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The New Trader's Tax Solution: Money-Saving Strategies for the Serious Investor


Praise for Previous Editions

“Here’s my advice: first, design a trading strategy that gives you an edge in the markets; second, trade your strategy with precision and steadfastness’ third, study The Trade’s Tax Solution and apply Tesser’s principles to your taxes and financial planning. If you’re trader or investor who wants to keep the maximum possible amount of the money you’re earned, your copy of The Trader’s Tax Solution will be worth its weight in stock certificates?” - Thomas A. Bierovic Manager, Strategy Testing & Development, Omega Research, Inc.

“I have heeded Ted Tesser’s advice for many years. His background, knowledge, and experience have been invaluable in saving me an enormous amount of money over the years. This book is my bible for financial and tax strategies.” - Bill M. Williams, PhD, CTA Professional trader and President, The Profitunity Trading Group

“Taxes can be the largest single expense for a successful trader. Ted Tesser draws on his experience as both a CPA and successful trader to show you how to minimize this expense. This book is clearly written, practical, and comprehensive. Deserves a place on every trader’s bookshelf.” - Sheldon Knight, K-Data, Inc.

“Ted Tesser is one of the nation’s foremost experts on investment taxation. In this definite guide to reducing and even eliminating whole classes of tax exposure, Ted presents a wealth of solid tax strategies that investors and traders will find indispensable.” - Nelson Freeburg, Editor, Formula Research

“Ordinarily a ho-hum subject, Tesser has made reading about taxes for traders enjoyable. This book is not only a fun read, it is an invaluable reference. The Trader’s Tax Solution contains everything a trader needs to know about taxes.” - Sunny J. Harris, President, Sunny Harris & Associates, Inc. Author, Trading 101: How to Trade Like a Pro, Trading 102: Getting Down to Business, and Electronic Day Trading 101

Ted Tesser, CPA, is a partner with Tesser, Horowitz, and Ullmann, Inc., a firm serving clients around the world. He specializes in investment taxation, is an active trader, and is the author of Trader's Tax Survival Guide and the best-selling video Cut your Trading Taxes in Half!

