Five *Superb* Tax Shelters For The Long-Term
Consider these 5 Tax Shelters to SLASH your income taxes over long term.
1. Your Castle=Sweet Tax Goodies
Homeowner taxpayers who are married can exclude up to a $500,000 gain on sale of a principal residence, and $250,000 for single taxpayers. For married taxpayers, there is an ownership test and a use test. The individual taxpayer must have owned and occupied property as his or her principal residence for at least two years out of five years before sale. For married taxpayers, both spouses must meet use test, but only one spouse needs to meet ownership test. If only one spouse meets use test, he or she may still use $250,000 exclusion.
This is a FANTASTIC tax-free benefit. For example, an individual who is a do-it-yourself type taxpayer and is willing to get their hands dirty, could make a sizable amount of tax-free income by fixing up and reselling run-down homes, which are structurally sound. Also, certain people, such as carpenters, small contractors, and others could build new homes providing a lot of labor for property, and then sell property for sizable tax-free gains, and could do this repeatedly over and over again.
2. Rental Real Estate Tax Shelters
When a taxpayer is willing to suffer demands of being a landlord, he or she can enjoy tax deductions now with tax-favored capital gains when property is sold.
An individual can deduct interest, taxes, out-of-pocket expenses and most fixing up costs. Depreciation on properties can be deducted up to amount of rental net income, plus $25,000 a year. So a taxpayer can have a rental loss of $25,000 (which is mostly depreciation, a non-cash outlay) to offset against other taxable income of $25,000 each year.
If taxpayer is in 28% marginal tax bracket, a $25,000 loss against other income would mean $7,000 of tax-savings every year, which isn't too bad, and capital gain tax rates when property is sold. Losses are not desirable (except when they consist of depreciation)unless they can be converted into capital gains in future.
3. The Ultimate Tax Shelter: Your Own Business
Having your own business is number # 1 way to reduce your tax bill, and can be used to convert your personal expenses into allowable deductions.
Some of personal expenditures that can be converted would be an automobile, health insurance costs, medical expenses, and vacation travel. You can hire your children (see # 4 below), and take home-office expenses and make pension contributions as well.
Establishing a "profit motive” is key, and to be in business, you merely have to declare it. There are two tests for whether a “profit motive” exists. One is objective, and one is subjective.