Pay Taxes Like A Billionaire
The term "masstige" refers to the mass market production of prestigious products that only the wealthy could previously afford. Examples include more affordable models of BMW vehicles, such as the 1 Series sedans and X3 SUVs, smaller versions and lower-priced Tiffany jewelry or more entry-level versions of fashionable purse and shoe models from the likes of Coach and Uggs. (Taxpayers should be wary when a new "temporary tax" is introduced. Sometimes these temporary taxes are anything but. To learn more, see "Temporary" Taxes That Stuck.) IN PICTURES: Top 10 Solutions For A Big Tax Bill
Masstige has allowed a wider base of individuals to be able to shop like millionaires. In a similar vein, opportunities also exist to pay taxes like a billionaire and lower overall taxable income. Here is an overview of some strategies available to most taxpayers.
Own Your Own Business
Many wealthy individuals became so by hanging out their own shingles and starting their own businesses. Owning a business is one of the best ways to use tax strategies to your advantage as they can allow one to combine personal tax options with business ones, and being in control of both is definitely advantageous. Examples of tax benefits include expensing vehicle mileage, as it is an approved deduction for business owners, as is travel as long as it is for business purposes. There are also ways to hire family members in a tax advantageous way.
Own Real Estate
Owning real estate is another solid way to control and minimize taxes. Real estate can be depreciated and lowers taxable income, and expenses that go into maintaining and improving a rental property can be deducted, as can the travel costs to visit and maintain them. Rental property income is taxable, but if balanced with expenses can allow in additional overall income for property owners as well as the opportunity to benefit from real estate appreciation over time.
Earn & Save
One of the clearest benefits to being rich is that the need to draw job income from a regular (and taxable) salary can be minimal. Low income levels mean low tax rates. Currently, dividend income is taxed at 15%, although capital gains taxes are somewhat higher, so living off of investment income is an easy way to keep the tax hit low. To get to this point, maximize contributions to the below accounts while working to build a nest egg and eventually lower the reliance on a fully taxable salary.
With higher levels of discretionary income and savings comes the ability to sock away assets in accounts with tax benefits. Traditional individual retirement accounts (IRAs) defer taxes until age 70.5, which is when mandatory distributions start. The same goes for employee 401(k) plans and self-employment retirement plans.
Municipal bonds are generally exempt from local and state taxes. As such, they are especially helpful in high-tax states such as New York and California. Additionally, securities that are held for the long term are extremely tax-efficient because taxes are not due until they are sold. This allows them to appreciate and accrue what can be large unrealized gains.
Give Away More
Donating to your favorite charity is a great tax-saving strategy, and also serves important philanthropic purposes. Individuals can also give away $11,000 per year without having to pay federal gift taxes. And donating appreciated assets allows individuals to save on the taxes and also receive a deduction for the value of the asset, be it a stock or some type of real estate. (Being generous has never been more financially rewarding! Read Give To Charity; Slash Your Tax Payment.)
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Consider Professional Help
In many instances, it may simply help to hire an individual with more insight in navigating the complicated tax code. In addition, few people have the time to master the best ways to keep taxes lower, be it for individual or business purposes. It's best to a consult with a tax or attorney professional to ensure that unique circumstances are considered, and that certain exemptions or loopholes can be taken advantage of. The above examples could certainly use some verification if you would like to consider using them.
Other areas on which experts should be able to advise include: strategies to depreciate assets or business startup costs, how to know which business expenses carry the most bang for their buck or are truly expendable, or whether leasing or purchasing equipment is the most tax efficient. The right way in handling an audit is another important consideration that could come from an outside accountant or attorney.
The Bottom Line
Many of the above strategies are available to any taxpayer and may help sway certain individuals into starting their own business or investing in real estate, given the tax advantages that can become available. Certain strategies become more beneficial as wealth levels increase, but can also serve as motivation to get to the next level in terms of savings and wealth creation. (The number of taxes that we now consider a given did not always exist. Find out how they arose. Refer to The History Of Taxes In The U.S.)
Find out what happened in financial news this week. Read Water Cooler Finance: Steady Stocks, Big G's And Madoff News.