MILLIONAIRE EXPLAINS: How to cut your taxes in HALF (loopholes that are 100% legal)

let's talk about seven different ways that you can cut your tax bill in half or even down to zero 100 legally so the first thing that you can do is to consider moving to a no income tax state states that currently have no income taxes are Alaska Nevada Florida South Dakota Washington Texas and Wyoming for example if you earn a hundred thousand dollars a year and live in a high income tax state like New York you could be paying over six percent in state taxes alone that's six thousand dollars whereas if you move to a state with no income tax like Texas or Florida you could save that six thousand dollars instead to do this strategy you could either physically move to the new state or you can simply establish legal residency in the new state without actually moving there there's a couple ways to do this and this is actually what I did I'm currently living in Mexico City but my legal residence is in Texas which has zero percent income tax and to do this I have an actual Texas mailing address through a virtual mailbox service this is really good for someone who works remotely like I do and spends time in different places around the world rather done at one fixed address all year long so it really comes down to the difference between your residence and what you call your domicile that is where I am registered to vote Texas is where my business is registered my vehicle is registered where my driver's license is from and it's where I receive all my important mail however even if you are a legal resident of a state with no income tax if you make money in another state you still might need to pay income tax in that state so every state does have different requirements it's not just a simple question of just getting a virtual address in another state and calling it a day but there are a lot of ways to do this and many people use a strategy because it's smart so make sure to talk to a CPA or a tax professional to help you set this up properly to understand my next tip you first need to know that the IRS has different types of tax rates there is income tax and then there's capital gains tax income tax is what you get taxed on out of your paycheck and it ranges anywhere from 10 to 37 depending on your tax bracket capital gains tax is what you get taxed when you sell an investment at a higher price price than what you bought it for that profit is called a capital gain and capital gains tax ranges from zero to twenty percent or long-term gains and 10 to 37 for short-term gain so my tip for you is if you are planning to sell any Investments whether it's stocks or crypto and those have appreciated in value and therefore you'd be selling out a profit make sure not to sell that asset until at least one year has passed that way you incur the long-term capital gains tax rate versus the short-term capital gains tax rate now capital gains are taxed only when you actually sell out of profit so you have a lot of flexibility in terms of when you incur the tax bill because you decide when to sell and so what you can do with this is you can even sell an investment that is appreciated a lot you can wait to sell that in a year that you have very low income and therefore you're in the lowest tax bracket for example maybe it's the year that you decide to go back to school and therefore you don't have a job or the year that you get laid off so there's a lot of leeway in when you can incur the capital gains tax and make it as low as possible and now for or a super tip do a Roth IRA conversion when the stock market is down so a Roth conversion is when you move money from a traditional IRA or a 401k into a Roth IRA I like Roth IRAs because once you put money in there and you invest it it'll grow tax-free and you don't have to pay taxes when you withdraw either no matter how much your Investments have appreciated that is why I always try to convert as much of my pre-tax retirement accounts into Roth style accounts as much as I can because I'd rather just pay tax upfront and never worry about paying taxes when I withdraw however when you do a Roth conversion you will owe taxes on the amount converted so you don't want to just convert everything you have into Roth IRAs and then get hit with a huge tax bill but here's the trick you can lower the tax bill by doing the Roth conversion when the stock market is down therefore the value of what you're converting is lower and therefore your tax bill will be lower as well for example let's say you have a hundred thousand dollars in a traditional IRA or in a 401k now if you want to convert that to a Roth you'll have to pay taxes on a hundred thousand dollars which is the amount that you convert if your taxes are say 30 you're gonna owe thirty thousand dollars in taxes just for doing the conversion instead let's say the market has gone down and instead of your Investments being worth a hundred thousand let's say they're worth eighty thousand dollars so if you do the Roth conversion you'll owe tax on eighty thousand dollars or that'll be twenty four thousand dollars assuming the same tax rate of thirty percent so that's a huge difference you save six thousand dollars in taxes by doing the Roth conversion when the market is down versus when the market is up now side note you'll want to do what's called an in-kind conversion which is when you transfer investments from the traditional IRA to the Roth IRA without actually selling them you're just moving stocks One account to another instead of selling the stocks and moving the cash to the other account this is an in-kind contribution and you'll want to do this so that you don't lose your place in the market during the conversion now if you are watching this video there's a good chance you've at least dabbled in crypto so this next tip is great for saving money on crypto taxes however I will say that it also applies to stocks as well basically if you bought crypto and it went up and now you're looking to sell you will incur a capital gain and you'll owe tax on that just like with any other asset that you sell but the trick is that you can choose how that capital gain is calculated so here's what I mean let's say you bought a Bitcoin in January another one in February and another one in March then you want to sell one of those Bitcoin in April out of profit well which