Tax Avoidance Strategies for Higher Earners in 2021
Tax remains one of the largest expenses of any business. So where can we get expert tax advice? We want to minimize our business taxes and protect our profit from the government as much as possible. Over the past few months, news broke out that Trump paid a total of only $750 in tax. What do we even begin to do with that information?
The truth is, the government is actively helping business owners cut business costs through different strategies and deductions. We see that happen mostly in tax savings. For example, if the government wants us to provide more homes people can rent, they will put out credits for us to purchase more rental properties. If they need us to buy new equipment and pour money into the economy, the government improves bonus depreciation credits.
We also see the government nudging business owners along, especially during the pandemic. Because they need people employed, they devised payroll protection to encourage owners to hire more people or keep their current employees on. The paycheck protection program provides loans to business owners that could be forgiven.
What Is a Tax Strategy?
Tax strategy analyzes your business structure, payroll, and income expenses. It works as a way for us to reduce our taxes and pay the lowest amount of tax as morally and legally possible. We want to maximize our credit or turn personal expenses into business deductions instead.
An excellent tax strategy is not just a plan of action designed for months. It should be a long-term plan for your financial future designed with years, if not decades, in mind.
We have tax laws that people take as the government’s way of making us pay more. That isn’t the case. Nine percent of the tax law focuses on credits or deductions for business owners. Only one percent of the law covers income.
Having a solid grasp of the tax law helps you craft smart tax strategies. Once you know the law like the back of your hand, you can find things in there that can benefit you in the long run.
Check out this video if you want to learn more about tax strategies and how they can help you pay the least tax as legally possible.
Best Tax Strategies for High-Income Earners
Using the right tax strategies can protect your profit from the government. We all know there are thousands of tax loopholes and strategies out there. Trump only paid $750 in taxes, and everyone is righteously irritated by that. Amazon didn’t pay any taxes. There are strategies hidden in the tax code that all business owners use to pay less taxes.
However, if you apply these strategies, you can also ensure that most of your hard earned profit remains untouched by the government too.
Use Cost Segregation
Property owners use cost segregation to accelerate their depreciation. By doing so, they can reduce their federal income taxes for years. Not only do you see a reduction in your current tax liability via cost segregation, but you can also enjoy a significant increase in operating cash flow.
A typical cost segregation study takes 30 to 60 days to complete. However, you can opt to expedite the process, depending on the provider and time of the year. Your personal property assets get identified and separated from real assets. Once your property assets are reclassified, this shortens the total depreciation time. You can have a more organized tax reporting and enjoy years of decreased taxes.
The Protecting Americans From Tax Hikes Act of 2015 contained provisions that favor business owners with qualified research and development (R&D) expenditures. Business owners that heavily rely on R&D can take advantage of these provisions. You can use the R&D credit for increasing research activities and claim it against payroll taxes or alternative minimum tax.
Business owners must determine which projects or activities qualify for the R&D credit. Industries that typically qualify for the R&D tax credit are software development, engineering, pharmaceuticals, manufacturing, and communications. If your business is within these industries, you can significantly benefit from claiming R&D tax credit to reduce payroll taxes further.
Section 179 offers an incentive for small business owners to scale their business by purchasing new equipment. Business owners can list the new equipment’s total cost as expense deduction, providing relief on the tax burden.
While the expense deduction is limited to office equipment, computers, cars, and other business-related machinery, the tax break Section 179 provides is almost instantaneous. This greatly benefits business owners who need to buy starting equipment.
Although the equipment bought must conform to Section 179’s specifications, and the deduction must be within the code’s allowable amount. There’s also a chance that the equipment covered by the code qualifies for bonus depreciation, further reducing the tax bill.
Deduct Travel Expenses
Travel expenses can be deducted from your business taxes. We advise business owners to combine personal travel with legitimate business purposes. You can also redeem flyer miles from all of your business trips for personal travel later on.
Restructure Your Business
Reduce your taxes by switching to Limited Liability Company (LLC). Restructuring your business means eliminating the employer-half of paying Social Security and Medicare taxes. While there can still be risks in changing your business structure, this is one of the best ways business owners can minimize their taxable responsibility.
Save Money for Healthcare
Putting aside money for healthcare reduces taxes significantly. Having a Health Savings Account (HSA) reduces taxes and any associated medical expenses. Plus, having coverage for unexpected healthcare needs is never a bad thing.
Sean Moore, chief finance officer of Smart College Funding, explains the triple tax advantage of HSA. Your contributions are considered pre-tax. They grow tax-free, and any withdrawals for medical expenses are also free of tax.
Employ Your Family
One of the unorthodox pieces of advice we can give you is to hire a family member. The Internal Revenue Service (IRS) provides different options that can protect your income from huge taxes. One of those is hiring family members. By doing so, you can pay a lower marginal rate and eliminate the tax on your family member’s income.
Purchase Municipal Bonds
We recommend investing in tax-exempt bonds such as municipal bonds. When you purchase a municipal bond, you also lend money to the issuer in exchange for interest payments. Once the bond is mature at the end of the given period, the original investment is returned to you.
The income you receive from municipal bonds is exempt from all income taxes, including interest payments. While you earn less income with municipal bonds than other taxable bonds, it can still help you reduce your tax responsibility significantly.
Sell Inherited Properties
Selling inherited real estate right away saves you a lot on property taxes. Look at it this way. If your parents bought a house for $300,000 and it is now worth $850,000, they would have paid capital gains on $550,000. They will then be required to pay property taxes based on that amount, limiting any potential growth from the sale.
However, if you sell the property soon after you inherit it, not only do you save money on property taxes, but you also maximize your inheritance to the fullest extent.
The truth is, contrary to what everyone believes, business owners and investors pay a lot less tax than anyone else. Once you know the tax code’s ins and outs, you can easily find hidden strategies you can use to minimize your taxes. Maximize your income and protect your profit. Make wise financial decisions that’ll keep your money growing instead of depleting it.
In This Video
What if I told you that you could add more people to your team? Purchase updated equipment? Afford high end marketing? With the tax strategy laid out in this episode, you will discover that it is possible to reallocate funds to the things that really matter for your business. Carlotta Thompson is the tax expert who helps make it happen.
Carlotta decided to launch her own business after years working for the IRS, because her passion was to help business owners protect their hard-earned profit from unnecessary expenditure. Because she is well-versed in tax law, she knows the tax saving strategies, credits, and deductions for high income earners that could have you paying less tax than Trump. “
In this world nothing can be said to be certain, except death and taxes.” But taxes don’t have to be the death of your business. With Carlotta to help you crack the tax code, you no longer have to deliberate about where you can get expert tax advice.