African American men were still called “boy” to their faces. Their fight for dignity, fair wages and the hope of a better future for their families drew the support of Dr. Martin Luther King Jr., who was assassinated in that city 43 years ago today.

The critical services that public employees provided in our communities then and now range from the most humble, such as garbage collectors, to the most dangerous (police officers and firefighters) to the most profoundly influential on the lives of our children. 

Yet in state after state, the collective bargaining rights of dedicated teachers and other public employees have been denied or are in serious jeopardy just as they were in the civil rights era. The same politicians pushing these laws are attacking affirmative action, assailing voting rights and pushing laws to block any path to citizenship for millions of hardworking immigrants in this country.

King made clear connections between what he called “our glorious struggle for civil rights” and collective bargaining rights. He called the labor movement “the principal force that transformed misery and despair into hope and progress . . . [and] gave birth to . . . new wage levels that meant not mere survival but a tolerable life.”  

Heirs of King’s legacy who serve our communities see similarities between the struggle in Memphis then and the struggles in Madison and Columbus now.

Dian Palmer, a public health nurse in Milwaukee whose family moved to Wisconsin from Mississippi for better jobs and greater opportunity, starkly remembers the days when her family faced housing discrimination in their new home state because of the color of their skin.  

Palmer is “disgusted” by the ways that what is going on today reminds her of those times. Last month Wisconsin state legislators stripped away collective bargaining rights, wages and benefits from nurses like Palmer, teachers and other public workers and made cavalier comments about how they should all just “get over it,” she says.

Lynn Radcliffe, an administrative assistant in the Cleveland schools’ special education program, testified to Congress last month that today’s public employees are facing the same harsh treatment the Memphis sanitation workers did — “being treated as less than, disrespected and economically deprived of earning a decent wage to take care of their families.”

The powerful business interests that align today against working people hearken back to the “downtown business improvement association” that opposed justice for the striking Memphis sanitation workers. Today’s shadowy 527 groups funded by the Koch brothers and their oil conglomerate — and other bad-actor corporations and executives — would destroy our nation’s last real defense against unrestricted corporate power and Third World wages and working conditions for all. 

The Memphis city workers in 1968 tapped into the spiritual power of our common humanity — a source of power that seems to be gaining traction as people stand up for state and local workers today. A key part of King’s theology was the stranger on the Jericho road, which turned around conventional thinking about uniting with people who we perceive as not being like us.

 We saw this spirit reflected in the tens of thousands of people who rallied in Wisconsin, Ohio and other states to fight for a vibrant middle class for all workers. Protesters from all walks of life accepted King’s challenge: “The question is not, If I stop to help the [sanitation workers], what will happen to me?  The question is, If I do not stop to help the sanitation workers, what will happen to them?” 

In today’s jobless recovery, people of color and women are being hit hard. As public services are cut along with collective bargaining rights, women are disproportionately among those laid off and facing income cuts.  The “underemployment” rate of discouraged and part-time workers is roughly 15 percent for whites but 25 percent for black and Hispanic workers. 

This week, at pulpits, synagogues and other locations nationwide, ordinary people will commemorate King’s death by standing together to tell the powerful interests and the politicians who carry out their wishes that enough is enough.

We are uniting to stand up for the dream of what Martin Luther King Jr. called “a tolerable life.” In today’s terms, that translates as  “a middle class life.” A path into the middle class for millions of Americans — black, white, Latino, Native American and Asian American — is not a dream that we will allow to die.

By: Benjamin Todd Jealous and Mary Kay Henry, The Washington Post, April 3, 2011

April 4, 2011 Posted by | Class Warfare, Collective Bargaining, Congress, Corporations, Democracy, Equal Rights, Governors, Human Rights, Immigrants, Income Gap, Jobs, Labor, Middle Class, Politics, States, Union Busting, Unions, Wisconsin | , , , , | Leave a comment

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