Learn How You Can Benefit From Tax Shelters
Originally Posted by Thomas (TJ) Underwood on April 3, 2014
As the 2013 tax filing season comes to an end many consumers have posed the question as to how they can more effectively shelter their income from taxes.
In this discussion we will discuss highly effective ways that you can shield your income from the tax bite. Be sure to comprehend and apply what you feel will work for you and your family—as by doing so you can keep more of your hard earned cash in your and your family’s hand!
Common Tax Shelters (for personal tax returns)
- Rental Properties (residential investing)
- Pass-Through Business Losses (sole proprietor, partnerships etc.)
- Tax Efficient Investing (stocks, bonds, mutual funds, ETF’s, IRA’s, 401k’s, 403b’s, 457’s, thrift plans etc.)
Rental Properties as Tax Shelter
Rental property income that you earn during the year can be offset against rental expenses and when you combine that with the depreciation deduction that you receive on an annual basis you can actually end up with a loss that you can offset against your income for the year—thus lowering or possibly eliminating your taxes owed for the year—depending on your own unique tax position!
If you were Married Filing Jointly and in 2013 you had:
Income $60,000 less rental loss on tax return of $3,000 less itemized deduction of $20,000 less personal exemptions of $7,800 means that taxable income for 2013 would be $29,200 instead of $32,200.
The rental loss of $3,000 has the effect of lowering the taxes for the individual listed above based on $60,000 of annual income. By effective planning the individual listed above could (if they were in the right financial position) increase the number of rental properties owned and possibly bring their taxes down to zero.
Keep in mind that this is a simplistic example as other caveats may be present. After a number of years they could choose to sell (depreciation recapture would normally apply and the gain would be taxable), refinance and pull money out tax free or continue renting out the properties and earning rental income.
Business Losses as Tax Shelter
Another tax shelter that is available is that of a business loss from a sole proprietor or partnership that is taxed on the individual tax return. As a sole proprietor or partnership you open a business and for the first few years of operations you operate at a loss. That loss can be deducted on your personal tax return if you operate as a sole proprietor or partnership.
Using the same $60,000 of income listed above your taxes would be as follows:
Income $60,000 less business loss on tax return of $6,000 less itemized deduction of $20,000 less personal exemptions of $7,800 means that your taxable income for 2013 would be $26,200 instead of $32,200. In effect your taxable income was lowered by $6,000!
The business loss (keep in mind that you may have unlimited liability if you are a sole proprietor, therefore you must use this strategy with caution—you must know the potential risks involved and decide if the risk is something that you are willing to live with based on the type of business that you have) of $6,000 has the effect of lowering the taxes for the individual listed above based on $60,000 of annual income.
By effective planning you could deduct the business loss on your taxes for the first few years of operations until the business started turning a decent profit.
Once the business was profitable you could go to a corporate type of ownership that would provide you with better liability protection and possibly a better tax structure and thus the lower payment of taxes during your profitable years.
Tax Efficient Investing as Tax Shelter
Even though you can’t eliminate all of your investment related taxes—there are things that you control that can actually help you lower the taxes on your investment income!
You must ask yourself—how does taxes and annual fees that I have control over affect my long-term investment horizon?
It is important that you realize that different types of investments are taxed differently depending on the type and whether they are held inside—or outside of—your retirement account!
It is important that you realize that the earnings from the following are taxed differently:
- a taxable brokerage account that contain stocks, bonds, mutual funds etc.
- tax-deferred accounts that contain stocks, bonds, mutual funds, IRA’s, 401k’s, 403b’s, 457’s, thrift plans, ETF’s etc.
- a tax-free ROTH
Also, it is important that you withdraw from the above accounts in a manner that will minimize the taxes that you will pay.
Generally speaking you want to withdraw from your taxable account first (taxed at your ordinary income or capital gains rate) then your traditional IRA (mandatory withdrawals required at age 70.5 and taxed at the ordinary income tax rate—unless you had non-deductible contributions) and then your ROTH (no mandatory withdrawals required—particularly effective if you expect to be in the same or a higher tax bracket during your retirement years).
The key benefit of investing inside of your retirement account is the tax-deferred compounding that you will receive for a number of years (until you decide to withdraw—at which time they will be taxed at your ordinary income tax rate).
For that reason—you must know the types of investments that are best suited inside—or—outside of your retirement accounts!
