4 ms·

You might be able to move around when you incur income tax a little bit that way, but you can't avoid it.

by harryh 10y ago

ChuckMcM 10y ago
This is exactly right, you can shift it into another tax year but you can't legally avoid it. But everyone's tax situation is different.
- charlesdm 10y ago
  There are ways, e.g. by donating to your own accredited charitable foundation.
  - icebraining 10y ago
    But then you can only use the money for certain purposes.
    - charlesdm 10y ago
      Of course, you can't get rid of your entire tax bill (well, maybe you can, in one tax year). But you can probably do more with charities than you'd assume. For example: let's say you buy a mansion. This mansion has a forest or large amounts of land surrounding it. A charity focusing on land or nature preservation could acquire that land.
    - deleted 10y ago
      [deleted]
Retric 10y ago
Deferring tax means you get interest on money that would have been taxed which acts as a tax break. Ex: Supose you have 100$ your tax rate is 15% and you get 5% in interest. Pay 10% now you have (100$ - 15$) * 1.05 = 89.25 next year. Swap that order 100$ * 1.05 - 15$ = 90$ Next year or a ~7% tax break. Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate.
- harryh 10y ago
  Yes, borrowing can increase the leverage on an investment. It can magnify gains, but it can also magnify losses. No, you cannot use leverage to reduce taxes to zero. You are confused if you think that. Go play with the numbers some more. Don't forget that you have to pay taxes on the investment gains you make with borrowed money (as you did in your example).
  - Retric 10y ago
    You only need to pay capital gains when you sell an asset. As to deferring if you defer and save 10% then next year defer and save 10% of that it's a net reduction of 0.9 * 0.9 and every year you defer is another * 0.9. If nothing else inflation makes deferring tax loads very attractive.
    - harryh 10y ago
      It's true that you can somewhat increase your overall return by deferring capital gains taxes because you get to hold on to the assets you would have paid in taxes longer and those assets can earn a return for you (this is why certain types of tax advantaged retirement accounts are nice). But I think you are significantly overstating the potential gains when you say that you can save 10% a year. For example let's say you have $1000. Tax rates are 15% and annual investment returns are 8%. Under strategy A you sell and pay taxes at the end of every year. Under strategy B you only sell at the end of 30 years and pay taxes all at once. Under strategy A you will end up with $6,738.55. Under strategy B you will end up with $8,069.6 which is about 20% more. 20% more is a lot so that's a strategy worth thinking about! But it's not reducing your tax bill anywhere close to 0. In fact you actually pay more in total taxes under strategy B in nominal terms (and about the same in real terms assuming 2% inflation) because you have more overall gains. Overall, I agree that deferring tax payments can be a very useful thing to do. I just dispute your statement that "Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate." That's simply not true.
      - Retric 10y ago

You might be able to move around when you incur income tax a little bit that way, but you can't avoid it.

by harryh 10y ago

You might be able to move around when you incur income tax a little bit that way, but you can't avoid it.

This is exactly right, you can shift it into another tax year but you can't legally avoid it. But everyone's tax situation is different.

charlesdm 10y ago
There are ways, e.g. by donating to your own accredited charitable foundation.
- icebraining 10y ago
  But then you can only use the money for certain purposes.
  - charlesdm 10y ago
    Of course, you can't get rid of your entire tax bill (well, maybe you can, in one tax year). But you can probably do more with charities than you'd assume. For example: let's say you buy a mansion. This mansion has a forest or large amounts of land surrounding it. A charity focusing on land or nature preservation could acquire that land.
  - deleted 10y ago
    [deleted]

Retric 10y ago

Deferring tax means you get interest on money that would have been taxed which acts as a tax break. Ex: Supose you have 100$ your tax rate is 15% and you get 5% in interest. Pay 10% now you have (100$ - 15$) * 1.05 = 89.25 next year. Swap that order 100$ * 1.05 - 15$ = 90$ Next year or a ~7% tax break. Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate.

harryh 10y ago
Yes, borrowing can increase the leverage on an investment. It can magnify gains, but it can also magnify losses. No, you cannot use leverage to reduce taxes to zero. You are confused if you think that. Go play with the numbers some more. Don't forget that you have to pay taxes on the investment gains you make with borrowed money (as you did in your example).
- Retric 10y ago
  You only need to pay capital gains when you sell an asset. As to deferring if you defer and save 10% then next year defer and save 10% of that it's a net reduction of 0.9 * 0.9 and every year you defer is another * 0.9. If nothing else inflation makes deferring tax loads very attractive.
  - harryh 10y ago
    It's true that you can somewhat increase your overall return by deferring capital gains taxes because you get to hold on to the assets you would have paid in taxes longer and those assets can earn a return for you (this is why certain types of tax advantaged retirement accounts are nice). But I think you are significantly overstating the potential gains when you say that you can save 10% a year. For example let's say you have $1000. Tax rates are 15% and annual investment returns are 8%. Under strategy A you sell and pay taxes at the end of every year. Under strategy B you only sell at the end of 30 years and pay taxes all at once. Under strategy A you will end up with $6,738.55. Under strategy B you will end up with $8,069.6 which is about 20% more. 20% more is a lot so that's a strategy worth thinking about! But it's not reducing your tax bill anywhere close to 0. In fact you actually pay more in total taxes under strategy B in nominal terms (and about the same in real terms assuming 2% inflation) because you have more overall gains. Overall, I agree that deferring tax payments can be a very useful thing to do. I just dispute your statement that "Push it off long enough (without interest or fees) and you pay arbitrarily close to 0% tax rate." That's simply not true.
    - Retric 10y ago