How to Lower Your Taxes (Legally)

by Sandy Botkin, Esq., CPA

Startling statistic: the average person spends 30 to 45 percent of their gross income on taxes, 25 percent on housing and utilities, 20 percent on food and 10 percent on transportation.

This means that high-income earners have between 5 to 10 percent of their gross income left for everything else such as retirements, education for kids, loans, insurance, entertainment gifts etc. Don't you find this alarming? No wonder Americans have a hard time getting ahead of the inflation curve…

1. Hire your kids and shift income, tax-free:

How would you like to deduct the equivalent of your kid's weddings, college costs, cars and books? There are a number of ways, but one of the best ways high-income individuals can accomplish this is by hiring their kids in their business.

Wages paid to your children under 18 in a non-corporate business are exempt from social security and federal unemployment tax. Even better, all children can earn up to $5,700 of reasonable wages for their services without have to pay any federal income tax!

Why? Everyone gets a standard deduction against wages of $5,700. Thus, the first $5,700 of reasonable wages that you pay them would be free of income tax. Even better, you could also obtain an exemption for them on your tax return. Don't we have great tax laws?

2. Double deduct equipment in your business or in your rental property:

How would you like to deduct equipment used in your business or rental real estate investments twice? Yes, you read correctly. Moreover, the solution has been around a long time and blessed by a U.S. Supreme Court Decision.  The technique is called the gift-leaseback.

In a gift-leaseback, you would give property that has already been mostly depreciated to a family member who is in a lower tax bracket than you and then lease it back from them.  In effect, you would be deducting the equipment twice: once as depreciation and the second time as a lease payment.

You would use this technique for those that you would give money to anyway. Thus, this could be done with your kids, nieces and nephews, brothers, sisters, parents and significant others.

The gift-Leaseback involves two steps:

1. Give away the title to the property that you are using in business or in your investment property to these family members.

2. Use a lease and lease the equipment back from them.  Thus, the equipment is still being used in business or in your investment property.

This is ideal for most business equipment such as cell phones, phone systems, furniture, art work, manufacturing or farm equipment. In addition, this is a very viable technique for equipment used in investment property such as washers, dryers, refrigerators, stoves etc.

Many states require use of a trust to receive the equipment for the leaseback. The funds from the trust would then be distributed to your beneficiaries. Finally, the use of the gift-leaseback helps asset-protect you from lawsuits since the property transferred in trust would not be in your name.

3. Set up a charitable remainder trust:

Would you believe me if I told you that you could eliminate all capital gains on stocks and bonds, get a charitable deduction when you set up this trust, get an income for life for yourself at the same time and, in addition, avoid all estate taxes on the property transferred into this special trust? Does all this sound too good to be true?  Well, it is true.

 A charitable remainder trust is a trust set up for a charity or multiple charities but with you, the donor, continuing to either use the property donated or to receive income for the rest of your life. Thus, you would contribute stock, bonds, real estate or other appreciated property to this trust, which would give you a charitable deduction.

The trust would sell the property incurring no income or capital gains tax since it is a tax exempt trust. Finally, you would receive income for the life of the trust.  The charity would get the property in the trust, if any, after your demise and would, thus, not be included in your estate. Everyone wins except the IRS.

In addition, while the contributions are irrevocable, you do have control over how and where the assets are invested.

There are several types of charitable remainder trusts. There is a Charitable Remainder Unitrust that pays a fixed percentage of the trust value to you each year. There is a Charitable Remainder Annuity Trust that pays you a fixed dollar amount each year. Finally, there is a Charitable Pooled income fund that is usually set up by a charity that will enable many donors to contribute.  The only disadvantage is that your beneficiaries would not get the property after your death. Thus, these trusts are ideal for high-net-worth or net-income taxpayers.

Taxes are the biggest expense most high-income and high-net-worth individuals have. What have you done about it and what are you doing about it? By following my advice, you will make your life less taxing.

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