How To May No Taxes On Job Income Or Passive Income
How To Pay No Taxes Notes
* To generate passive income, youve first got to save a lot. You can replace my passive income examples with normal wage income if you like. The effect is the same.
* What is peculiar is that one still has to pay property taxes to the state. At least property and state income taxes are deductible and the money is not going to the federal government. You can choose to move to a different state to lower your tax liability. Changing citizenship on the other hand is much more difficult.
* Starting in 2018, there is a SALT cap limit of $10,000 per person. If you get married, you actually dont get $20,000 but still only get a $10,000 limit. This is going to be a net negative for many higher income earners who own property in expensive coastal cities.
* A $30,000 mortgage interest deduction can be calculated as a 3% mortgage interest rate off of a $1 million dollar loan. Too bad the mortgage limit is now $750,000 for 2020+.;Some may poo poo paying interest. But I say paying interest with other peoples money to build wealth is much better than paying taxes to the government.
* If you have a modified adjusted gross income of $200,000 as an individual, or $250,000 as a married couple, youll also have to pay a 3.8% surcharge tax on all capital gains and dividend income. This is called the Net Interest Income Tax. The government does not have the guts to cut spending, hence more taxes are inevitable.
The Standard Deduction
Should You Focus On Minimizing Federal Tax On Your Pension In Retirement
Thus far, I stated that you will need to pay tax on your FERS pension in retirement. I also talked about how your FERS pension affects social security. Finally, I presented some thoughts about minimizing your federal taxes through maximizing Roth contributions.
However, we should examine whether minimizing federal tax on your pension in retirement should be your primary goal. Despite what the internet tells you, I dont your primary goal should be tax minimization. Instead, I believe that you should focus on maximizing your post-tax income/wealth.
Your primary goal should not be tax minimization. Instead, focus on maximizing your post-tax income/wealth.
You might wonder how these two goals differ. In many cases, minimizing taxes results in maximizing your income. However, you may choose a tax efficient strategy that results in your having less wealth.
Before the increase in the standard tax deduction, I knew people that held a mortgage solely for the tax deduction. Because they dont pay tax on the mortgage interest, they lower their taxes. .
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Doing An Ira Rollover The Wrong Way
Let’s say you have $200,000 in a 401. You retire and take it as distributionbut you dont fill out the paperwork correctly. Your company withholds $40,000 in taxes from your funds: 20% of the distribution amount.
You deposit the remaining $160,000;into an IRA within 60 days as a rollover, but now you have to come up with an additional $40,000 to deposit into this IRA in order for the entire $200,000 to count as a rollover.
What if you dont have the $40,000 available to put into the IRA to make up for the tax withholding that’s already been sent to the;IRS? That $40,000 is considered a taxable distribution from your account. You’ll have to pay taxes on it, even if you meant for it all to be an IRA rollover.
That’s $9,600 in taxes at a 24% tax rate that could have been avoided. You’ll have to pay an extra 10% penalty tax, too, if you’re under age 59½.
How Does The Estate Tax Work
If the total value of your estate adds up to more than the exemption limit, you will pay estate taxes on everything above that limit.
As of 2020, the federal exemption limit sits at $11.58 million per estate, and it will climb with inflation until 2025. If Congress does nothing before then , the exemption will revert to its previous level, down around $3.5 million.
Since you dont know when you will die, you need to start planning now if you want to minimize or avoid the federal estate tax.
The calculations for how much tax you will owe begin by adding up the value of your estate, and then subtracting your debts. Your estates value includes all your assets, not just your cash, investments, and retirement accounts. It also includes your home, business properties, boats, art, and other non-cash assets.
And this is where the problem begins. Suppose your estate is valued at $20 million, but $18 million of that is tied up in real estate and a business, six cars, and some art. That leaves only $3 million in liquid assets to pay estate tax with.
Thus, your heirs will possibly be forced to QUICKLY sell assets, may be even the business or some real estate, just to pay the estate tax, after all uncle Sam doesnt like to wait past the deadline to collect their money. Not an enjoyable chore for your beneficiaries.
Where does that $3 million number come from?
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Taxes On Iras And 401s
Once you start taking out income from a traditional IRA, you owe tax on the earnings portion of those withdrawals at your regular income tax rate. If you deducted any portion of your contributions, you’ll owe tax at the same rate on the full amount of each withdrawal. You can find instructions for calculating what you owe in IRS Publication 590, Individual Retirement Arrangements.
