2 Strategies to Reduce Taxes from the Sale of Your Business

Recently, one of my colleagues took me aside and asked what I could do to help a 40-year-old client who sold his business last year for $40 million. He wanted to shelter the proceeds from capital gains taxes and possibly fund a trust for his family. We both already knew that the opportunity to reduce the tax recognition on the capital gain had long passed.

Had he sought our advice long before he was committed to the sale of this business, we could have explored some valuable options. Here are two of them.

The Qualified Small Business Stock Exclusion

One option our client may have considered is to investigate qualifying his business for Small Business Stock treatment under Section 1202 of the Internal Revenue Code (IRC). Section 1202 was added through the 1993 Revenue Reconciliation Act to encourage small business investment. A Qualified Small Business (QSB) is any active domestic C corporation engaged in certain business activities whose assets have a fair market value of not more than $50 million on or immediately after the original issuance of stock, regardless of any subsequent appreciation (IRC § 1202 (d)(1)).

Qualified Small Business Stock that is issued after Aug. 10, 1993, and held for at least five years before it is sold may be partially or wholly exempt from federal capital gains taxes on the value of the shares sold, up to the greater of $10 million in eligible gain or 10 times the aggregate cost basis in the shares sold in each tax year (IRC § 1202 (b)(1)). Be aware that this limitation applies to each separate shareholder, and a trust, or multiple trusts, established and funded with QSB Stock gifted by a qualified QSB shareholder may enable much more than $10 million in gain exclusion. For QSB shares acquired after Sept. 27, 2010, the capital gain exclusion percentage is 100%, and it is excluded from alternative minimum taxes and the net investment income tax with the same five-year holding requirement (IRC § 1202 (a)(4)).

But only certain types of companies fall under the category of a QSB. To be a QSB, the domestic corporation must engage in a “Qualified Trade or Business” (QTB). Such a business will generally manufacture or sell products, as opposed to providing services and expertise. Businesses that generally will not qualify are those offering services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, banking and insurance, as well as hospitality businesses such as hotels and restaurants (IRC § 1202 (e)(3)).

To qualify and continue as a QSB, the business must follow certain rules (there are many, and these are the most basic): It must be a domestic C corporation when the stock is issued and when sold, and at least 80% of its assets must be used in the active conduct of one or more QTBs during substantially the entire five-year holding period. If the business is already an LLC or S corporation, it may still qualify if the business reorganizes and revokes the subchapter S election and issues new stock in the C corporation, then meets the holding period before selling.

It is critical that management of the company understands all of IRC Section 1202’s requirements and agrees to maintain the business in a manner that continues to satisfy the active business requirement and the asset investment limitations, and avoid the pitfalls related to stock redemptions, tax elections and conversions.

To summarize, in order for the QSB shareholder to claim the tax benefits upon sale, the following must apply: The shareholder may be a person or business not organized as a C-Corp; the QSB stock must be original issue and not purchased in trade for other stock; the shareholder must hold the QSB stock for at least five years; and the QSB issuing the stock must devote more than 80% of its assets toward the operation or one or more QTBs.

The Tennessee Income Tax Non-Grantor Trust Strategy

Most states conform to the QSB stock exclusion and also exclude capital gains tax on QSB stock when sold as required in IRC § 1202. The exceptions are California, Mississippi, Alabama, Pennsylvania, New Jersey, Puerto Rico, Hawaii and Massachusetts. If you live in one of those states, you may want to consider a concurrent trust strategy described below to eliminate all capital gains taxes on the sale of QSB stock. But even in conforming states, the QSB shareholder can claim additional exclusions greater than the $10 million exclusion limitation by gifting into multiple trusts so all the possible gain from the sale is excluded.

Shareholders living in a nonconforming state or expecting an aggregate capital gain much greater than the $10 million cap may use a Tennessee Income Non-Grantor Trust (TING) to eliminate all federal and state taxation on the sale of the QSB stock gifted to the TING prior to an agreement to sell. Tennessee law enables a person who owns a highly appreciated asset, like QSB stock, to reduce or eliminate his resident state capital gains taxes on the sale of the QSB stock through a TING. While several other states also have laws that support this strategy, Tennessee legislators have adopted the best parts of other states’ laws. To be clear, a taxpayer already living in a state with no state income tax may use resident state trusts to spread the capital gain resulting from the sale of QSB Stock.

The grantor will gift the QSB stock to one or more TINGs (a gift of QSB stock is an exception to the original issue rule under IRC § 1202 (h)(2) and the five-year holding period is not interrupted by a gift to a trust under IRC § 1202 (h)(1)). The trustee may then sell the QSB stock in a manner that allows treatment as a long-term capital gain. If the TING makes no distributions in the tax year in which the QSB stock meeting all the requirements is sold, the sale will be excluded from federal and state capital gain recognition.

The Sourced Income Rule Affecting Trust Taxation

The client’s resident state may seek to tax at least some of the income of a nonresident TING if the client’s resident state has a close interest in the trust’s assets, such as through real property located in or a business operating in that state. This is known as the Sourced Income Rule. Some states think they have a sufficient connection to levy a tax on a nonresident trust simply because the settlor or a beneficiary of the trust lives in that state, or the trustee has an office in that state. That broad application of the definition of a resident trust may be misplaced, but many of our clients want to avoid any expense from litigating against a state taxing authority.

However, if the tax savings are substantial, then a client considering a TING should be aware that the Supreme Court has unanimously ruled that the state of North Carolina overstepped its taxing authority when it sought to tax trust income based solely on the residence of a trust beneficiary. North Carolina argued that its taxing authority included any trust income that “is for the benefit of” a state resident. The Supreme Court disagreed and ruled in the case of North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust “that the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” This ruling may serve to restrain other state taxing authorities from applying an overly broad application of their resident trust rule.

