Are you a high income earner and you need ideas on how to cut down your taxes legally? If YES, here are 50 best ways to reduce taxes for high income earners.
Do you have a high salary, own a business, own real estate, have capital gains, or generate a lot of income from inherited assets? If any of these apply to your situation, then this article will be of great benefit to you. It goes without saying that in almost all countries of the world, the more money you make, the more tax you will have to pay.
According to a survey that was carried out by the Spectrum Group, two out of three rich individuals worry about the tax implication of the investments they have or have made. And this worry is not unfounded. In fact, research that was carried out by Vanguard found out that taxes can cost as much as two percentage points in returns a year.
The price tag: $70,000 if you were to invest $10,000 annually for 20 years and earned 4% on your money instead of 6%. For the nation’s highest-income earners – those making more than $220,000 annually – the amount going to the tax man is significant.
In addition, federal and state income taxes are not the only taxes paid on income. Those with earned income also pay social security and Medicare taxes. In addition to taxes levied directly on income, there are also property taxes, vehicle license taxes, sales taxes and multiple “hidden” taxes that we pay: gasoline taxes, liquor taxes, tobacco taxes, entertainment and restaurant taxes, hotel taxes and luxury taxes et al.
For many inventors, the taxes that are being levied on them can go a long way to reduce profit unless they take an active step to minimize the effects of these taxes. According to the Federal Reserve Bank of St. Louis, individuals earning between $100,000 and $199,999 annually in fiscal 2016 had an effective or average tax rate of 17 percent. And those earning between $200,000 and $499,000 had an average tax rate of 22 percent. That is exorbitant!
Most high income earners do not want to pay more income taxes than required, and many do some sort of tax mitigation, even if it is as simple as keeping track of deductions and deferring income into retirement accounts. As wealth gets more complex, so must the strategies.
Those who are very wealthy often apply sophisticated tax-avoidance and tax-reduction strategies to lower their income tax bill, along with estate transfer strategies to lower their estate tax liability. When they are unable to avoid paying taxes, they look for ways to defer tax payments, such as setting aside substantial amounts of pretax compensation (along with its appreciation) into qualified retirement plans.
It should however be noted that tax avoidance when it constitutes tax evasion is illegal, at least in the United States of America, and as such, the tips that will appear on this list are only aimed at tax minimization and not evasion. Here are 50 tax strategies that can be employed to reduce taxes for high income earners.
50 Best Ways to Reduce Taxes for High Income Earners
1. 401(k) or 403(b): If you are an employee and you have an employer-sponsored 401(k) or 403(b), in 2018 you can contribute up to $18,500 per year of your gross income. The contribution you will make will come straight out of your paycheck before it’s taxed, and the money goes tax-free into the 401(k) or 403(b). If you’re 50 and older, you have $6,000 catch-up, so your annual contribution limit is $24,500.
Solo 401(k) are also available to high-net-worth individuals that have self-employment income, and it’s only you, or you and your spouse, that can set up a Solo 401(k). This allows you to do the same annual contributions as a standard 401k) – $18,500, or $24,500 if you’re 50 and older.
2. Roth Conversions: a Roth IRA is a type of retirement account that grows tax-free. In the case of a normal retirement account, when you put money into it, you will get tax deductions. The money will then appreciate in value as time goes on and whenever you intend to “cash out” you will then have to tax taxes on the amount that you have withdrawn.
Roth IRA on the other hand is somewhat dissimilar from a regular IRA. You do not get a tax deduction when you put it in, but it grows tax-free, and any money that you take out of a Roth is 100% tax-free. The IRS will allow you to take some of your existing IRAs or 401(k)s and convert them to a Roth IRA. And the good thing about that is, once it’s in a Roth, all future taxable income, growth, and principal, is now tax-free for you, your spouse, and future generations – it’s a permanent tax-free account!
It may be a good time to convert if for instance you are a business owner who has had a really successful year, followed by a year that generates less income, and thus putting you in a lower tax bracket. That might be a good year to do some Roth conversions.
