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here are many different tax shelters, and some of them are more popular than others. One of the most popular is a retirement account such as an IRA or 401k, but there are other options out there. In this blog post, we will explore these alternatives to traditional retirement accounts so that you can find the one that best suits your needs.
What is a Tax Shelter?
A tax shelter is a type of investment that reduces the amount an individual pays in taxes. One popular example is retirement accounts such as IRAs and 401ks, which have special rules for how they can be used to reduce taxable income. However, there are other options available too! This blog will explore some alternatives so you know what your best option might be.
What Types of Tax Shelters Exist?
Tax shelters exist in many different forms: from education savings plans like 529s or Coverdell ESAs to business structures such as LLCs (Limited Liability Companies). There are also various types of deferred compensation plans offered by employers. Which one works best varies depending on your personal situation – talk with a financial advisor to see what might work best for you.
Retirement Accounts
Retirement accounts are another type of tax shelter. Some examples include traditional IRAs and Roth IRAs, SEP-IRAs (Simplified Employee Pension Plans), or SIMPLE IRA plans offered by an employer.
Deferred Compensation Plans
An employee’s ability to defer income is a common form of taxation shelter. Deferring compensation means that the company deducts from your paycheck but doesn’t pay you until later on in life when it might be more valuable to you because there are fewer deductions at higher incomes!
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In these days of high-income taxes, it can be difficult to come up with a good plan for what strategy to use in order to reduce one’s taxable income. However, the answer may lie in either traditional IRAs or SIMPLE IRA plans offered by an employer. Deferred Compensation Plans are also available and make perfect sense given that most people have been putting off saving for retirement because of the current economic climate. One thing is certain: finding out about all your options will lead you down the right path as you work towards minimizing those pesky taxes!
Avoiding Taxes without paying High Tax Rates is not Impossible!
Workplace Benefits
Workplace benefits allow for a certain amount to be excluded from the employee’s taxable income. The benefits are often expensive, but they can save you money in taxes at tax time and provide valuable healthcare coverage for your family or yourself. If an employer offers this benefit to their employees then it is worth looking into as a possible option since the exclusion of these types of funds reduces one’s taxable income and could result in significant savings on future tax returns!
IRAs
There were some changes made under the legislation that became law during 2012 which allow IRA owners to make penalty-free withdrawals if they have reached age 59 ½ (the traditional IRA contribution limit remains unchanged). A SIMPLE IRA plan also allows contributions such as salary deferrals up until the year when an individual becomes 70½ years old.
Charitable Giving
Giving to charity is a popular way for taxpayers to reduce their taxable income and it is also an effective tax shelter. Contributions of cash or property can be valuable tools, but the amount that you are able to deduct as a charitable contribution depends on your adjusted gross income, which will determine if you itemize deductions. If this deduction reduces your taxes below what they would have been without the contribution, then the donation provides one with a “tax savings” in addition to achieving some other desired result (such as providing relief). The entire value of donated stocks may not always get deducted because securities trading at market prices less than $20 per share do not qualify for capital gain treatment; however, this does not diminish its effectiveness as a possible tax shelter.
Income Tax Shelters: These tax shelters are designed to reduce the amount of income taxes that a person pays by either deferring or avoiding altogether paying taxes on some types of income. One example is an Individual Retirement Account (IRA) which, when contributed to and not withdrawn from until retirement age, will allow one to avoid owing any federal income tax for as long as possible. There has been talking about eliminating this type of account because it’s often used only by the wealthy who can afford such contributions; however, there may be other ways in order to cover these costs without impacting those with lower incomes too heavily – if at all should IRAs become eliminated completely so they would still serve their purpose during retirement years.
Medical Savings Account
Medical savings account such as HSA and MSA are also a possibility for those who can afford to contribute to them, especially if they have children or other dependents.
529 Plans
The 529 Plan is another type of account that one may use in order to avoid paying federal income tax on the money used as investments – just remember that this plan should only be used for investing purposes and not as an emergency fund since it’s likely still vulnerable from market fluctuations.
Salary Reduction Agreement (SRA)
A salary reduction agreement such as SRA allows employees to take out pre-tax contributions from their paycheck so that when combined with employer contribution(s), taxes owed will be reduced drastically. This plan usually does not apply outside of 401k programs but could serve as a great tax shelter if the employee has no other retirement plan in place.
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Real Estate
It’s been said that 90% of millionaires got their wealth through real estate.
Reduce taxes by preferring tax shelter over other investment options like stocks and bonds. The most popular type is the mortgage interest deduction, which allows taxpayers to deduct up to $750,000 on a new or existing home loan if they itemize deductions (so it’s worth checking with your accountant before buying);
Homeowners can also try benefits such as capital gains exclusion ($250k for singles/$500k for couples) that apply when you sell your primary residence after living there at least two years out of five during the eight-year period just prior to sale.”
Business Ownership
Business ownership allows you to shield your assets from taxation as long as you take business losses for personal use.
Your home office deduction may also be taxed more favorably than other types of income and investments, which can help offset the cost of owning a house in a high-tax state like California.
The internet is full of resources to help with professional tax preparation services such as except that will handle bookkeeping and prepare everything on time. It’s worth it to get every possible deduction if you’re going to owe money on April 15th.”
Complex Investments
Complex investments are the most common type of tax shelter. These are investments with a high amount of risk, and they can be either inside or outside the United States.
The most commonly used complex investment is stock options. This allows you to buy shares at below-market prices by selling them back for a profit when the price increases to market value.”
Income Tax Shelters: Nowadays it seems like there aren’t any decent income tax shelters left – maybe because so many people have already taken advantage of them? You might consider giving up your ownership in an S corporation if that’s what you’re doing now (and assuming you’ve been taking losses on personal use). We also talked about home office deductions being more favorable than other types of income and investments.
Child Tax Credit
Child tax credits are the best tax shelters for families, especially if they have one or more children. That is because the federal government offers a $1000 credit per child under 17 years old and also an additional $300 credit for each of those who are disabled.
Tax Shelters: There are many different types of tax shelters that people can get their hands on. We talked about some in this post – like S corporations which allow you to buy shares at below-market prices by selling them back when the price increases to market value — but there’s plenty more out there… just ask your CPA!
Final Thoughts on are there any tax shelters left?
The best type of income tax shelter may be one with kids–especially if they have two or more children. This is because the Federal Government gives an additional $300 credit for each of those who are disabled. There are many different types of tax shelters that people can get their hands on. We talked about some in this post – like S corporations which allow you to buy shares at below-market prices by selling them back when the price increases to market value — but there’s plenty more out there… just ask your CPA! In conclusion, I would say yes, there are still a few left. You don’t need to worry about paying taxes and going bankrupt!
Do you want to learn more about tax havens? Check out these Best Books on Tax Havens.
Meet Maurice, a staff editor at Bigger Investing. He’s an accomplished entrepreneur who owns multiple successful websites and a thriving merch shop. When he’s not busy with work, Maurice indulges in his passion for kayaking, climbing, and his family. As a savvy investor, Maurice loves putting his money to work and seeking out new opportunities. With his expertise and passion for finance, he’s dedicated to helping readers achieve their financial goals through Bigger Investing.