Both of these strategies used together can be highly beneficial for a QSB shareholder living in a QSB nonconforming state or one who expects the total capital gain from a sale to exceed the $10 million cap on a QSB capital gain exclusion. However, these strategies also require that the QSB management and the QSB shareholder plan many years ahead of any contemplated sale.

Senior Vice President, Argent Trust Company

Timothy Barrett is a senior vice president and trust counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, 2016 Bingham Fellow, a board member of the Metro Louisville Estate Planning Council, and is a member of the Louisville, Kentucky and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Program Planning Committee.

Source: kiplinger.com

How to Invest in Agriculture

Many people think of investing in agriculture as owning farmland and operating a farm. Many investors overlook this business area when deciding where to put their money because they don’t see themselves toiling the land. But there are various options to invest in agriculture without being a farmer.

Farmland investing is just one way to invest in agriculture. Additionally, investors can invest in farming-related exchange-traded funds (ETFs) and real estate investment trusts (REITs) or trade commodities to take advantage of the agricultural markets.

What Are Agriculture Investments?

Investing in agriculture is more than just owning some farmland and working the land. Agriculture can be an alternative investment that diversifies an investor’s portfolio. Investors can get exposure to agriculture and farming by investing in businesses involved in the whole farming process, from the seeds in the ground to the distribution of products to grocery stores.

4 Ways to Invest in Agriculture

1. Agriculture Stocks

Investors can put money into various publicly-traded companies that provide services in the farming industry. These agribusiness firms range from those involved in actual crop production — though many crop producers are privately held — to companies in the farming support businesses. The farming support businesses include companies that make fertilizer and seeds, manufacture farming equipment, and process and distribute crops.

Companies in the agriculture industry include, but are not limited to:

•   Archer Daniels Midland Company (ADM): A large food processing and commodities trading firm

•   Deere & Company (DE): Known as John Deere, this company manufactures agricultural machinery and heavy equipment

•   Corteva, Inc. (CTVA): An agricultural chemical, fertilizer, and seed company

•   The Mosaic Company (MOS): A large company that produces fertilizer and seeds

•   AppHarvest Inc (APPH): A small-cap company involved in indoor farms and crop production

2. Agriculture ETFs and Mutual Funds

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to the agricultural industry. Agriculture-focused mutual funds and ETFs invest in a basket of farming stocks, commodities, and related assets, allowing investors to diversify farming exposure.

3. Farm REITs

Farm and agricultural real estate investment trusts (REITs) own farmland and lease it to tenants who do the actual farming. REITs that invest in farmland can be a good option for investors who want exposure to farmland without actually owning a farm.

This type of investment can provide investors with various benefits. For example, a REIT is a type of liquid asset, meaning an investor can quickly sell the investment on the stock market. In contrast, if an investor were actually to own farmland, trying to sell the land could be a drawn-out and complex process. Other benefits include regular dividend payments and geographical and crop diversification.

Recommended: Pros and Cons of Investing in REITs

4. Commodities

Agricultural commodities are the products produced by farms, like corn, soybeans, and wheat.

Trading commodities can be a profitable, though risky, endeavor. Investors who trade commodities look to take advantage of the market’s volatility for short-term gains. Usually, this is done by trading futures contracts, though large investors may actually purchase and sell the physical commodities.

Commodity trading can be risky, especially for a novice investor. ETFs with exposure to commodities may be better for investors with lower risk tolerance.

Recommended: Why Is It Risky to Invest in Commodities?

Benefits and Risks of Investing in Agriculture

Benefits

One of the significant benefits of agriculture investments is that people always need to eat, so there will usually be some demand support for businesses in the industry. Because of this, some investors view the sector as somewhat recession-proof and a good way to diversify a portfolio.

Another benefit is that farmland REITs and certain agriculture stocks can provide passive income through regular dividend payouts. Additionally, farmland investments can provide a hedge against rising inflation.

Risks

The agricultural and farming sector can be fickle, as it’s subject to various risk factors that can impact investments. Uncertainties stemming from weather to government policies to the global commodities markets can cause volatile swings in prices and income that affect investments in the sector.

Here are some risks facing agricultural investments:

•   Production risk: Major weather events, crop diseases, and other factors can affect the quantity and quality of commodities produced.

•   Market risk: The global markets for commodities can affect farming and agricultural business as prices can swing wildly, making crop production and agribusiness demand uncertain.

•   Financial risk: Farms and related businesses often use debt to fund operations, so rising interest rates and credit tightening can hinder companies in the industry.

•   Regulatory risk: Changes in taxes, regulations, subsidies, and other government actions can impact agricultural businesses and investments.

Are Agriculture Investments Right for You?

It might seem like agriculture investments are risky, but with that risk comes reward. If an investor’s risk tolerance allows for it, agricultural investments can provide diversification in a portfolio.

The Takeaway

Fortunately for investors who want to put money into the agriculture sector, they don’t necessarily need to buy a farm. Several investment vehicles can fit their needs to get exposure to farming. Farmland REITs, agribusiness stocks, and farming and commodity ETFs can be options to build wealth in the farm business.

Investing in agriculture doesn’t have to be as hard as owning a farm and working the land. Investors can start investing in agriculture by trading stocks and ETFs for as little as $5 with SoFi Invest®.

Check out how to start investing with SoFi today.

FAQ

Is agriculture worth investing in?

