Tax Shelters for Everyone

Give Me Shelter

What do Helio Castroneves, Joe Francis, Nicholas Cage and Annie Liebovitz have in common? All of them had run-ins with the IRS last year for failing to pay the correct amount of taxes.

Out of all of those celebrities Helio seemed to be the worst off. Castroneves was accused of hiding millions of dollars in fees for racecar driving and endorsements in a Dutch tax shelter.

If convicted he could of faced several years in prison and be on the hook for over $2 million in back taxes, penalties and interest. OUCH!

Thankfully Helio was found not guilty, but instead of trying to shelter his wealth in offshore accounts like he’s inevitably seen people do in the movies he should of legally sheltered his income to avoid paying some taxes. It’s easier than you think.

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First off, let me explain what a tax shelter is. A tax shelter is any investment one makes to reduce their taxable income. In essence you are trying to reduce the amount of money you pay in taxes to local, state and federal governments each year. Trying to reduce your tax bill is legal, failing to pay your tax bill is illegal.

If only Helio would of come to me first, before attempting to hide his income from Uncle Sam. I would have told him how the U.S. Government is cracking down on people who try to shelter their money in offshore tax shelters like he did.

A few months ago President Obama signed into legislation a new act that makes it easier for the IRS to go after individuals and companies that exploit U.S. tax loopholes and attempt to dodge paying some or all of their tax bills. Specifically, the government is going after institutions that are hiding accounts for Americans trying to avoid paying some or all of their taxes. The law allows the IRS to tax the assets of these holding companies up to an additional 30% if they do not disclose the nature of investments held by their American clients. The federal government estimates it has lost nearly $1 trillion from these tax shelters.

Tax shelters have gotten a bad reputation. We tend to think of them as something only the super wealthy do in places like Switzerland or the Caribbean. But this doesn’t always have to be true. There are numerous methods to shelter your income legally from having to pay a large tax bill every April. These methods are available to everyone from Joe the Plumber to Bill Gates. I don’t know about you but when Uncle Sam says it’s OK to keep more of my money I listen and follow along!

You probably think you don’t know the names of any common tax shelters but I bet you do. The most widely used tax shelters are retirement savings programs. Individual Retirement Accounts also known as IRAs, 401(k)’s, and plans like it are examples of widely used tax shelters.

If you own your own home that too is a legal tax shelter. It’s also one of the best! Owning a home gives you so many opportunities to reduce your tax bill. You can deduct mortgage interest, points paid to get the loan, interest on certain home equity loans, and property taxes. Plus there are ways to keep the profit you make from selling the home tax free!

Our government has long encouraged Americans to buy homes instead of renting them. To support this they allow you to deduct the interest you pay on your mortgage each month from your annual tax bill. The government even allows you to deduct the interest you pay to buy a vacation or second home!

The government further allows you to deduct all the property taxes you pay including state and local taxes. Even if you’re a tenant shareholder in a co-op apartment building, you get to deduct your share of any property taxes paid.

Furthermore, the government allows you to keep up to $500,000 for married couples filing joint returns of profit from the sale of your home. The only requirement is that you live in the residence for two out of five years you own the home.

The best part is you can do this as many times as you want. This isn’t a one-time only type of thing. You don’t have to roll your gains over to a new house within a certain time period or anything like that. You can even rent after you’ve sold your home for a profit and then qualify for the tax free gains again every two years.

Earlier in the article I mentioned that the most common forms of tax shelters are retirement saving programs. They’re a great way to secure your financial future in your golden years and keep money away from Uncle Sam. No matter what type of retirement savings account you have you can reap the tax deduction benefits.

If you have a 401(k), your contributions are taken out of your income pre-tax. Thus deferring those taxes from this year’s tax bill.

For 2010, most people can put away as much as $16,500 a year. If you’re over age 50 you can put away as much as $22,000 a year. Imagine protecting over $16,000 of your income from the tax man and it’s all perfectly legal!

Add in bonus features like tax free investment growth until you take a distribution and the fact that many companies match part of your contribution up to the first 6% (free money!) and you can see why I’m shouting this information from the rooftops.

401(k)’s are generally only for those who are employed by someone else. If you are self-¬employed do not feel left out. IRA’s are typical retirement saving accounts for entrepreneurs that are also great tax shelters. I like Roth IRA’s for the simple fact that when you take out money from the account you don’t get taxed. When you contribute to a Roth IRA with money that has already been taxed you do not pay federal income taxes on any withdrawals. Traditional IRA’s work in the opposite way. Contributions made to this type of retirement savings account can be deducted from your tax bill each year but are taxed when you take the money out of the account. I advocate the Roth IRA because you are typically in a low tax bracket when you begin to contribute. Even if you are in a higher tax bracket when you begin to withdraw money from your Roth, you still do not have to pay any additional taxes on the money. It’s a great reason to contribute the maximum amount each year to a Roth IRA while you are in a lower tax bracket. You can never be taxed again on that money no matter what tax bracket you end up in.

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If you have a child or grandchild you’d like to help out, setting aside money for their college education is a nice little tax-shelter for them and possibly for you too. Most commonly called the 529 plan, this tax shelter allows recipients to take out money for college or university expenses. The best part about this plan is that depending on which state you live in the person contributing the money into the account may be able to write-off their contributions against their income taxes. Considering that some 529 plans allow up to $200,000 in contributions in a lifetime, your tax saving benefits can be extremely significant! Plus, when the student takes money out of the account the distribution is federal tax-free.

There are so many more legal tax shelters I could talk about in this letter. Flexible spending accounts for healthcare, 1031 Exchanges for real estate purchases, the list goes on and on. The important thing to know is that all of these tax reduction advantages are available to everyone, not just the rich. And you don’t need to go overseas to get these benefits!

Until Next Time…

Keeping Money In Your Pocket,

Nancy Patterson


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