The Last Best Tax Shelters Podcast
In this episode of The Science of Economic Freedom, you’ll find out about some of the best tax shelters currently available right now to virtually all Americans.
More importantly, we’re not going to talk about any specific tax shelter products. Rather, this episode is all about the strategy and tactics you can use to put existing tax shelters to work for you.
For example, you’ll learn:
- How to optimize your retirement accounts; how to get on the path to maximizing your retirement account contributions, and how to handle rules such as required minimum distributions (RMD).
- Why owing real estate can be a tax deduction both during the period of home ownership, as well as when it comes time to sell a home.
- How owing a small business where you receive 1099 income lets you offset business expenses such as automobile, travel, computers, cell phones, internet connection, office supplies and more.
- Why owning a small business could allow you contribute as much as $55,000 per year to a special type of IRA.
- What the structural tax benefits are to owning a small business.
- Plus, a quick list of “honorable mention” greatest tax shelters that may apply to you.
Here are a few “Action Steps” to take away from this episode:
1) Ask yourself which tax shelters you are participating in, and whether you are maximizing your retirement account contributions.
2) What new ideas can you implement form the list of great tax shelters in this episode?
3) What questions came to mind that you can run by your financial and/or tax advisor?
4) Send me an email with your questions, show topic suggestions, or other ideas to [email protected].
Doug: When was the last time you thought about a tax shelter? Are there any good tax shelters left after the new tax law went into effect? Today we will discuss the last great tax shelters still available to all Americans, on The Science of Economic Freedom.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc is the parent company of Mercer Global Advisors Inc and is not involved with investment services.
Doug: Welcome to The Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is about helping you achieve your financial dreams – we call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones, today we want to help you identify your next step on that journey. This is episode 15, “The Last Great Tax Shelters.”
Mention the term “tax shelters” and people’s eyes light up. Any time we can gain an edge on the taxman we are all ears. But every year investors and savers pass up opportunities to save on taxes and invest for their future.
These tax shelters that we’re going to discuss today are available to all Americans. Not all Americans may choose to use these tax shelter options, but these are your options. We’re not going to talk about some product that gives you a three-to-one write-off or a ten-to-one write-off. There are no products discussed at all.
Do tax shelters fit into your long-term financial goals?
These are strategies that are legal and encouraged by Congress because they are good for America. These great tax shelters are retirement accounts, real estate, and small businesses. Before we get into a discussion of each of these options, let’s review how these tax shelters fit into your long-term financial goals.
We should remember that taxes are the single biggest expense of our lifetime. It is just common sense to manage your tax situation. Now, broadly speaking, many people overpay their taxes because they’re unorganized, uneducated, or are just not focused on their financial wellbeing and their long-term goals.
Three of the best tax shelters
Now, we want economic freedom. We have specific goals to help us reach our destination. We know that we must be organized, educated, and aware of how we’re going to achieve success. Paying less in taxes and taking advantage of the rules is just one of the ways we win.
If we’re going to achieve economic freedom, and that is going to work because we want to, we must save for economic freedom. These tax shelter options we’re going to discuss today are most likely already built into your goals, but are you maximizing the benefits of each one? We’re going to find that out today. Now, here is our disclaimer. This information is for education purposes only. Every taxpayer is an individual and you should seek the counsel of a qualified tax consultant.
Tax shelter for retirement accounts
Now let’s take these three tax shelters one at a time. Let’s begin with your retirement accounts. If you are working, you have retirement savings options. These options will vary depending upon where you work and what is offered through your employer. If you’re retired, there are also specific strategies that you can deploy to save on taxes. We’ll cover the saver and the retiree today.
How to maximize your retirement account
Before we get into the specifics of your retirement plan options, let’s talk about economic freedom. The sooner the better, right? Here is a bit of statistical research you should be aware of.
Vanguard, one of the country’s largest retirement plan providers, studied its participants and found that only 10% maximized their retirement plan contributions. 90% of participants chose not to maximize their retirement savings each year.
Why not? Most would tell you the reason is cashflow. They don’t have the means to save to the max. This would not allow for other expenses, bills, and debts to be paid on time. So, what are you doing? Are you saving to the maximum allowable level? If not, a review of your spending priorities is in order. I would suggest you review episode six and the Spending Plan resource at thescienceofeconomicfreedom.com.
Each year you do not maximize your retirement accounts is time you’re adding to the achievement of economic freedom. You are delaying the achievement of your goal. Even if your company does not offer an employer-sponsored plan, you still have the option of contributing to an IRA or a Roth IRA. Contribution limits may vary from year to year and plan to plan.
Also, your age matters. Most retirement plan options allow for a catch-up provision for those over age 50. Now, it would be confusing to go through every type of plan and its contribution limits here on the podcast. Check with your plan provider for the details of what the maximum contribution is for you.
But the bottom line is your retirement plans offer you a tax reduction this year, and tax deferral for many years into the future. Another way to describe this: contributions either lower your overall income or are a tax deduction. These accounts grow with no current taxes due. These accounts and their proper management are a must to achieving economic freedom.