Agricultural investments can help diversify a portfolio. Depending on what areas of the agriculture business you invest in, the assets can produce steady income and long-term capital gains.

How much should I invest in agriculture?

Determining how much you should invest in any asset class depends on your financial goals and personal risk tolerance. It would be best if you didn’t put too much of your money into the agriculture sector; you want a diversified portfolio.

How do I invest in a farm?

Buying a farm can be difficult; you would need a lot of capital for a down payment, just like any other piece of real estate. If you want exposure to farmland, agriculture and farm-related REITs can be a good option, especially for retail investors.


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Source: sofi.com

What Is a Trust Fund – How It Works, Types & How to Set One Up

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When most people hear “trust fund,” they think of wealthy people living in fancy estates using them to pass immense amounts of wealth to their heirs. But that isn’t always the case.

A trust fund is simply a legal entity that holds assets of value like property or stocks and bonds on someone else’s behalf (in trust). They’re useful for numerous reasons, including estate planning, protecting assets, avoiding complications during probate, and minimizing taxes.

Trust funds are helpful for estates of varying sizes. But before you set one up, it’s best to understand what it is and what it can and can’t do.


What Is a Trust Fund?

A trust fund is a legal entity that can hold valuable assets on behalf of an individual person, group, or organization. There are many different types of trust fund, each designed to achieve a different goal.


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Trusts give the person establishing them more control over their estate than a will does. They can also provide legal protections or tax benefits that reduce the taxes the person establishing the trust or its beneficiaries may owe.


How a Trust Fund Works

Establishing a trust fund requires three parties:

  1. The Grantor. The person who establishes the trust and places assets into that trust is the grantor. They determine the beneficiaries and any rules or stipulations they wish to put in place, such as only allowing the beneficiary to use the money to pay for college.
  2. The Beneficiary. The person, people, or organization that benefits from the trust is the beneficiary. They don’t own the assets but will benefit from them, often by receiving access at some point or getting monetary distributions from the trust.
  3. The Trustee. The person or organization responsible for managing the trust and its assets is the trustee. They must act as a fiduciary for the beneficiary and follow the rules or stipulations laid out in the trust documents.

To establish a trust, the grantor typically works with a lawyer to draw up a document outlining the terms of the trust, the beneficiaries, the trustee, and the details of how the trust will work. 

For example, a grandparent might establish a trust for their grandchildren, name their children as trustees, and stipulate that they must use the money for their grandchildren’s college education.

One perk for beneficiaries is that they do not pay taxes on their distributions. Instead, the IRS taxes the trust directly.

Trusts are a popular estate planning tool because they’re more binding than something like a will. In the example, the grandchildren must use the trust fund to pay for college costs. If the grandparent instead distributed that money in a will simply noting they want it to go toward college costs, the grandchildren don’t have the same legal obligations to use it for that. 


Types of Trust Funds

One of the benefits of trusts is their flexibility. You can establish one for almost any purpose. And there are many types of trust funds available to suit various needs. 

Living Trusts

Living trusts are trusts that you create while you’re alive. The benefit of a revocable trust is that they let the assets in the trust avoid probate, the process by which the executor of the estate determines how to distribute the property left behind. Probate can be a lengthy process, which living trusts let families avoid.

They come in two primary forms: revocable and irrevocable.

A revocable trust gives the grantor more power over the trust’s assets. The grantor can amend the trust documents at any time after creating a revocable trust, changing the terms of the trust, or naming different beneficiaries. 

Once the grantor dies, a revocable trust becomes an irrevocable trust and cannot be altered.

In contrast, irrevocable trusts are more permanent. Once the grantor establishes an irrevocable trust, they cannot make changes to it or name different beneficiaries without the consent of the current beneficiaries.

An irrevocable trust has additional tax benefits for the grantor. Because they can’t make changes or remove assets after forming the trust, any assets placed in the trust are no longer the grantor’s property.

That means the grantor can take advantage of the annual gift tax exclusion by making gifts to an irrevocable trust.

Testamentary Trust

You can also create a testamentary trust through your last will and testament. Essentially, it instructs the executor to create the trust after your death.

While that means testamentary trusts don’t provide all the benefits of avoiding probate you could get from a living trust, they still carry other benefits. For example, it allows the decedent to establish another kind of trust, like an educational trust, for an heir. It also lets them place more restrictions on how their heirs use the money left behind.

Educational Trust

An educational trust simply specifies the beneficiary must use the assets for educational purposes. It can be revocable or irrevocable.

Depending on the grantor’s wishes, the trust can specify where the beneficiary has to study, what subjects they need to study, how frequently it will make distributions, and what types of expenses it will cover.

For example, it could state that it will only cover the beneficiary’s tuition costs or make a lump-sum distribution each year the beneficiary is in school and leave it to the beneficiary to decide how best to spend the money for education.

Of course, these restrictions could have consequences. If the beneficiary doesn’t go to college or leaves money in the trust once they leave school, you need a plan for what to do with it.

Special Needs Trust

A special needs trust is a trust designed to help care for someone who is disabled or otherwise requires accommodations without disqualifying them from receiving government assistance.

Many government assistance programs require aid recipients to have a limited income or limited assets. If their income rises or they receive a large gift, it can stop them from receiving essential government aid.

A special needs trust can hold assets on behalf of someone receiving government care and ensure the trustee uses those assets to help the beneficiary.

The rules for these trusts can vary from state to state, but they must typically be irrevocable and give the trustee significant control over how to use or distribute the assets.

Charitable Remainder Trust

Charitable remainder trusts allow the grantor to benefit from charitable contribution tax deductions while still receiving income from their assets. In exchange, the funds remaining in the trust go to a charity once the grantor dies.