If you have a Roth IRA, you’ll pay no tax at all on your earnings as they accumulate or when you withdraw following the rules. But you must have the account for at least five years before you qualify for tax-free provisions on earnings and interest.
When you receive income from your traditional 401, 403 or 457 salary reduction plans, you’ll owe income tax on those amounts. This income, which is produced by the combination of your contributions, any employer contributions and earnings on the contributions, is taxed at your regular ordinary rate. Keep in mind that withdrawals of contributions and earnings from Roth 401 accounts are not taxed provided the withdrawal meets IRS requirements.
Use An Online Check Calculator
There are a number of free income tax calculators online. If you enter your gross pay, your pay frequency, your federal filing status, and other relevant information, the calculator will tell you your federal tax liability per paycheck.
You can multiply that by the number of pay periods in a year to see your total tax liability.
This method is easy, and the result will be reasonably accurate, but it may not be perfect since your actual tax liability may depend on some other variables, such as whether you itemize deductions and which tax credits you claim.
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These Tips Can Help You Reduce Taxes On Your Income
Michelle P. Scott is a New York attorney with extensive experience;in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.
Lea Uradu, J.D. is graduate;of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary;Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.
Income is taxed at the federal, state, and local levels, and earned income is subject to additional levies to fund Social Security and Medicare, to name a few. Taxes are difficult to avoid, but there are many strategies to help ward them off.;Here are six ways to protect your income from taxes.
Have Specific Questions Related To Your Us Expat Tax Return
We can help! Our dedicated team of CPAs and IRS Enrolled Agents have specific expat tax expertise to help U.S. citizens living abroad. Taxes and regulations can be complicated, but we can help navigate federal tax returns in a way that makes sense for each individual situation.;
If youre ready to file, get started today to be matched with one of our expat-expert accountants.
Have questions before you get started? Contact us today for the answers you need.
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What Happens If Us Citizens Dont File Taxes While Living Abroad
US citizens who dont file US taxes while living abroad may face penalties, interest costs, or even criminal charges. The IRS charges penalties for both late filing and late payments. If your lack of filing is willfulmeaning you knowingly avoided your US tax requirements while living abroadmore serious legal consequences may apply.
- Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%
- Failure to Pay Penalty: 0.5% of the unpaid taxes for each month the tax payment is late, up to 25%
- Over 60 Days Late: the minimum Failure to File Penalty is $435 or 100% of the tax due, whichever is less
Fortunately, the IRS does offer a way for Americans abroad to get caught up penalty-free if they didnt know they needed to file US taxes while living overseas. Regardless of how many years youve missed, the Streamlined Filing Procedures only requires you to file the past three years of Federal tax returns and the past six years of FBARs, making it an easier, less expensive way to become compliant.
Claim Applicable Tax Credits
Above we cover some ways to reduce your taxable income, but its nowhere near all the deductions for which you may qualify.;
Remember that you get a standard tax deduction of $12,550 for the tax year 2021 and $12,400 for the tax year 2020. So any income below that isnt taxable. If youre wondering how much money do you have to make to not pay taxes, thats the loose answer.;
However, you can either choose to take an itemized deduction or a standard deductionnever both in the same year.;;
In addition to deductions, you may qualify for a number of tax credits. While deductions reduce your taxable income, tax credits reduce the amount you owe in taxes if you spend it in ways that qualify for the credit. Its a subtle but important distinction.;
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Pay Less Taxes Because The Government Is Inefficient
When it takes 18 months for the city to fix a noisy and dangerous manhole cover, perhaps paying tens of thousands of dollars in state taxes is not worth it anymore. How about $5 bucks instead?
John F. Kennedy once said, Ask not what your country can do for you, ask what you can do for your country. Unfortunately, those words were spoken on January 20, 1961. Most of us werent alive then since the median age in America is only 35. Im afraid our society has permanently adopted a one-way take, take, take mentality.
I think Ive paid my dues. Unless youve paid as much in taxes, please dont criticize me for writing an article on how to help you legally pay less taxes. To build wealth, we must minimize our expenses. Taxes are one of the largest expenses well ever incur.
