earned income

[wabmester]

2003 was my first full year without a salary, but I did receive about $10K for a little consulting work (1099). I find that this amount is just about perfect in that it allows me to deduct expenses such as health insurance, and I still have enough left over to contribute to an IRA.

I plan to find other small streams of business income while still maintaining a retired status and lifestyle, and I'm curious about a couple of things:

1) If others are doing this and what sort of things you're doing. I figure just about anybody on this board could run a little side-biz doing financial planning or tax prep, for example.

2) Are there any legit ways to turn passive income into earned income? I know the IRS is cracking down on tax shelters, but what about forming a corp to hold investments and pay you an income without any tax shelter component?

 

[John Galt]

After I semiretired in 1993,, I worked part time for a
CPA (I used to be an accountant) for about 6 months.
Then, I moved to Tx. on a consulting contract which
lasted 4 years (some part time - some full time).
I could have continued, but they wanted full time
work and I wasn't interested any more. It did help
a lot with my decision to retire totally.

When I retired in '93, I owned a small manufacturing co.
I shut it down, but it continues on as a personal
holding company (PHC). Most all of the income is passive (rents, royalties, etc.) This works fine,
except there are draconian tax hits on PHC profits.
This problem can be avoided by paying the profits
out to the shareholders as dividends..

John Galt

 

[RYD]

Curious as to the impact on health insurance. As this is a major concern for many (note the amount of posts on this site) having a small business allow you to deduct the cost? Second it may allow you to join a group of co-op that could roll you into a group plan at hopefuly a better rate than you could receive alone.

Justs a thought

Happy New Year to all

 

[John Galt]

RYD...........good thoughts vis-a-vis getting your health
insurance through a small business, like a co-op or
association for example. I ran into a snag on this
(blindsided again) when I started having trouble
getting/affording insurance. It seemed getting it through my little holding company was a slam dunk,
and in fact I'd had it before through an association
we belonged to. Very affordable. Alas, by that time
I lived in a different state than the one where the
corporation was lodged. Can't move the corp. The
only thing I could do was reestablish my residence in
the same state. Not too appealing but I did consider it.

John Galt

 

[John Galt]

My approach is similar to GDER, i.e. I don't want
"working" (even part time) getting in the way of
my fun and adventures. Once I could get out
(skinny as it was) I was gone. Good decision for me.
When I semiretired in '93, I thought I would have to work part time continuously, at least until SS kicked in.
I managed to avoid that, and must say that the part
time work I found was not very rewarding, except perhaps in a monetary sense. This may be partly because I was used to being the "Captain" and now
was just crew. I envy people who have an activity
they just love which happens to produce income.
I never got that lucky.

John Galt

 

[sgeeeee]

I retired in April 2003, so not even a full year. Consulting offers still come in fairly regularly. I turn most away simply by giving them the ground rules: my schedule comes first and if I have additional time, I'll talk with them. Amazingly, I still got two takers. I always enjoyed engineering work, so this work is fun and entertaining when I only do it when I want to.

I also have several books that are earning royalties and the three publishers I work with sometimes pay me to review a manuscript, etc. I will probably write/edit more books in the future.

I also enjoy working at the polls for elections and occasionally I'll work security for a local carnival or event. These jobs pay (barely) but I really like these kinds of jobs because you get to meet and talk with such a diverse group of your neighbors.

I will use the consulting/publishing income to full advantage. Deduct office expenses for my home office, etc. I expect it will be significant enough to do that for the next 2 or 3 years. By then, I should be technically obsolete.

 

[wabmester]

Heh, I always suspected that those carnival security guards had PhD's -- thanks for confirming

I also have a little K-1 income from some business partnerships, but I didn't think the IRS treated that as earned income. Is it different for publishing royalties?

GDER, my IRA contribution isn't so much for additional investments as it is to move taxable investments to tax-exempt. And it's great to be able to fully deduct health insurance vs the 7.5% AGI floor otherwise.

I agree with you guys in terms of not taking on work that would tie me down. So far, the consulting work has been extremely flexible, but I'm looking more for a passive money machine that the IRS treats as earnings. I suppose that something like collecting money from vending machines is legitimately viewed as business income, for example.

 

[John Galt]

Wabmeister, it's an interesting question you pose.
I have studied it quite a bit. I am not a tax expert,
but I can tell you that your K-1 and royalty income
are absolutely passive income. Early in my retirement, I considered
actively managed real estate to produce earned income
for the same purpose as yours. The vending machine idea should work also.

John Galt

 

[wabmester]

John Galt, I considered actively managed real estate as well, but I vaguely remember something about only direct rental expenses being deductable towards rental income. I'll have to run that one by my tax guy.