For example, Brianna could establish a charitable trust and name a local museum as the charity of her choice. If she places $100,000 in the trust, the trust might give her (or another named beneficiary) an annual payment of $5,000 each year until she dies.

When Brianna establishes the trust, she receives a tax benefit for making a charitable contribution to the museum. However, she does have to pay taxes on the distributions she receives.

Once Brianna dies, whatever money she left in the trust goes to the museum.

Charitable remainder trusts can be highly complex when it comes to taxes, so it’s essential to work with a tax professional when considering whether one is right for you.

Common Collective Trust Fund

A common collective trust fund is a trust fund managed by a bank or trust company. It combines assets for multiple investors, often pooling assets from things like profit-sharing, pension, and employee stock bonus plans. 

These funds are very similar to mutual funds and are commonly held in employer retirement plans.

Perpetual Trust Fund (Dynasty Trust)

A perpetual trust fund, also called a dynasty trust, is a trust that aims to pass wealth to future generations while avoiding taxes like the estate tax, gift tax, or generation-skipping transfer tax. A properly designed dynasty trust can last for many generations, creating a family dynasty of wealth.

These trusts usually include clauses to change their beneficiaries over time. For example, it might start benefiting the grantor’s children, then change to benefit the grantor’s grandchildren once they reach a certain age or all of the grantor’s children die.

Because the goal of dynasty trusts is to last for a long time or even forever, the grantors of these trusts typically name a financial institution or bank the trustee.

Assets in the trust aren’t the property of any of the beneficiaries, so they can avoid taxes like capital gains and estate taxes. However, they do have to pay income tax on distributions.

Spendthrift Trust

A spendthrift trust is one designed to protect the beneficiary from creditors and their own poor financial habits. These trusts typically give the trustee more control over the assets in the fund.

The effect is that the beneficiary can’t sell the trust’s assets or access significant amounts at once to squander. But neither can creditors if the beneficiary racks up considerable debt.

Social Security Trust Fund

The Social Security Trust Fund is the trust fund the Social Security Administration uses to hold all the assets used to pay benefits like Social Security and disability. It’s not a trust you can create, but almost every American pays into it and hopes to benefit from it someday, so it’s important to know how it works.

The trust fund owns interest-bearing government securities, such as bonds, and gets its funds from payroll tax deductions paid by both employees and employers.

When the benefits paid out by Social Security exceed the income received from payroll taxes, money from the trust fund pays those benefits. When payroll taxes exceed benefits paid, the additional revenue goes into the trust.

As of the Social Security Administration’s 2021 report, the Social Security Trust fund held $2.908 trillion in assets.


Advantages & Disadvantages of Trust Funds

Trusts have many tax benefits and can give the person establishing the trust more control over how the beneficiary ultimately uses their money. However, they’re not perfect for every situation.

Advantages of Trust Funds

Trusts can give their grantors control over their hard-earned money in life and in death, ensuring more of it goes to their beneficiaries than the government. A trust’s many benefits include: 

  1. Grantor Control. The person establishing the trust can set rules for how beneficiaries should use the funds in the trust, and the beneficiary must follow those wishes, even after the grantor dies.
  2. Tax Incentives. Various types of trusts can help the grantor and beneficiary avoid or reduce taxes like capital gains and estate taxes.
  3. Probate Avoidance. When someone dies, their estate goes through probate, a legal process by which the state or executor distributes assets, whether or not they have a last will and testament. Assets in a trust can skip this process, meaning loved ones can access the assets sooner. It also reduces the chance of the grantor’s wishes being ignored.
  4. Privacy. The probate process is public, which means the estate and wishes of someone who dies become public record. Trusts offer a more private option.

Disadvantages of Trust Funds

Though there are advantages to trusts, they aren’t right for everyone. Carefully consider these disadvantages before setting one up.

  1. Limited Benefit for Small Estates. One of the reasons to establish a trust is to avoid taxes. But smaller estates are unlikely to face taxes, anyway. For 2022, the estate tax exclusion is $12.6 million federally, though some states have lower limits. For example, Massachusetts and Oregon have the lowest exclusions as of this writing, taxing estates that exceed $1 million.
  2. Cost. Setting up a trust means working with expensive professionals like lawyers and tax professionals. The cost may exceed the benefit for some.
  3. Finding a Trustee. Establishing a trust means finding a trustee to manage it. You either have to ask a friend or relative to take on this task, which might be a large one depending on the trust’s assets, or pay a professional to handle the work.
  4. Loss of Control. While trusts give the grantor more control in some ways, setting up an irrevocable trust means losing control in others. Once you establish an irrevocable trust, you can’t make changes, which means losing some level of control over your assets.

How to Set Up a Trust Fund

Setting up a trust fund is a multistep process. If you’re looking to create a simple trust, you could finish in a few weeks. If you want to construct a more complicated one with many restrictions and beneficiaries and a large number of assets, you should expect a monthslong process. But the steps you take are the same either way.

1. Figure Out the Goals of Your Trust

The first step to set up a trust fund is to figure out your goals for establishing the trust.

Do you want to use the trust to have more control over how your beneficiaries use your assets after your death? Is avoiding taxes your primary goal? Do you want a way to donate money to charity but retain a stream of income for retirement? 

You can use a trust to accomplish each of these goals, but each requires a different type of trust.

2. Find a Trust Professional

Once you know your goals, you’re ready to sit down with a professional. Most major financial institutions offer fee-based trust services if you have sufficient assets with them. For example, Fidelity manages trusts of $1 million or more. Fees start at 0.45% of the invested assets, but the percentage decreases as you add funds. You can work with the professional to hammer out details.