one did you sell the one you bought in January or the one you bought in February or the one you bought in March let's say the Bitcoin you bought in January was at a price of ten thousand dollars the one in February was at twenty thousand the one in March at thirty thousand so if Bitcoin is currently at fifty thousand dollars I'm using totally made up numbers here then selling the one that you bought in January for ten thousand dollars means a capital gain or a profit of forty thousand dollars that would be the fifo calculation method or the first in first out method of calculating capital gains and the fifo method assumes that the first one you bought is the first one you sell first in first out then there's lifo calculation method or last in first out which assumes that the last one you bought is the first when you sell so in this case it would be the 30 000 Bitcoin that you bought in March and you would be selling that for fifty thousand dollars so with the last in first out lifo calculation method your calculator profit would only be twenty thousand dollars so just by choosing the lifo calculation method instead of the fifo calculation method your capital gain in the eyes of the IRS goes from forty thousand dollars to twenty thousand dollars and that'll make a huge difference in how much tax you're gonna owe the next way you can save money on your taxes is to set up a business when you're employed your employer withholds taxes from your paycheck and you just get what you get after taxes but when you have a business or you're self-employed you have a lot more leeway to save on taxes because you have the ability to deduct business expenses business expenses can be anything from office supplies dinner with potential clients and even travel expenses if they are work related so let's say I fly to New York City for a work meeting I can write off that hotel and the flight and while I'm there I might also meet up with friends and enjoy the city for a bit too or let's say you on a new laptop that's a business expense or you have a home office that's a business expense or you buy books courses coaching you invest in yourself to become a better you know entrepreneur and CEO for your business you can deduct that from your taxes too and this is really nice because these are all things that I would spend money on anyway except that purely because I own a business I can live my life and do things that I do anyway in a tax efficient way by deducting business expenses obviously this doesn't mean that I'm gonna do things for my personal life and just call it a business expense it all has to be justifiable but all I'm saying is I can just organize my life in a way and do all the things that I want to do but sort of just structure in a way where I can deduct as many business expenses as possible here's an example maybe I like to go out to eat a couple times a week well instead of going out to eat with a friend I might ask a friend to just come over my house instead and instead go out to eat with a potential client so that that higher you know restaurant expense can be a business expense this is really cool because when I first started working for myself even though I was making less money than I was making with my Wall Street salary because I actually paid way less in taxes my net pay like the cash flow that I actually got after taxes ended up being about the same so if you have any sort of side hustle or self-employed gig like dog sitting or consulting or graphic design or whatever talk to your accountant about how you can be smart about deducting your expenses under the business so that you can lower your taxable income and pay less taxes another trick is something called tax loss harvesting which is when you sell losing Investments to get the tax deduction for example let's say you bought stocks for ten thousand dollars and its value went down to five thousand dollars if you sell the stock you can use that five thousand dollar loss to offset any other capital gains that you made elsewhere in your portfolio in the same year and if you don't have capital gains to offset that year you can also carry forward the loss to Future years and use it then side note the IRS has rules around tax loss harvesting so you can't just sell a stock at a loss and then buy it back immediately and then claim that loss on your tax return because that's what you call a wash sale you didn't really sell the thing so you can either just sell the stock at a loss claim the loss on your tax return and call call it a day or if you don't want to lose your place in the market and you actually like that stock but you still want to get the tax benefit you can do the following sell the stock claim the loss on your tax return and then buy back a very similar stock in order to not lose your place in the market and still maintain your exposure to that area of the economy for example let's say you sold five thousand dollars worth of American airline stock to harvest the losses for your tax return and then you can buy five thousand dollars worth of Delta instead that way you can still be invested in the airline Market while benefiting from the tax loss harvesting this is definitely a very cool tax trick but as always don't do this without professional guidance especially when it comes to figuring out which stock to buy in replacement of the one that you sold at a loss another way to pay a lot less in taxes is by investing in real estate and there are a couple ways you can do that but we're going to talk about two depreciation and refinancing as a property owner you can deduct a portion of the property's value every year for a certain number of years usually over a 20 20 or 27 and a half year period this is because the IRS recognizes something called depreciation or the decreasing value of an asset due to time wear and tear for example if you purchase a property for a hundred thousand dollars and then depreciate it over 20 years you'd be able to deduct five thousand dollars per year in depreciation from your taxable income what's cool is that depreciation is considered an expense by the IRS it actually literally reduces your taxable income however it's not an expense that you actually paid out like an expense that you paid to the plumber for repairs on your property or for cutting the grass so ironically depreciation has nothing to do with your property's