12 Ways to Save on Taxes: Strategies the Rich Actually Use

Introduction

Taxes are expensive, but there are legal loopholes to reduce your taxable income to the point that you pay next to nothing in the way of taxes. We lose a significant portion of our yearly income to taxes, and wealthy people seem to know how to pay less in taxes and keep more of their hard-earned money. They take advantage of the legal loopholes in the tax code to reduce their tax liability.

They reduce their taxable income by writing off things that are typically viewed as personal expenses, the same expenses that you and I spend money on. Because of this, it is very understandable that people believe that taxes are inevitable; however, due to the loopholes in the tax code, you can apply the same methods as the wealthy in order to reduce your tax liability. EasyFiling helps business owners track and organize these deductions so nothing gets missed during filing season.

The Tax Code Rewards Behaviors, Not Income

People assume that taxes are based solely on income, which isn’t entirely false, but is missing a crucial detail. The IRS taxes people based on earning methods. Tax implications for a person making $150,000 in wages (W-2) will vary vastly from those of a person making $150,000 in a business or through investments. Job creation, investment, and economic activity participation are all encouraged through the tax code, which is why people get tax vehicles such as write-offs, exemptions, and lower taxes. Recognizing this is the best tax savings approach, and all methods we cover follow this ideology.

Earned Income vs. Business Income vs. Investment Income

The broadest, yet effective tax savings approach is understanding how each of the income types is treated, particularly how earned income is taxed versus how business income is taxed. Economic activity in business and investment is always encouraged through lower taxes and numerous tax benefits. The most significant tax savings come from knowing the differences and making that change. Changing earned income to business income and, then even, to investment income is a paradigm shift.

12 Must-Know Ways to Save on Taxes

1. Writing Business Expenses Off (Legally)

Certain businesses and side hustles can save on tax costs, as every legitimate business entity can claim tax write-offs. Use business-related, market, travel, and marketing expenses, as well as software, for tax deductions. Using a separate business bank account and keeping good records helps defend expenses in the event of an audit. As a business owner, writing off legitimate expenses is one of the easiest means of tax savings.

2. Business Depreciation

If you buy new equipment and/or rental property, you must write off amounts a little bit at a time over a period of years. This can greatly benefit property owners. Even with a property earning positive cash flow, it can, on paper, be a negative cash flow because of depreciation. This, combined with the offset of other income, is one of the most effective tax savings strategies, and it actually provides you with income without losing any money.

3. Investing for Wealth Instead of Just Earning It

Supercharging your income by means of investing is a more tax-savvy alternative because of the tax implications of what you earn. Yes, you can work more, and yes, you can earn more, but you have to pay more in taxes. If you hold your investments for more than a year, your tax rate for the gain is 0, 15, or 20 percent. These are way lower than what you’d pay for earned income. Hence, this makes growing your income through investments a good way to save on taxes, especially in the long term.

4. Tax Benefits From Real Estate

There are tax benefits for owning real estate that are hard to find in other classes of investments. These include tax deductions for mortgage interest, tax write-offs for depreciation, and the 1031 exchange. This 1031 exchange allows you to avoid paying capital gains taxes when you invest the profits from one property into another. For savvy wealth builders, real estate is one of the best means to minimize taxes and create enduring wealth.

5. Using Retirement & Tax-Advantaged Accounts

Investing in tax-advantaged accounts is a way to reduce your taxable income now and save for the future. For most people, tax-advantaged accounts are one of the easiest methods to reduce their tax liability. Here are the current contribution limits:

Simply maxing out one of these accounts is one of the best options to reduce your tax liability.

6. Employing Family Members

If you have a business, one tax strategy you could utilize is hiring family, or even your children, to do legitimate work. The income is taxed in the children’s lower tax brackets, and each child is allowed to earn the standard deduction amount and pay no taxes. This keeps money within the family and is a reduction in business income.

7. Using Debt Strategically (Not as a Burden)

Some types of debt can be beneficial and actually help reduce your tax bill. For example, some mortgage and business loan interest payments can be tax-deductible. Another example is how wealthy people borrow money at low interest rates, purchase and invest in appreciating assets, and then later write off the interest. This technique is known as using “smart debt” and helps convert a potential liability into a tax-saving asset.

8. Charitable Contributions & Donor-Advised Funds

For people who itemize their tax returns, donating to certain tax-exempt charitable organizations, including a Donor-Advised Fund, can result in an immediate tax deduction. This is an even better option than donating to the charity and then writing off the donation, because the donor can decide where and when to donate later. This approach is common among people who get a big tax bill due to an unplanned windfall and need to donate to mitigate the tax liability.

9. Tax Loss Harvesting

When you lose money on an asset, you can sell it to receive a loss that can reduce capital gains on other investments you have. It only works one-to-one per investment. If you have a loss and no gains to offset, you can deduct $3,000 from your other income, and the loss is carried over to the next tax year. Tax loss harvesting works because it is one of the only consistent ways to cut taxes year over year.

10. Estate Planning and Trusts

These days, forming an irrevocable trust is for everyone, not only the ultra-wealthy. It is protective of assets from creditors, shifts income to lower tax bracket beneficiaries, and shelters those assets from your taxable estate. If you want to create lasting wealth, an estate attorney isn’t optional; you need one to create an estate plan.

11. The Value of Specialized Service Providers

A good tax attorney or CPA does not simply prepare tax returns; they apply for tax deductions and keep you legal. They save you tax money and prepare returns at a lower cost than the tax savings they provide. Consider the fees you pay them to be an investment, not a cost.

Closing: How You Can Start Today

The objective here is to begin from the fundamental principles. Focus on the primary strategies that are presently applicable to your situation. As the strategies are built on solid principles, incrementally adding more strategies will lead to better results.

• Are you employed? With your next investment options, try to set aside a portion of your investment in a 401(k) or IRA.
• Do you have a side hustle or freelance work? Make sure you keep a log of your business expenses.
• Are you doing any investing? Focus on long-term investing as well as tax loss harvesting.
• Are you serious about wealth creation? Talk to a CPA about forming irrevocable trusts, buying real estate, and structuring income.

At every age and every stage of one’s career, there exist methods to reduce tax liability that are legal, publicly available, and utilized by persons with any level of income. For the individuals with whom you are compared, the fundamental difference is that they have taken action. The time for you to act is now, and in doing so, you will obtain the strategies to reduce your tax liability.

Frequently Asked Questions (FAQs)

Is it legal to pay taxes this low?

Yes. It is legal to pay as little in taxes as possible by utilizing tax avoidance strategies. Tax evasion is the other side of the coin, which is illegal. Tax evasion can include things like hiding income or making false deductions. This is a tricky part of legality, but these strategies are completely legal.

Do these strategies only work for rich people?

Absolutely not. The average person can also set up a retirement account, qualify for business deductions, and start investing. The strategies simply scale; you start small and then grow.

What is the best first step?

Know the type of your income. If you are a W-2 employee, then having a side hustle or an investment account can open up a world for you that comes with a bunch of deductions and a lower tax rate.

Do I need a CPA?

Not for the basics. However, good tax professionals find ways to save on taxes way more than what you pay them, usually within the first year.