3. Choose a Trustee

You also have to determine who the trustee and the beneficiary will be. For some types of trusts, such as a dynasty trust, you need a professional trustee, like a bank or financial institution. Other trusts, like educational trusts or spendthrift trusts, more naturally lend themselves to having a family member serve as trustee.

4. Make the Trust Official

Once you’ve worked out the details, your estate planning attorney, the trustee, and any financial advisors will help draft the trust documents. You just have to sign on the dotted line to make it official. 

5. Fund the Trust

Once you’ve signed the paperwork, you’re ready to start funding the trust. You can put pretty much any asset of value into the trust, including cash, real estate, and stocks.

6. Register the Trust

You must register your trust with the IRS so it can get a taxpayer identification number and file tax returns. If you’re working closely with a financial institution to manage the trust, your trustee can help. Otherwise, the tax professional, lawyer, or brokerage company holding the trust’s assets can help register it.


Trust Fund FAQs

Trusts are complicated, and there are many ways to set them up. But first, it’s essential to understand how they work and how you can use them to accomplish your financial goals.

What’s the Difference Between a Trust & a Trust Fund?

People often use the terms trust and trust fund interchangeably, but they’re slightly different things.

A trust fund is the legal entity that contains assets or property for the benefit of someone else. A trust is a legal document outlining the rules of who the trust fund benefits and how the beneficiary can use assets in a trust fund.

How Is a Trust Fund Handled in Probate?

One of the most popular reasons to set up a trust is to avoid the probate process, which can be lengthy and prevent your loved ones from accessing the money you leave behind when you die.

Any assets in a trust avoid probate court and can skip the normal legal process.

Who Should I Make My Trustee?

Naming your trustee can be difficult because you’re trusting that person with managing your assets and following the wishes you outlined in the trust. 

Some types of trusts naturally lend themselves to making a family member the trustee. For example, if you establish a trust to benefit your grandchild, it makes sense to name their parents (your own child) as the trustee.

Longer-term trusts may require a financial institution or a long-lasting entity to serve as the trustee. But that can mean paying management fees.

How Does a Trust Fund Affect Estate Taxes?

You can use a trust fund to reduce or avoid estate taxes to some degree. The IRS considers money placed in an irrevocable trust a gift in the year you place it in the trust.

Each year, taxpayers may make gifts up to a certain amount ($16,000 in 2022) without it counting against their lifetime gift limit. That means the grantor of a trust can add $16,000 to the fund each year and pay no taxes on that amount, reducing their potential estate tax liability.

What Is a Trust Fund Baby?

A trust fund baby is a pejorative term used to describe a young person whose parents or family established a trust fund for them. This trust provides them with a sufficient income to live comfortably without having to work or find significantly gainful employment.

The common image of a trust fund baby is that of a privileged young adult coasting their way through life with little to no responsibilities.

These situations certainly exist, but the term doesn’t accurately describe most people benefiting from trust funds. Trust funds are simply a legal tool people can use to protect their assets and ensure their beneficiaries follow their wishes. 

Many middle-class families use trust funds for reasons as simple as avoiding probate or keeping assets safe from creditors, not to let their children live a life of luxury without having to work.


Final Word

Trust funds are a powerful legal tool you can use for reasons ranging from estate planning and tax avoidance to caring for a loved one. Though they may have a negative reputation as a toll available only to the wealthy, many groups can benefit from using them.

If you’re thinking about setting up a trust fund, it’s also a good opportunity to think about taking inventory of your finances and ensuring everything is in order. You might also consider talking to an estate planning attorney to draft a will if you don’t already have one. Being prepared only benefits your family in the long run.

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

TJ is a Boston-based writer who focuses on credit cards, credit, and bank accounts. When he’s not writing about all things personal finance, he enjoys cooking, esports, soccer, hockey, and games of the video and board varieties.

Source: moneycrashers.com

Effective Tax Strategies for the Present and Future

Did you get a surprise when you filed your taxes this year? It’s common for taxpayers to be caught off guard – either owing more than anticipated or receiving an unexpected refund. Though most taxpayers are relieved once taxes are filed, many have little understanding about how to manage their tax situation to enhance their savings and investment strategies.

Many find the process of managing taxes too daunting and simply react to taxes resulting from savings and investment decisions, rather than implementing strategies to minimize their taxes beforehand.

 In 2020, many investors overreacted during the pandemic and, fearing market volatility would erase investment gains, sold appreciated investments, subjecting them to increased taxes. Others sold assets in 2021 and incurred taxes because they suspected a proposed tax increase would push capital gains rates from 20% into tax rates of 37% or more, though ultimately there wasn’t political support to pass such tax increases.  

To avoid these types of reactive, knee-jerk approaches to decisions, you need a comprehensive tax strategy in place. Once equipped with appropriate strategies – such as those outlined below – taxpayers can adapt their savings and investment decisions and consider taxes as part of the equation.

Savings and Income Tax Advantages

Planning for taxes is meaningful because they influence other overarching financial decisions, including what we purchase, where we live and work, and when and where we can retire comfortably.  Managing taxes effectively requires looking at short-and long-term factors, primarily around savings and spending, investments and legacy planning.  Often taxes can be lowered depending how much is saved and what savings vehicles are used.  Current income tax rates affect our ability or willingness to save – especially in light of incentives offered by qualified retirement plans. For instance, investing in a 401(k) or an IRA can reduce current taxes and provide tax-deferred investment growth until assets are distributed.  Alternatively, a Roth IRA or a Roth 401(k), may result in greater current tax payments but permit tax-free growth and tax-free distributions when funded with after-tax dollars. 

