If you thought becoming a millionaire was all about getting a job that paid you a massive amount of money as a salary, you’re mistaken. Sure, it helps to be paid a bucket load of cash at the end of each month, but it’s only part of the equation, as is knowing how to spend your money that little bit smarter. The real secret to building your wealth is to lower your tax bill.
Yup. Two-thirds of all millionaires make a conscious effort to care about the tax implications of their investments. The reason for this is pretty simple: taxes can cost well above two percentage points in terms of annual returns. That can be tens of thousands of bucks, which is enough to make even the most well-off millionaire balk a bit.
That’s why we have pulled together a list of strategies to help you avoid paying taxes like a millionaire (all of which are totally legal):
House Your Funds Properly
401(k)s and IRAs are a must-make move when it comes to avoiding short-term capital gains or interest income, both of which are taxed as normal income. It’s all about being smart with your “asset location” because, trust us, you can save some serious points a year in returns. Taxable bond funds, high-yielding dividend stock funds, actively managed funds, buy-and-hold equity funds and index funds – they all have a role to play, it’s just knowing how to use them to the best ability.
Share Your Pain With The Tax Man
A great habit to get into is selling off stocks that are down and using these losses to offset the gains you have made elsewhere in your portfolio. You don’t need to be doing this all year round, just once at year at the end of the tax year will be enough to help you avoid paying more tax than you need to.
Play The Property Game
There are certain ways you can save yourself having to pay a hefty amount of tax on your property investments. On one end of the scale, you can donate your home to a charity to avoid tax. Yeah. You read that right. We said there are real estate donation tax benefits that are well worth exploring if you have a hefty bill coming your way. The other thing you can do is structure your 1031 exchange properly, which is basically a way of selling a property and reinvesting the proceeds into a new property while deferring the capital gains taxes. It’s a clever move to make.
The Business Of Structure
Only 2% of millionaires inherited their business, which means a massive portion of self-made millionaires built their businesses from the ground up, setting them up as sole proprietorships early on to limit the amount of taxable income. The reason for this is because If you lose money at first, you can use losses to offset other income, including capital gains, which is harder to do in a corporation. Clever, clever.