Tax loops holes, all the rich people use it, they should be illegal right? Just write it off, you just bought a new G wagon no worries just write it off easy no worries. Well, the U.S government incentives people to make financial decisions that helps the USA in general such as buying heavy gas guzzling cars. If they are over 6,000 lbs. than you are able to fully depreciate the vehicle that year.

Many people make taxes harder than they need to be which is fair. Just know that YOU too should follow the rules set forth by the IRS to your advantage. (Disclaimer: this is not financial advice and you should always speak to a tax accountant if you are unsure of your tax position)

Income is money earned whether from a day job or from investments, and you are taxed on that income based on the type of income. Not all money is taxed the same and some income is taxed at a higher rate than others. Rule of thumb is to follow tax rules set forth by the government in order to maximize your tax savings.

Defer Income, Accelerate Expenses

Taxes are only recognized when it is earned or in business when it is distributed.

When you are paid by an employer whether salary or hourly on your W-2 you have federal taxes withheld for at the end of the year when your federal taxes are due. If there is an overpayment than you will receive that back in a refund by the IRS, but if you owe than you are expected to pay that difference by April 15. If you defer some of your income, such as into a 401(k), you aren’t taxed on that contribution on payday which is very beneficial in terms of tax savings and your retirement.

The idea behind tax-deferred retirement investing is that your tax rate in retirement will likely be lower than your tax rate now which means when you withdraw from your investment you are taxed in the lower bracket. Since you are working a full-time job, your marginal rate is theoretically higher now as you might even have other incomes in form of capital gains as well than when you’re just pulling in payments from your retirement accounts and Social Security.

It would be in your best interest in invest earlier, the earlier you start the more it can compound just don’t pull all of your retirement all at once.

Not Every Dollar Is Taxed the Same

One would imagine that the wealthy should pay more taxes than lower income individuals and a quick glance at the federal bracket would represent that.

However, many forget there are other taxes such as the payroll tax on top of the federal due each year. FICA tax is known as Medicare and Social Security the Social Security portion, 6.2%, is only assessed on income up to the wage base ($147,000 for 2022). The Medicare portion, 1.45%, is assessed on all income.  Of course, this is your half and the employer would cover the other portion helping you out.

Contractors and business owners could receive 1099s and these have no federal withheld and the individual receiving them are responsible for covering the full amount of payroll. They also pay a payroll tax but it’s called self-employment tax because they pay both sides – employer and employee. The works out to be 15.3% for all income up to the wage base and then 2.9% on income above it. The positive with 1099 income is that you are able to deduct expense associated with your contracting job with will reduce your liability.

Qualified dividends are very favorably as the government wants to incentive you to invest your money. If you are in the 10% or 15% bracket, they are 0% up to $40,000. However high-income earners are subject to the net investment income tax of 3.8%) If you sell a business and have the proceeds as long-term capital gains, it’s treated as such are you will be that additional amount over $400,000.

A common strategy for small business owners would be to reinvest all income and build equity in the business that you can sell in the future. As you grow your sales and revenue would increase so generally assets such as customer list and goodwill would increase. Instead of getting taxed on the income from your business and once again once you file your individual return (depending on how your business is set up C Corp).

Any income you earn from the business will immediately get hammered by FICA for 15.3% and then for your rate. If you sell it, you are only burdened by long term capital gains which saves you payroll. It would be wise to set up an S Corp if you qualify for one and have the income as that is another route you could take to save in payroll. (Please consult with a professional as every case is different)

Listed below are how some incomes are taxed differently:

• Estate tax – technically not “income” but assets get step up basis which means fair market value on the date it was transferred (currently $11.4mm per person in 2022), this is after you take full advantage of the structure of gift taxes before you pass. You would need to file a 706-estate and it is complex, remember life insurance money inherited is not taxable (could be in some states) income and if set up properly in a crummy trust is very beneficial. (Story for another day)
• Home Exclusion – Free on the first $250,000 ($500,000 for couples) as long as you lived in the home for 2 of the 5 years than you would qualify so take advantage.
• Long term capital gains – Taxed at long term capital gains rates depending on your bracket
• Qualified dividend income – At long term capital gains rates which is favorable
• Short term capital gains / interest income – Taxed at your marginal rate but not subject to FICA
• Regular income – At your marginal rate but subject to employee’s side of FICA
• Self-employment income – At your marginal rate but subject to employer and employee FICA (self-employment)

The rich do pay more in it but could have a much lower rate if they follow a plan set by the government. Remember the government gives these tax breaks to incentive people to do things that would help the economy.

State Taxes are Mean

Do not overlook state taxes, some states are brutal for your wallet. States such as California, New York, Arizona have state you are responsible for at the end of the year.

If you want to retire early it would be wise to look into each state tax law as some have additional on retirement income distributed. Make sure you research each state before you live there as cost of living is another factor.

There are only seven states with no income tax and they are (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). These states you will not have to worry about paying additional state taxes on top of your federal paid.

Take advantage of where you are living, research and learn what deductions each states gives to help reduce state liability.

Charitable Contributions the Best Way

Donating to charity helps that cause that foundation is trying to achieve. That is a wonderful thing socially if you are religious or what to help unfortunate people in a time of need. A benefit for that is you are able to get a deduction that goes on Sch A to reduce your liability. Remember you first need to surpass the standard deduction and itemize first before any charitable contributions take effect.

If you are a high earner or over 72 with huge retirements accounts it is wise to look into this strategy as it will reduce liability greatly. Once you are over 72, the government requires you to withdraw money from your retirement savings account called the minimum required distributions. Instead of pulling that money out and paying on it, some people it makes more sense depending on the situation to donate that instead and have no tax liability.

The main reason why you are here is to read real secrets. Here is a big one, stocks held over one year one donated are taken at the fair market value at the time donated and cashed by the foundation/ charity. You could have bought that stock lower and it has increased in value in which you have not paid your capital gain, however as long as the stock is held for a year you would be able to take the fair market value of the stock donated. So, you avoid paying taxes on the gain of the stock and take the charity deduction a double win as long as you are in the right bracket.

(Life) Insurance Proceeds Aren’t Taxed

Set your dependents up for success even your future generations. A strategy commonly use is buying life insurance as the proceeds when paid out are not taxable.

Life insurance can be tricky and even cantorial as it is a topic not understood by many. With many life insurance sales man around it gives off a scummy vibe which is why you need to be careful when choosing your life insurance. How it is set up and structured is very important as well depending on which state you are living it so it is wise to speak with a tax professional who specialized in this area. By setting one up properly you can have your loved ones receive millions once you pass free, that will boost their living that could last for generations.

Home Exclusion 250K Per

When it comes time to sell your primary residence $250,000 of the gains are excluded per individual when it comes time to filing your taxes. $500,000 are excluded if you are filing married jointly so keep this in mind if you want to move to another residence.

It is important to keep note, you must live in that property for at least 2 of the 5 years in order to take this exclusion. It is a good strategy to implement if you want some tax-free gains and with real estate market on the rise it is worth researching.

It is very wise to keep good records of your home repairs, maintenance, and improvements as this is added to the total basis of your home. Repairs and maintenance are not deductible but home improvements are so keeping a tally on these. The difference between maintenance and improvement is that improvements increase the value of your home. Repairs and maintenance are things that keep your home in good working order which don’t increase your basis.

Conclusion

Knowledge is key, as long as you keep these in mind before making a financial decision it will help you greatly. Uncle Sam will always get his cut, so be sure to speak with a Professional before you make any transactions especially if you are a high-income earner.