 

[John Galt]

Man, GDER, I couldn't have said it better myself
(high praise indeed). I said once that I truly believed
if I stayed in my workaholic mode (after my
divorce), I would have attained millionaire status
by "normal" retirement age (whatever that is).
In fact, I turned down one of the most lucrative
offers I ever had in my life just because my time/health
were more important to me. I'm with you.
Just say no!

John Galt

 

[haha]

I've done the math and my ER is secure.

I don't remember if you have previously said that you have a pension and/or subsidized health insurance. In my mind, these are the only things that can make retirement secure. Thre is nothing like indexed income, and of course health insurance.

If a person is really planning to live from his investments, IMO "secure" is a term of art.

Mikey

 

[sgeeeee]

Heh, I always suspected that those carnival security guards had PhD's -- thanks for confirming  

Yeah, eventhough I'm not qualified, I get to do that work because I know someone.

I also have a little K-1 income from some business partnerships, but I didn't think the IRS treated that as earned income.  Is it different for publishing royalties?

Publishing royalties are reported on 1099misc. and are applied to my publishing/consulting company schedule C income. Other payments from the publisher are for specific tasks.

 

[eridanus]

*I am not an accountant nor am I a tax attorney.

I believe you can form a single member LLC and turn capital gains into earned income. The LLC pays you, the manager, a fee for managing an account (which comes out of the gains on the account). That fee can then be used to pay for health care, HSA, IRA, mini-401k, etc. If it works out, the fee is used up by the deductions and you will owe no or little self employment taxes. This may or may not be advantageous to you tax-wise, especially considering the lower capital gains rates. The IRS considers single member LLCs as "sole propietorships" but your state may not.

http://www.irs.gov/faqs/faq12.html

Ask a knowledgable CPA if this is wise. Even when it's legal, the IRS may still frown upon it.

 

[John Galt]

Re. one-person LLC, and earned vs. passive income. I researched this pretty completely, including quizzing CPAs and
attorneys. Basically, I kept looking until I found
someone who gave me the answer I wanted .
I can tell you that this is a very murky area. Proceed
with caution.

John Galt

 

[wzd]

From what I have heard, you need to have another reason to form the LLC beside simple tax avoidance, or the IRS can disregard it. Now there are valid estate planning reasons, and liability reasons (for real estate at least), that would justify it, but if it is just for tax reasons, beware.

I don't pay tax attorneys and accountants for much, but for this I would! As John Galt said, its a murky area.

Wayne

 

[wabmester]

I just did my taxes after my first full year of ER.  I haven't really been following the tax law changes this year, but there's some great stuff in there!

A little earned income goes a long way in ER.  This year, I was able to:

* deduct 100% of my health insurance costs

* contribute $6000 to an IRA + spousal IRA

* if your AGI is under $50K, the IRS gives you an additional credit on top of your IRA contribution!  This is a bottom-line tax *credit* as opposed to a top-line deduction, and ranges from 10% to 50% of your contribution depending on AGI

And these goodies are on top of the usual business expense deductions that you can take (but didn't get as a mere employee).

This is the most fun I've had doing my taxes in a long time  

 

[unclemick]

Dumb question - if I'm in ER, don't have a job, and want to 'game' the system - how do I create 'earned income'?

 

[unclemick]

BTY - the only examples I know of were people who started small businesses and found themselves 'unretired' before they knew what hit them - often 'helping a son or daughter - 'get started'.

 

[wabmester]

Dumb question - if I'm in ER, don't have a job, and want to 'game' the system - how do I create 'earned income'?

Yeah, that's the question I asked when I started this thread. I had a little consulting work last year.

Basically, I think the best approach is to turn a hobby into something that can generate a little reportable income. TH mentioned doing a little handyman / computerguy work. SG wrote a book. I know a guy who collects some odd stuff and leases it out as movie props.

The only thing the IRS requires is that your hobby/business makes money (technically, you could lose money and still be legit, but that doesn't help you as far as earned income goes).

 

[AllanE]

I plan to retire in a couple of years at 55 from my homebuilding company, but I still want to dabble in real estate a little just to be able to write off those items as business expenses I've become accustomed to. Cell phones, computers, software, auto, health insurance, medical expenses, long term care insurance, “business” trips, even my broadband connection are business expenses for me.

Allan

 

[cute fuzzy bunny]

I'm just 80% of the way through my taxes...procrastinating since i'm not paying again this year.

However, it appears (according to turbotax) that I was able to deduct the majority of my healthcare costs because my AGI is zero, and any med expenses, including insurance, over 7.5% are deductable.