Another instance of a good time for conversion would be in the case of a high wage earner who retires and is temporarily in a lower bracket until they reach age 70 and a half and must make required minimum distributions. These are just some of the situations where a Roth conversion might make a lot of sense when doing year-end tax planning or retirement planning.
There is one thing you will have to note however, you have to pay taxes on the conversion, so make sure to plan your conversions carefully. Look at your tax brackets and see if a conversion actually makes sense for you.
It is also good to note that as of recently, you can no longer re-characterize your Roth IRA conversions – they’re now permanent. So be sure to double-check your math and make sure you really want to do that Roth conversion because it cannot be undone.
3. Selling Inherited Real Estate: another tax reduction strategy for high income earners that is not yet fully understood by a lot of people is selling off inherited real estate. When you inherit real estate, particularly states with community property rules, you get a full step up in basis, making your property tax go up.
For instance, your parents bought a home for $100,000, and now it’s worth $1 million. If they were to sell the home, they would have a $900,000 gain ($1 million minus the $100,000.)
If the event that they should both pass away, and you get the property, it’s still worth a million dollars, but your cost basis for tax purposes is stepped up to $1 million. If you sell the home very soon after they pass, say within a year or whatever, there’s little or no gain, because you have a new cost basis. If you sell it for $1,005,000, you only have a gain of $5,000 because you have a $1,000,000 step up.
Notice that a lot of children or beneficiaries that inherit real estate do end up selling once they learn that the step up takes advantage of the tax deductions. Some people don’t know about this and they end up holding on to property they don’t really want, not realizing there’s no property tax consequence.
3. Donor-Advised Funds: one of the best strategies of reducing taxes for high income earners is by way of donor-advised funds because it has a potential of allowing you to take advantage of current and future year contributions and deduct them all in the current year.
In other to make use of a donor-advised funds, you will have to set up an account with a custodian, such as T.D. Ameritrade, Schwab, Fidelity, a brokerage firm, et al. They will have a special kind of account, a donor-advised fund, where as soon as you put the money into it, it becomes a charitable tax deduction.
This however does not mean that the money will go to charity, rather, it means that you are the trustee. You get to invest the funds however you want. You also get to decide what charities receive whatever amount you want in that year, and in future years.
If you were going to give $10,000 a year to charity for the next 10 years, that’s $100,000. If this year you’re in the highest tax bracket you’re ever going to be in, this might be the year to get that tax deduction. Put $100,000 into a donor-advised fund, get a full tax deduction up front while you’re in the highest bracket, and then you dole out $10,000 per year to charities of your choice.
In order to enhance the effectiveness of a donor-advised fund, you should not donate cash. Instead, donate your appreciated stock held outside of retirement accounts. Whatever the stock is worth on the date of the donation or the contribution into this account is tax deductible, and you don’t have to pay tax on the gain on sale, making it a double benefit
5. Investing in Real Estate: even though selling off real estate has been mentioned previously as a way of ameliorating taxes, investing in real estate can also be a great tax reduction strategy. For instance, if you should purchase a property that is worth a million-dollar.
You have to allocate the property between land and buildings. Let’s say the building part is worth $750,000 or 75%. You get to depreciate that, or deduct a piece of that property, over 27 and a half years, which means you’re going to get a $27,000 depreciation deduction, each and every year.
Now if you take your rental income minus your expenses, and if you have $27,000 of profit, guess what – you can pay zero tax because you get that depreciation deduction. And that’s going to last for the next 27 and a half years. If you love real estate, why not buy 10 $1 million properties? Now you get $270,000 of depreciation deductions – in other words, tax-free income.
However, there are some limitations. In order to take these deductions, either you or your spouse need to be a real estate professional. That means you have to work 750 hours a year, and it has to be the majority of your time.