Acknowledgments xiii

Introduction: We Are All Traders! 1

1 The Basics of Accumulating Wealth and Keeping It 3

The Foundation--Things You Need to Know 3

The Basics of Tax Planning 3

Red, Gray, or Black-and-White? Choose Your Tax Strategy 4

There Is No Mystery to Saving Taxes 7

The Paradigm Shift to Tax Freedom 8

2 The Trader ’s Tax Solution 9

There’s Too Much Tax . . . Here’s What You Can Do about It 9

“Thanks a Million, Uncle Sam.” (Or Should I Say $89,500.49 after Taxes!) 11

Does Anyone Feel Morally Obligated to Pay the Maximum Income Tax? 12

How to Direct the Government in Your Best Interests 13

Investors Are Hit Particularly Hard 16

The Government’s Free Lunch--Your Tax Return! 17

Starving the Government--Trader Status 17

Investor, Trader, or Broker-Dealer/Market Maker--What’s the Difference? 18

You May Be a Trader and Not Know It! 20

Case in Point--Was Louis Yaeger a Trader? 22

What This All Means 25

Schedule C--Born to Be Filed 26

Other Benefits of Claiming Trader Status 28

It’s Your Business--Why Not Deduct It? 29

3 Recent Trader Cases 47

The Case of Fredrick R. Mayer 47

The Case of Rudolph Steffler 53

The Case of Stephen A. Paoli 54

Trader Status--Other Cases 56

4 The 1997 Trader ’s Tax Act--The Most Significant Changes for the Trader and the Investor since 1986 58

The Top 10 List of Things to Know 58

Section 475 for Traders of Their Own Accounts 64

Summary and Conclusion 68

5 The Triple Crown 69

The Most Effective Tax-Saving Strategy I Have Ever Known 69

Step 1--The Business 69

Step 2--The Entity 75

Step 3--The Voluntary Employee Benefit Association 97

The Triple Crown 111

6 Providing for a Wealthy Retirement 112

The Big Boom of 50-Year-Olds! 112

Life’s Tough and Then You Retire--How to Make It Easy 114

Denial Is Not a River in Egypt 115

See No Evil, Hear No Evil . . . Opening Your Eyes 115

And the Walls Come Tumbling Down--the Pillars of Retirement Planning 118

The Tax Factor 119

Paying My Fair Share Does Not Mean the Maximum Tax I Can Pay 120

What Lies Ahead--and How Will It Affect Your Retirement? 121

The Crumbling Pillars 121

Conclusion: The 10 Deadly Sins of Retirement Planning 127

7 They Don’t Make Hearses with Luggage Racks 129

The Last Laugh 129

Estate-Tax Planning 101: The Basics 131

The Unified Gift and Estate Tax 131

Multiple Choices--A Career in Government or a Career in Government? 136

A Typical Estate 136

Your Retirement Plan Gets Hit Worse 137

Conclusion 142

8 Income and Expenses: A Review 144

Income Defined 144

Earned and Passive Income versus Investment Income 148

Unlimited Gains/Limited Losses 149

Unlimited Income/Limited Expenses: The Pig and His Pal 150

What Is an Expense? The “Four Criteria Deduction Test” 150

Total Return Investment Plan (TRIP) 151

Calculation of True Yield 152

The Risk/Reward Ratio Revisited 156

Risk/Reward Ratio Meets the “Tax Factor” 158

9 New World Retirement Planning 162

Individual Retirement Accounts 162

Simplified Employee Pension Plans 164

Qualified Retirement Plans (KEOGHs) 165

10 New World Estate Planning 170

Using the Annual Gift-Tax Exemption 171

Using Estate-Tax Planning Strategies 173

Other Considerations in Addressing Estate-Tax Planning 174

Sixteen Crucial Definitions 179

11 The Double Play: To Give Is But to Receive! 183

Background 183

To Further Compound the Situation 189

A CRT and Your Heirs 190

A Crummey Trust Is Not So Crummy! 191

To Gift Is But to Receive 192

Prepay Your Estate Tax for Pennies on the Dollar 193

The Double Play--Summary 196

12 The Layup: It ’s Just a Matter of Trust 197

How and Why to Set Up a Trust 197

The Layup--Summary 201

13 The Home Run: A Way to Double Your Exemptions 202

The Basics 202

The Home Run--Summary 203

14 Modern-Day Miracles--Chalk Up a Few for the Good Guys 204

Trader Status Audit Victories I Have Had 204

What We Can Learn from All of This 218

15 Knowing Your Limits: How Far Can You Go? 220

Question of Legality 220

“Only the Little People Pay Taxes” 221

How the IRS Builds a Criminal Case 222

The Taxpayer Bill of Rights 224

Specific Mitigating Circumstances 226

Your New Rights as a Taxpayer 229

Significance to the Investor and the Trader 230

Michael Milken 233

How to Play for Keeps with the IRS 233

What Criteria Are Most Important in the Selection of Tax Returns for Audit? 234

Types of Audit-Selection Processes 236

Ten Ways to Reduce Your Chances of Being Audited 237

Playing in the Major Leagues with the IRS 242

Audit DO’s and DON’Ts 243

Other Winning Audit Techniques 246

16 101 Tax-Reduction Strategies 250

Conclusion 280

Appendix A Investment /Trading Vehicles and How to Report--Tax Consequences 281

Appendix B Deductions Related to Investment and Trading Activities 291

Appendix C The VEBA--Code Sections 294

Appendix D The VEBA--Court Cases 300

Appendix E Other VEBA Rulings 312

Appendix F 166 Frequently Asked Questions and Answers 318

Appendix G Trader Tax Return Examples and the 475 Election 350

Appendix H Logs and Journals 468

Appendix I It ’s All a Matter of Time (The Reality of the Wash Sale Rule) 511

Appendix J Trader Evaluation Questionnaire 515

Notes 519

Disclaimer 523

About the Author 525

Index 527

Additional Resources 541