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> For the first three years you make no money, but the forth you make a million. You'll be taxed at a much higher rate than if you had made a consistent 250k a
by jpmattia 13y ago
> For the first three years you make no money, but the forth you make a million. You'll be taxed at a much higher rate than if you had made a consistent 250k a year.
Ancient History Item: Before the tax reform act in 1987, you had the ability to do income averaging across tax years to address this situation. It was reformed away.
- fragsworth 13y agoYou can still average your taxes across the years if you're a contractor, by paying taxes in advance - with a simple accounting trick that nobody seems to be aware of: 1. In the first year, suppose you and a corporation (you own this corporation outright) makes no income. 2. In the first year, you make a loan to your corporation ($50k for instance) 3. In the first year, you also pay yourself a salary of $50k. You pay taxes on this "income". Yes, you're paying taxes on money you didn't really truly actually earn yet. 4. In the second year, suppose your corporation makes $100k of income. Your corporation repays your $50k loan. The loan repayment is tax-free, and the remaining $50k then becomes your salary for the year. If you do not actually have $50k to perform steps 1-2, you do it repeatedly with small bank transfers until you've accumulated enough "loan" and enough "salary". You then effectively pay two years of $50k income, instead of one year of $0 income and one year of $100k income.