actual cash flow nor does it have anything to do with your property's actual market value just because the IRS lets you depreciate the property by five thousand dollars a year doesn't mean that the property is decreasing in value by five thousand dollars a year if anything it's going up year over year so depreciation is a huge huge awesome advantage to owning real estate so after you take nice tax deductions every single year because of depreciation while the property's market value is probably going up let's say one day you want to cash out on the profits this is where the second trick I want to talk about refinancing comes in a cash out refi is when you refinance your mortgage to take out additional cash so here's how it works with real numbers let's say you purchase a property for a hundred thousand dollars and you took out an 80 000 mortgage to help you buy that property then let's say 10 years later the property has gone up in value it's now worth a few hundred thousand dollars so what you can do is instead of selling the property you can just refinance the old mortgage and take out a new mortgage a bigger mortgage based on the properties now higher value of 200 000 so because banks will lend you around 80 percent of the property's value you can now get a mortgage on this property of a hundred sixty thousand dollars so the bank will actually give you a hundred sixty thousand dollars for this new mortgage and then you could use 80 000 of that to pay off your old mortgage and then that leaves you with eighty thousand dollars extra of tax-free cash yes you will have a bigger loan on your property and therefore your monthly mortgage payment is also going to be bigger but if the property value has increased that's probably because the rents have also increased so with that higher rent you should most likely be able to cover that higher mortgage payment as well so cash out refi is a much better way to access your Equity than by selling because first of all it's tax-free and second of all you'll still be able to own the property this is actually something a lot of real estate players do they'll own a property get a mortgage on it wait for the property to go up or you know renovate it and make the property value go up faster and then they'll take out a bigger mortgage pay off the old mortgage and walk away with the tax-free cash out refi cash and then they'll take that money and invest that in another property and rinse and repeat all right you've probably heard this one before but I gotta mention it because it is the low hanging fruit and this is to max out your retirement accounts such as your 401k your IRA or your HSA if your employer offers a 401k everything you put into it directly reduces your taxable income for my higher owners out there this is the easiest way to instantly reduce your taxes by a lot now in addition to a 401k you can also consider opening a health savings account or HSA with an HSA you can contribute pre-tax dollars invested and have it grow tax-free then you can use the funds for qualified medical expenses also tax-free it's pretty amazing if you want to learn more about different types of investment accounts such as the HSA as well as where to open them and which ones are right for you make sure to grab a copy of my Ultimate Guide to investment accounts right here I'll put the link below now if you're self-employed or you have your own business you can also open a solo 401K which allows you to put away as much as 66 000 a year this is for 2023. so if you have your own business this could be huge tax savings I always max out my solo 401K as much as I can every single year another option is if you own a business and it generates enough income you can also open What's called a defined benefit plan which is a more advanced strategy that allowed me to put away almost two hundred thousand dollars tax free last year and then of course there's the Roth IRA or if you make too much money you can do a backdoor Roth IRA so by maxing out all the retirement accounts you have available to you and you have many different options you can save for retirement which we all have to do and cut down a lot on your taxes so are you ready this is how you would cut your taxes in half let's say you're in a 35 tax bracket and you make a 100 000 salary well then you'll pay 35 000 in tax right however let's say after watching this video you understand all the different ways to pay less taxes and instead of making a hundred thousand dollar salary you make forty thousand dollars in business income forty thousand dollars through a cash out refi on a real estate property and twenty thousand dollars in long-term capital gains from you know the sale of the stock or of crypto so it's still the same amount of income in total a hundred thousand dollars same as your salary but you're paying a lot less in taxes because if you're in the 35 tax bracket you'd pay fourteen thousand dollars on your business income three thousand dollars on your long-term capital gains and of course no taxes on your cash out refi which means seventeen thousand dollars in total tax so that is literally half of what you would pay if you made all that money just through a paycheck I am always shocked by how many tax tricks and loopholes involve business and investing it just goes to show Freedom can never be found in a paycheck if only because of the taxes so even if you depend on a paycheck right now you have to be smart about using your paycheck to invest and start businesses that is the only way you can legally reduce your taxes while also making more and more money and of course gaining more and more freedom I hope you enjoyed this video be sure to subscribe if you haven't already and I'll see you again next week same time same place bye thank you

Channel: Rose Han

Views: 102,718

Keywords: investing with rose, personal finance 101, personal finance tips, taxes, lower your taxes, taxes explained, investing, personal wealth, saving money, tax season, money saving tips, save money 2023, taxes united states, rich secrets, secrets to get rich, personal finance for beginners, taxes for beginners 2023, money for teens, finance for teens, millionaire explains, millionaire mindset, how to rich 2023, understanding money, save money, tax loopholes, real estate 2023

Id: 9UV313785zc

Length: 15min 50sec (950 seconds)

Published: Sat Apr 22 2023