Legal Strategies to Reduce Income and Lower Tax Liability
The process of reducing your income and lowering your tax liability can vary significantly by country. This guide is specifically designed for individuals in the United States, but the principles can be applied globally. Consulting a professional accountant can be invaluable for navigating the complexities of the tax code.
Overview of Legal Tax Strategies in the United States
In the US, there are legal ways to reduce your taxable income and consequently, your tax liability. These strategies involve understanding the current tax code, utilizing all available deductions, and making informed decisions about income and investments.
Borrowing Against Assets
One of the innovative ways to legally lower your tax liability is by borrowing against assets that are not taxable. For instance, highly wealthy individuals often borrow against their assets, such as real estate, without incurring any immediate tax liability. As long as the asset is not sold, the debt and its associated wealth remain untaxed.
This strategy can be particularly effective if the primary income source is from assets that do not generate taxable income. For example, real estate investments do not create capital gains until they are sold, providing a means to accumulate assets without immediate tax consequences.
Increasing Property Wealth
Another effective strategy is increasing property wealth through the purchase of commercial or investment property. In New Zealand, as mentioned, owning rental properties can provide tax-free gains if held for a significant period. The appreciation in property values over time can be substantial, and if structured correctly, can lead to significant tax savings.
For example, consider an individual or a company in a multibillion dollar firm. They might use the proceeds from one investment to purchase commercial property, turning it into a retention strategy rather than an immediate cash flow generator. This can lead to substantial long-term gains, provided the property is managed effectively.
Reducing Income through Losses
Another adept way to manage your tax liability is by taking losses that you might have otherwise avoided. Selling shares at a loss can provide capital losses that offset capital gains, thereby reducing your overall tax burden. Additionally, reviewing and utilizing all available deductions can help in reducing your taxable income.
If you manage to earn less, you naturally have a lower tax liability. This can be achieved by taking strategic losses and completely offsetting any gains. It’s also beneficial to look into all the available deductions that are legally applicable to your situation. For instance, homeowners can deduct mortgage interest and property taxes, which, in the early years of a mortgage, can provide substantial tax savings.
Stay Informed and Utilize the Latest Deductions
Staying informed about the latest tax code changes is crucial. Many people, even neighbors, fail to take advantage of available deductions due to a lack of knowledge. It’s important to be proactive and consult with a professional accountant who can help you navigate the complexities of the tax system.
An example can be highlighted where a neighbor was unaware of their eligibility to declare mortgage interest and property taxes as deductions each year. Despite being on a 30-year mortgage for 13 years, they had not claimed these deductions, potentially missing out on tens of thousands of dollars in savings. It would be too late to refile past tax years, but it was essential to adjust their practices for future filings.
Conclusion
To effectively manage your tax liability, it is crucial to understand the nuances of the tax code and explore all available legal strategies. Whether it’s leveraging borrowed funds against assets, investing wisely in property, or strategically utilizing deductions, taking a proactive approach to your finances can significantly reduce your tax burden. Consulting a professional accountant is highly recommended for personalized advice that can help you maximize your savings and minimize your tax liability.