One of the most important issues that effect all Americans is taxes, this issue does not matter whether you are a millionaire who creates jobs or a middle class person who purchases items from those millionaires. How Millionaires Avoid Taxes is a valuable source for those looking to cut their taxes and those who already find themselves in the top 1% of income earners.
Millionaires know the IRS uses only 1040 tax returns to determine if taxes should be paid. This leaves millions of wealthy individuals with other places to put their money. Learn the truth about unlimited IRAs, Roth IRAs, 401Ks, municipal bonds, CDs, stock options and real estate. Profit from the strategies that millionaires use. The ebook shows how to legally avoid paying taxes for life.
Family limited partnership
Millionaires might also use family limited partnerships to avoid high estate taxes. A partnership is created and ownership of assets is transferred to it. Heirs are gifted an ownership interest in the partnership, and the value of that ownership interest is discounted under estate tax rules.
This reduces the amount of assets that transfer through probate and are considered part of the taxable estate. But, again, there are costs involved with setting up a family limited partnership. It’s not normally necessary to do this unless you have a substantial estate that would be subject to tax.
Business expenses
You could deduct necessary business expenses commonly accepted in your trade or business. For example, if you run a store, you could deduct the cost of goods sold on your federal taxes. Or if you’re a freelancer, you might be able to deduct costs related to your business website. This is something that wealthy business owners might do to reduce their tax burden.
Again, you need to have business income to take advantage of this tax savings opportunity. The best tax software can help you identify deductions for your business if you run a company of your own. The best business credit cards could also make it simpler to track your business expenses at tax time, too.
Charitable donations
Donating to charity is one way wealthy people save money on their tax bills. But there are certain rules to follow.
In general, deductions to a charity are deductible only if you itemize. Itemizing means you declare deductions for specific expenditures, rather than claiming the standard deduction. The standard deductions for 2021 are:
- $25,100 for married couples filing jointly
- $12,550 for single tax filers
- $18,800 for heads of household
Unless your charitable contributions and other deductions exceed that amount, it makes sense to claim the standard deduction instead. If you itemize and want to claim the charitable deduction, generally, you are limited to deducting no more than 60% of your adjusted gross income. However, there are some exceptions to that for qualified contributions. These include cash contributions to public charities or certain private foundations.
For tax year 2021, however, taxpayers can deduct up to $300 in donations (for single tax filers) or $600 (for married joint filers) on their federal taxes even if they don’t itemize. This special benefit was enacted due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. These deductions apply to cash contributions to charities only.
Property taxes
Property taxes are deductible, but again you will need to itemize to claim this deduction. You can deduct up to a total of $10,000 (for married joint filers) or $5,000 (for single tax filers) on your federal taxes. This $10,000 limit applies to state and local taxes, including property taxes and state income or sales taxes. Still, it could be a good way to reduce your tax burden.
If your property taxes and other deductions don’t exceed the standard deduction, it probably doesn’t make sense to itemize.
Managing assets like a business
One way to save on taxes is creating a structure — such as a limited liability company, or LLC — to manage multiple investments, said Featherngill. It could include portfolio assets, real estate or a business.
While it could get complex, there may be opportunities to save money while at the same time creating a governance structure for your assets, she explained. “If the LLC is a management company that provides oversight and advice to owners of the assets, under certain circumstances the expenses incurred by the LLC will be deductible as business expenses.”
Depreciation
Depreciation refers to the loss in value of business property that occurs over time. For example, business equipment such as machinery loses its value over time as the equipment ages. If you have a rental property, depreciation can also occur when you make improvements that stay useful for several years, such as replacing a roof.
Wealthy people who own businesses or rental properties can deduct depreciation. Unfortunately, this is a form of tax savings you can take advantage of only if you own a rental property or a business with qualifying equipment.
There are numerous methods of calculating what this deduction is worth, but the simplest is the “straight line” method, which allows you to calculate your deduction using the following equation:
(Cost of the asset – the salvage value (what it’s worth at the end of its estimated useful life)) / estimated useful life
This gives you the annual depreciation expense you can deduct when you file your federal taxes. However, there are annual maximums on the amount you can deduct. For the 2021 tax year, the maximum is $1.5 million.
Estate and gift exemptions
Gift and estate deductions help bring down taxable income, but there is even more reason to take advantage of them now.
Thanks to the new tax law, the deductions have been temporarily doubled. Individuals can now claim up to $11.18 million, compared to the $5.29 million limit per person in 2017. The exemption expires after the end of 2025, so the wealthy are taking advantage, said Featherngill.
Many of them are setting up long-term trusts, such as a Delaware Dynasty Trust, which allows wealth to be passed down from generation to generation, she said. While it is subject to income taxes along the way, it will not be taxed as a gift if it meets the limit and will not be subject to estate tax when money comes out.
However, given the costs involved in setting up and running a multi-generation trust, it only makes sense when you have $5 million or more to commit, said Featherngill.
Investment income
Millionaires often have investment income in addition to earned income, and this might provide certain federal tax benefits. You might be able to take advantage of these tax benefits, provided you buy investment assets and profit from them.
Investment income can have a relatively low capital gains tax rate, provided you hold the investment for over a year. The capital gains tax rates are either 0%, 15%, or 20%, depending on your income and tax filing status.
If you do not own your investments for over a year, though, you will be taxed at the short-term capital gains tax rate, which is equal to your ordinary income tax rate. This tax rate can be up to 37%, depending on your tax bracket.
You could also reduce your capital gains taxes if you sell investments at a loss. These losses can be used to offset gains, potentially reducing your tax burden.
Learn more about how to avoid capital gains taxes on stocks and avoiding capital gains tax on home sales.
Step-up basis
The step-up basis is a fundamental way wealthy people avoid paying tax when their investments increase in value. When an asset is sold at a profit, it’s taxed. However, if the asset isn’t sold but instead passed on to an heir, then the asset’s value is adjusted to its worth at the time of the death.
Say, for example, a wealthy person bought an investment for $10,000, held onto it for a very long time, and its value went up to $100,000. If the person died, someone would inherit the investment. When they do, the stepped-up basis will adjust the value of the asset to $100,000. If the person who inherited then sold the asset the next day for $100,000, no capital gains taxes would be owed on it. So $90,000 in profits would have gone untaxed.
Anyone could take advantage of this tax benefit, provided they don’t sell assets that have increased in value but rather leave them to loved ones to inherit.
Trusts
Trusts are a key tool if you’re trying to determine how to avoid inheritance tax or estate tax. It’s possible to create an irrevocable trust and transfer assets into it. The trust becomes the owner of the assets, and the person who created the trust can name their heirs as the trust’s beneficiaries when they die.
Because the assets don’t pass through probate and aren’t inherited in the traditional sense, no estate or inheritance tax is owed. Anyone could take advantage of this, but creating a trust can be expensive, and it involves giving up some control over property. It’s also not necessary for most people because only a few states charge inheritance tax. And for the tax year 2021, estate tax at the federal level isn’t charged until the estate is valued at $11.7 million or higher.
Conclusion
A lifetime of careful tax planning is important to every millionaire. This book shows how they do it. More importantly, it shows you how to keep more of what you earn by reducing the taxes on the money you save and invest each year. “How Millionaires Avoid Taxes” contains proven methods for paying less tax legally!