SS and Investing

[VCM]

I am on permanent disability for a couple of years now, I want to start trying to invest online but don't want to risk my disability in the process. I talked with my CPA and she said she has several clients to invest through a trust but that the trust also has to be claimed in your personal tax returns in some way. My other thought was to form an LLC but I don't know if in doing so or if the company turns a profit that it too could disqualify me. Don't get me wrong, if I am able to do this successfully I will gladly surrender my disability in favor of making some real money again, but don't want a couple of good months to disqualify me before I am regularly turning a profit.

 

[Taxing Matters]

What is the exact benefit you are getting. Social Security disability income (SSDI) has no income limit for income from sources other than working. If you are getting Supplemental Security Income (SSI), then your total income from all sources matters because SSI is a means-tested program, which means you have to be low income to qualify to get it.

If you use a LLC for the investing and you are the sole owner of the LLC then by default that LLC is disregarded for federal income tax purposes and the assets and income of the LLC are treated as your income and assets. In short, the single member LLC is no different than if you just invest yourself without using any kind of entity. So doing that isn't going to help you at all with this.

 

[HRZ]

To clarify a bit...SSI is also asset tested ...yes taxing matters has it in the answer.

The bigger real life problem is that most people do not do well as on line traders on a daily basis . Some who are a whizz may...but personally I have met but one such whizz ..

Hey, if you are on SSDI, give it a try ?

 

[VCM]

I am 39 and getting SSD for 'Early Onset Parkinsons' ... they told me that where most people get reviewed every 3 years or 6 years, because of the nature of my condition I will at best get reviewed every 10 years. I have family members who make a living investing so I was just going to ride their coat tails as it were.

 

[HRZ]

In your situation I would sure lean towards giving it a serious effort . GIven SSD is not income tested except for work income .

But I'd be very rigid about not risking my full asset base ..set a parameter and live by it .

Be careful not to list yourself as working as a trader !

To me, a trust or LLc is unnecessary added baggage unlikely to be of any help unless you want to fund a trust as a special needs trust to try to side step means testing downstream if you were to seek any such added public sector benefits...mechanics of using a self settled trust to do so and crystal balling future law/regs as well as your future needs are way beyond me .

Trust tax returns are a bit of a pain but not that big of a pain ...if you are smart enough to be a good investor you can sort thru the returns with available software or pay your CPA to do so. Keep in mind trust tax rates on undistribited income ramp up faster than personal income tax ratee. It's been a while since I paid a lawyer to set up a trust, but I expect that is a pretty modest change even today .
A special needs trust is NOT a homebrew project.

I'm just unclear if any such tool is needed in your tool box.

 

[VCM]

Ok, so for the most part I wont jeopardize my disability ... is it or is it not advantageous from the income tax standpoint to invest personally or as a corporate entity.

Prior to my current condition I was self employed within a C Corp and my CPA at the time used to tell me that corporate entities were taxed at a lower rate then individuals and only on their proffits after expenses.

 

[HRZ]

There are a few changes in corporate tax rates to liberalize it for some smaller firms and on that I am in the dark. I'm not a fan of lots of paperwork just to file paperwork. Double taxes on distributed C income in the past were no bargain and S is treated as pass thru .

IF the point includes building up a nest egg and maintaining flexibility to qualify for OTHER means tested benefits downstream , I'd review use of a special needs trust with competent tax counsel.

 

[VCM]

OK, thank you so much for the insight.

 

[Taxing Matters]

Ok, so for the most part I wont jeopardize my disability ... is it or is it not advantageous from the income tax standpoint to invest personally or as a corporate entity.

Prior to my current condition I was self employed within a C Corp and my CPA at the time used to tell me that corporate entities were taxed at a lower rate then individuals and only on their proffits after expenses.

C corporations currently are taxed at a flat rate of 21% of their income. Corporations do not get any lower rates for long term capital gains like individuals do. The additional factor that you must consider with a C corporation is that when the corporation pays out profit to you, that will be a dividend to you and dividends are ordinary income to you. Thus, profit paid out to a shareholder is taxed twice; the corporation pays tax on it, and then the shareholder pays tax on it, too. This is why most small businesses avoid organizing as C corporations.

Individuals are taxed on their ordinary income at tax rates that range from 15% to 39.6%. They are taxed on their long term (investments held for one year or more) capital gains from stocks and other financial investments at rates from 0% to 20%. Short term capital gains are taxed at the same rates as ordinary income.

What this all means is that generally you would only save money in tax using a C corporation for your investing if (1) most of the gains are short term and thus taxed as ordinary income; (2) your overall tax rate for ordinary income as an individual is less than 21% if you had that same income individually; AND (3) you don't take the profit out of the corporation.