Choosing between those alternatives requires looking at the overall situation.  An investor in the 24% income tax bracket, for example, who contributes $10,000 to a pre-tax 401(k) plan can save $2,400 in federal taxes, lowering the net overall investment “cost.” A designated Roth 401(k) or Roth IRA, assuming savings at the same $10,000 level, would not provide any current income tax break, but would allow the account owner to later take withdrawals tax-free, provided other parameters are met (e.g., five-year account period and/or meeting other restrictions).

Individuals should compare taxes saved through savings deferral at their current tax rate with those rates likely to apply once tax-deferred assets are to be withdrawn. For example, a married couple or individual with a marginal 24% tax rate who expect to be subject to much higher taxes in retirement (current highest marginal tax rates are 37%), caused by income from a pension or from other sources, may want to pay taxes on income now, and invest the after-tax dollars to produce tax-free distributions later to avoid paying taxes at higher rates.  Alternatively, those expecting income to level off or be reduced once they withdraw funds may be better off with a tax-deferred 401(k) allowing them to retain current income.

Naturally, the situation can change over time, so tax-saving strategies should be revised as circumstances change.

Managing Taxable Investment Accounts

Effectively managed brokerage accounts and other non-qualified, taxable accounts may incorporate a prudent tax-loss harvesting strategy coordinated by investment and tax advisers.  Long-term investors can take advantage of lower capital gains taxes from tax loss harvesting when selling investments to cover current expense and withdrawal needs and particularly when buying and selling investments as part of their long-term investment rebalancing to maintain a desired asset allocation and to keep their portfolio diversified.  

Investment rebalancing usually involves selling appreciated assets and purchasing others at more attractive prices to meet their investment objectives. In the process, selling appreciated assets can increase capital gains taxes. As appreciated assets are sold, investors can find opportunities to also consider selling other investments currently valued at less than their purchase cost, which can be due to temporary market volatility or other reasons related to the individual holding(s).  Selling assets at a loss enables investors to capture a tax benefit.  In effect, it allows them to offset any capital gains incurred from selling the appreciated assets.

Consider, for example, an investor who purchases individual publicly traded stocks. For simplicity, let’s assume 100 shares of a stock were purchased over one year ago at $200 per share (total acquisition price of $20,000) and are sold at a price of $150 per share, (total sales price of $15,000). Ignoring any cost of the sale, it generates a $5,000 long-term capital loss (long-term only when the position was sold after a one-year holding period) which can be used to offset other current year taxable capital gains when other investments are sold at market prices greater than their cost. In situations where total annual losses from all sales exceed gains – e.g., there are not sufficient gains to completely offset total losses – up to $3,000 of such loss can be used to offset ordinary income in the current year. To the extent losses exceed $3,000, (by $2,000 in the example), investors can “bank” those excess losses to offset future gains, which can be carried over only until death under the current law and regardless of whether capital gains tax rates increase in the future.

A careful approach to loss harvesting should be guided by tax and investment professionals to avoid mistakes when managing capital gains and repositioning investments. Savvy investors can use volatile market periods to make strategic investment maneuvers, through selling to capture their available losses, and may consider repurchase of the same or similar position (the same position may be acquired only after 30 days to avoid wash sale rules).  Complications by way of higher taxes can arise from violating wash sale tax rules that effectively disallow a loss if the same security or securities are repurchased within 30 days across various accounts owned by an investor.

In summary, using a tax-effective strategy that looks through a current and future tax lens can keep your savings and investing decisions on the right path for financial success.

The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

Senior Wealth Strategist, BNY Mellon Wealth Management

As a Senior Wealth Strategist with BNY Mellon Wealth Management, Kathleen Stewart works closely with wealthy families and their advisers to provide comprehensive wealth planning services.  Kathleen focuses on complex financial and estate planning issues impacting wealthy families, key corporate executives and business owners.

Source: kiplinger.com

Tax Changes and Key Amounts for the 2022 Tax Year

Now that this year’s tax filing season is over, it’s time to start thinking about next year’s return. After all, the more tax planning you do, the more money you may be able to save. But proper tax planning requires an awareness of what’s new and changed from last year — and there are plenty of tax law changes and updates for the 2022 tax year that savvy taxpayers need to know about.

Big tax breaks were enacted for the 2021 tax year by the American Rescue Plan Act, which was signed into law in March 2021. But most of those tax law changes expired at the end of 2021. As a result, the child tax credit, child and dependent care credit, earned income credit and other popular tax breaks are different for the 2022 tax year than they were for 2021. Other 2022 tweaks are the result of new rules or annual inflation adjustments. But no matter how, when or why the changes were made, they can hurt or help your bottom line — so you need to be ready for them. To help you out, we pulled together a list of the most important tax law changes and adjustments for 2022 (some related items are grouped together). Use this information now so you can hold on to more of your hard-earned cash next year when it’s time to file your 2022 return.

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Child Tax Credit

picture of "child tax credit" spelled out in lettered blockspicture of "child tax credit" spelled out in lettered blocks

Major changes were made to the child tax credit for 2021 – but they were only temporary. The credit amount was increased, the credit was made fully refundable, children up to 17 years of age qualified, and half the credit amount was paid in advance through monthly payments from July to December last year. President Biden and Congressional Democrats tried to extend these enhancements for at least one more year, but they haven’t been able to get that done so far (and probably won’t be able to later).

