Business and Tax Planning

I am reading the two books on taxes for traders that I ordered. Green's book is not as well written, but his strategies are simpler and less aggressive. Tesser takes things to the next level. There may be some contradictions between their advice but I have only read part of each book so far. I am learning a lot. I am understanding more about what Kiyosaki was hinting about regarding business tax deductions. Deductions taken on a Schedule C for example have no effect on triggering the AMT. Traders have many special tax advantages. So if you think you could qualify as being in the business of trading rather than investing it is well worth reading these books. You don't have to set up a company to get business deductions but it allows you to take some other deductions - particularly deducting health insurance from income and making contributions to retirement plans (and social security). If you have another job or your partner has a job with health insurance this will be less important for traders and investors.

Tesser discusses a program I had never heard of: VEBA - a voluntary employee benefit association. Tesser claims that this program can be used as a retirement program. All the information I can find online though says that it is only for medical expenditures. I think his advice is relying on shutting down the program at some point and distributing the proceeds to the employees. The money in the program is tax deductible and tax deferred. The advantage is that none of the limitations that apply to regular retirement programs regarding contribution limits and age restrictions apply to VEBA. Seems that this is a rather aggressive strategy though he claims that none of the strategies in the book get anywhere near the legal limits.

The IRS has never stated what exactly allows one to qualify as a trader rather than investor but instead lays out some vague criteria in Publication 550. If trading isn't your major income source it seems unlikely you will qualify and instead you will trigger an IRS audit. Trading futures seems to make it easier to claim trader status than trading stocks as futures are prima facie trading instruments. Otherwise you will need to show that you do extensive, frequent, and continuous trading. That can be hard to prove if you have a full time job.

The good news is that I can take things step by step:

1. Planning stage - current: proving profitability of trading strategy - learning about tax law etc.
2. Switching to trading futures - which are taxed at lower rates than stocks.
3. Claiming trader tax status - only possible when income is sufficiently high or I quit my current job.
4. Setting up a management company
5. More advanced strategies for estate planning etc - Tesser recommends partnerships.