With self-employment tax at a 15.3 percent rate on the first $61,200 (for 1995) of income from self-employment for the year, and the combined employer-employee rate for FICA tax the same, there is a great deal of incentive to reduce the amount subject to those taxes. One approach is to pay rent to a spouse for the use of the land owned by the spouse. Rent, as a business expense, is deductible and is reported as investment income, usually on Schedule E. For husbands and wives filing joint returns, schedule E income is subject to income tax but escapes self-employment tax if the lessor is not materially participating under the rental arrangement. In most instances, spousal rentals involve cash rent leases so there is usually no question raised about material participation.



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