As a result, the child tax credit reverts back to its pre-2021 form for the 2022 tax year. That means the 2022 credit amount drops back down to $2,000 per child (it was $3,000 for children 6 to 17 years of age and $3,600 for children 5 years old and younger for the 2021 tax year). Children who are 17 years old don’t qualify for the credit this year, because the former age limit (16 years old) returns. For some lower-income taxpayers, the 2022 credit is only partially refundable (up to $1,500 per qualifying child), and they must have earned income of at least $2,500 to take advantage of the credit’s limited refundability. And there will be no monthly advance payments of the credit in 2022.

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Child and Dependent Care Tax Credit

picture of form for the child and dependent care tax creditpicture of form for the child and dependent care tax credit

Significant improvements were also made to the child and dependent care credit for 2021. But, again, the changes only applied for one year.

By way of comparison, the 2021 credit was worth 20% to 50% of up to $8,000 in eligible expenses for one qualifying child/dependent or $16,000 for two or more. The percentage decreased as income exceeded $125,000. When you combine the top percentage and the expense limits, the maximum credit for 2021 was $4,000 if you had one qualifying child/dependent (50% of $8,000) or $8,000 if you had more than one (50% of $16,000). The credit was also fully refundable in 2021.

For 2022, the child and dependent care credit is non-refundable. The maximum credit percentage also drops from 50% to 35%. Fewer care expenses are eligible for the credit, too. For 2022, the credit is only allowed for up to $3,000 in expenses for one child/dependent and $6,000 for more than one. When the 35% maximum credit percentage is applied, that puts the top credit for the 2022 tax year at $1,050 (35% of $3,000) if you have just one child/dependent in your family and $2,100 (35% of $6,000) if you have more. In addition, the full child and dependent care credit will only be allowed for families making less than $15,000 a year in 2022 (instead of $125,000 per year). After that, the credit starts to phase-out.

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Earned Income Tax Credit

picture of money sticking out of pocket on jeanspicture of money sticking out of pocket on jeans

More workers without qualifying children were able to claim the earned income tax credit (EITC) on their 2021 tax return, including both younger and older Americans. The “childless EITC” amounts were higher, too. However, once again, those enhancements expired at the end of last year.

Without the 2021 improvements in place, the minimum age for a childless worker to claim the EITC jumps back up to 25 for 2022 tax returns (it was 19 in 2021). The maximum age limit (65 years of old), which was eliminated for the 2021 tax year, is also back in play for 2022. The maximum credit available for childless workers also plummets from $1,502 to $560 for the 2022 tax year. Expanded eligibility rules for former foster youth and homeless youth that applied for 2021 are dropped as well. In addition, the rule allowing you to use your 2019 earned income to calculate your EITC if it boosted your credit amount no longer applies.

There are also several inflation-based adjustments that modify the EITC for the 2022 tax year. For example, the maximum credit amount is increased from $3,618 to $3,733 for workers with one child, from $5,980 to $6,164 for workers with two children, and from $6,728 to $6,935 for workers with three or more children. The earned income required to claim the maximum EITC is also adjusted annually for inflation. For 2022, it’s $10,980 if you have one child ($10,640 for 2021), $15,410 if you have two or more children ($14,950 for 2021), and $7,320 if you have no children ($7,100 for 2021).

The EITC phase-out ranges are adjusted each year to account for inflation, too. For 2022, the credit starts to phase out for joint filers with children if the greater of their adjusted gross income (AGI) or earned income exceeds $26,260 ($25,470 for 2021). It’s completely phased out for those taxpayers if their AGI or earned income is at least $49,622 if they have one child ($48,108 for 2021), $55,529 if they have two children ($53,865 for 2021), or $59,187 if they have three or more children ($57,414 for 2021). For other taxpayers with children, the 2022 phase-out ranges are $20,130 to $43,492 for people with one child ($19,520 to $42,158 for 2021), $20,130 to $49,399 for people with two children ($19,520 to $47,915 for 2021), and $20,130 to $53,057 for people with more than two children ($19,520 to $51,464 for 2021). If you don’t have children, the 2022 phase-out range is $15,290 to $22,610 for joint filers ($14,820 to $21,920 for 2021) and $9,160 to $16,480 for other people ($8,880 to $15,980 for 2021).

Finally, the limit on a worker’s investment income is increased to $10,300 ($10,000 for 2021).

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Recovery Rebate Credit

picture of a tax form, government check, and one-hundred dollar billpicture of a tax form, government check, and one-hundred dollar bill

Americans were thrilled last March to hear they were getting a third stimulus check in 2021. Those checks were for up to $1,400, plus an additional $1,400 for each dependent in your family. (Use our Third Stimulus Check Calculator to see you how much money you should have gotten.) But some people who were eligible for a third-round stimulus check didn’t receive a payment or got less than what they should have received. For those people, relief was available in the form of a 2021 tax credit known as the recovery rebate credit.

However, there are no stimulus check payments in 2022. As a result, there is no recovery rebate credit for the 2022 tax year.

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Tax Brackets

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Although the tax rates didn’t change, the income tax brackets for 2022 are slightly wider than for 2021. The difference is due to inflation during the 12-month period from September 2020 to August 2021, which is used to figure the adjustments.

2022 Tax Brackets for Single/Married Filing Jointly/Head of Household

Tax Rate

Taxable Income (Single)

Taxable Income (Married Filing Jointly)

Taxable Income (Head of Household)

10%

Up to $10,275

Up to $20,550

Up to $14,650

12%

$10,276 to $41,775

$20,551 to $83,550

$14,651 to $55,900

22%

$41,776 to $89,075

$83,551 to $178,150

$55,901 to $89,050

24%

$89,076 to $170,050

$178,151 to $340,100

$89,051 to $170,050

32%

$170,051 to $215,950

$340,101 to $431,900

$170,051 to $215,950

35%

$215,951 to $539,900

$431,901 to $647,850

$215,951 to $539,900

37%

Over $539,900

Over $647,850

Over $539,900

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Long-Term Capital Gains Tax Rates

picture of charts on computerpicture of charts on computer

Tax rates on long-term capital gains (i.e., gains from the sale of capital assets held for at least one year) and qualified dividends did not change for 2022. However, the income thresholds to qualify for the various rates were adjusted for inflation.

