If you thought building tax free wealth was unpatriotic, here’s a rather interesting but seemingly odd fact. It turns out that even the highest-ranking government official has been avoiding taxes for decades.
Yes, that’s right. I’m talking about the President of the United States himself, Donald Trump. Tax-return data recently uncovered by The New York Times shows that the Leader of the Free World paid – get this – $750 in federal income taxes in both 2016 and 2017!
Shocking? Well, there’s more. The $750 happens to be the highest amount he’s given Uncle Sam in recent years. You see, for the better part of the past two decades, Trump has been consistently finessing his personal income tax bill to $0 or nearly $0.
Tax Free Wealth for You
I know you probably have strong personal opinions about all that. But, you might want to hold your horses for now. Let’s set the politics aside and, instead, admire the work of art here.
Whatever political affiliation you lean towards, you’ve got to hand it to Trump – he’s one heck of a master at outmaneuvering Uncle Sam. And in case you’re wondering, the answer is yes – you can work your way up the chessboard too.
Here are 3 tricks to start you off on a journey of building tax free wealth.
3 Proven Tips For Growing Tax Free Wealth
Find Solace in Retirement Accounts
This is probably one of the oldest tricks in the legendary tax avoidance rulebook.
You see, with a retirement account such as the employer-sponsored 401(k) plan, you automatically get the chance to reduce your taxable income. Every single dollar you direct to the retirement account translates to less taxable earnings by the end of the year.
And the simple reason is, federal tax policies prohibit Uncle Sam from dipping his itchy fingers into the pensions and retirement savings cookie jar. That means that 401(k) plans, 457 plans, 403(b) plans, and similar retirement schemes will keep your savings untaxed for the long haul.
If you’re making $100,000, for instance, and then you end up contributing $18,000 to your 401(k) plan- Uncle Sam will only be left with a taxable income of $82,000.
But, there’s a catch. It turns out that while your retirement account deposits will not be taxed, withdrawals are never that lucky. Uncle Sam will gladly take his cut in the form of capital gains tax.
On the flip side, there are several tricks you could cleverly apply to minimize such unfavorable losses.
Instead of withdrawing funds, you could borrow a loan against your 401(k) balance. The IRS won’t breathe down your neck with capital gains charges in that case. They’ll leave you to freely leverage the loan for investments (like a new home), without withdrawing directly from your retirement accounts.
Of course, it’s possible to avoid huge taxes as an individual. But, you know what could make the whole process much easier?
Yes, that’s right – managing your taxes through a corporation.
It’s no secret that corporations in the US get better tax benefits than individuals. Plus, incorporating yourself allows you to personally distance yourself from not only your business income and its accompanying taxes, but also the rest of the liabilities that might arise from your company.
Don’t let the term “company” discourage you, though. You don’t actually need a huge enterprise to set up a corporation. Even a basic business can go ahead and legally register itself as a Limited Liability Company (LLC).
In fact, this is one of the strategies celebrities popularly use to finesse Uncle Sam. Mitt Romney, for instance, has, on several occasions, used his corporations to capitalize on various tax loopholes. So much so that he ends up paying a tax rate of as low as 14% on his personal fortune of more than $250 million.
And which loopholes are we talking about here?
Well, once you incorporate an LLC business through a registered agent and proceed to channel your business funds through the company’s accounts, you get to pay yourself interest-free wages, as well as take advantage of expense deductibles.
Uncle Sam basically allows you to deduct all your business expenses from your taxable corporate income. You can, for example, exclude your office rent plus the utility bills that come with it.
And while you’re at it, you might also want to expand your tax free wealth through defined benefit plans. That means using the employer status you enjoy in your company to put more tax-deferred money into your retirement savings.
Uncover Every Possible Tax Credit
Deductions are great, but tax reduction doesn’t end there. While deductibles are usually knocked off from your taxable income, tax credits are discounted directly from your tax bill. So, all things considered, you stand to gain much more from tax credits.
But, how exactly do you convince Uncle Sam to award you credits that are capable of building tax free wealth?
There are many types of tax credits you could claim. However, they often come with very strict conditions.
If you’re seeking to claim the famous Earned Income Tax Credit, for instance, you need to be at least 25 years old, but younger than 65. What’s more, the IRS will disqualify you if you happen to be listed as a dependent under another taxpayer.
Other tax credits you might want to check out include; Savers Tax Credit, Child and Dependent Care Credit, Lifetime Learning Credit, plus American Opportunity Tax Credit.
It’s worth noting that you stand better chances of qualifying for tax credits as a business owner. Uncle Sam tends to use such perks to boost the growth of corporations in the country.
The Bottom Line
Always keep in mind that the outcome of the tug of war between you and Uncle Sam substantially depends on your overall financial literacy. In other words, your battle plan can only stretch as far as your command of the US tax system.
As such, you need to dig beyond the basic tax laws to uncover all the clauses, deductibles, credits, and benefits that you might possibly leverage to finesse Uncle Sam, and consequently, build tax free wealth.
So far, only a handful of people have been able to master this game. And, as it turns out, most of them work very closely with seasoned tax experts and accountants.