Be aware of index funds that invest in sectors, small companies, bonds, a particular country or EFT’s as they have the real potential to have a higher turnover than traditional index funds that are normally tax-efficient outside of your retirement account.
Other key tax moves are to consider the holding period—short versus long—when you are selling your stocks, bonds or mutual funds held outside of your retirement account.
In addition be sure to do your annual re-balancing on investments that are held inside of your tax-advantaged retirement accounts for the same reason as investing inside of taxable accounts—you will have no tax consequence—no taxation at ordinary income rate for short-term investments and no taxation at the capital gains rate for long-term investments!
Those who fall into the lower income category can also shelter their income by contributing to a MyIRA, 401k or other retirement accounts and receive a Retirement Saver’s Tax Credit. If married filing joint you must earn less than $60,000—if head of household less than $45,000 and if single less than $30,000!
If you are eligible and make the proper contributions you could receive a tax credit up to $2,000 if married filing joint and lower amounts if Head of Household or Single. As a credit it would reduce your taxes dollar for dollar but the credit is not refundable—meaning the credit could only take your taxes to zero.
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Final Thoughts on Tax Shelters
You must always realize that tax-time is only the beginning when it comes to your tax planning. You must consider the annual effect of your income, your expenses, your tax position and what you can do to reduce or eliminate the taxes that you may owe.
The Common Tax Shelters mentioned above are proven ways that taxpayers have reduced their tax burden for years and you can do the same. Be sure you hire competent professionals who can help you attain your future goals legally—but with a lower tax bill as the ultimate outcome. It is our desire that this discussion will help you minimize your and your family’s taxes in the future. You must actively engage your mind to find ways that you can lower your annual taxes.
Always realize that the higher your income the more you can benefit from tax-shelters—generally speaking.
With the top tax rate now at 39.6% on ordinary income and 20% on qualified dividends—tax shelters are more important than ever. Keep in mind that the higher your income, the more potential tax shelters that you also have at your disposal.
If you are a high earner you also now have to pay a 3.8% surtax on certain investment income so use tax shelters appropriately—based on your own unique situation.
When you consider utilizing any of the tax shelters mentioned above you must realize that your personal situation will be the key to selecting an approach that will work best for you and your family.
TheWealthIncreaser.com began in January of 2014 with the goal of enhancing the financial future of consumers in an intelligent, consistent and proactive manner so that consumers could achieve real financial success in the most efficient manner possible.
TheWealthIncreaser.com is the creation of Thomas (TJ) Underwood who is a former fee-only financial planner, former top producing loan processor and is currently an active real estate broker at Realty 1 Strategic Advisors and who has been serving consumers in the area of finance—for over 20 years!
A pioneer in the real estate industry his company is one of only a handful of real estate companies in existence that offer clients comprehensive financial planning as a part of the home buying and home selling process as a complimentary service.
You will usually find him assisting home buyers, home sellers and those who are trying to improve their financial position in the Atlanta Metropolitan area and throughout the world improve their finances in an intelligent, consistent and proactive manner.
He is also the Author of The Wealth Increaser—an empowering new book that is now available on this site ($29.95) to help consumers achieve success in an intelligent, consistent and proactive manner.
He considers it an honor to use his rare combination of experience as a former fee-only financial planner, former top-producing loan processor and current position as an active real estate broker serving the Atlanta Metropolitan area to provide consumers enlightening personal finance systems and approaches that they can implement in their life that will provide them the opportunity to achieve what they truly desire in the most efficient and effective manner possible.
About This Article:
The above article was written by Thomas (TJ) Underwood on April 3, 2014. Thomas (TJ) Underwood is a licensed real estate broker in the state of Georgia and is the writer behind The Wealth Increaser, Home Buyer 411, Home Seller 411, The 3 Step Structured Approach to Managing Your Finances, Managing & Improving Your Credit & Finances for this MILLENNIUM and CREDIT & FINANCE IMPROVEMENT MADE EASY—FREE GUIDE.
He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner. He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future.
You can contact him from a number of sources but the most direct way is to contact him through Realty 1 Strategic Advisors Website. You can contact him from a number of sources but the most direct way is to contact him through Realty 1 Strategic Advisors Website. You can also get other highly relevant tips on “living your life more abundantly” and possibly earn revenue at the same time by linking to TheWealthIncreaser.com.
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