In today’s society estate planning and taxes are so closely intertwined that many people think that saving taxes is what estate planning is all about. Of course, if you've read Basics of Estate Planning then you already know that estate planning is about much more than just taxes.
In fact, before taxes are even relevant, you first have to earn, save and invest money wisely. But, hopefully you are able to do that and you begin to make a nice income. That’s when you should be sure you are managing your affairs the best way possible to minimize the taxes you pay.
I recently received a chain e-mail that was circulating around. You may have seen it yourself. It listed all the taxes the average person pays today. Absolutely amazing. Our society is saturated with taxes from top to bottom.
Of course everyone knows about the income taxes they pay (due every April 15th). But, you may not think about the many other taxes that, for most people, are cumulatively much larger.
Here’s a few:
And maybe the most insidious tax of all is the cost of compliance with all these taxes. That cost is essentially yet another tax. You know, the money you pay your accountant every year to figure out your taxes. Also, the time you spend/waste keeping up with changes in tax laws; getting all your tax information together; filling out forms, etc.
Undoubtedly taxes are a major hindrance and constant drag as you travel the road towards capital and wealth creation.
Of course, when you think of estate planning and taxes, the first thing you think of is the estate tax (often called “death tax” or “inheritance tax”) which can tax both probate and non-probate property. You probably have heard about the recent estate tax changes. You can read more about that at estate tax.
The bottom line is that if you can legally avoid taxes you can obviously accumulate wealth more quickly. So how do you avoid taxes -- legally?
The only way is to make the tax code work for you. The tax laws provide various ways (i.e. “tax shelters”) to lessen your tax burden. I dare say that for every tax our politicians impose, they provide 3 tax shelters to benefit those that can use them.
If you own your home, that is a wonderful tax shelter. You probably can deduct your mortgage interest, points, and property insurance from your taxable income.
Another wonderful tax shelter is owning your own business. That can be a terrific way to legally avoid taxes. The reason is that when you own a business, potentially, you can deduct many expenses that employees cannot deduct. (More about this at best low cost investment.)
Individual Retirement Accounts (IRA’s); 401k’s; Section 527 Plans; Education Savings Accounts, etc – all can provide great tax advantages.
If you are an employee, your fringe benefit plan may offer you great opportunity to enhance your estate plan by avoiding taxes. You can read more about that at Fringe Benefit Plans.
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