Legal Ways To Lower Or Defer Your Tax Burden
Taxes are an essential part of our economy, whether we as tax payers like it or not. They are used for roads, schools, social services and so much more. We have a legal obligation to pay taxes to the federal government and those taxes are decided on how much we make. This amount is considered your gross income and your taxes will be based on this.
Although our obligation is clear and mandatory, there are ways that taxpayers can try to alleviate their tax burden. It is perfectly legal to lower your tax burden as much as you can, as long as your means of doing so are legal. The American tax code is huge, worded funny and ambiguous and these are the reasons that there are so many loop holes to consider. So below are a few perfectly legal ways to lower your tax burden or defer it to another year, usually the one proceeding it.
While it may be clear why a lower tax bill is beneficial, a deferment can be just as much so. To understand why, a person must understand that not all people pay the same amount of taxes. Basically, the more you make, the higher tax bracket you must pay. The benefits of deferment can be found if you can defer income from a higher tax bracket year to the next year if your tax bracket is going to be lower than the previous year.
Firstly, those that do business internationally, there are many countries that will tax you at a lower rate than the United States will. If you pay tax on income in another country, usually that income can be included in a foreign tax credit. Many investors are using this loophole too efficiently and the IRS are trying to find a way to tax this income, however at the moment, it is still an option.
Post dated checks are another way to defer payments of your taxable gross income. If you receive a payment from a customer at the end of one fiscal year and it is post-dated to the next year, the income will not be realized or tax until the following year. You can also with hold billing until the following year if it is close to the end of the fiscal year. Most people will not pay until billed, thus if you don’t ask, there is no income in one certain year. These are ways to defer your tax liability if the following year’s bracket will be less.
Alimony is an amount paid to a spouse by another spouse in the event of a divorce. Some couples may find that getting a divorce decree stating alimony, the payer will get to claim all the money paid as a deduction against their gross income. If however, it is not stated in the divorce decree, any money paid to spouse will not be tax deductible.
Government Bonds are one of the best known tax shelters or deferments. The Series E and Series EE bonds are a great way to take your money and not have to pay any taxes on your income until you cash n the bonds. Furthermore, you can take the money from a Series E or EE bond and roll all the income into another Series HH Bond to defer gross income tax payments even longer.
For companies that use cash-basis accounting methods, they can elect to defer income recognition for advanced payment for goods. If the company is using accrual accounting methods, Revenue Procedure 2004-34 allows for deferral of income for advanced payments for services that will be performed in the following year. The only downside to this though, is that a company cannot change they method of accounting unless authorized by the IRS to do so.
Insurance policies that have savings features are another great way to set money aside and the taxes of the income only have to be paid when the policy is paid or money is extracted from the policy. There is usually a fine or fee to pull the money out of the policy, so these fees should be included to compute savings. The first 50,000 dollars in coverage of a group term life insurance policy is also tax deductible and can be used to lower your tax burden.
Homeownership has two ways to save you from paying taxes, not just deferment. If someone owns their own home, the money that could be spent on rent would be taxable, however the savings of such, should be seen as untaxed revenue. The interest paid on your mortgage payments are also tax deductible, thus no taxes will be paid on that amount while you are still paying off your house.
To plan ahead, try to find investments that will appreciate in value, not generate annual incomes that will have taxable income each year. CDs of one year or less can successfully defer payments of income into the following year, as well as time certificates. A person can also plan large sales from closing until the beginning of a following year if tax burdens for the year are worrisome or the tax bracket is high. All these things can be used to lower or defer your tax burden and it is your right to do so.
Hoffman, W. H., Raabe, W. A., Maloney, D. M., Young, J. C., Boyd, J. H., & South-Western Cengage Learning (2012). South-Western federal taxation: Comprehensive volume. Mason, OH: South-Western Cengage Learning.