Legendary writer F. Scott Fitzgerald wrote a disparaging view of the rich in the opening of a 1925 short story called “The Rich Boy.”

“Let me tell you about the very rich. They are different from you or me.” – F. Scott Fitzgerald

As it turns out, Fitzgerald was more right than perhaps even he realized. Rich people not only have more money than everyday Americans, they use that money and the influence to maintain and perpetuate their wealth for themselves and their heirs.

Many of their strategies involve accounting tricks used to dodge the long arm of the IRS. But tax-dodging accounting tricks are not limited to the rich. Several of the most effective tax minimizing strategies are readily available to everyday taxpayers. Most tax-avoidance strategies that are out of reach to people who are not rich are best avoided – they are often legally shady or straight-up scams.

1. Municipal Bonds

Governments at every level issue municipal bonds to finance large-scale projects like schools and highways. These bonds are generally safe investments with interest rates that exceed those paid by ordinary savings accounts. Under most circumstances, earnings from municipal bonds are exempt from federal income taxes. So if you are in the 28 percent tax bracket and purchase municipal bonds that pay 5 percent interest, that’s like getting a nearly 7.5 percent yield on your investment, which adds up fast. Municipal bonds are available to ordinary taxpayers and the ultra-rich alike. They not only provide tax savings, but are a decent way to invest locally.

2. Schedule C versus Schedule A

Many of the richest people call themselves the boss, and benefit not only in increased autonomy but in lower taxes. How? Two words: Schedule C.

The IRS makes it really easy to take the standard deduction — and puts significant barriers in the way of itemizing, deductions on Schedule A, mostly in the form of requiring deductions to exceed a certain percentage of your adjusted gross income before they’re allowed.

But switching Schedule A for Schedule C allows you to sidestep this hurdle for expenses such as health insurance premiums by declaring them as business expenses. You don’t have to be the head of a multinational corporation to use Schedule C to list your deductions. Any small business owner or self-employed entrepreneur is eligible, even if you only work for yourself part-time.

3. Dividends Vs. Salary

Because they count as separate legal entities, each corporation must file a separate income tax return. Shareholders who receive dividends from the corporation’s earnings must also declare those dividends on their individual income tax returns. This is known as double taxation. But double taxation can also result in lower taxes for those who know how to work the system to their advantage.

By incorporating themselves, savvy taxpayers channel their wages into corporations, pay themselves a nominal salary and collect the bulk of their earnings as dividends. These are paid only after the corporation covers its operating expenses. Dividend income is also taxed at a lower rate than wages: for 2013 the tax rate is 15 percent of dividends up to $400,000 and 20 percent for dividends above $400,000. Also, dividend income is NOT subject to Social Security and Medicare tax, which translates to an additional tax savings of 15.3 percent. Not too shabby.

If you opt to incorporate your enterprise to take advantage of lower dividend taxes, be aware that the IRS is hip to this strategy. You cannot just shift 100 percent of your corporation’s earnings into dividends. That’s known as tax evasion, which can be costly in both tax penalties and in potential time behind bars. Pay yourself a reasonable salary in line with similar salaries in your industry to stay on the right side of the IRS.

4. Life Insurance Borrowing

If you are a high income earner, have significant assets or want to ensure that your family never has to worry about finances, a life insurance policy with a high face value payout makes sense. Once you have established, say, a $1 million life insurance policy, many banks will allow you to borrow up to 90 percent of the surrender value of the policy. And since you’re getting a loan, the funds you receive are not subject to income tax. They also are not subject to capital gains tax, or any other tax at all. But before you jump on this tactic, know the risks.

Bankrate has an excellent article on this, Are life insurance loans a bad idea?

5. Trust Funds

Estate taxes and probate are dirty words in many high net worth circles. But shifting assets into a grantor retained annuity trust (GRAT), commonly known as a trust fund, represents a legal way to avoid both. Trust funds generate tax-free income as payouts from the trust. Prominent figures like Morgan Stanley CEO James Gorman and Nike CEO Philip Knight have utilized trust funds to maintain tax free wealth for their heirs.

Further reading: How the Rich Use GRATs to Get Richer

Establishing a trust fund rather than bequeathing your estate in a will also allows your heirs to avoid probate. A “pour-over” will ensures that any assets that you hold at the time of your death that were not originally included in the trust fund are transferred after your demise. Establishing a trust fund requires the services of an attorney, but the expense could be well worthwhile.

