People absolutely hate paying taxes. It is one of the most frustrating parts of working or owning your own business. One of the ways people try to circumvent this would be through tax shelters. It is thus important for you to know what a tax shelter is, what it entails and if there would be any adverse consequences to using a tax shelter. This would be beneficial if you live in Macon Ga or any part of the United States. So let’s start from the basics.
Understand the meaning of a Tax Shelter
When the word tax shelter is usually used, it is meant to refer to ways in which a person or a company can reduce the liabilities which he has accumulated concerning taxes. The specific meaning and interpretation of a tax shelter could depend on the thinking of the person using the word. Some persons may believe that any clause or code relating to taxes which allows a person to be exempted from taxes or pay fewer taxes is a tax shelter. Others might not agree.
However, the general principle or thinking is that tax shelter allows a person to escape from most of the burdens of tax payment hereby ensuring that he achieves the lowest possible liabilities when it comes to tax. Would you like an example of what tax shelters look like? A typical example could be the use of banks in other countries by rich persons or corporations in a bid to reduce the visible income. Another example would be retirement accounts which are handled by individuals. The use of tax shelters is not new and has been prevalent for quite some time. However, there is a different kind of tax shelter which should catch your interest.
Meaning of Abusive tax sheltering
The Internal Revenue Service has defined what is called an abusive tax shelter process. This simply means that forms of tax shelters which are in the form of trust accounts or transactions. These transactions seek to remove the amount of taxes which are payable to the IRS in many ways. One of these ways would include;
- Hiding some parts of their income in accounts in other countries not controlled by the IRS
- Using over claiming deductions
- Hiding certain assets through various means
Differences between a tax shelter and a tax haven
It is important to remember that apart from the abusive tax sheltering transactions, most tax shelters are completely legal. While this may be true, they are in no way the same thing as a tax haven. The two concepts are fundamentally different. One of the main differences which differentiate them would their location. A legal tax shelter would mostly be within one’s country while tax havens are usually outside a person’s country. Tax shelters are mostly legal and recognized while some forms of tax havens can prove to be illegal in its very nature.
Examples of tax shelters
There are quite several tax shelters which a person can use in a country. These would include;
Home Equity
This is one of the more popular ways in which people make use of tax shelters. When people purchase homes in most countries including the United States, it is very common for them to seek mortgage loans. These loans would help them spread out the costs over some time. Home equity would then refer to the amount or valuation of the property that has been brought that is devoid of all forms of debt.
Tax sheltering would be seen when the property which was bought is now meant to be sold. The IRS offers to all persons the opportunity to have an exemption on the capital gains tax. This would usually apply only for $250,000 of any property which falls under this category.
The 401(k)
Another type of tax shelter would what is called the 401(k) accounts. While this would qualify to be a good and legal tax shelter, it would often not last for long. Here’s how it works. The more funds you make available for this kind of account, the more likely you would have to pay a smaller percentage of taxes. The funds which you have left in the account would have the opportunity to grow thanks to interest and the lack of deduction of taxes.
However, as earlier mentioned, this won’t last forever. Try as hard as you can but you would have to pay taxes for this account. The taxes start coming in when you have to make certain withdrawals from the account. For every withdrawal that you make, a certain percentage of taxes would need to be paid. Another type of tax shelter program is the retirement account which is kept for individuals after they retire. It works just about the same way as this program.Â
Benefits of Tax benefits
Of course, without saying too much, some of the benefits which come from tax shelters are quite obvious. We are just going to touch some of them;
It saves you money
Everyone is working towards saving some funds every now and then. With tax shelters, you would be able to save some money by legally reducing your tax liability. This would probably allow you to invest that cash into something more profitable. It’s surely a win for you.
Rise of Tax is inevitable
The truth is that the more deficits which are accrued by the government, the more you would probably see the taxes rise. As those taxes keep rising, you would probably come to appreciate the value of having tax shelters. Tax shelters would help you save money now and avoid the constant pressure which the rise of taxes would have on the money which you are making. It could allow you to set up for the future easily.
Money for college
If you are a parent with a kid who is about to go to college, then you would probably be aware of the EFC rules which states that you have to contribute a proportion of your assets. However, if you choose to save some of your money under several tax shelters, those funds or assets would not be counted towards the contributions which you would have to make at the end of the day.
Effects of using Tax Havens or abusive tax sheltering
While there is a good side to tax sheltering, using the other door could get you into trouble. The effects if caught by the IRS could range from loss of the funds to even criminal liability. If you live in Macon Ga, the best course of action would be to seek the help of a tax lawyer before taking steps to use such services.
A tax lawyer would be able to advise on the specific forms of tax shelters which would benefit you both now and in the long run. Without your tax lawyers, you would probably make a lot of mistakes with your tax issues. Ready to get a tax lawyer? Cumberland Law Group would be a great place to start. They are made of a team of tax attorneys who have years of dealing with the IRS. You would be instantly updated as to the rules regarding tax shelters.
So what are you waiting for? Get a tax lawyer today to enjoy the benefits of having a tax shelter.
