8 Tax Tricks Rich People Use—and They Work!

Learn the tax tricks that might help you save money, just like the wealthy!

For Americans with the financial means to hire tax advisers, tax planning often occurs year-round. Usually, taxpayers must report every dollar earned and are subject to taxes on the portion that is considered taxable income. But there are several legal ways to reduce your taxable income and therefore your tax liability, such as by taking advantage of tax breaks.

Many of the tax deductions that you might be familiar with are in fact unavailable to the rich Americans because a taxpayer must make less than a certain amount of money to be eligible for them. But other methods for legally shrinking your taxable income are more common among taxpayers with high incomes.

Let’s see some of the best tax tricks the wealthy use to avoid a hefty tax bill!

tax tricks
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1. Claiming depreciation

Buying assets or property for your business and deducting part of the cost each year over time is a tax deduction referred to as depreciation. Similar to other tax breaks, this legitimate expense translates into a lower taxable income and, therefore, a lower tax bill for a business.

Depending on the type of property, the period of time over which you can

might vary. Check out Publication 946 on the IRS website to learn more details.

2. Deducting business losses in a future tax year

Businesses have expenses, like paying employees or the cost of supplies. Deducting these expenses is one of the most effective tax tricks that can help you save money on taxes. It will help you reduce your business’s taxable income, meaning the amount of money in your income that you must pay taxes on.

According to financial experts, if a business has a loss one year—meaning its tax breaks were more than its taxable income—the excess deductible expenses can be used to reduce taxable income in a future year.

The IRS allows business owners to carry over a net operating loss, also known as NOL, to a future profitable year. This NOL shrinks the business’s taxable income for the future year, which means reducing taxes for that year too.

So, if you have a business, this is one of the best tax tricks to use to save some money!

3. 1031 exchanges

Your real estate property increases in value, and you decide it’s the perfect time to sell, but will that mean you’ll have to pay taxes on that gain? In certain situations, you can delay the gain and taxes on it by exchanging the property for a like type—basically, roll the profit from the sale of your property into the purchase of another property.

This type of tax deduction is referred to as a 1031 exchange or like-kind exchange. It applies to real estate that’s held as an investment or used for business.

According to financial experts, this is one of the most common tax tricks Americans use, and most of them enter into 1031 exchanges by using qualified intermediaries, such as an attorney or a real estate agent.

However, one of the important requirements for a deferred like-kind exchange is the time restriction. The property owner must purchase a replacement property(ies) within 180 days of the old property’s disposition and still qualify to defer some or all of their gain, provided other conditions are met.

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4. Hiring the kids

Do you own a business and have your kid as an employee? If the answer is yes, this is one of the best tax tricks you can use.

Savvy business owners know it’s smart and useful to pay your children too. If you have a business and hire kids, the wage you pay them is a deductible business expense that reduces your business’s taxable income.

In certain situations, you won’t even have to pay your kid’s Medicare and Social Security taxes, also known as FICA taxes, as businesses typically do. That means more money in your wallet.

Just make sure your children are actually participating in the business.

Keep reading to discover other tax tricks!

5. Charitable contributions through foundations

If you enjoy giving to others, your list of tax tricks is about to have a new entry. If you start a foundation with a minimum of $250,000 in initial funding, you’ll instantly reduce your taxable income.

You’ll need to distribute at least 5% of the foundation’s assets each year to take advantage of the tax benefits of a foundation. But then you can contribute as much as 30% of your adjusted gross income to your foundation each year, allowing you to shrink your taxable income year after year.

Within the foundation, your funds can increase without high tax costs. When a foundation sells assets like stocks, they are subject to a 1.39% excise tax rather than capital gains taxes.

6. Health savings accounts

Next on the list of tax tricks you can use to save money on taxes is having a health savings account. Also known as an HSA, this savings account is tax-advantaged, which means you can save for medical expenses. However, it’s important to note that you can only be eligible for an HSA if you have a high-deductible health insurance plan.

Money that you contribute to a health savings account is tax-deductible. But HSAs come with more tax advantages than just shrinking your yearly taxable income. If you leave funds in your HSA and let them grow, you won’t owe taxes on the gain when the time comes for a withdrawal, provided you spend the money on qualifying health care expenses. The same thing applies when you withdraw your principal contribution.

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7. Trust

You can gift assets, like cash and even property, to what’s known as a grantor trust to avoid paying taxes on the assets. If you think of it, this is a smart idea, and it’s definitely one of the most effective tax tricks.

A trust is an entity that holds property for the benefit of a person or family, for example. Another person, known as a trustee, manages or controls that trust.

By placing assets into a grantor trust, the grantor, or the creator of the trust, gives up control of those assets and writes off paying gift taxes on them in most scenarios.

8. Relocating

Last but not least on our list of tax tricks you can use to save money is one that’s targeted at those relocating. If you’re open to a move, changing residences is another effective tax-saving option. There are nine states that don’t have a state income tax.

Avoiding state income taxes can help you save quite a bit of cash. For instance, in California, people who make more than $1 million face a 13.3% state income tax rate. So relocating from California to a state that levies no income tax could save millionaires six figures or even more each year.

When in doubt about tax tricks, ask for help

As a final thought, it’s extremely important to mention that there’s a gray area in these (and many other) tax tricks. So, if you aren’t sure whether a certain tax break applies to you, it’s a smart idea to seek help from a tax expert who can evaluate your unique situation.

If you liked our article on tax tricks, you may also want to read 7 Important Tax Documents To Never Throw Away.


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