One aspect of personal finance that I haven’t studied much is taxes. Specifically how to pay as little taxes as possible, better known as tax avoidance. I decided that it was time to change this so I recently read a book about outsmarting the system, written by a former IRS agent who’d performed hundreds of income tax audits.
While the book was a short read it held valuable information and was right to the point. Here were the three best ways to beat income taxes.
Become a Business Owner
According to the author being a business owner had numerous benefits over being an employee.
For instance, take an employee who provides web design. He has taxes taken out of his paycheck and receives a W-2 at the end of the year. The second person provides freelance web design. This person can write off all the expenses of his business – car mileage, home office usage, cell phone service, internet, and business dinners among other things. He can also contribute a considerably larger amount of money in a SEP IRA than an employee can in a 401k. While the employee had the same types of costs he can’t write off any of them.
The business owner has the advantage in being able to write off his expenses and will come out ahead of the employee.
Become a Landlord
I don’t doubt the fact that being a landlord can be tough. Especially when it comes to finding and dealing with tenants.
However, real estate is something that I have always been interested in so I was glad to see this on the list. As a landlord you can deduct thing such as property insurance, taxes, maintenance, repairs, and other related fees on your income tax return. In addition you can also depreciate the cost of residential buildings – which is pretty great considering we count on most homes to appreciate in price.
The home (excluding the value of the land) can be depreciated over 27.5 years. This means that your rental profits can often be cancelled out by depreciation leaving you with no tax to pay on the rental income.
Become an Investor
During the last presidential election Mitt Romney came under fire for having an effective tax rate of 13.9 percent on his 2010 income tax return. How did he manage this? By being an investor!
According to the author investing in state or municipal bonds, qualified dividends, and long term capital gains in your personal investment accounts will help you beat income taxes and achieve financial freedom at a faster rate.
State and municipal bonds provide tax exempt income. And qualified dividends and long term capital gains (capital assets held for more than a year) will be taxed at a lower rate than your normal tax bracket.
Final Thoughts
Generally speaking the more money you earn the more taxes you’ll pay. However, if you plan smart you can avoid paying more income taxes than necessary.
If any of these ideas sound like a good match for you do some research and see how they can be integrated into your financial plan for the future.
How do you keep your income tax rate low?
Leonard @ The Wallet Doctor says
Its always surprising to me how few freelance workers end up paying a lot of taxes. You would think without money being regularly taken out of their check, they would need to pay up, but it almost never works out that way. Thanks for the interesting post!
Jared says
Sounds interesting! What was the name of the book? Thanks!
Alexa says
It was “Outsmarting the System”