Tax Basics

Tax Basics

Tax optimization is important; it is critical to get your taxes right lest you become in the crosshairs of the government. In the past, it was easily to outright skirt the rules of taxation, but no more! The only way to avoid taxation is to avoid it legally now, because technology will eventually catch tax evasion.

Obey the laws of your jurisdiction, and if you don’t like those laws, leave!

There are multiple tax systems around the world, the worst of which for the taxpayer being universal income tax. There is non-domicile taxation, territorial taxation, lump sum taxation, and many more options! You have to understand which type of tax situation you have.

One problem, if you are a citizen or green card holder in the US, you are taxed on your worldwide income no matter where you go. As long as you have citizenship, it is likely that you will have some filing and tax obligations, provided you make more than the standard deduction for the year.

Unfortunately, if you live in a western country, they own you.

US Citizenship, as well as some other high tax jurisdictions, place many regulations and filing restrictions on their citizens and tax residents. All US Citizens have to report foreign earnings and bank accounts to the proper authorities, at risk of fines, and in some cases, jailtime. Western countries sanction many countries that don’t follow their dictates, so there are certain countries that US Citizens cannot invest in or do business with. There are export controls and more restrictions.

There are certain deductions that can apply that reduce the overall tax burden, which can lower your tax burden, depending on the jurisdiction. Having a health-savings account, 401k, and IRA can reduce your tax burden and also avoid capital gains on investments, subject to limitations. Unfortunately, if you are a W-2 employee, there isn’t much you can do other than the previously mentioned things (or buying tax-free bonds if you are highly compensated) to reduce your tax rate.

If you want to truly pay less taxes as a percentage of income, you should consider opening your own business. As a business owner, much more tax deductions are available depending on your strategy, and you can make a lot more money depending on how well you run your business. 

You can deduct ordinary and necessary business expenses, provided you have a reasonable expectation of profit. Consult a CPA to discuss taxes for business owners. Contact us to discover how opening a business can achieve your personal goals!

In the US, real estate is the true tax shelter. Look at Donald Trump, who paid little to no taxes after the 2000s. This was thanks to the power of real estate.

Real estate is strongly encouraged in the US Tax Code and has favorable tax treatment. Property tax is generally deductible from federal taxes for rental properties, as well as depreciation, making real estate lightly taxed and favorable for high income earners who wish to reduce their tax load. And here’s the kicker.

Net losses on business income - including rentals, can be deducted or refunded to your business.

You can argue that real estate’s tax treatment creates economic distortions, but you should know that real estate is a powerful tool economically. Just the fact that depreciation exists is a cheat code, but another more powerful cheat code is the 1031 like-kind exchange. This allows you to defer capital gains on real estate indefinitely provided that you hold real estate for a designated period of time, and you purchase new real estate with your gains within a set period of time.

Many countries incentivize real estate and business ownership.

This is because countries try to retain economic development. When you create value for a country, a country is more likely to treat you more favorably. So, the best tax recommendation is to choose a country that favors the way you do business and make it your home!

Anyone can use the basics of taxes to make a decision. Whether you are using tax software or general applications for enterprise resource planning, you need to know how that software integrates with your tax system. Montclair Amherst, LLC helps with that. Schedule a consultation with us to ensure you make the right decision.

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