Paying taxes is a necessary part of life; however millions of people are often caught with untaxed funds as they attempt to illegally withhold taxes. Normally tax evaders end up doing jail time or paying hefty fines. What most of these people do not know is that you can live tax-free without breaking the law. In 2010 more than 28 million households did not pay taxes. Here is how to live tax free:
You can avoid paying taxes if you are selling property you have been fixing up for the last few years which you can sell at a substantial profit. A little planning can go a long way to help you avoid taxes legally. Find one or more good replacement properties and conduct a tax-deferred exchange. Though it is complicated if you do everything right you will circumvent paying most of the taxes.
To qualify for section 1031 exchange, a deferred exchange must be distinguished from the case of a tax payer selling his property and using the funds acquired in the sale to buy another property which is a taxable transaction. In a deferred exchange the disposition of relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Tax payers engaging in deferred exchanges often use exchange facilitators under exchange agreements which are in line with rules provided in the Income Tax Regulations.
If you draw some cash out of the transaction, you will only pay taxes on the cash, however if you have little or no other income your taxes will be quite low.
You can invest in rental real estate and manage your properties full-time. If you buy wisely you are likely to have enough cash flow on which to live. Keep in mind that the income will be reduced by the depreciation losses on the buildings.
As a full-time real estate investor your losses will be limited to $25,000 which is the limit for passive investors, this means that you may be able to live tax-free.
Investing your assets in the state’s tax-free municipal bonds is one of the methods on how to live tax free. The rate of return on municipal bond funds may vary from 1-7 percent. When investing directly in your state’s bonds none of the interest is taxable to the state or IRS.
House flipping which involves buying and selling a home every 2 years is one of the easiest ways on living tax free. The IRS does not tax the first $250,000 worth of the profits on the sale of your home; this figure goes up to $ 500,000 for couples.
If you conduct your research patiently you are likely to find a run-down home in an ideal location. Move in and fix it nicely and ensure that you do most of the fixing yourself if possible. When it looks as good as the houses in the neighborhood you can sell the home without paying taxes on the profit. If you do this every two years you will never pay a dime in income taxes on these profits.
Individual 401(K) plan
The individual 401(k) comes in two versions; the traditional and Roth version. The traditional approach involves an individual putting his money away on a pretax basis. The money grows tax-deffered; however it is taxed upon withdrawal. The Roth version is the tax-free option where you put in after-tax money and grow it tax-free, this means that the funds are not subject to tax on withdrawal.
Relocating to tax free havens
Some countries especially in the Middle East are well known for offering residents a chance to earn tax-free income. This means that you can move abroad and pay 0 percent tax. These countries include:
United Arab Emirates
The United Arab Emirates has one of the highest per-capita income in the world at $49,000.It has no capital gains or personal income taxes. Rather than generate revenue from personal income the country depends on money from oil companies that pay up to 55 percent in corporate taxes.
It is the world’s richest country with a GDP of 102,800 per-capita income. The country relies on its rich natural gas reserves to generate revenue.
Other tax havens include Kuwait and Oman. Closer home you can opt for the Bahamas, Monaco and Norfolk Island.
The above ideas on how to live tax free are legal options, however they require often require some adjustments in your lifestyle and good planning. At the same time they require sound financial management in order to work effectively.
Offshore banking and travelling
It’s possible if you are a resident of other countries that are not tied to the US dollar or you are a non-US resident, then there is the possibility of becoming a non-resident, that is not residing in that particular country for an extended period of time, it may also make sense to put any funds you have in offshore accounts. Although avoiding paying tax is becoming more difficult speaking with a qualified international tax lawyer maybe worthwhile especially if you are an internet entrepreneur or affiliate marketer, or just someone who can work ‘anywhere’