Dodging tax sounds like an underhanded, legally questionable action, although it is perfectly legal. From technical loopholes, exceptions, and even tax programs themselves, there are clever to keep more of your income for yourself. These strategies shared below ensure you fulfill your duty as a citizen of the country too. Furthermore, by allowing you to keep more of your income, you can reinvest it and accelerate your financial growth.
To help you make the most out of your hard-earned money, here are the top three ways to dodge tax legally.
1. Invest in QSBS
You’ve probably heard about investing in other people’s businesses. While apps and trading platforms allow users to buy, sell, and trade stocks, there are more options. One increasingly popular investment option, and a tax break opportunity, is to look at Qualified Small-Business Stocks or QSBS.
Also known as Section 1202 stock, QSBS refers to the shares of qualified small businesses (QSB). QSBs are those that satisfy criteria set by the Internal Revenue Code. Furthermore, these businesses have gross assets not exceeding $50 million upon stock issuance. As an investor or a stockholder of QSBS, you can enjoy tax breaks should you qualify under the following criteria:
- The investor must not be another corporation.
- The QSBS must be acquired from its original issue and not as a secondary buyer
- The QSBS must be purchased with cash or other valid property, or accepted the shares in exchange for a service rendered.
- Ownership of the stock must be at least five years before the tax break qualifications.
- And at least 80% of the QSB must still be used in company operations, specifically its declared businesses or trades.
While investing in small businesses is a risk, investing in a successful business could mean incredible tax breaks. What began as an initiative to boost support for small businesses has become one of the most popular strategies for dodging tax and accelerating wealth. When qualified, QSBS exemptions exclude $10 million or ten times the initial QSBS investment, whichever is greater, from gross income.
2. Start Trust Stacking
The QSBS investment scheme doesn’t end with tax breaks. With trust stacking, you can even double your QSBS exemption. To summarize the qualifications for QSBS exemption, you must be:
- A person or trust
- And invest $10 million or ten times the initial QSBS invesment
This exemption even covers the capital gains obtained from the sale of these shares too!
It is important to remember that the qualifications for QSBS exemption apply to each entity, to each person. It means that should two different people purchase the same qualified QSB shares, then they both enjoy the same benefits. Similarly, if a single person invests in two different qualified small businesses, that translates to two $10 million exemptions.
While it’s impossible to have others sell QSBS to you, you can transfer QSBS to a Charitable Remainder Trust (CRT).CRTs are tax-exempted and irrevocable trust funds. Through them, they’ll provide a revenue stream to its beneficiaries for a period of time or for life. Afterwards, the remainder of the trust goes to a charitable institution of your choice. By donating qualified shares to a CRT, they enjoy a separate tax exemption, and you eliminate the limit on tax-free capital gains.
3. Check out Municipal Bonds
Now that you’re set up for the long-term with your investments in small businesses, you can further increase your would-be retirement fund by investing in municipal bonds. Although it also comes in taxable forms, it is significantly more popular in its tax-exempted formats, making it a promising tax-free revenue stream.
Essentially, municipal bonds let you lend money to your local or state government. Your investment will go to the government and they will repay it in a predetermined number of interest payments spread over a certain period of time. What makes this more enticing is that it maintains a generally lower rate compared to most types of investments–although it is not entirely without its risks.
To maximize the tax exemptions, make sure to take out municipal bonds from where you live. Additionally, by lending additional funds to the local government, you help them implement more projects that help the community. This gives you a reliable tax-free income source and you know your money is invested for the good of the people.
Remember that by utilizing existing systems in place, you can dodge tax legally without violating any existing laws or regulations. There are other strategies you can check out too! Although the options listed above are among the best available options in terms of tax breaks and your potential returns.
As with any entrepreneurial endeavour, these strategies still carry their respective risks. Invest in them equipped with the right mindset and enough preparation to ensure that you make the most of these ways to legally dodge tax.
About The Author
Sophia Young recently quit a non-writing job to finally be able to tell stories and paint the world through her words. She loves talking about fashion and weddings and travel, but she can also easily kick ass with a thousand-word article about the latest marketing and business trends, finance-related topics, and can probably even whip up a nice heart-warming article about family life. She can totally go from fashion guru to your friendly neighbourhood cat lady with mean budgeting skills and home tips real quick.