If you’re working full time in a job, 2,000 hours per year, you would have to work 2,001 hours in your real estate investments to be able to qualify for this, which is probably unrealistic. But if you or your spouse are not working, maybe they can be the real estate professional, so you can take advantage of these deductions.
6. Section 199A Deduction: this can be beneficial to rental real estate investors. Using the section 199A deduction you get to deduct up to 20% of the profits of your small business or your rental real estate. This however is a deduction as opposed to a tax credit.
What this implies is that for instance if your business makes $100,000, 20% of that is $20,000, so that’s a deduction. If that is your only income, you end up paying tax on $80,000, not $100,000.
All individuals that own these types of businesses can qualify for this 20% tax rate deduction – however, there are limitations if you own a service business. Single service business owners start getting that 20% phased out with a total taxable income over $157,500. The phase-out is $315,000 for married couples.
7. Report less income to your state: Most states don’t tax your funds’ income from Treasury securities. But if you own diversified taxable-bond funds, you may need to hunt around on fund-company websites for tax documents that list the proportion of Treasury interest.
(For instance, in 2016, Vanguard Total Bond Market Index Fund received 30% of income from U.S. debt.) Similarly, you generally don’t have to pay state tax on income that a national municipal bond fund earned from muni bonds in your state.
8. Sell losers whenever you can: Many taxpayers wait until late in the year to check for holdings that have lost money since purchase and could be sold to offset gains. This is however not the best approach. Instead, you should look for opportunities to harvest ‘tax losses’ throughout the year. An opportunity that presents itself around February could be gone long before November.
9. Grab a 0% tax rate on gains: People in the 10% and 15% brackets (including joint filers with less than $75,900 in income and singles under $37,950) pay no tax on long-term capital gains. If that’s you, be ready to sell some winning funds later in the year, even if you will buy them back right away. Yes, you may have to pay a trading fee. But you will reset your “cost basis” (what you paid) higher, so that you’ll owe less tax on future gains than you would have otherwise.
10. Put your funds in the right spots: Use your brokerage account to hold funds that won’t throw off a lot of taxable income, such as a municipal-bond fund or a low-turnover stock index fund you expect to hold for years. Stash a high-income choice like a junk-bond fund in an IRA or 401(k) to keep that income off the return you’ll file next spring.
11. Get credit for a rough spell: People who earned some income during the year but were out of work for a long time may be eligible for the Earned Income Tax Credit. Married couples with three or more kids can have an income of $53,505 and still qualify to lop up to $6,269 off their tax bill.
12. Deduct job-change costs: If in 2017 your job-hunting expenses like printing, resumé preparation, and travel—plus other miscellaneous expenses—added up to more than 2% of your income, the amount over that can be deducted if you itemize.
That 2% floor will be lower than usual in dollar terms if you had a tough year. However, you should note that you must be looking for a job in your current field. Separately, if you had to relocate to land a new job, you might be able to deduct unreimbursed moving bills.
13. Save your raise: Before you get used to the higher take-home pay of a fab new job, boost your 401(k) contribution. If it’s a traditional plan funded with pretax dollars, you’ll lower your tax bill. The annual maximum you can set aside from your pay remains at $18,000 if you are younger than 50, plus another $6,000 if you are at least 50 or will celebrate that birthday by year-end.
14. Take advantage of the big changes: If your life has changed in a big way like say marriage, the birth of a child, divorce, the death of a spouse et al you can take advantage of it. A significant joy or sorrow in your family could mean a sizable impact on your taxes as well.
If so, file a new W-4 form with your employer to adjust your withholding, if you haven’t done that already. Your filing status for 2017is based on your situation at year-end, with one key exception.
15. Newlyweds: if you just recently got married, you should file a joint return. Quite a lot of people believe that it is better to file as married [filing] separately. That is not really the best step. Filing separately doesn’t help you avoid the so-called marriage penalty, or tax increase that many couples with similar earnings face after they are wed.
You’ll do better filing jointly except in rare situations, such as if one of you has low pay but high miscellaneous expenses, which are deductible only above 2% of income.
