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Tax Tips — Some Work, Some Don’t

One of the tax tips being sold to folks with IRAs, sometimes for exorbitant amounts of money, is going to cause them to lose their entire IRA. Basically, the hot shot financial planners/tax consultants restructure a person’s business or professional practice into an S corporation or LLC that then contracts with a C corporation to hire their employees and take care of all the business overhead. Any money that is left in the C Corporation is then paid out to their IRA, which owns the C Corporation.

Tax Tips – Get as Much Money into Your IRA as Possible

There’s no question – getting as much money into your IRA as possible is one of the top tax tips. In fact, one of the ten tax tips I provide in my free download addresses IRAs specifically. IRAs are one of the eleven tax shelters left in the IRS Code. There are ways to get money into an IRA, but directly or indirectly they all involve a “return on investment.” Any tax tips that involve putting money into an IRA and don’t involve the sale of an item or a return on investment won’t work.

Buying and selling real estate in an IRA is one of the tax tips that will work, and people are putting a lot of money in their IRAs doing this. Mitt Romney had his IRA buy stock in the companies he was hired to turn around. The companies were traded companies that any IRA could have invested in. Romney hadn’t created the company and didn’t own a controlling interest in the company. Basically, his IRA was just an investor in a company like all the other folks that invested in each company.

Tax Tips Based on Swanson Don’t Work

All of the schemes to get large amounts of money into an IRA include a discussion of the Tax Court case Swanson vs. Commissioner, settled in 2009. In short, Swanson set up a sales company owned by his IRA and used the company to sell carpentry tools his primary company manufactured. The sales company was paid commissions by the primary company for all the tools it sold. The profits in the sales company were paid out to the owner of the sales company – Mr. Swanson’s IRA.

The IRS said Swanson couldn’t move money to his IRA in this fashion. However, the Tax Court said Mr. Swanson was correct and could move money into his IRA through the structure he had set up. The IRS lost big time.

Sadly, tax tips based on Swanson basically won’t work today. The IRS has passed regulations that chip away at Swanson. The tax tips that involve restructuring of a person’s business or professional’s practice with a C corporation definitely won’t work, because the IRS will look at the scheme as taking the earned income of the business owner or professional and simply using it to make a contribution to his or her IRA. Imposing a C corporation in between the person and the IRA won’t stop the IRS from calling the money moving to the IRA a “contribution.”

The IRA Tax Tips Test

Whenever anyone is throwing around a “heavy discussion” on IRAs and the tax tips associated with using IRAs, you can put them to a simple test. Ask the guru if what he or she is talking about will work with a trust designed under Section 408 of the IRS Code. When the guru that is trying to sell you some sort of an IRA plan looks at you with a blank look and has no clue what a section 408 trust is, RUN AWAY FAST.

A Section 408 trust is an IRA. Section 408 of the IRS Code is the Section that defines IRAs. IRAs are trusts. Don’t you think someone giving tax tips associated with IRAs should have read the IRS Code that defines what IRAs are?

Even if the guru knows what a Section 408 trust is (most won’t know what it is), the IRS Code sections on prohibited transactions and self dealing have to be understood thoroughly. The stakes are very high with an IRA, because the IRS simply takes the total IRA when the rules are violated.

The gurus with all the tax tips will point out that they have clients that have been using their scheme for several years. Don’t let that fool you. There is no statute of limitations for prohibited transactions involving an IRA. The IRS simply isn’t exercising their rights to go after the abusers – yet.

Tax Tips You Can Use

For even more ideas, check out my 10 Tax Tactics download. It has tax tips almost every professional and small business owner can use. These are the best tax tips that can cut your taxes by thousands of dollars every year. Yes, the IRA is a great tax shelter, but it is only one of the tax tips a full tax plan should use.

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