Have Lots Of Itemized Deductions
Taxpayers with high incomes can avoid paying income taxes by having lots of itemized deductions. Unfortunately, as a result of the Tax Cuts and Jobs Act, itemized deductions are harder to come by than in the past. Starting in 2018, they only include deductions for:
- health expenses over an AGI threshold
- charitable contributions
- up to $10,000 in state and local taxes
- home mortgage interest
- casualty and theft losses due to a federally declared disaster, and
- gambling losses .
As a result of these changes, only about 5% of taxpayers will be able to itemize in 2018 and later. Still, higher-income taxpayers who make substantial charitable contributions and/or have large uninsured health expenses can still avoid paying income taxes.
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How Can I Avoid Paying Us Taxes Abroad
Based on the current US tax laws, the only way to avoid filing a US tax return and paying US taxes abroad is to renounce US citizenship. Renouncing your US citizenship is a serious and permanent decision that should not be taken lightly. Make sure to learn about all the requirements and implications of citizenship renunciation before considering this option.
So long as you are a US citizen or green card holder, you will be required to file a tax return annually and pay the associated taxes while living abroad. However, it is possible to avoid double taxation and reduce your US tax bill using special tax credits, deductions, and exclusions available to Americans living abroad.
Make Sure Youre Taking Your Maximum Capital Loss
If youve invested in stocks or bonds and have a loss on paper, you might want to sell and realize that loss so you can claim it as a tax deduction. The process is called tax-loss harvesting, and it can net you a sizable deduction from your income.
The tax code allows you to write off up to a net $3,000 each year in investment losses. A write-off first reduces any other capital gains that youve incurred throughout the year. For example, if you have a $3,000 gain on one asset but a $6,000 loss on another, you can claim a deduction for the full $3,000 net loss.
Any net loss beyond that $3,000 has to be carried forward to future years, at which point it can be used. And even if you cant realize the full value of that net loss, it can still make sense to realize some loss, especially if it pushes your Social Security benefit into the tax-free area.
Tax-loss harvesting works only in taxable accounts, not special tax-advantaged accounts such as an IRA.
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How To Reduce Taxable Income
First, its essential to get your expectations in line with reality.;
In other words, youre going to pay tax sooner or later. Theres no getting around that fact. With that in mind, the best way to avoid paying taxes is not to earn money; simple, right?
That may seem like a joke, but theres a kernel of truth to it because theres a difference between what you really earned and what the federal government recognizes as income. You can take advantage of that difference using any of the 11 simple ways to avoid paying taxes legally listed below.;
1. Contribute to a 401 or an IRA
Retirement accounts are the undisputed deans of tax avoidance. Theyre accessible to most people, and the first thing experts recommend for paying less tax upfront.;
Not only do contributions to a retirement account reduce your taxable income, but the funds you invest also grow tax-free until you retire. On top of that, many employers will match some or all of your 401 contributions, effectively giving you money for free.;
However, youll still pay taxes on that money sooner or later. Broadly speaking, you have to start making required minimum distributions when you reach the age of 70 years and six months.
That leads to the next question, which is how to avoid taxes on RMD?;
If you meet certain conditions, you could convert your IRA into a Roth IRA, which isnt taxed on distributions.;
2. Contribute to a Health Savings Account
3. Dont Sell Assets
5. How to Avoid Paying Taxes on a Bonus Check? Defer It!
Professional Gambler Makes A Winning Bet Against The Irs
In 2001, professional gambler Robert Mayo wagered over $131,000 and won $120,000. On his tax return, he listed his gambling losses, as well as his expenses for travel and research, as tax deductions. Mayo argued that the $10,000 he was in the hole should be considered operating losses rather than wagering losses because gambling was his profession. The tax court ruled in his favor, and his case set the precedent for a new law that allowed full-time professional gamblers to claim gambling losses and expenses as business expenses, according to Casino Players Report.
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Use A Health Savings Account
Employees with a;high-deductible health insurance plan;can use an;HSA;to reduce taxes. As with a 401, money is contributed to an HSA before taxes. For 2020, the maximum contribution is $3,550 for an individual and $7,100 for a family. ;For 2021, the maximum deductible contribution level is $3,600 for an individual and $7,200 for a family.
These funds can then grow without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when used to pay for;qualified medical expenses, withdrawals arent taxed, either.