16. Take credit for that beautiful new baby: You get to claim a child tax credit of up to $1,000 per child, in addition to an exemption for that new family member. Married couples filing jointly can claim the full credit of up to $110,000 of income. For a couple with one child, a reduced credit is available for incomes below $130,000. One requirement is that you must have a Social Security number or taxpayer identification number for every child you have.
17. Deduct any alimony you pay: You can deduct alimony checks you write to your ex, while he or she must report it as income. This should not be misconstrued with child support, which by contrast, doesn’t get deducted or taxed. You and your ex should make sure alimony sums match on your tax forms; otherwise you may just run into some troubles with the IRS.
18. Claim special status as a widowed parent: If you have a dependent child and don’t remarry, you can file for the next two years as a “qualifying widow or widower,” retaining the same benefits as married filing jointly.
19. Find the right home for your funds: Use your 401(k)s and IRAs for investments that throw off short-term capital gains or interest income, which are taxed as ordinary income. This means taxable bond funds, high-yielding dividend stock funds, and actively managed funds that trade frequently.
Then use taxable accounts for buy-and-hold equity funds that trade infrequently, such as index funds, and muni bond funds. Being smart about “asset location” can save up to 0.75 points a year in returns
20. Make Uncle Sam share your pain: Sell stocks that are down and use the losses to offset gains elsewhere in your account. Over the past decade, doing so once a year at year-end has added 0.6 points in annual return to your taxable account, according to data gathered by Wealthfront, an automated investment service.
21. Expand your alphabet: Even among millionaires, more than a third are worried about rising health care costs, according to a survey by PNC. That’s understandable. A typical 65-year-old couple will spend $260,000 throughout retirement on health care.
If you choose a high deductible health plan, you can contribute up to $3,350 in pretax money as an individual or up to $6,750 for a family to a tax-sheltered health savings account, or HSA ($7,750 for those 55 and older).
As with 401(k)s and IRAs, money that goes into an HSA is tax-deductible and is allowed to grow tax-free. If you saved $6,750 a year for 20 years in an HSA, earning 6% annually, you would have $248,000—enough to cover average medical costs. And withdrawals for qualified health care needs are tax-free.
22. Structure your business the right way: 8 out of 10 millionaires who are entrepreneurs built their businesses from the ground up, according to a U.S. Trust survey. Only 2% inherited them. Early on, a sole proprietorship is often the best way to limit taxable income. If you lose money at first, you can use losses to offset other income, including capital gains, which is harder to do in a corporation.
But if you seek liability protection and start generating close to a six-figure income, electing to pay taxes as an S corporation—rather than a limited liability company, or LLC—could help you avoid getting killed by self-employment taxes , covering Social Security and Medicare. While workers pay only half of their Social Security and Medicare taxes—their employers cover the rest—the self-employed are hit with the full 15.3% rate. But an S corp lets you control how you’re paid.
If your firm earns $150,000, you may opt to pay yourself a salary of $75,000 and take the rest as a so-called distribution of earnings. You would only pay only the self-employment tax on your $75,000 salary. An S corp also avoids the 3.8% Medicare surtax imposed by Obamacare on high earners. This move would save you more than $7,000 a year if well implemented.
23. Recruit your spouse: 4 out of 10 wealthy entrepreneurs like to hire their kin, according to a survey done by U.S. Trust. At the same time, 6 in 10 are worried about taxes. Address both issues by hiring a spouse and putting a large chunk of his or her salary into a 401(k) plan.
That will reduce your joint taxable income and boost retirement savings. The maximum contribution for 2016 is $18,000, or $24,000 for those 50 and older. If you have a solo 401(k), you can add your spouse to it.
24. Hire the kids: in order to reduce your tax you can hire your children and set up a direct transfer of their pay to a tax-sheltered 529 college plan or Roth IRA. The first $6,300 they earn will be tax-free for them because they will get an equivalent standard deduction on their tax return.