6. Payment in Kind

Back in the day, many rich people received payment in gold bullion or rare silk fabric instead of cash. A modern version of payment in kind allows high level executives like John Donahoe of EBay and Lawrence Ellison of Oracle to receive at least part of their compensation in securities rather than cash. The IRS has clamped down on payment in kind, making top notch legal advice a must for anyone who wishes to use this tax avoidance strategy. (TIME)

But ordinary folks can still take advantage of payment in kind by establishing bartering exchanges. If you choose to take part in bartering, know that the IRS has placed strict requirements on third-party bartering exchange services. Taxpayers who run afoul of the IRS could be subject to backup withholding, which requires upfront payment of a percentage of earnings to the IRS and is just as undesirable as it sounds. Individual small business owners or entrepreneurs who establish informal bartering arrangements with vendors – for instance, exchanging car repairs for promotional services – are not subject to these restrictions. Anyone who engages in bartering should maintain thorough and accurate records to be on the safe side. (IRS.gov)

7. Individual Retirement Accounts (IRAs)

Nearly everyone hopes to retire from full-time work at some point. IRAs allow people to put money aside for retirement and get significant tax savings at the same time. Conventional IRAs allow you to reduce your AGI by setting aside pre-tax dollars. You are also allowed to defer paying taxes on your earnings until you begin making withdrawals, usually after you have retired and are presumably in a lower tax bracket. Deposits to Roth IRAs are not tax-exempt, but the earnings usually are, as long as you allow the money to remain in the account for at least five years before you begin making withdrawals. Can you say “free money”?

8. Mortgages on Rental Properties

Many homeowners celebrate paying off their mortgages with mortgage-burning parties. But many super-rich individuals mortgage their rental properties to the hilt to reduce their income tax bills.

By placing mortgages against their properties that nearly equal their rental income, property owners can obtain loans – up to 75 percent of the equity they have built. For a property valued at $2 million, that can mean a loan of $1.5 million. And since the cash is not counted as income, there is no income tax liability. If you have rental property, you can engage in this tax avoidance strategy as well – but be sure to stay current on the loan payments.

9. Tax Havens

Many rich people shelter their money by establishing “tax homes” in offshore tax havens like the Cayman Islands which charge low or no personal income taxes. Like securities and trusts, establishing a tax haven that will stand up to IRS scrutiny requires sophisticated legal expertise. Unless you are in one of the top income brackets, this particular tax avoidance strategy is out of your reach. But you shouldn’t feel overly envious. Governments around the world, including the United States, have begun to make a serious effort toward clamping down on this form of tax evasion.

10. Shell Corporations

Shell corporations are essentially business entities that provide no measurable goods or services. Many shell corporations exist only as mailing addresses. Shell corporations, unlike dummy corporations, are totally legal and are frequently used to generate financing or maintain control over a conglomerate of companies. (Investopedia)

Nonetheless, many shell corporations are created with the sole purpose of minimizing tax liability, which may be legal or illegal depending on the nature of the shell corporation. For example, Republican presidential candidate Mitt Romney faced accusations that he shifted a large proportion of his income into a shell corporation based in Bermuda to unlawfully evade income taxes. Other shell corporations are engaged in unsavory and totally illegal activities like money laundering.

The Taxman Cometh

It is perfectly valid to use legitimate tax breaks and legal tax avoidance strategies to cut the bite that Uncle Sam takes from your income. You should not feel obliged to pay more than you absolutely must in federal income taxes. By adopting some of the strategies of the super rich you can keep more of what you earn, legally.

Important Personal Finance

Money matters. How you manage it matters even more. According to a study from Princeton University’s Woodrow Wilson School, money buys happiness but only up to a point. Once you hit an annual household income of $75,000 the effect money has on happiness flattens out.

However, a sense of control over your finances does correlate with happiness — whether you are ultra-wealthy or of modest means – which is why personal finance skills are so important.

To get you started, here are 10 important things about personal finance you should remember.

1. Everybody Needs A Personal Finance Plan

The first and most important step in personal finance is to decide what goals you will pursue. A personal finance plan will force you to be specific about your financial goals. These will guide your financial decisions and help prioritize the use of your time and resources.

Include short-term goals, such as paying for rent or a mortgage; mid-term goals, like buying a car or saving for a vacation; and long-term goals, such as buying a house, building a retirement fund or saving for your children’s college education.

2. Figure Out A Budget

Personal Finance Tips

Take an honest look at how you spend your money. Take the next 30 days and track every cent you spend. Identify areas where you can reduce or eliminate spending. Now create a realistic budget and stick to it. Treat your personal finances as a CEO looks at a company: avoid waste and place your assets where they bring the best return on your investment.

3. Spend Less Than You Make

This is closely related to having a realistic budget, but it’s so important it’s worth emphasizing. It doesn’t matter whether you are on minimum wage or you earn millions of dollars a year. The route to bankruptcy is the same: spending more than you make.

