Find out how to use legal tax shelters to reduce your taxes and save money, no matter how much or how little money you make.
Money Girl
194 MG Don't Miss These Five Legal Tax Shelters
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Tax shelters have gotten a bad rap. Some are illegal, like offshore companies and bank accounts that hide money from uncle Sam. But there are plenty of tax shelters for us law abiding citizens too. A tax shelter is simply a way to reduce your taxable income, so you pay less tax, no matter how much or how little money you make. In this show, I'll point out some common legal ways to reduce your taxes and save more money. And if you want to learn more, just visit the blog at moneygirl.quickanddirtytips.com, where you'll find links to just about everything that I mentioned in this podcast. Now, on to tax shelters. Not only is real estate a real shelter, but it's a powerful tax shelter too. I mentioned some of the valuable tax benefits of homeownership in last week's show, titled Should You Ran or Buy a Home. When you buy a real estate, you cut your taxes the year you buy it, every year you own it, and even on the back end when you sell it. Mortgage points paid on a loan, mortgage interest, private mortgage insurance, and property taxes are typical tax deductions for homeowners. If you tap into your home's equity with a loan or a line of credit, you may also be able to deduct some of the interest you pay on that debt too. If you decide to sell your main home and have lived there for at least two years, you get to keep up to $250,000 of capital gains or profit on the sale tax free. If you're married and file a joint tax return, you can avoid taxes on up to $500,000 as a couple, additionally the costs for selling a home, such as real estate commissions, advertising and title insurance get deducted from your capital gain. A second way to shelter your money from taxes is a retirement account, like an IRA or a workplace 401(k). If you're self-employed, you have options too, like setting up a SEP, a simple or a solo 401(k) plan. Not only do all of these retirement accounts help you accumulate a nest egg, but they also let you keep more of your hard-earned money by cutting your tax bill. What's not to love about that? When you invest pre-tax money in a traditional workplace retirement account, your taxes don't go to the government. Instead, they stay in the account to grow until the funds are withdrawn. Contributions you make to a traditional IRA with after-tax income generally qualify for an immediate deduction on your tax return. Another route is to contribute to a Roth account, where you pay taxes on contributions up front, but get to take tax free withdrawals later on. The third tax shelters for your money are workplace benefits, like health and disability insurance. The cost for employer-provided benefits is typically deducted from your paycheck before payroll taxes are calculated and withheld. That's money you make that never gets taxed. Also, don't forget that when your company reimburses you for things like education expenses or a monthly car allowance, that's typically non-taxable income too. The fourth shelters are medical spending accounts. Some employers offer a flexible spending arrangement, or FSA, to help you pay for the costs of medical expenses. You and your employer can make contributions that are tax-free, as long as the funds are spent on qualified medical expenses by a certain annual deadline. You may also have the option to participate in a health savings account or HSA. If your employer offers a high-deductible health plan, or if you purchase one directly from a private insurer, health savings accounts are similar to flexible spending arrangements, except that there's no use it or lose it deadline. Both of these accounts are fantastic ways to shelter out-of-pocket money that you spend on medical expenses from taxes. You spend it over here. 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As kids practice, they get positive feedback, awards and explanations for wrong answers. Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when you sign up today at Ixcel.com/moneygirl. Visit Ixcel.com/moneygirl to get the most effective learning program out there at the best price. This episode is brought to you by AARP. Ten years from today, Lisa Schneider will trade in her office job to become the leader of a pack of dogs. As the owner of her own dog rescue, that is. A second act made possible by the reskilling courses Lisa is taking now with AARP to help make sure her income lives as long as she does. And she can finally run with the big dogs. And the small dogs who just think they're big dogs. That's why the younger you are, the more you need AARP. Learn more at aarp.org/skills. Whether you want to be the next Mark Zuckerberg or just want to do a little computer work on the side, having a business is the fifth shelter and an excellent way to save more money on taxes. For instance, if you start building websites on the side, some reasonable business expenses might include the cost of a computer, office furniture and accounting software. As long as you're really attempting to make a profit from your business, you can turn some of your personal expenses into allowable business deductions. You don't have to make a profit, but you do have to be seeking a profit in order to be considered a legitimate business. If you operate your business from a home office, that entitles you to even more money-saving tax deductions. You're allowed to deduct a certain amount of household expenses, such as maintenance, insurance and utilities, based on the size of your office as a percentage of your home. And by the way, home office deductions aren't just for homeowners. Tenants can also claim them. These five tax shelters, real estate, retirement accounts, workplace benefits, medical spending accounts and businesses are some of the most common and easy ways to keep more money in your pocket. With all these legal options, who needs an offshore account? Get more money tips, resources and money-saving ideas by liking the MoneyGirl Facebook page. Just go to Facebook.com and do a search for MoneyGirl. You can also follow me on Twitter at Twitter.com/LaraAdams. And when you visit QuickenDirtyTips.com, be sure to subscribe to the MoneyGirl free email newsletter for exclusive content that isn't available anywhere else. Email your money questions to me at money@quickendirtytips.com. And one more thing, I want to make sure that you get a copy of Steven Robbins' new book, Get It Done Guys 9 Steps to Work Less and Do More. It covers all the big things that cause you to fall behind on your goals. You'll learn how to deal with distractions and get techniques to stop procrastinating. Get It Done Guys 9 Steps to Work Less and Do More is available in paperback, as an e-book or as an audiobook. Pick up or download your copy today. I'm glad you're listening. Cha-ching! That's all for now. Courtesy of MoneyGirl, your guide to our richer line. Looking for toys that'll get the biggest reactions? Yes, please. Walmart has jaw-dropping toys, like for real Daisy Yoga Code. Awesome! Razor Crazy Cart Shuffle. Whoa! 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