Creating your wealth nest egg comes with diligence and time. One of the biggest components of successfully building wealth is to start with a foundation, which requires that you keep your taxes low so that you can allocate your capital elsewhere. There are many ways for you to lower your taxes, one of which is to use a tax shelter to protect your wealth from the IRS. Although there are some illegal means of you doing this, these are all far too risky, and could lead to hefty fines or even jail time. Instead, it is recommended that you take a look at these five IRS-approved tax shelters to lower your taxable income and help build up your wealth.
1. Live in a State Without Business or Income Tax
Although it may be silly to make a move to a state solely because of its tax laws, keeping these nine states in mind when you are deciding your next move can considerably benefit your wealth. You do not have to worry about personal state income tax while living in New Hampshire, Nevada, Florida, Alaska, Wyoming, Washington, Texas, Tennessee, or South Dakota. If corporate income tax is something that would affect you, then check out Wyoming, South Dakota, Texas, and Nevada to avoid this type of income tax.
2. Put Money into a Retirement Plan
The majority of people begin to put money into a retirement account once they’ve landed their first job, as they are then given an employer-sponsored program. If you are lucky enough, some employers will match as high as 100 percent of any contributions into a 401(K). That means you’ll receive a 100 percent return on your investment guaranteed. On top of this, if historical average stock market returns prove correct, you will see an 8 to 12 percent increase per year tax-deferred. Putting money into your 401(k) will lower your annual income, and maybe even your tax bracket, which will significantly lower your tax burden
3. Take Advantage of a 529 College Savings Plan
A 529-college plan, otherwise known as a Qualified Tuition Program, is a tax shelter that lets you save money on your child’s higher education expenses. The 529 plans are very similar to retirement programs in that any contributions you make will grow tax-free. These programs vary and have differing contribution limits. However, most do not go higher than $200,000. The biggest benefit to opening and contributing to one of these plans is that you will accumulate no federal tax on its earnings.
4. Leverage Your Capital Losses
If you’ve made any capital gains on investments, then you can deduct the capital losses made on those gains and thus pay zero tax on the positive investment returns. Even if your investments have made no capital gains, you may still take as much as $3,000 of capital losses against your traditional income.
5. Purchase a House
You should not buy a home simply because it will help lower your taxable income. However, you should know that there is a massive tax benefit to doing so. When you buy a house, you can deduct the interest that you pay on your mortgage, a percentage of your real estate taxes and the depreciation, and thus receive home improvement credits. On the other hand, if you are attempting to make some money from flipping real estate, the tax deal can get even better. This is because when you sell a house for under $250,000, or $500,000 for a married couple, any profit that you make will be tax-free. The single requirement for this is that you’ve lived in the house for at least two years before you decide to sell it.