HOW THE RICH HIDE THEIR MONEY AND PAY NO TAX

 

      

      Rich people aren’t rich just because they make a lot of money – they’re rich because they know how to avoid paying taxes, the legal way of course.

     

      Sometimes it’s not how much money you make, but how you treat it so you can minimize your tax liabilities, keeping more money in your pocket.

 

      You work hard for your money so it makes sense to avoid paying taxes as much as possible. This doesn’t mean rich people don’t pay taxes or they hide their money.  

 

      They are just as honest as the rest of us – they just know how the system works and what avenues they can use to avoid paying taxes.

 

     Are you ready to act like a rich person and avoid paying taxes too? Here’s how. But before we get started, give this blog post a support and here is a disclaimer,  

 

      This is not financial advice, and everything that’s said in this blog post is for educational and entertainment purposes.  And now let’s get into the back to blog post. 

 

FOUCUS ON LONG-TERM CAPITAL GAIN FOR LOWER TAX RATES

 

     Capital gains are profits you earn from selling an asset for more than you paid for it. That’s the idea of investing – you want to make more money, but at what expense?  

 

     With Uncle Arun holding out his hand, it takes away from the excitement (and point) of investing. There are ways to lower your tax liability though by focusing on long-term capital gains.

 

     Short-term capital gains are any profits earned on investments you held for less than one year. These profits fall under your ordinary tax rate, which is much higher than the long-term capital gains tax rate.

 

     You didn’t let your money sit for very long and made a quick profit – the IRS wants its share of that revenue since you really didn’t give anything up to get it. Instead of investing for a few months or even 11 ½ months, keep your investment for over one year.  

 

     The IRS awards you with a much lower tax rate of either 0%, 15%, or 20% depending on your income. They do this because you gave up your money for a longer period – you took a higher risk and now you can pay lower taxes on the profits because of it.

 

     The amount you pay varies based on your income.  Single filers with less than $40,000 taxable income or married filing jointly with $80,800 income pay 0% on their long-term capital gains whereas single-filers with taxable income over $441,450 and married filing jointly with $501,600 annual income will pay 20% on their long-term capital gains.

 

      You can offset your tax liabilities even further too. If you have capital losses, they can offset your capital gains, decreasing your tax liability even further.

 

     Many rich people use this strategy to decrease the taxes on short-term and long-term capital gains. Watch your threshold though. If you go over $3,000, you’ll carry the loss over into future years.

 

MODIFY INCOME (take a smaller salary and pay yourself in dividends)

 

      Rich people often own their own businesses so are in charge of their income. This offers an incredible advantage because you can modify your income to lower your tax liability.  

 

      In other words, you take a smaller salary, but pay yourself in dividends. When you have a smaller salary, you have less ‘ordinary income’ which is taxed at the highest rates.

 

      The more money you make, the higher tax rates you pay, with the highest rate in 2021 being 37%. If you don’t pay yourself a salary, you can still make money without incurring large tax liabilities.

 

     Figure out how much money you must pay yourself to live, and then use the tactics the rich use to pay themselves without getting hit with the higher tax rates:

 

     PAY YOURSELF IN DIVIDENTS

      You’ll earn profits from the company without drawing a salary. Dividends are taxed at the capital gains rate, so you can save money by paying no more than 20% on your dividends versus the much higher ordinary income tax rate. 

 

      Or Pay yourself in stock options. Paying yourself with stock options gives you the chance to exercise your right to buy stock when you want. 

 

      This tax-reducing tactic allows you to control when you pay taxes since you don’t pay the taxes until you exercise the option.

 

 

TAX DEFERRAL (retirement accounts)

 

     Tax deferral isn’t an uncommon way to lower your tax liabilities, but the rich can max out their contributions so they minimize their tax liability as much as possible.

 

     Deferring your tax liabilities by investing in your future sets you up for a successful retirement. Knowing how to max out your tax deferral is important, here’s how:

 

TRADITIONAL 401K ACCOUNTS – If you work for someone and they sponsor a 401K account, you can contribute as much as $19,500 per year.

 

      That means you can defer up to $19,500 of your salary from taxes since you contribute to your 401K before taxes.

 

      The money then grows tax-free until you withdraw it in retirement, but even then you can use strategies to reduce your tax liabilities.

 

TRADITIONAL IRA ACCOUNTS – If you don’t work for someone offering a 401K, you can open an IRA.

 

      While the limits are much lower than a 401K, you can still defer some of your earnings to avoid taxes for now. In 2021, the IRA max contribution is $6,000 per year.

 

SELF-EMPLOYED IRAS– If you own a business, you may be eligible for a Solo 401K. But The contribution limits are much higher (up to $57,000 in some cases), allowing you to defer even more income.

 

     Keep in mind to check out the fine print and what legalities you’re up against if you open these accounts.

 

CHARITABLE CONTRIBUTIONS -- Giving money to charity has always been a great way to lower your tax liabilities, but only the rich seem to take advantage of it.  

 

      If you regularly give to charity or can give to charity, it may help you lower your tax liability. We aren’t just talking about typical charitable contributions, though.

 

      This isn’t the type you write a check for or give a wad of cash. Instead, we’re talking charitable contributions of your investments.

 

      Believe it or not, charities accept investments as contributions, and both you and the charity benefit. 

 

     Rather than selling the asset, taking the cash, and contributing, you contribute the investment directly to the charity.

 

      This does two things: You don’t have the hassle of selling the asset, hoping for a profit, and waiting for the money to contribute to your chosen charity.

 

      You avoid the long-term (or short-term) capital gains taxes you’d earn if you sold the asset for a profit. Saving 20% on the transaction means more money in your pocket and therefore the charity’s pocket too.

      Charities can decide how to handle the asset, whether they sell it right away or keep it in the hopes that it continues to appreciate, giving them an even larger donation.

 

OPEN AN IRREVOCABLE TRUST -- A trust protects your assets from lawsuits or anyone coming after you for money, but only an irrevocable trust helps reduce your tax liability.  

 

      With an irrevocable trust, you transfer the funds into the trust, which is not in your name. You cannot touch the assets in there since you no longer own them.

 

      That sounds harsh, but here’s the benefit – since they aren’t in your name, you don’t pay the taxes – the trust does. This lowers your taxable income and therefore your tax liability.

     

     The exception to the rule, however, is if you take income from the trust. If you set it up so you receive annual income (which isn’t unusual), you’ll owe taxes on the earned income, but it’s generally much less than the amount in the trust, which means a lower tax liability.

 

     Bottom Line is If you’re trying to lower your tax liabilities – it’s time to think outside the box. We are all programmed to make money, pay our taxes and live life, but what if you could keep more of that hard-earned money in your pocket?

 

      It’s possible with a few simple tweaks in your financial plan. Whether you pay yourself less, contribute more to your retirement, contribute to charity, or invest smarter, you can keep your tax liabilities down and either have more money in your account today or when you retire.

 

      The key is to know what options are available to you considering your financial status. If you’re ready to learn how to save more money on your taxes, implement these steps and see how different your finances look both now and at tax time.