They will be taxed at 10% on the next $9,225. Plus, their wages will be a tax-deductible business expense for you, as are wages you pay others. Just make sure you assign the kids work that’s reasonable for their age. And don’t pay them excessively, in case of an IRS audit.
25. Donate appreciated stock or other securities to nonprofits: People with investments in stocks, bonds and other securities can donate those that have appreciated in value that they’ve held for at least one year, resulting in significant income-tax savings. In fact, donating stock saves even more taxes than donating cash, since there is no capital gains tax when appreciated securities are given to a nonprofit.
Here’s how this works for people with a federal tax rate of 39 percent and a state tax of 6 percent: By making a $10,000 cash donation, they can save $4,500 in taxes. However, making a $10,000 donation in stock that has doubled in value saves approximately $6,000 in taxes, including $1,500 in future capital gains taxes.
26. Donate other assets that have appreciated: The IRS also provides tax breaks for people donating other assets, such as certain wines, art and land.
27. Buy film and TV production credits: Several states offer tax credits to television and film production companies that make a television series or feature film in that state. These companies may transfer or sell these credits to individuals, which means a person can buy a film tax credit and receive a tax break on their state tax returns.
Here is an instance of how it works: An investor buys a $20,000 credit from the movie studio for $17,500 before December 31, 2017. As a result, the investor is entitled to a $20,000 state tax credit. However, in 2018 the investor will need to report $2,500 in short-term capital gains.
28. Harvest tax losses: Take the opportunity to sell stocks that are worth less than what you paid for them. By realizing or “harvesting” a loss, investors are able to offset taxes on gains from other investments and potentially from other income.
For example, people who invested in January in the SPDR S&P Oil & Gas ETF, believing that oil prices would rebound in 2017, lost money. That particular investment was down about 17.5 percent through mid-October, which means a $40,000 investment made in January is worth $7,000 less today.
29. Invest in a low-income-housing credit partnership: These tax credits give incentives to use private equity to develop affordable housing for low-income Americans. The tax credits are attractive because they provide a dollar-for-dollar reduction in a taxpayer’s state income tax.
30. Utilize the federal solar tax credit: Officially called the federal investment tax credit, this subsidy offers solar farm owners a 30 percent tax credit. These credits are available for an investor who holds an interest in a partnership or other companies that own a solar energy system. For homeowners, there is also a federal tax credit available for installing a residential solar system.
31. Make a loan to your spouse: To reduce the impact of tax on passive income from investments, couples can spread the wealth around using a loan, whereby a high-income spouse lends money to the low-income spouse for investment purposes.
It is pretty straightforward the borrowing spouse invests the money and pays interest back to the spouse who lent the money. Both have to declare the interest, but the lower-income spouse can deduct the interest cost against income because it’s being used to invest, providing the money is in a non-registered, taxable account producing income, such as dividends.
At the same time, the income generated from the invested money is taxed at a lower rate than it would be in the hands of the higher-earning spouse.
32. Go corporate: For business owners, incorporating offers tax efficiencies, including a lifetime capital-gains exemption when selling the shares of the corporation, or qualified farm or fishing property. For professional and other entrepreneurs with high incomes, incorporating is definitely a good strategy, but some aspects are a wait-and-see game with the pending rule changes.
Among the maneuvers under review is “income sprinkling,” whereby earnings from the corporation are split among the business owner, a spouse and adult children to reduce the overall tax burden.
33. Use basic tax shelters: While it’s tempting to imagine the wealthy hiding their money offshore to shelter it from the IRS, the real and legal tax shelters exist in plain sight. Among them are registered retirement savings plans (RRSPs), registered education savings plans (RESPs), registered disability savings plans (RDSPs, for families with loved ones with disabilities) and even tax-free savings accounts (TFSAs).
And they’re available to all. It’s just that high-income earners have more cash available to put in these vehicles. The RRSP is the go-to account, allowing deferral of taxes owing on contributed income today until retirement when, presumably, that money would be withdrawn at a lower tax rate. The immediate savings are considerable.
