The richest of the rich are withholding more money from the government than even the IRS had estimated.
A recent study by the National Bureau of Economic Research has found that Americans in the top 1% are underreporting their income by up to 20% — far exceeding even the agency’s own estimates of tax evasion by the wealthy.
This tax evasion is costing the U.S. government upwards of $175 billion a year, according to the report.
Tax evasion is a crime. It’s not to be confused with tax avoidance, which is a perfectly legal strategy to keep your tax bill as low as possible.
When it comes to holding onto their money, no one does it better than the rich. Billionaire Warren Buffett, and his accountants, use a number of these tips to lower his own tax rate.
Here are some strategies you can adopt from high earners when filing your taxes to hold onto more of your income.
1. Build a strategy around long-term capital gains
This is a tip Warren Buffett relies on come tax time, according to Entrepreneur. There’s a reason investing, whether that be in the stock market, real estate, mutual funds or bonds, is associated with the upper echelon — it can be incredibly profitable.
And what’s more, you’ll enjoy a preferential tax liability rate on capital gains (what you make over and above what you put into your investments) for assets you’ve held longer than a year.
What does that mean? The best, most profitable strategy to invest in stocks is a slow and steady approach — whether you’re a beginner or not.
Investing is not just for the rich. All you have to do to get started is download a low- to no-commission investment app that’s good for beginners.
For example, There is an app that lets you invest your spare change.
2. Invest in municipal bonds
Bonds are essentially like loans you give to the state or local government. Bonds are assigned maturity dates for a predetermined period of time, after which you can redeem the full amount of your original investment plus interest.
That interest is exempt from federal taxes, as well as some state and local taxes, depending on where you live.
You can also take out corporate bonds, where you essentially loan money to a company. While corporate bonds tend to pay higher interest rates, municipal bonds are a safe way to invest your money, get some returns and keep more of your gains.
3. Contribute the max to your retirement accounts
Preparing for retirement can be an overwhelming process. Just thinking about how much money you’ll need can be daunting. But if you enlist some professional help, it will seem much more manageable.
By maxing out your contribution limits for your 401(k) or 403(b), you can reduce your taxable income — it’s a win-win.
Don’t have a workplace retirement plan? You can still get a tax break by contributing up to $6,000 (or $7,000 if you’re 50 or older) to a traditional individual retirement account (IRA), which could then reduce your taxable income.
4. Use a health savings account
If your health insurance plan has a high deductible, you can use a health savings account to reduce your taxes. It works like a 401(k) where you contribute funds to the account before taxes.
In 2021, the maximum deductible contribution level is $3,600 for individuals and $7,200 for families. Once you’ve moved that amount into your account, it can accrue interest and grow without you having to worry about paying tax on any earnings.
You also won’t have to pay taxes on any withdrawals for qualified medical expenses.
5. Take advantage of new tax laws and credits
While the tax changes that benefit Warren Buffett may not also benefit you, it is never a bad idea to stay up to date with any new laws, hikes or cuts. Some tax credits reduce your tax liability, while others will give you money back — like the recently expanded child tax credit.
When you go to file your tax return, make sure you haven’t overlooked any deductions before you hit submit.
If you’re working with a tax professional, they should be able to help you find any unclaimed credits or tax breaks. But if you’re filing on your own, many tax software programs will also have an option to double-check for deductions and maximize your refund.
6. Donate to charity
This is another strategy Warren Buffett uses in his tax planning. It feels good to help others, but reducing your tax liability will add an extra spring to your step.
ver the year, if you make any donations of more than $300 to a charitable organization, keep your receipts to claim them when you file your taxes. This year, you can claim up to $300 without having to itemize your deductions.
To claim any donations over $300, you would need to itemize. But it’s estimated that fewer than 10% of taxpayers will itemize deductions for their 2020 tax return
You can also write off any out-of-pocket expenses for volunteer work like travel, transportation, meals out on behalf of a charity, gas and oil for your car and even the cost of a volunteer uniform.
Some people also donate property like cars, art, jewelry or even real estate to charitable organizations. And those can all be claimed as long as the organization is a registered charity on the IRS’ exempt charity list.
7. Don’t save thinking about it until tax time
Rich people, and their accountants, will often plan these strategies out well in advance.
Work with a professional financial planner to come up with your strategies and don’t save thinking about your tax liability until tax season starts.
Coming up with a plan for the year ahead and sticking to it will ensure you hold onto more of your money.
That’s so much better than scrambling in late winter to move enough money into your retirement account or trying to find all your receipts to add up your charitable contributions.
That being said, you don’t have to file your taxes until May 17 this year, meaning you still have a few weeks to factor these tips in.
And while these moves may not bump you up into the top 1% but they will ensure you hold onto a higher percentage of your earnings — and that may be enough for some to feel flush with cash.