How Millionaires Save Money on Income Taxes

How Millionaires Save Money on Income Taxes?

How can I save money on my income taxes

How can I save money on my income taxes

(MP) Your taxes have a direct impact on every bit of your finances. They help figure out how much money you have to invest, that you should invest, the level your capital earns plus how much of those earnings you’re able to keep. It’s a customed of mine to informed my clients that they became millionaires. You too can save money on income or business tax by knowing how to park (invest) your money. If you’re not investing your earnings you’re like a cash cow for the government.

 

First step to saving money on income taxes

Philanthropy is great but money is not saved when you give to charities (that’s write-offs) its done inside your investment portfolio. At the end of the day investing money isn’t about how much you earn on investments either, but how much you get to keep after paying Uncle Sam.

Understanding how different types of incomes are taxed

Tax-free vs. Tax-Deferred
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Some kinds of incomes are tax-free. You won’t ever pay Uncle Sam for these examples:

-Interest on debt obligation of states, cities, along with other government agencies. Within the investment world, these are commonly called tax-free bonds or municipal bonds. They basically a pay reduced rate of interest than taxable corporate bonds in exchange for their tax benefits.

–Up t $250,000 ($500K if you’re married) of a given gain on the sale of one’s home. You can qualify for the exclusion each time sell a house you have live in as your principal residence for about two of five-years preceding the sale.

–Child support or money you receive typically from a former spouse as a primary settlement from a divorce.

–Money you receive in a lump sum typically from a life insurance policy when you are designated as the beneficiary.

–Death benefits paid for accidental death and health insurance policies to you.

–Income from a disability insurance policy you buy yourself.

–Some or all of your social security benefits after your retire.

–Workers’ compensation benefits.

Other forms of income are tax-deferred meaning you don’t pay uncle sam now, but you will have to pay him down the road. Maybe not for years but Uncle Sam will be looking for his money. But in the meantime you get the usage of this money. That’s why tax-deferred is among the top of tax-free investment vehicles. You can invest and re-invest to make more. On the list of tax-deferred income are:

-Retirement benefits you get from traditional IRAs and Keoghs. (Keogh plans are for self-employment investment income).

–Income from installment sales, primarily used to sell real estate.

–Any gain on the sale of property in an involuntary conversion. An involuntary conversion results from the loss or destruction of property through theft, casualty or condemnation. To exclude the gain from selling this type of property, you need to reinvest the insurance proceeds in similar property within a certain period, according to your state law.

Know your tax rate & save

It’s essential to know the difference between your effective tax rate plus your marginal tax rate. The effective tax rate is the rate you pay on all of your taxable income. Your marginal taxes is the rate your pay on the last dollar you earn. This marginal rate indicates how much each tax deduction is worth to you. If your marginal rate is 15%, a deduction is worth $150. If your marginal tax rate is 27%, every deduction you make is worth $279 and so on.

Know your capital gains tax

This can be income you receive from the sale of property that has appreciated since you brought it, anything from a home to stocks. There are various capital gains rates, based on what type of property you sell, the length of time you owned it and your other income. Your tax adviser will help you see clear through all this.

–Gains on property you owned for a full year or less are short-term capital gains. They’re taxed at the same rate as your other income.<

–Gains on property you owned for more than 12 months are considered long-term capital gains taxed at a maximum of 20%.

You probably won’t make money on all your investments every year, you’re likely to wind up year-end with a mix of winners and losers. Fortunately, you can use short-term losses on your investments such as mutual funds that didn’t do well to wipe out other short-term gains. You can also use short-term losses to offset long-term profits dollar for dollar and save big money on your taxes. A competent financial tax adviser will help you through this, but now you are armed with knowledge when you walk into his or her office.

Don Briscoe
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Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
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