Retiree tax shelter
Now let’s talk about a retiree. There are several provisions in the tax code you should be aware of. First is the necessity of the required minimum distribution, sometimes referred to an RMD. It is a requirement of all taxpayers at the age of 70 and a half to take a minimum withdrawal from their retirement accounts. Now, there are two tax strategies to consider that could change this situation.
The first is a Roth conversion strategy. Depending upon your income and tax bracket, it may be beneficial to convert a portion of your IRA to Roth status. Roth IRAs are not subject to RMD withdrawals, and distributions are tax-free. Converting a portion of your IRA to Roth status lowers the value of that account, which lowers the amount of the required minimum distribution. Taxes must be paid when the conversion is made, and this is when you need to consult with your financial planner and tax advisors to know if Roth conversion makes sense for you.
Required minimum distribution
Now another strategy. When you are in required minimum distribution years you may want to consider gifting your required minimum distribution income to a charity of your choice to reduce your overall income in any one year. Now, cash flow, taxable income, and your tax bracket matter to a retiree. Consult with your advisors to customize strategies for you.
Tax shelter for real estate ownership
The second great tax shelter built into our tax code is real estate ownership. Many of you may own your home, others may desire to do so someday. The preferential treatment of real estate can be summed up like this.
During the homeownership phase, you can deduct mortgage interest expenses with certain limitations. Along with interest, some or all of your property taxes may be deductible. The value of the deduction is subject to limitations.
Now, this can be an effective way of putting a roof over your head while your property appreciates in value. By comparison, there is no interest deduction for paying rent. There is no appreciation of equity for the renter. The tax code is subsidizing homeownership.
In addition, when it comes time to sell, if you have owned your home for more than two years, or two of the last five years, there are no taxes on a gain of $250,000 for a single taxpayer and $500,000 for a married couple. This capital gain exclusion opportunity can be used again and again. These simple provisions of deductibility of interest and tax-free capital gain exclusion are two reasons to include real estate as one of the last great tax shelters.
Tax shelter for small business
Finally, there are tax advantages to owning a small business and, in a similar category, earned income from business activities. Let’s start with earned income from business activities.
You may have heard of someone getting a 1099 for business activities such as consulting, legal work, contracting, modeling, or one-time events. This could be a side business, a work-from-home business, or even a start-up business.
This type of income must be declared on your taxes because the IRS is receiving notice via the 1099 that the income was paid to you. What many people don’t realize is this income declaration allows you to have offsetting business expenses. These are reported on your taxes under Schedule C.
These expenses may include: automobile expenses, travel, office supplies, internet connection, computers, printers, and in some cases a home office deduction could be allowed. One of the biggest and best expenses is a retirement account. You may qualify for a SEP IRA which allows you a contribution as high as $55,000 a year.
Now, the rules for SEP IRA contributions are based on a percentage of income, and it’s maxed at 25%. Again, we recommend you speak with a qualified tax advisor to help you with what would be reasonable deductions for the income you are declaring.
Now there is the small business. This is truly one of the great tax shelters for a very good reason. Most jobs in America today are created by small businesses. Congress was wise to encourage start-ups to build our economy and grow jobs.
Small businesses can deduct almost anything that relates to the starting or maintaining of their businesses. There are depreciation rules that benefit the business for the purchase of real estate and equipment. There are rules that encourage the offering of retirement plans, the deduction of healthcare expenses.
Business owners take tremendous risk in starting a business, and there are incentives to do so. There are no taxes on the appreciation of the business until it is sold. Businesses can run at a loss, carry forward losses to offset future gains. There is a lot of flexibility when it comes to small businesses and taxation.
Now, not everyone is cut out to be a small business owner, and if you are generating 1099 earned income and are a team of one there are great ways to manage your taxes, increase your retirement savings and move towards economic freedom. But for those brave enough to start their own businesses, and they are successful, they are well on their way to achieving economic freedom.
Alternative tax shelters
There you have it, the last great tax shelters in America. But wait, there’s more. Before I get the “What about this?” email, let me give you my list of honorable mentions in the area of tax shelters.
- Health savings accounts. Health savings accounts are much like a Roth IRA: tax-free growth, tax-free withdrawals.
- Another favorite of mine, Roth IRAs have so many special provisions that we will be doing a separate show on Roth IRAs.
- Cash-value life insurance. Not for everyone, but these types of life insurance policies carry some special provisions under the tax code that can be valuable.
- And finally, capital appreciation of equity ownership in the stock market not yet realized. If you allow your gains on equity to sit for years and years, you will not pay taxes until you realize the gains, just like a small business owner.
That’s it. The last great tax shelters.
Now, what about your next steps on your journey to economic freedom? I open the show with the same intro each week. I am asking you to find your next step in today’s program. Here are some questions to answer that may help you find yours.
- Which tax shelters are you currently participating in, and are you maximizing your retirement plan contributions?
- What can you put to work from today’s program? What new ideas could you implement?
- What questions came to mind that you should run by your financial or tax advisor?
- Lastly, I want to ask you to send me your questions, show topics, and critiques. My email address is [email protected]. This is Doug Fabien. Thanks for listening.
Announcer: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio.
This program is sponsored by Mercer Advisors. Mercer Global Advisors, Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors, Inc. is the parent company of Mercer Global Advisors, Inc., and is not involved with investment services.
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