In 2009, Sport Illustrated ran a piece on “How (and Why) Athletes Go Broke” that illustrates this point beautifully. According to the article, 78 percent of former NFL players go bankrupt or suffer financial stress within two years of retiring. The average salary for an NFL player in 2009 was $1.896 million, and the median salary was $790,000. How do you go broke when you have an income of $790,000? Easy, by spending $790,001.

4. Build an Emergency Fund

Important Personal Finance

Life has a habit of throwing you a curve ball every now and then. Whether it comes in the form of an unexpected pregnancy, the loss of a job, or a faulty car transmission, you need to be prepared for the unexpected.

On average, it takes more than four months to find a new job; so look at your budget and calculate how much money you need to cover your basic expenses for six months. A year is even better, particularly if your line of business is prone to layoffs.

5. Take Care of Your Health

Unpaid medical bills, not credit-card debt or underwater mortgages, are the number one cause for bankruptcy. Every year nearly 2 million people file for bankruptcy because they cannot afford to pay for their medical builds. Not surprising, when you consider a broken leg can set you back $7,500 and the average cost of a 3-day hospital stay is $30,000.

Although health insurance will not shield you completely from financial hardship, it will give you a fighting chance. Apply for health insurance today and take other practical steps to protect your health, such as not smoking, exercising regularly and maintaining a healthy weight.

6. Pay Off Debt First

Important Personal Finance

The average savings account in 2013 had an annual interest rate of 0.06 percent. The average annual percentage rate for credit cards was 15.38 percent. The math is compelling. Pay off your debts before you start saving, particularly if you have credit-card debt.

If having a financial cushion in your bank account makes you feel more secure, consider the extra credit available to you when you reduce your credit-card balance as your emergency fund until you’re debt-free and can start building a more substantial financial cushion.

7. Save For Retirement

The average length of retirement is 18 years. That’s an awful long time to be broke. Once you have taken care of your basic needs, saving for retirement should be at the top of your financial to-do list. Don’t rely on Social Security. If it’s still around by the time you retire, great, you just got yourself a bonus. However, it should not be your main source of retirement income.

A good rule of thumb is to save 15 percent of your household income in Roth IRA and pre-tax retirement funds. If you can keep saving at that rate for 35 years, you should – assuming an 8 percent return on your investment — be able to live your golden years on 80 percent of your pre-retirement income.

8. Protect Your Credit Score

Important Personal Finance

A good credit score is key to your financial health. You probably already know your credit score will determine whether your lease or loan application is approved and will influence what interest rate you’ll pay on your mortgage, credit cards and auto loans. However, that’s only part of it.

According to a 2012 study by the Society for Human Resources Management, nearly half of U.S. employers perform credit checks on job candidates. Insurance companies use your credit score to calculate your auto and renter’s insurance premiums. Even your love life is affected by your credit score. A 2013 survey by freecreditscore.com reported that 75 percent of women (57 percent of men) considered credit scores important when choosing a long-term partner.

You can find and compare a ton of credit reporting companies in our Super Money Reviews section.

9. Get Life Insurance

If you have dependents who would be affected financially by your death, you should obtain enough life insurance coverage to take care of their needs. If you’re single and without dependents, consider disability insurance to replace your source of income during prolonged illness.

Keep your investing and insurance separate. Whole life policies combine life insurance with an investment component that pays out cash once the insurance term ends. True. Knowing you will get some cash back at the end of your insurance’s term may help with the feeling you are throwing money away in an insurance you may never use. But there are better places to invest your money and the high cost of whole life policies could mean you end up buying less life insurance coverage than you need.

10. Plan for Taxes

Personal Finance Tips

Although we must all deal with it, tax planning is often the least understood component of personal finance. Granted, tax law can be complicated; and If you run a business or you’ve made important financial decisions this year, such as buying or selling a house, it may be a good idea to hire a professional to file your taxes. However, preparing your taxes doesn’t have to be that daunting.

Keep accurate records of both your income and deductible expenses. Reduce your chances of being audited by filling your return completely, correctly and on time.

Don’t give the government an interest-free loan. If you get a big tax refund every year, you’re paying too much, reduce the amount of taxes you withhold from your paycheck. On the other hand, don’t wait till the end of the year to pay your taxes. By the end of the year you should have paid 90 percent of your tax bill or you could face hefty underpayment penalties.

Personal Finance Isn’t Rocket Science

Learning about personal finance is not like learning about economics or business management. Sure, it helps to know the meaning of key financial terms and some basic math skills won’t hurt, but truly understanding personal finance goes much deeper than that. Understanding financial concepts is the easy part. Putting them in the practice is the real challenge. As Dave Ramsey, the financial author and nationally syndicated radio host, once said, “Personal finance is more personal than it is finance: it is more behavior than it is math.”

This article was written by staff writer Andrew Latham. His mission is to help fight your evil debt blob and get your personal finances in tip top shape.
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