All people feel the burden of taxes on an annual basis. Some of the richest individuals, however, know what it takes to give the taxman the smallest amount possible. By relying on a couple of tricks that have managed to stand the test of time, these rich individuals become capable of getting even wealthier with the passage of time.
Wondering what it takes to keep your money inside your pocket? You may want to acquaint yourself with some the accounting and taxation tricks that the wealthiest one percent of individuals rely on.
Life Insurance Borrowing
Anyone that is a high income earner can benefit from this opportunity to reduce the amounts of taxes that have to be paid on an annual basis. Such individuals should choose a life insurance policy that has a rather high value.
Once you’ve chosen the policy, you’ll find various banks enabling you to borrow anywhere up to 90 percent of the policy’s value. The money you will be getting are considered a loan. As such, this amount isn’t subjected to income taxation.
On top of that, life insurance borrowing isn’t burdened by capital tax gains. Though this opportunity may be great for decreasing taxes, it’s still linked to various risks. Talking to an experienced consultant about it is the best way to determine if the strategy is the right one for you.
Freezing the Value of Assets
Another quite common accounting trick used by the super rich, “freezing” assets is a great opportunity for avoiding several kinds of taxes.
Trust freezing is an excellent example of putting away financial resources and transferring those to children or other individuals. By transferring the money, you’ll be free from having to pay income tax.
To make the most of this opportunity, you will need to trade your common stock for preferred stock. Once you do this, put some of the preferred stock in a trust. By doing that, you’ll get a chance to live off the dividends. As in the case of life insurance borrowing, talking to an experienced accountant before choosing this opportunity will make it easier to decide whether asset freezing is the best opportunity to improve your financial situation.
An Individual Retirement Account
Individual retirement accounts are the perfect opportunity for having sufficient financial resources later on in life.
By getting started with an individual retirement account, you will be saving money for the years to come and you’ll also get to reduce your tax amount. Through a conventional IRA, you get to set aside pre-tax income.
In addition, an IRA allows you to defer paying taxes until you begin withdrawing the money. At this time, you would have retired already. This means that you’ll be benefiting by lower taxation margins.
Capital Gains Management
Long-term assets that are held for more than one year and are considered capital gains will be subjected to a 15 percent tax rate. Short-term capital gains, on the other hand, are taxes just like regular income. Wealthy individuals will be forced to pay the incredible 39.6 percent tax. It’s easy to see how effective capital gains management can lead to serious savings.
Working with an accountant to time capital gains will bring the biggest benefits. In addition, losses can also be used for the purpose of offsetting capital gains and reducing the taxation amount even further.
Tax Heavens – Sending the Money Overseas
What’s common between David Bowie, the Rolling Stones and the U2 members? All of them have relied on the so-called tax heavens to decrease taxes. Sending money to such overseas locations is one of the simplest and most effective options used by the super rich and famous.
Setting up a tax heaven abroad, however, is far from a simple task. IRS scrutinizes such transactions, thus rich individuals need the assistance and experience of professionals in the field of accounting. The tax avoidance strategy is solely suitable for super rich individuals. Everyone else that would like to decrease tax amounts will probably be better off by choosing one of the other strategies listed in this article.