A Winning Strategy for Planning Your Taxes
Every time you get issued a paycheck, approximately 1/4 of your pay (your gross earnings) is withheld to cover taxes. Wouldn't it be great if the money ordinarily withheld for federal, state, social security, and Medicare taxes could instead be invested to make you more money? The big corporations can get away with deducting most of their taxes. Why can't you? The answer, primarily, is that you just don't have the information on how to do so properly. Until now.
The large corporations all have entire accounting staffs working around the clock to find every way possible to avoid paying Uncle Sam any more than they absolutely must. These companies are permitted a heap of deductions based on the assumption that big business creates jobs and participates in activities beneficial to consumers and the government.
But there is a big difference between individuals and businesses - you don't need this article to tell you that. Just as there is a widening gap between the poor and the rich. Most average consumers do not add anything of substantial worth to their local or the U.S. economy. It is, therefore, that much more important that individual wage-earning taxpayers capitalize on whatever breaks are available to them.
For those who are both a taxpayer and a homeowner, the most common deduction taken is for interest paid on their mortgages. This is a benefit to any homeowner, unless that person bought a larger home or took out a higher mortgage than they could otherwise afford specifically based on the so-called "incentive" of a tax break on mortgage interest. This is paramount to buying an annual bus pass because each ride is cheaper that way, while ignoring the fact that you hardly ever take the bus.
With a bit of luck, this strategy could work out in some homeowners' favor, provided their house and neighborhood continually appreciate - but who wants to base their financial future on luck?
Before going any further, it would be prudent at this point to warn you of the numerous tax-related information products (books, ebooks, audio tapes, etc.) written by people convicted of tax fraud. If a book on saving in taxes (or how to pay zero taxes) spouts off on the constitution or makes strained legal interpretations - beware. There are plenty of legal ways to save money on your taxes, and beyond that, it's better pay the remainder than risk heavy fines (including back taxes, interest, and penalties) as well as possible imprisonment.
A common example of such activity occurs when someone comes into a big windfall through an inheritance, contest winnings, sale of a business, receipt of a large company bonus, or the exercising of stock options. Oftentimes, these folks are hoodwinked into having some offshore company invent a fictitious loss in order to offset the huge gain. In such cases, the IRS could (and would) easily track them down and make them pay.
It's far better to invest in vehicles with a positive cash flow (even better if it's a passive income) which qualify for an honest and valid tax break. If you buy enough investments like these, you could potentially reduce your liabilities to nothing. Be careful, though, of having too many investments of this kind. The IRS will limit carry-forwards of any tax losses, which could result in you losing some of those investments. Remember, too much of a good thing can become a bad thing. Discuss an appropriate plan with your financial advisor.
Two particularly useful deductions are oil well depletion and real estate depreciation. The government is keen to get consumers to invest in oil and real estate and therefore bestows generous tax breaks to those who do. In the meantime, you have the confidence of an investment with an inordinately high probability of turning a consistent and reliable profit.
The tax incentives for investing in real estate include: mortgage loan interest, property taxes, insurance premiums, maintenance expenses and depreciation.
Take a look at your federal tax form 1040. Add your itemized deductions in Schedule A to the Standard Deduction of about $3,000 and subtract that amount from the Adjusted Gross income listed. What's left tells you how much depreciation you'll need to accumulate in order to make this strategy work for you.
If you then take that number and multiply it by the number of years over which investment real estate is currently depreciated (29.5 years as of this writing), you come up with the purchase price of the real estate investment you should buy. Do keep in mind that you are limited to $25,000 annually in depreciation unless you are a qualified real estate professional according to IRS standards.
The Alternative Minimum Tax, incidentally, was put in place, at least in part, to prevent wage earners from taking too much advantage of this part of the tax code.
You don't have to invest in oil wells or real estate to benefit from this strategy, though. Simply stock up on an appropriate amount of legitimate investments with a positive cash flow, and you'll reduce your tax debt while simultaneously increasing your income - the ultimate result of which is a higher net worth.
Kenneth C. Kelly is the President of Strativia, a financial management software development and services company specializing in applications for personal and business use. Strativia is the developer of Budget Forecaster , a sophisticated home budget and personal finance management application. Website: www.strativia.com. Contact: info@strativia.com.
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