11 Ways to LEGALLY Pay Less in Taxes:
1. 1031 Exchange
A 1031 Exchange is when you legally defer paying taxes on the gains or profits of highly appreciated real estate investments.
You essentially swap 1 real estate investment property for another.
But beware, there are many rules and exceptions.
A 1031 Exchange is when you legally defer paying taxes on the gains or profits of highly appreciated real estate investments.
You essentially swap 1 real estate investment property for another.
But beware, there are many rules and exceptions.
Some of these rules include:
- Properties exchanged must be like-kind
- You must have an intermediary
- Within 45 days of the sale, you must designate the replacement property
- You must close on the new property within 180 days of the sale of the old property
- Properties exchanged must be like-kind
- You must have an intermediary
- Within 45 days of the sale, you must designate the replacement property
- You must close on the new property within 180 days of the sale of the old property
2. Primary Residence Capital Gain Exclusion
You can defer paying taxes on up to $500,000 of gains if married filing jointly ($250k if single).
The primary rule includes:
- You must have owned & lived in your home for 2 out of the last 5 years
You can defer paying taxes on up to $500,000 of gains if married filing jointly ($250k if single).
The primary rule includes:
- You must have owned & lived in your home for 2 out of the last 5 years
3. S Corps
An S Corp is a tax classification.
So if you have an LLC, consider electing S Corp status to save money on taxes.
S Corps help you save on:
- Self-employment taxes (social security & Medicare)
In fact, for every dollar you make, S corps could save you up to 15.30%
An S Corp is a tax classification.
So if you have an LLC, consider electing S Corp status to save money on taxes.
S Corps help you save on:
- Self-employment taxes (social security & Medicare)
In fact, for every dollar you make, S corps could save you up to 15.30%
With an S Corp, you can reduce your salary.
Salary requires payroll taxes.
As long as you take a "reasonable" salary from your business's profits, you could save money on payroll taxes.
And you can take the remainder as distributions, which aren't subject to payroll taxes.
Salary requires payroll taxes.
As long as you take a "reasonable" salary from your business's profits, you could save money on payroll taxes.
And you can take the remainder as distributions, which aren't subject to payroll taxes.
4. HSAs
HSAs offer a triple tax benefit - if you have a high-deductible health plan.
You get a:
- Tax deduction on contributions
- Tax deferral on investment growth
And as long as you withdraw money for qualified medical purposes, you will never have to pay taxes.
HSAs offer a triple tax benefit - if you have a high-deductible health plan.
You get a:
- Tax deduction on contributions
- Tax deferral on investment growth
And as long as you withdraw money for qualified medical purposes, you will never have to pay taxes.
5. Solo K
A Solo K is a 401k that is available to business owners with no employees.
You can make contributions up to the maximum 401k contribution limit ($66,000) as both an employee & employer.
A Solo K is a 401k that is available to business owners with no employees.
You can make contributions up to the maximum 401k contribution limit ($66,000) as both an employee & employer.
Solo K's also allow the spouses of business owners to contribute up to the maximum annual 401k limit.
That's as long as the spouse earns income from the business.
So in theory, both spouses could save up to $66,000 per year.
That's as long as the spouse earns income from the business.
So in theory, both spouses could save up to $66,000 per year.
6. Defined Benefit Plan (DBP)
If you're:
- Self-employed
- Making a lot of money
- Want to save a lot in taxes
Consider opening a DBP.
In 2023, you can contribute up to $3.4M in some DBPs.
If you're:
- Self-employed
- Making a lot of money
- Want to save a lot in taxes
Consider opening a DBP.
In 2023, you can contribute up to $3.4M in some DBPs.
DBP contribution limits are typically:
- Actuarily calculated
- Based on age & income
DBPs allow for:
- Tax-deferred growth
- Tax deductible annual contributions
- The ability to roll over your benefits to an IRA at retirement
- Actuarily calculated
- Based on age & income
DBPs allow for:
- Tax-deferred growth
- Tax deductible annual contributions
- The ability to roll over your benefits to an IRA at retirement
7. QCDs
If you're:
- Nearing your RMD age (73 in 2023)
- Expecting to pay a lot in taxes
- Don't need the RMD money
- Charitably inclined
Then a QCD might be right for you.