34. Manage the timing of your tax deductible expenses: If you know in advance that you’ll have considerable tax-deductible expenses, you may be able to choose which financial year you purchase them in. That can be important to make the most of your tax deductions right now, especially if you’re a sole trader.
For example, if you have a large expense that is tax deductible and your income for that year is going to push you up to the next tax threshold, it may be best to purchase your item right before the end of the tax year. This will lower your taxable income for that year and, in some cases, could move you down into a lower tax bracket.
On the other hand, in a year when you take unpaid leave or a break from working and your income (and tax) is lower, it might be better to delay purchase of larger tax deductible items until later, when your income and tax jump higher (so you have more tax to save).
This will help you reduce tax paid on the higher tax bracket and save more money. To rephrase: If you need to buy an expensive work-related item and it’s late in the financial year (the financial year is 1 July to 30 June) then buy that item in the financial year when your income will be higher. That helps to maximize the value of your tax deduction (and your tax refunds).
35. Investments affect your taxes: Depending on your individual finances or circumstances, making an investment can also help you reduce tax considerably. However, this is certainly not the case for everyone. Before you decide to invest, speak to your financial planner who can advise you if an investment will suit you.
Remember, the investment should benefit you now AND into the future – there is no point saving a small amount of tax now if a poor investment ends up losing you your original capital in the long run.
36. Paying off your mortgage can reduce taxes: In general, you are taxed on your savings (because of the interest income you earn on savings) so if you are an avid saver, you could face a hefty tax bill at the end of each year. If you are buying your own home, you can kill two birds with one stone by shifting savings toward your home loan instead.
You pay down your mortgage plus you are no longer taxed on that money. The over payment is usually still accessible as a re-draw, should you need to use some of the money in the future. However, watching your home loan get lower and lower is exciting and that can make you think twice before dipping in.
If you need to save money that you have easy access to, you can still reduce your mortgage interest costs by using an offset account. It’s a good idea to talk to a financial advisor for help planning the best mortgage and personal finance management that suits your own circumstances.
37. Adjust your finances with your partner: If you have a partner, it can be possible to adjust your finances between you, to optimize your tax circumstances. For instance, if as a couple you have shared savings in a short term account, earning some interest, it would be beneficial to invest that money in the name of the lowest income earner, because they will pay the least tax on the interest earned on that savings. Your financial advisor can help you make the most of this.
38. Pay attention to the details when selling assets: Do you plan to sell an asset that is subject to Capital Gains Tax (CGT)? One of the most common examples is a rental property or a house that has ever been rented out.
If you sell an asset that triggers CGT, there are some things to consider. How long have you owned the asset? If you have owned the asset for longer than twelve months, you may be entitled to a 50% Capital Gains discount. If you haven’t owned the asset for at least twelve months, you will have to pay more CGT.
Does your income fluctuate? If so you may choose to sell the asset in a year you expect to earn a lower income, as your capital gain won’t have such an impact of your tax liability. The ways that selling assets can affect your taxes can get a bit complicated so it is most advisable to seek the services of a tax agent.
39. Pay Your Property Tax Bill Early: If you have a property tax bill due in January and you itemize, paying it before December 31 will allow you to deduct the payment from your taxable income on your 2017 tax return. However you should be cautious when threading this path.
Prepaying your property taxes could trigger the alternative minimum tax, designed to prevent wealthy people from using so many legal deductions to avoid taxes. Several popular write-offs, including property taxes, must be added back when calculating AMT liability. Talk to your tax preparer or use tax software to determine whether you’re vulnerable to the AMT.
Also you have to consider that tax reform plans under consideration aim to lower rates and simultaneously reduce deductions and credits. Under the House GOP tax plan, deductions for a variety of local taxes, including real estate taxes, would be scrapped. Prepaying your tax bill and writing it off this year would sure beat not being able to write it off at all.
