“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” Benjamin Franklin
With the extended deadline to file 2020 taxes now gone, it may have felt that the full year with focused on filing your taxes.
For many people, tax filing season is the opposite of the most wonderful time of the year. TD Ameritrade recently surveyed more than 1,000 Americans asking them about things they’d rather do than prep their tax returns. Turns out that nearly 16% of Americans would rather curl up on the cold, hard floor of an airport terminal than tally their taxes…yuck.
As you may have seen with my previous posts, taxes are likely the biggest expense you will face during your lifetime and can have a massive impact to your ability to build and enjoy your wealth. Ask most CPAs (and Americans for that matter) and the chances of tax rates rising is high. Compared to historic tax rates, we’re actually at a extremely low tax rates as the government racks up massive debt and the federal reserve continues to print money.
But are paying a lot of taxes necessary all bad?
On the positive side, it means that you have a job producing income, or a business that is profitable, or have other good sources of income to help you live your best life and provide for your family.
Although you cannot control where tax rates are going, you can take responsibility for learning ways to reduce your tax burden while actually doing what the government wants you to do. I once heard it from Tom Wheelwright, author of Tax Free Wealth, that the IRS Tax Code is a set of incentives. Most of it is a guide to how to legally reduce your taxes, not pay them.
Here are ways you can “partner” with IRS and government to actually reduce your tax bill:
- Start a Business: The entrepreneurial spirit is alive and kicking these days. With many businesses struggling over the past year and laying off workers many have been forced to find a different path and create their own businesses. Starting a business is highly encouraged by the government as it can create jobs and value to the economy. Businesses are able to take deductions for most of their expenses reducing the income subject to taxation. For typical w-2 earners, you get taxed primarily on your gross income not your income after expenses; that can be a big difference.
- Provide housing: Whether through direct ownership of real estate or syndicated partnerships that own properties such as apartments, providing housing to others come with significant tax benefits. Not only can you benefit from depreciation of your asset, you can also deduct many of the costs of managing and financing the property. Also under current laws, if you do not sell the property before you die, the asset gets a “step-up” in basis such that your heirs do not have to pay the capital gains taxes when they inherit property and sell it.
- Give to Charity: Giving to charity and helping others is highly encouraged and can be deducted from your income for federal taxes and some states. It can be in the form of cash or other assets such as a home, stocks or even clothing. Not only do you get the satisfaction of helping a good cause, but you can reduce your tax bill. For those with appreciated assets there are other strategies that involve estate planning which could provide streams of guaranteed income AND deductions for current taxes. Seeking the help of a good estate attorney is highly recommended.
- Protect your family: One of the most tax efficient assets is whole life insurance. Just like all types of life insurance, the death benefit comes tax-free to beneficiaries when the insured passes. For those with a higher net worth, life insurance can be coupled with an irrevocable trust so that the death benefit proceeds transfer without the burden of estate taxes.
This asset can also provide big tax benefits while living. Designed properly, whole life insurance can accumulate tax-deferred growth of the cash value in the policy without the chance of loss. There are also ways to gain access to the cash value through withdrawals and/or guaranteed loans from the life insurance company all through life and without taxes. Having use of your cash tax-free while you’re alive and having it pass tax-free to your beneficiaries is a great combination.
Conclusion
Although taxes are something we all have to endure, there are plenty of ways to minimize its impact to your wealth if you’re open to exploring. The IRS Code can be your guide.