If you're:
- Nearing your RMD age (73 in 2023)
- Expecting to pay a lot in taxes
- Don't need the RMD money
- Charitably inclined
Then a QCD might be right for you.
With QCDs, you can directly gift your RMD to a charity (up to a maximum of $100k/yr) and not pay a penny in taxes.
The key to QCDs is that you do not take receipt of your RMD first.
The RMD must be sent directly to the charity from your IRA to avoid paying taxes.
The key to QCDs is that you do not take receipt of your RMD first.
The RMD must be sent directly to the charity from your IRA to avoid paying taxes.
8. Employ Your Kids
Business Owners Listen Up.
If you have kids under 18, you can:
- Employ them
- Pay them $13,850/yr tax-free
- Deduct your kids' salary from your taxable income
When you employ your kid, that's a business expense.
And business expenses are tax deductible.
Business Owners Listen Up.
If you have kids under 18, you can:
- Employ them
- Pay them $13,850/yr tax-free
- Deduct your kids' salary from your taxable income
When you employ your kid, that's a business expense.
And business expenses are tax deductible.
When you hire your kids and pay them $13,850/yr:
- Your kids won't owe income taxes
- You don't have to pay taxes on the $13,850
- You can open a custodial Roth IRA for your kid, invest up to $6,500 cash, and build long-term wealth
Your kids will thank you later
- Your kids won't owe income taxes
- You don't have to pay taxes on the $13,850
- You can open a custodial Roth IRA for your kid, invest up to $6,500 cash, and build long-term wealth
Your kids will thank you later
9. DAFs
Anyone can open & invest in a DAF in America - online.
You would receive an income tax deduction in the year of the contribution.
Once you've contributed to a DAF, you can invest your money.
And in the year of the contribution, you'll get your income tax deduction.
Anyone can open & invest in a DAF in America - online.
You would receive an income tax deduction in the year of the contribution.
Once you've contributed to a DAF, you can invest your money.
And in the year of the contribution, you'll get your income tax deduction.
Here's how you could get a tax deduction:
- Non-cash assets = up to 30% AGI deduction
- Cash = up to 60% AGI
- Non-cash assets = up to 30% AGI deduction
- Cash = up to 60% AGI
10. Tax Loss Harvesting (TLH)
You can cut your tax bill with TLH.
Here's how:
- Sell an investment at a loss
The loss can reduce your:
- Taxable gains
- Ordinary income (up to $3,000)
You can cut your tax bill with TLH.
Here's how:
- Sell an investment at a loss
The loss can reduce your:
- Taxable gains
- Ordinary income (up to $3,000)
Just beware of the wash sale rule:
You cannot sell a stock at a loss & then repurchase it within 30 days. Otherwise, the initial loss cannot be claimed for tax purposes.
You cannot sell a stock at a loss & then repurchase it within 30 days. Otherwise, the initial loss cannot be claimed for tax purposes.
If your losses are greater than gains, you can carry the losses forward to future tax years to offset income (or capital gains).
Let's say you:
- Recognized $30k of losses & $20k of gains in the same year
- You can use the $30k in losses to offset the gains.
And you owe no tax.
Let's say you:
- Recognized $30k of losses & $20k of gains in the same year
- You can use the $30k in losses to offset the gains.
And you owe no tax.
11. Muni Bond Investing
Generally speaking, income earned from muni bonds is exempt from federal income tax.
Here's a general rule of thumb: If you're in the 32% tax bracket or higher, you should probably consider muni bonds as an investment vehicle producing passive income.
Generally speaking, income earned from muni bonds is exempt from federal income tax.
Here's a general rule of thumb: If you're in the 32% tax bracket or higher, you should probably consider muni bonds as an investment vehicle producing passive income.
Keep in mind that I am no investment advisor or tax expert, so always talk to your financial professionals first before executing any of these strategies.
Thanks for reading!
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