Terry ..use of an S-Corporation
It will not save you taxes, generally. You have to figure out whether it has appeal to you.
Here are the characteristics and why I formed an S-Corp. But first, what I did for my kids' education.
I am a believer in profit center thinking, separate purposes and relate the financial part to them.
So, I set up a Trust, after I sat down one day and figured out in which years how much money is needed for 4 years each for 5 children. They are 6 years apart (twins) and therefore 20 years of college spread over 10 calendar years (6 + 4). I figured out when I would be broke. This spurred me on. At least I thought about it early, one does know 18 years (plus 8 months) in advance !!!
So, I set up a Trust, put in money every year, invested, read Value Line Sunday morning for two hours. My father-in-law was the Trustee.The Donor can not be the Trustee. The kids had to plan each Semester, have a budget and an accounting for the previous semester (which agreed with the bank statements) Done on a spreadsheet which were soon available, thank goodness.
Then the Trustee would be instructed to write checks for those semesters. He was a wonderful Trustee. All they had to supply was the accounting for the previous semester, the total budget (down to tickets to come for Xmas, books - total)
As a result I can tell you what each 1st degree did cost, down to the last cent. I saved $ 100 000 and paid out $ 325 000, at the end there was money left over. It went to the Stanford Med School degree of the last child, there being no other purpose. Paid about half of that. Then the Trust was dissolved. Never had to change my standard of living, even though one year four were in college at the same time, three at MIT.
The key was to save early and invest. Taxes are lower in the US but college is not free. In Canada and Germany taxes are skyhigh but college was free, in Germany no time limit! So, all I did I applied the tax saving and didn't take it to go to Acapulco as most people with my income did. After which they complain about the hgh cost of tertiary education.
S-Corporation is a form of corporation which you have to elect when you organize a new corporation. It can not have more than 70 stockholders (used to be 35), generally can only have one kind of stock and not be owned by a C-Corporation, the normal type.
The S-Corp pays no taxes, but it has to give each shareholder a K-1 Form which lists how much and what type of income was made, pro-rata, by that shareholder.
The K-1 income must then be reported on your Form 1040 Income Tax return. Just like you would report 1099's etc. The computer tax programs - I use MacInTax - will ask you about your K-1s in the Interview. Pretty easy at that point.
You have a corporate bank account, a corporate seal (which you need on your stock certificates when transferring stock to someone or to the broker for sale), you get a corporate ID number, just like on the 1099 payor number. You have a Board (yourself + ?) and a Corporate Secretary (yourself) You have to file a 1120S corporate tax return, which is work, as is the accounting you have to do, but not all that much. There used to be a MacInTax for business which included S-corporations, but they discontinued it (The Intuit CEO is on te Apple Board !) so, now I use TurboTax for Business and run it on VirtualPC 2.1.1
Doing taxes with these programs is almost fun, I hate to admit.
Very important, of course, you can divide your S-Corp up any way you like by issuing or transferring stock. (Board decision, minutes) The ownership is represented by the Stock Certificate. I guess, if you gave some stock to your children, and their K-1 income is low, they don't have to file at all. When it grows, they are in a lower tax brackets.
So, I guess, it could help save taxes. Of course, if most of the increase in value is gain, and unrealized, there is no tax at all, until you sell. No 1040 for the kids.
Now, I set up an S-Corporation for a totally different reason: I was retiring and was going to sell the house in a New York City Suburb which I had bought 28 years earlier. Huge, huge Capital Gain, unless you buy a new residence within + or - two years of the sale of the old one. The IRS law at the time (it has changed a lot)
But prices were going up in Florida and I wanted to buy a house three years before retirement. What to do ? I paid $ 300 for the following advice: I can set up an S-Corporation, have it buy the house and rent it. When I have sold the old house, I kick the renter out and buy the new house from the S-Corporation, with the proceeds from the sale of the old house, which I pay into the S-Corp.
The advice was, it is not harmful to buy from a related party. So, I did. That is why the S-Corp has all that house money and invests in stock.
It was extremely fortunate that I did this, because a month before my retirement, my wife was diagnosed with cancer. The house was sold, subject to inspection. The inspector was one day late. I could keep the house, took care of my wife for a year until she died.
I sure would have missed the two year window. I learned thinking in tax terms when I ran the holding company. It is amazing what you can do, legitimately.
The S-Corp BTW made passive losses (renting usually does, the money is in appreciation, if any), but when you give up renting you can offset earned income with it. So, I did save taxes there also. When I sold it to myself, I did so at a price substantiated by a Real Estate Appraisal - in case the IRS audits.
You mention IRA. There are now Education IRA's possible. I have not studied them, no more need. (I let my kids study it for Grandkids) It may be covered by the IRS Publication 590 (so is Roth). If so, I recommend writing for it - reading seriously on the screen is a pain - or print that section.
irs.ustreas.gov
There is, of course an IRS Publication for S-Corps but I can't lay my hand on the number. I always study these first, then stuff from brokers, newspaper articles on the subject, etc.
If you have questions, will be glad to answer
Walter |
