7 Ways To Create Tax-Free Assets And Income

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Tax hikes are probably coming. Even if Congress doesn’t agree on a substantial increase this year, they are likely to come.

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The 2017 tax law is due to expire after 2025. Pre-2018 tax law will be automatically reinstated unless Congress agrees to something else. Plus, the trillions of dollars that have been added to the national debt over the years will have to be paid off at some point.

Tax-free investments are a good way to avoid the upcoming tax hike. You can get some of your assets and income tax-free. Here are seven tax-free tax strategies to consider adding to your portfolio or increasing your use if you already have one.

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Long term capital gains. The maximum tax rate on long-term capital gains is 20%. But many people forget that the 20% rate only applies to the highest income levels. Lower income levels have lower rates.

For many people, the tax rate on long-term capital gains is 0%. And for many others the rate is only 10%. The same rates apply to qualified dividends.

Qualified dividends and assets owned for more than one year if in 2021 taxable income other than long-term gains or dividends does not exceed $40,400 for single taxpayers, $54,100 for head of household or $80,800 for joint filers Profit on the sale of is taxed. 0% federal rate unless they let you exceed the threshold amount.

A word of caution at the 0% rate. Profits and dividends may not be taxed at the federal level, but they do increase adjusted gross income, which can lead to increased taxes on Social Security benefits or other taxes. Also, your state may tax benefits at a different rate.

You can pay a 0% tax rate on long-term capital gains by managing your taxable income.

Avoid actions that will increase your gross income, such as taking additional distributions from traditional IRAs and 401(k)s. Instead, take additional distributions from a tax-free account if you can. Or you can wait until next year to sell some investments when there is no urgent need to sell this year.

You can also consider ways to increase the deduction and reduce your taxable income. For example, several years’ worth of charitable contributions can be split over a year after you deduct expenses to itemize.

Another strategy is to sell investments in which you incur a paper loss. Losses are deducted against capital gains for the year. Losses up to $3,000 that exceed gains can be deducted against other income, and any excess losses can be carried forward in future years to be used in the same way.

Remember that to qualify for long-term capital gains, an asset has to be held for more than a year. Sell ​​the property only the day before, and the gain will be short term and taxed as ordinary income.

529 Savings Plans. These college savings plans make wealth planning tools and make investment returns tax-free.

You contribute money to a 529 plan and name a beneficiary of the account. Typically a child or grandchild is designated a beneficiary with the expectation that the account will eventually pay for college education.

You can use up to five years of your $15,000 annual gift tax exclusion in a year when you contribute to the account, ensuring that contributions up to $75,000 are saved from gift taxes and any of your lifetime estate and gift tax exclusions. does not use.

You don’t get a federal income tax deduction for making contributions, but many states allow at least a limited deduction against state income taxes.

Compounding the investment account gives tax-free returns. Distributions are tax-free when used to pay for qualified education expenses. The definition of qualified education expenses has expanded over the years and now includes pre-college education expenses of up to $10,000 paid to public or private institutions. Computer and Internet expenses are also allowed.

If the plans change, you can change the beneficiary of the account and withdraw the money as and when required.

Health Savings Accounts. This is the only strategy with triple tax benefits and a great way to save for retirement.

Many medical insurance plans and policies with high-deductibles qualify the insured for contributions to health savings accounts (HSAs).

Contributions up to the annual limit are tax deductible when you make them and are excluded from gross income when your employer makes them. Investments can be made in the account, and the income in the account is compounded tax-free.

Distributions from an HSA are tax-free when you pay or reimburse for qualified medical expenses that are not reimbursed by other sources. Also, if you’ve incurred unreimbursed medical expenses in prior years, an HSA can reimburse you for them tax-free this year.

Everyone eligible for an HSA should open an account and ensure that the maximum contribution is made each year. If your employer doesn’t contribute to the annual limit, make the contribution yourself. If it makes sense to transfer money from a taxable financial account to an HSA.

Qualified Opportunity Fund. Qualified opportunity zones were created in the 2017 tax law. Investors get tax exemption for investing in specified economically disadvantaged areas. Most investors make these investments through funds and partnerships formed to qualify for the Opportunity Sector tax breaks.

You can defer long-term capital gains by investing the profit in a qualified opportunity area within 180 days after the event that triggered the profit.

Gains can be deferred until before December 2026 and when the funds are sold or exchanged.

Also, when the fund is held for at least five years, the taxable gain is reduced by 10%. When the fund is held for at least seven years, taxable gains are reduced by 15%, although the possibility of fresh investments is eliminated.

Hold the fund for a long time and any profit arising from selling the fund will be tax free.

A Qualified Opportunity Zone fund may be a good idea for someone who is recognizing substantial capital gains from the sale of a business, real estate or securities.

Qualified small business stock. A profitable investment in a small business can be tax-free up to a certain amount.

A qualified small business is one that is organized as a US “C” corporation. Sole proprietorships, LLCs, and sub-chapter S corporations do not qualify.

Stock must be issued after August 10, 1993, and received by the taxpayer directly from the corporation in exchange for money, property (other than stock), or services. Also, the total gross assets of the business must have a tax basis of less than $50 million when the stock is received.

When the requirements are met, the profit from the sale of the stock is tax-free up to $10 million or 10 times the adjusted tax basis of the stock, whichever is greater.

Many small business owners and investors qualify for tax-free benefits from eligible small business stock, but do not realize it. Others may qualify by considering the rules when creating or investing in a business.

Roth IRAs and 401(k)s. Transferring assets to a Roth account determines tax-free gains and income for a lifetime.

There is no tax break when money is put into a Roth account. The benefits are tax-free compounding of investment returns and tax-free distribution of accumulated wealth.

You can contribute to a Roth IRA or Roth 401(k). You can also convert a traditional IRA or 401(k) to a Roth IRA.

Insurance. Life insurance benefits are probably the most permanent tax-exempt asset, and the situation is not likely to change any time soon.

In addition to life insurance benefits for beneficiaries, you can borrow tax-free from the cash value account of most permanent life insurance policies during your life, although any unpaid loans reduce benefits passed to beneficiaries.

A good strategy can be to convert the asset into permanent life insurance.

For example, you can take distributions from a traditional IRA and use after-tax amounts to purchase permanent life insurance payable to your children or grandchildren, or a trust for their benefit.

The life insurance benefit is guaranteed and will be tax free to the beneficiaries. For many people, the life insurance benefit will exceed the after-tax value of the IRA. Plus, it won’t be subject to market volatility the way an IRA would.

Other assets can be reestablished as permanent life insurance, providing a guaranteed tax-free inheritance for the beneficiaries.


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