Some statistics say that 47% of the country does not pay taxes. Then there are the few wealthy who have ridiculously high income and wealth, but ludicrously small tax payments. While you may not be in either extreme, it is definitely a good idea to save on your taxes and evade a few of them sophisticatedly.
Here are few such tax tips to help you reduce your tax bills and make your pockets deeper.
Multiply Your Non-Taxable Income
Believe it or not, there still remain a few tax-free income assets. Here we go.
► Roth IRA Accounts- Leave the money in the account for five years without withdrawing, and your income grows, and you are not charged any capital gains or income tax on it.
► Public/Municipal Bonds- When you invest in these bonds, you are entitled to a large chunk of subsidy from the federal government. Federal income tax is not charged on the yields from this bond.
When you invest in these bonds issued by states, cities, counties and quasi-public agencies, you are entitled to federal income tax exemption on interest income from these bonds. However, if you are already subject to an alternative minimum tax, income from private activity bond becomes taxable.
► Life Insurance Benefits
As a beneficiary of a life insurance policy, that hasn’t been sold to a third party, your received amount will be tax-free.
A Mutual or Policy-Holders cash-value building life insurance policy generates dividends that are credited to cash value policy, which leads to increase in the death benefit.
The insurance dividends you receive on these are non-taxable as they are basically nothing but the surplus premium that you paid.
Life Insurance Cash Value
Any increase in your life-insurance cash value is tax-free, and you can borrow against this future potential death benefit. You may choose to pay back the loan with interest or the interest can accrue and pay the death benefit off. What you are doing is neutralizing the increase in your cash value and freeing it of federal income tax by borrowing against it. The thing to remember, about life insurances however are that you should have a stable source of income to prevent the policy from lapse, and to draw actual financial benefits from it, you have to wait for a good ten years minimum.
Invest in Real Estate
Real estate remains a favorite and tax-saving mode of wealth creation. Real estate investors are reducing their tax burden further by taking allowable deductions for depreciation.
Capital gains accrued through real estate can also be deferred indefinitely through use of 1031 exchanges. The 1031 Exchange is a legal strategy used by veteran real estate investors to avoid paying taxes when they sell properties.
The 1031 Exchange allows an individual to sell a property and carry that amount to acquire a higher priced property. When you use your received profits to buy a new property, you don’t have to pay taxes till the next property is sold.
Real estate acquisition gives the opportunity to lower your taxes significantly. Tax deductions and exemptions for real estate owners enable them to turn losses into profits from all the money they saved from deductions.
These tax breaks can include any actual costs occurred for financing, managing, maintenance, repairs, property management, advertising and other utilities. All mortgage payment interest is also deductible.
Sell Assets that Make a Loss Too!
The simple paradigm that makes this work is you have to pay high taxes on any capital gains that you make, a sharp 20%.
But when you diversify your assets into few earners and few losers, the IRS mainly taxes on the differences between gains and losses. By striking the right balance between selling the assets that make losses and the assets that gain , you will be only taxed on the difference amount between the two, which in reality will cancel out your capital gains tax and up to $3,000 per year in ordinary income.
Acquire Dividends from Your Business
Drawing a salary from your own business is not a financially wise decision. Salary is taxable income. You need to pay social security and medicare taxes on them. However, when you take dividends from your business instead of salary, you save on employer and employee portion of Social security and Medicare tax.
Unlike salary, dividend income gets a slashed tax rate. The IRS however is aware of such techniques on part of individuals. Taking your whole paycheck as dividends could land you in deep waters with the Internal Revenue Service. So cut yourself a reasonable chunk as salary and rest as pay check.
When You Land Into Tax and Foreclosure Troubles
Its said that one out of every four tax-paying Americans run into tax trouble. You don’t file or pay taxes for a few years? And then suddenly the Internal Revenue Service sends you a ‘Final Notice of Intent to Levy’.
You have made regular mortgage payments. However, you have run into some financial crisis, and missed a few payments. Before you could apply for a modification, you receive a stern foreclosure and the bank is not willing to listen?
Well before it’s too late, catch hold of an expert New York tax lawyer to help you fix your taxation and foreclosure problems and get your life back on track.
John Fazzio is an experienced and aggressive trial attorney at Fazzio Law Offices based in Mahwah, New Jersey. As a trial practitioner, he specializes in tax controversy, foreclosure litigation, entertainment law, and trials. He strongly believes that an attorney should be capable of handling human relations, legal arrangements and critical thinking.