Tax/income question

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It was suggested that my wife (who does real estate on the side) incorporate that as a business.

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First of all - if the money flow is significant - at all - this is almost always going to be good advice, for a whole range of reasons.

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The only income that will count against us is salaries, and the rental income and real estate commissions won’t affect us.

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You're misunderstanding the advice. All gross (and net, for that matter) income will "count" to a degree. How it is counted, and what rates will apply (and what will be subject to SS, Medicare, etc.) are all considerations in coming up with an effective tax rate.

And you have far more options doing that within a corporate structure than you do with just ordinary business income without that structure.

It isn't painless. You'll probably have some costs associated with forming and maintain the structure, but I would definitely look into it some more with an eye towards determining if it is right for you. More record keeping. You'll have to maintain a "wall" between your personal finances and business finances, etc., but it will probably yield some overall savings.

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Even though the house we rent out is in our name and not owned by this business.

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That would be part of the deal. The business doesn't exists yet. You would have to transfer it to the business for that to be covered by the business structure (which will be transaction and, perhaps, financing costs, etc.).

You're on Step 4 of about a 20-step process. Baby steps, but it isn't all that bad.

1099

Does she contribute to or max a 401k at work?

So the first question should be, do you need the money to live with? Or is it just going to savings?

We look at LLCs, taxed as S Corps, as a way to save money on self-employment tax. However, what you are looking for is to actually reduce your individual income. A S corp won't solve that issue... all the S corp will do is reduce the amount subject to S/E (payroll) tax. It won't reduce the amount subject to income tax.

To reduce that amount, you would have to form a C Corporation, or an LLC taxed as a C Corporation. Have the commissions go in there, and only pay out as a salary what you need to live on. Let the rest grow.

You will have to pay corporate income tax on what isn't paid out to her as salary. In addition, there are compliance costs involved in all of this.

Further, I would not put the house in the corporation. Why? Because when a corporation sells real property, it's ordinary income, not capital gain income. Plus, you still have to get the cash out, which either means income to her on her W-2, or dividends to her.

You are looking at an awful lot of work and compliance costs to accomplish a Roth contribution. This is not something I would recommend.

Do either you or her have Roth 401K options at work?

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You are looking at an awful lot of work and compliance costs to accomplish a Roth contribution.

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And why not do a backdoor Roth? I have some years where I am right in the middle of phase out and I contribute what I can to the Roth, the contribute the balance to a traditional, then convert the traditional.

Great advice in the rest of the post.