Building sustainable wealth is not difficult. It doesn’t require luck, genius, or special connections. You don’t have to attend expensive financial seminars or subscribe to online courses that promise to teach you the latest tricks for sustainable wealth management. Being financially intelligent and organized is a skill that can be learned just like anything else. The bottom line can actually be summarized in three short points:
• Make more than you spend and invest the difference wisely.
• Develop habits that result in wealth accumulation.
• Use your tax savings to your advantage.
The first step to building wealth starts with reducing taxes. Most people don’t know that you can save the most money by making sure you know about every possible deduction or credit. You should take legitimate deductions every chance you get as you’re legally entitled to them. However, you need to stay informed as the rules change every year and sustainable wealth advisors can help keep you stay up to date with the latest changes. Popular deductions include mortgage interest, real estate taxes and student loan interest, which can save you up to $2,500. And that’s just the beginning. Other options include tax credits for child care costs, retirement contributions to 401(k)s and individual retirement accounts. Some qualified education costs are also an option.
Here are 10 simple steps to make sure you’re on the right path to maximizing your finances:
1. Check to see if you qualify for the earned income tax credit
The earned income tax credit applies to low- and moderate-income taxpayers. It offers credit as high as $6,000. Households with combined earnings of less than $50,000 should check with sustainable wealth advisors to see whether this credit applies to them. Couples, particularly those with children often qualify, but lose out on this benefit as they fail to check.
2. Start a business
Becoming an entrepreneur can improve your tax situation. This is partly because business owners have more control over how they pay taxes. They have the option of keeping more money in the company instead of drawing it down as income. In addition to this, they can count certain costs as expenses. (Entrepreneurs should consider hiring a tax professional to navigate the ins and outs of the Internal Revenue Service rules on eligible expenses, which can be tricky.)
3. Take advantage of child benefits
The tax code offers many benefits to couples with children, including credit for child care costs, the child tax credit (worth up to $1,000 for each child under age 17, which is phased out for high earners) and the ability to count more dependents in your household. You can claim Child Relief Up to a maximum of $4,000 per child, which can be shared between husband and wife. Alimony payments are tax deductible as well.
4. Put money into college savings
Very few people take advantage of 529 college savings accounts for their children. This causes them to miss out on the tax benefit of letting the money grow tax-free. Money that goes toward tuition doesn’t require for parents to pay taxes on the earnings. (They invest after-tax money). Using a Roth IRA to save for college is another suitable alternative, because you can withdraw contributions at any time tax- and penalty-free. This allows the account to serve as a terrific tax-deferred college-savings plan increasing sustainable wealth.
5. Take advantage of your mortgage for as long as possible
Because mortgage interest payments are tax deductible, homeowners actually benefit from retaining their mortgage for as long as possible (rather than paying it off early). Of course, you have to weigh that tax benefit against the additional interest payments incurred, and the satisfaction of paying off the debt if you can afford to. Generally, interest on up to $100,000 of your mortgage can be deducted, no matter what you use the money for. However, for a growing number of taxpayers subjected to the alternative minimum tax (AMT), home-equity debt is deductible only if the loan was used to buy or improve your home.
6. Use charitable donations
Charitable contributions are tax-deductible, so it makes financial sense to give away to get back. When you donate stock to a charity, your tax deduction will be for its full fair market value. This means that if it has appreciated considerably since you first bought it, you’ll also avoid paying capital gains tax. In addition to this, personal property donated to a charity (for example: old or unwanted furniture dropped off at Goodwill), is also tax-deductible based on fair market value. Always keep your receipts when you make the donation. On top of that, parents can give each child up to $26,000 with a technique dubbed “gift splitting.”
7. Stay on top of medical expenses
Some health-related expenses, including acupuncture, supplies like bandages, and breast pumps are tax deductible. The irs.gov website has a complete list of all tax deductible items, but you need to keep all receipts to qualify. You can even include travel expenses in medical deductions. Apart from the cost of getting to and from the doctor, you can also deduct up to $50 a night for accommodation if medical care requires you to be away from home overnight. That’s $50 is per person you can deduct, so traveling with a sick child to get medical care totals $100 a day.
8. Invest in yourself
From a tax perspective it makes sense to start a business. However, you need to choose wisely as whether you’re a sole proprietorship, a subchapter S corporation, a C-corp or a limited-liability company (LLC) will have a major impact on your taxes. Hiring your children if you have an unincorporated business, can have real tax advantages. You can deduct what you pay them, which will shift income from your tax bracket to theirs. And because wages are earned income, the “child tax” does not apply. All children under age 18, don’t have to pay Social Security tax on their earnings. You, however, can use their earnings as a basis for an IRA contribution increasing sustainable wealth management.
9. Make personal expenses – office expenses
If you regularly work from home or are registered as self-employed, you can qualify to deduct some personal expenses as home-office expenses. These include utility bills, insurance premiums and home maintenance costs. According to new IRS rules you can claim a standard deduction of $5 for every square foot of office space, for a total of up to 300 square feet. If you need a new car for your business, you can take advantage of Congress’ special tax incentives if you buy a heavy sports-utility vehicle or a pick-up.
10. Time manage your taxes
Checking your tax before you file it can save you a costly audit. If you cannot file it on time, file an extension. If you fail to pay at least 90% of what you owe by tax day on April 15 you are liable for penalties. If you stop working, you can start claiming benefits as early as age 62. However, with every year you delay — until age 70 — you can receive higher benefits for the rest of your life. Delaying benefits also means you are postponing the time when you’ll owe tax on them.
As you learn how to use the tax deductions you qualify for to your benefit you will notice that in time the sum starts to add up. Managing your expenses and income more efficiently is certainly the first step towards accumulating some savings, but if you want to build sustainable wealth you should do some research on the types of investments that you can afford and that make sense for your financial plan, budget and timeframe. There are many options, including buying stocks, government bonds, securities and company shares as well as investing in funds. Some of these are also tax deductible and are a relatively safe investment with tax-free earnings. You can combine the different methods described above with investments that work for you to create your financial independence. Remember that the only thing standing between you and financial freedom is the willingness to act on everything you’ve learned. Talking with sustainable wealth advisors is a great start to your goals.