If You Can’t Beat ‘Em…Join ‘Em: Seven Ways Rich People Legally Reduce Their Tax Liability

For as long as the government has levied income taxes, there have been tax loopholes. One of the first, going back to the 1913 tax code, was the non-cash income exclusion. So, if your boss made your house payment, you didn’t pay income taxes on that portion of your salary.  

Alas, that loophole is long gone. But there are many others that many people frequently use. So, the IRS generally does not even ask questions.

Yacht or Second Home

If you have the cash to make one of these major purchases, you are almost certainly looking for ways to reduce your income tax liability. These items are extremely straightforward. Two houses mean two property taxes and other payments. To qualify for a similar deduction, the yacht does not need to be the Queen Mary. Any boat with a sleeping area, a toilet, and a kitchen will qualify. Unlike state income tax requirements, the IRS usually does not require a homestead or residential designation.

Whole Life Insurance

There is a very healthy debate among financial planners as to whether whole life or term life is the best overall deal. In the area of income taxes, the answer is easy. Whole life insurance combines an investment account with an insurance policy. Investments grow tax-deferred, much like retirement savings. Plus, under certain circumstances, the distributions are tax-free. Plus, upon the policy owner’s death, the beneficiary generally pays no taxes on the transfer.

Inherited Real Estate

In terms of capital gains taxes, the IRS calculates basis for inherited property as of the date of the prior owner’s death and not the date of purchase. Assume Frank bought a $100,000 home in 1980. By the time Frank died in 2020, due to improvements and market appreciation, the house’s value was $200,000. Frank’s heir could sell the house for $200,000 and pay no capital gains tax.

Investment Income

People in the top tax bracket usually pay 39 percent of their income in taxes. But the capital gains/rental income top tax level is usually 20 percent. Additionally, landlords may deduct their taxes and other costs as business expenses. Altogether, the tax savings could be significant. If the tenant steals some of your property, it’s not a total loss, because you can deduct these losses as well.

Hire Your Children

If business owners hire their under-18 children, the owner does not have to pay Medicare or Social Security taxes. Some restrictions apply in terms of the type of business entity (e.g. sole proprietorship, partnership, etc.), the type of work done, and the salary amount.

Business Expense Deduction

Owners may deduct almost any expense tangentially related to their business as long as have these costs reimbursed under an accountable plan:

  • Business Travel Expenses: Commuting expenses and daily parking are not deductible. But other business travel costs, including the costs incurred meeting clients, traveling to meetings, and going between job sites, are fully deductible.
  • Mileage: If you use your car for business purposes, the 2019 mileage deduction was 58 cents per mile. A few years ago, the IRS added a flat rate option for those who are not too good with record-keeping.
  • Work Travel Expenses: If you leave home for a work assignment that lasts less than a year, most of your living expenses are deductible. That includes taxi fares, plane tickets, mileage costs, meals, laundry, and telephone service.

Other common deductions include home-office deductions, union dues, and professional fees. These are just a few of the ways your clients can legally reduce their income tax bills.

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