40. Delay the Sale of Investment Winners: If you’re about to rebalance your portfolio by selling some winners, you can redeploy the cash elsewhere, remember that waiting until after January 1 means you won’t have to report the gains as part of your 2017 income. Never make an investment move based solely on the tax impact, but don’t ignore it, either.
41. Mortgage interest deduction: Though the mortgage interest deduction has undergone some changes as the result of tax reform, it’s still very much available. It used to be that you could write off the interest you pay on a home loan worth up to $1 million, but under the new laws, this threshold has been lowered to $750,000.
Still, that leaves a fair amount of wiggle room for homebuyers with a higher income and price range. Furthermore, this change applies to new mortgages only. If you signed a $900,000 mortgage last year, you’re still eligible to deduct its interest in full.
42. The Child Tax Credit: Up until recently, the Child Tax Credit offered $1,000 to filers with qualifying children under the age of 17. The problem, however, was that the credit started phasing out at $75,000 in income for single tax filers, and $110,000 for couples filing taxes jointly. Under the new laws, however, the Child Tax Credit not only doubles to $2,000 per qualifying child, but becomes attainable for higher earners as well.
That’s because the income limits at which it begins to phase out have increased to $200,000 for single filers and $400,000 for married couples filing joint returns. Furthermore, unlike deductions, which work by exempting a portion of your income from taxes, a tax credit is a direct dollar-for-dollar reduction of your tax bill, which means it can really go a long way.
43. Lower taxes on long-term investments: Any time you make money from an investment, the IRS is eligible to get a cut (unless that investment is held in a tax-advantaged retirement account). But if you’re willing to retain your investments for at least a year and a day before selling them, you’ll keep more of your profits for yourself.
That’s because your capital gains will fall into the long-term category, and you’ll be subject to a much lower tax rate than what you’d pay on short-term gains.
As was the case in years past, short-term capital gains are currently taxed as ordinary income, and even though most individual tax brackets have been lowered as a result of the aforementioned changes, they’re still higher than the current long-term capital gains brackets, which are 0%, 15%, or 20% for top earners. In other words, if you’re patient about selling investments, you can snag some additional tax savings.
44. Use cost-segregation studies to accelerate depreciation on assets: On the IRS website, depreciation is explained an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property. Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable.
Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable. To determine and accelerate depreciation so taxpayers can get the deductions today instead of 20 years down the road, taxpayers can undergo what’s called a “cost-segregation study,” which divides assets into their respective categories and assigns the appropriate deductions.
45. Take advantage of major tax deductions for their businesses: According to the Rich Habits Institute, 85%-88% of American millionaires are self-made. One way they earn their fortunes? Owning their own businesses. Business owners may be able to take advantage of Section 179 of the tax code, which allows companies to deduct up to $500,000 in assets for the fiscal year.
Plus, a measure called “bonus depreciation” allows business owners to depreciate 50% of the cost of equipment purchased and used. It will apply through 2017, and then depreciate 40% of that cost in 2018 and 30% in 2019. That is a big plus because you’re lowering taxable income by picking up big deductions. However, you have to be cautious.
46. Deduct your health insurance if you are self-employed: Self-employed individuals are usually able to deduct their health insurance, and it’s missed all the time.
47. Deduct the legal fees required to secure alimony: Only a specific subset of taxpayers qualify for this deduction, but it’s a strategy that can minimize taxes if used correctly. Since receipt of alimony is taxable, any legal fees paid for this collection of alimony are deductible. This strategy illustrates the trickiness of the tax code, which can be used to great effect only if the taxpayer fulfills all of the requirements.
48. Get the right tax code: Check your tax code each year (the numbers and letters on your payslip). If you’re on the wrong code, you may be paying too much tax.
In conclusion, just because you’re a higher earner doesn’t mean you can’t get a break on your taxes. However, any decision to utilize a tax credit or deduction should be made as part of an overall financial strategy. But making use of these tips above, and with the help of a tax or financial advisor will help to reduce the amount of your money that goes taxes each year.