If you are on SSDI and not SSI then I do not see the use of a trust for this to be helpful you either, at least in terms of tax. And you really shouldnt need a trust to get around income limits for SSDI unless you are such an active trader yourself that you would be considered self-employed as a trader rather than a passive investor.

 

[VCM]

C corporations currently are taxed at a flat rate of 21% of their income. Corporations do not get any lower rates for long term capital gains like individuals do. The additional factor that you must consider with a C corporation is that when the corporation pays out profit to you, that will be a dividend to you and dividends are ordinary income to you. Thus, profit paid out to a shareholder is taxed twice; the corporation pays tax on it, and then the shareholder pays tax on it, too. This is why most small businesses avoid organizing as C corporations.

Individuals are taxed on their ordinary income at tax rates that range from 15% to 39.6%. They are taxed on their long term (investments held for one year or more) capital gains from stocks and other financial investments at rates from 0% to 20%. Short term capital gains are taxed at the same rates as ordinary income.

What this all means is that generally you would only save money in tax using a C corporation for your investing if (1) most of the gains are short term and thus taxed as ordinary income; (2) your overall tax rate for ordinary income as an individual is less than 21% if you had that same income individually; AND (3) you don't take the profit out of the corporation.

If you are on SSDI and not SSI then I do not see the use of a trust for this to be helpful you either, at least in terms of tax. And you really shouldnt need a trust to get around income limits for SSDI unless you are such an active trader yourself that you would be considered self-employed as a trader rather than a passive investor.

If I was going to incorporate again I was hoping to do just a LLC so it would be it's own taxable entity and not my personal asset like a trust ... I only brought up the C Corp because that is what I was told to form for a separation of liability.

 

[Taxing Matters]

If I was going to incorporate again I was hoping to do just a LLC so it would be it's own taxable entity and not my personal asset like a trust ... I only brought up the C Corp because that is what I was told to form for a separation of liability.

You get limited liability (separation of liability) with a LLC, too. And for federal tax purposes you can elect for the LLC to be treated as a C corporation, S Corporation, or sole proprietorship. If you form a corporation under state law you may elect to have that corporation treated as either a C corporation or S corporation for federal tax purposes.

But it is only with the C corporation that you get the double taxation: the corporation itself pays tax on its net income and then the owners (shareholders) pay tax on that again when the income is distributed to them. So unless the corporation never pays out the income to shareholders the C corporation will in most instances mean more total tax is paid.

With sole propriestorships, partnerships, and S corporations only the owners pay tax on the income, and they pay that tax whether they get distributions or not from the business. So you avoid the problem of double taxation.

Whether you have a LLC or corporation, the limited liability protection under state law is typically about the same either way. But for single owner simply using an entity for passive investing you'll not see much benefit in having the limited liability there.

 

[VCM]

You get limited liability (separation of liability) with a LLC, too. And for federal tax purposes you can elect for the LLC to be treated as a C corporation, S Corporation, or sole proprietorship. If you form a corporation under state law you may elect to have that corporation treated as either a C corporation or S corporation for federal tax purposes.

But it is only with the C corporation that you get the double taxation: the corporation itself pays tax on its net income and then the owners (shareholders) pay tax on that again when the income is distributed to them. So unless the corporation never pays out the income to shareholders the C corporation will in most instances mean more total tax is paid.

With sole propriestorships, partnerships, and S corporations only the owners pay tax on the income, and they pay that tax whether they get distributions or not from the business. So you avoid the problem of double taxation.

Whether you have a LLC or corporation, the limited liability protection under state law is typically about the same either way. But for single owner simply using an entity for passive investing you'll not see much benefit in having the limited liability there.

You get limited liability (separation of liability) with a LLC, too. And for federal tax purposes you can elect for the LLC to be treated as a C corporation, S Corporation, or sole proprietorship. If you form a corporation under state law you may elect to have that corporation treated as either a C corporation or S corporation for federal tax purposes.

But it is only with the C corporation that you get the double taxation: the corporation itself pays tax on its net income and then the owners (shareholders) pay tax on that again when the income is distributed to them. So unless the corporation never pays out the income to shareholders the C corporation will in most instances mean more total tax is paid.

With sole propriestorships, partnerships, and S corporations only the owners pay tax on the income, and they pay that tax whether they get distributions or not from the business. So you avoid the problem of double taxation.

Whether you have a LLC or corporation, the limited liability protection under state law is typically about the same either way. But for single owner simply using an entity for passive investing you'll not see much benefit in having the limited liability there.

Ok, so apparently I got hosed in my previous business. Thank you for the clarification.