The richest of the rich are withholding more government money than even the IRS had estimated.
A recent study by the National Bureau of Economic Research found that Americans in the top 1% underreport their income by up to 20%, even far exceeding the agency’s own estimates of tax evasion by the wealthy.
This tax evasion costs the US government more than $ 175 billion a year, according to the report.
Tax evasion is a crime. It should not be confused with tax evasion, which is a perfectly legal strategy to keep your tax bill as low as possible.
When it comes to saving their money, no one does it better than the rich. Billionaire Warren Buffett and his accountants use a number of these tips to lower their own tax rate.
Here are some strategies you can adopt from the top earners when declare your taxes to keep more of your income.
1. Build a strategy around long-term capital gains
It’s a tip Warren Buffett relies on at tax time, according to Entrepreneur. There’s a reason investing, whether it’s in the stock market, real estate, mutual funds, or bonds, is associated with the upper echelon – it can be incredibly profitable.
In addition, you will benefit from a preferential capital gains tax rate (what you earn in addition to what you invest in your investments) for assets that you have held for more than a year.
What does it mean? The best and most profitable strategy for investing in stocks is a slow and steady approach whether you are a beginner or not.
Investing is not just for the rich. All you have to do to get started is download a low or no commission investment app this is good for beginners.
For example, there is an application that allows you invest your spare currency.
2. Invest in municipal bonds
Bonds are basically like loans you give to the state or local government. Bonds are assigned maturity dates for a predetermined period of time, after which you can redeem the full amount of your original investment plus interest.
This interest is exempt from federal taxes, as well as certain state and local taxes, depending on where you live.
You can also take out corporate bonds, where you essentially lend money to a company. While corporate bonds tend to pay higher interest rates, municipal bonds are a safe way to invest your money, earn returns, and keep more of your earnings.
3. Make the most of your retirement accounts
Preparing for retirement can be an overwhelming process. Just thinking about how much money you will need can be intimidating. But if you ask for professional help, it will look much more manageable.
By maximizing your contribution limits for your 401 (k) or 403 (b), you can lower your taxable income – it’s a win-win.
Don’t have a workplace pension plan? You can still get tax relief by contributing up to $ 6,000 (or $ 7,000 if you’re 50 or older) into a traditional individual retirement account (IRA), which could then reduce your taxable income.
4. Use a health savings account
If your health insurance plan has a high deductible, you can use a health savings account to lower your taxes. It works like a 401 (k) where you put funds into the account before taxes.
In 2021, the maximum deductible contribution level is $ 3,600 for individuals and $ 7,200 for families. Once you transfer this amount into your account, it can earn interest and grow without you having to worry about paying income tax.
You will also not have to pay tax on withdrawals from eligible medical expenses.
5. Take advantage of new laws and tax credits
While tax changes that benefit Warren Buffett may not also benefit you, it’s never a bad idea to stay on top of new laws, increases, or cuts. Some tax credits reduce your tax payable, while others reimburse you, such as the child tax credit.
When you go to file your income tax return, make sure you don’t have neglected all deductions before clicking submit.
If you are working with a tax professional, they should be able to help you find unclaimed credits or tax breaks. But if you file it yourself, many tax software will also have the ability to verify deductions and maximize your refund.
6. Donate to charity
This is another strategy that Warren Buffett uses in his tax planning. Helping others is good, but lowering your tax liability will add extra strength to your process.
n during the year, if you donate more than $ 300 to a charity, keep your receipts to claim them when you declare your taxes. This year, you can claim up to $ 300 without having to itemize your deductions.
To claim donations over $ 300, you will need to itemize them. But it’s estimated that less than 10% of taxpayers will itemize deductions for their 2020 tax return.
You can also deduct all personal expenses for volunteer work like travel, transportation, meals on behalf of a charity, gasoline and oil for your car and even the cost of a volunteer uniform. .
Some people also donate goods like cars, artwork, jewelry, or even real estate to charities. And these can all be claimed as long as the organization is an IRS registered charity ‘ exempt charity list.
7. Don’t hesitate to think about it until tax time
The wealthy and their accountants will often plan these strategies well in advance.
Work with a professional financial planner to strategize and think about your tax liability before tax season begins.
Making a plan for the coming year and sticking to it will ensure you keep more of your money.
It’s so much better than scrambling at the end of winter to transfer enough money into your retirement account or trying to find all of your receipts to add up your charitable contributions.
That being said, you don’t have to file your taxes until May 17 of this year, which means you still have a few weeks to consider these tips.
And while these moves may not push you up into the top 1%, they will ensure you keep a higher percentage of your income – and that may be enough for some to to feel flush with money.