We all know that a penny saved is not a penny earned. To save a penny you have to earn almost two pennies. The government takes one for taxes, and you save the other (if you don’t spend it).

So part of investing properly is to try to minimize taxes by whatever legal means are available. And there are lots of them. There are many more for people that earn a lot of money, but there are some for people who are not big corporations or are not in the highest tax bracket. Most tax-saving devices for medium-income people are well known and taken advantage of by accountants who file tax returns for their clients.

But today I want to just tell Bill’s story, which is one that not as many people take advantage of as they might.

Bill works for a hedge fund company and makes a very nice living. Until last year he was paying about $150,000 a year in state and federal taxes. But with a big mortgage on his house, two car loans, a daughter in a fancy college and a son in private school, Bill didn’t have much left over in discretionary dollars.

So Bill’s wife Betty formed a “C” corporation named Services by Betty (SB).  She was going to call it Betty’s Services, but didn’t like the acronym. SB began providing services to Bill by doing research on the companies his firm was interested in. Each week she gave Bill computer printouts she found on the Internet concerning those companies. This helped Bill a lot in his work.

For these services Bill paid SB about $4,000 a month. This was a tax deduction for Bill and reduced the family taxes by almost $2,000 a month.

SB had a medical plan which covered Betty’s family and all of the family medical expenses were paid by SB. It also paid for Betty’s car and car expenses, and for the furnishing and upkeep and utilities for that part of the family home Betty used for her business. Since SB is a C corporation, none of its income (or expenses) go on the family joint tax return.

Betty also hired her college-age daughter to help with SB, and paid a wage to her which helped her college expenses. Since the daughter had no other income, but had some expenses, the tax on this wage was very small.

When all was said and done, SB had a very small tax to pay, and the corporate rates for low-income companies is very small, so there was negligible tax on the corporation.

The bottom line is that Bill reduced his top percentage tax rate a few points, and saved about $20,000 a year. That turned out to be just enough to pay for his son’s private school, a cost that is not tax deductible. And a good time was had by all.

These little tax helps can make life easier. Be sure you have a good tax advisor to help you find them.

 

Rotten Apple

 

Watching Apple Inc. stock continue to drop is, of course, depressing to those of us who own it. But, as they say, every cloud has a silver lining. So I’ve been recommending the sale of the January 2015 380 put. At $57 one put brings in a premium of $5,700. That’s a nice little income. The only risk is that if Apple goes down below 380 during the option period you might be forced to buy 100 shares of the stock at $380 a share, for a cash outlay of $38,000.  But owning 100 shares of Apple at that price, when it pays over 3 percent in dividends, doesn’t seem like much of a penalty. And since you already took in $5,700 the net cost is really only just over $32,000 or $320 a share. It’s hard to believe that one could be so lucky!

In addition to watching my losses in Apple, I’m carefully watching my losses in copper. I thought it was a good investment when it was about 15 percent higher than it is now, partly because of the increase in housing construction and partly because I see the U.S. economy going up, but it hasn’t happened.  But I don’t think I’m wrong on this except for the timing, and if it was good then it’s even better now.

Several banks have just downgraded commodities in general, and gold and copper specifically. I think it’s a good time to buy for the long term (1-2 years).

That’s all for now. Stay tuned in a couple of weeks for more tax tips.

 

For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.

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