In 2022, the 0% rate applies for individual taxpayers with taxable income up to $41,675 on single returns ($40,400 for 2021), $55,800 for head-of-household filers ($54,100 for 2021) and $83,350 for joint returns ($80,800 for 2021).

The 20% rate for 2022 starts at $459,751 for singles ($445,851 for 2021), $488,501 for heads of household ($473,751 for 2021) and $517,201 for couples filing jointly ($501,601 for 2021).

The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

The 3.8% surtax on net investment income stays the same for 2022. It kicks in for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

For more on long-term capital gains tax rates, see What Are the Capital Gains Tax Rates for 2021 vs. 2022?

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Standard Deduction

picture of tax deduction written on table surrounded by coinspicture of tax deduction written on table surrounded by coins

The standard deduction amounts were increased for 2022 to account for inflation. Married couples get $25,900 ($25,100 for 2021), plus $1,400 for each spouse age 65 or older ($1,350 for 2021). Singles can claim a $12,950 standard deduction ($12,550 for 2021) — $14,700 if they’re at least 65 years old ($14,250 for 2021). Head-of-household filers get $19,400 for their standard deduction ($18,800 for 2021), plus an additional $1,750 once they reach age 65 ($1,700 for 2021). Blind people can tack on an extra $1,400 to their standard deduction ($1,350 for 2021). That jumps to $1,750 if they’re unmarried and not a surviving spouse ($1,700 for 2021).

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1099-K Forms

picture of a 1099-K formpicture of a 1099-K form

Starting with the 2022 tax year, third-party payment settlement networks (e.g., PayPal and Venmo) will send you a Form 1099-K if you are paid over $600 during the year for goods or services, regardless of the number of transactions. Previously, the form was only sent if you received over $20,000 in gross payments and participated in more than 200 transactions. The gross amount of a payment doesn’t include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.

This change to the reporting threshold means more people than ever will get a 1099-K form next year that they will use when filling out their income tax returns for the 2022 tax year. However, remember that 1099-K reporting is only for money received for goods and services. It doesn’t apply to payments from family and friends.

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Charitable Gift Deductions

picture "charity donation" written on blackboardpicture "charity donation" written on blackboard

The “above-the-line” deduction for up to $300 of charitable cash contributions ($600 for married couple filing a joint return) expired at the end of 2021. As a result, it isn’t available for the 2022 tax year (it was available for 2020 and 2021). Only people who claimed the standard deduction on their tax return (rather than claiming itemized deductions on Schedule A) were allowed to take this deduction.

The 2020 and 2021 suspension of the 60%-of-AGI limit on deductions for cash donations by people who itemize also expired, so the limit is back in place starting with the 2022 tax year.

10 of 25

Retirement Savings

picture of a compass pointing to the word "retirement"picture of a compass pointing to the word "retirement"

Here’s some good news for retirees: The IRS updated the table used to calculate required minimum distributions (RMDs) to account for longer life expectancies beginning in 2022. That means RMDs should be a bit smaller starting in 2022 than they were before.

For people who are still saving for retirement, many key dollar limits on retirement plans and IRAs are higher in 2022. For example, the maximum contribution limits for 401(k), 403(b) and 457 jumps from $19,500 to $20,500 for 2022, while people born before 1973 can once again put in $6,500 more as a “catch-up” contribution. The 2022 cap on contributions to SIMPLE IRAs is $14,000 ($13,500 in 2021), plus an extra $3,000 for people age 50 and up.

The 2022 contribution limit for traditional IRAs and Roth IRAs stays steady at $6,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and up. However, the income ceilings on Roth IRA contributions went up. Contributions phase out in 2022 at adjusted gross incomes (AGIs) of $204,000 to $214,000 for couples and $129,000 to $144,000 for singles (up from $198,000 to $208,000 and $125,000 to $140,000, respectively, for 2021).

Deduction phaseouts for traditional IRAs also start at higher levels in 2022, from AGIs of $109,000 to $129,000 for couples and $68,000 to $78,000 for single filers (up from $105,000 to $125,000 and $66,000 to $76,000 for 2021). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $204,000 of AGI and ends at $214,000 (they were $198,000 and $208,000 for 2021).

More lower-income people may be able to claim the “saver’s credit” in 2022, too. This tax break can be worth up to $1,000 ($2,000 for joint filers), but you must contribute to a retirement account and your adjusted gross income (AGI) must be below a certain threshold to qualify. For 2022, the income thresholds are $34,000 of adjusted gross income (AGI) for single filers and married people filing a separate return ($33,000 for 2021), $68,000 for married couples filing jointly ($66,000 for 2021), and $51,000 for head-of-household filers ($49,500 for 2021).

11 of 25

Teacher Expenses

picture of a man teaching an elementary school classpicture of a man teaching an elementary school class

For the 2022 tax year, teachers and other educators who dig into their own pockets to buy books, supplies, COVID-19 protective items, and other materials used in the classroom can deduct up to $300 of these out-of-pocket expenses ($250 for 2021). The maximum deduction for 2022 jumps to $600 for a married couple filing a joint return if both spouses are eligible educators – but not more than $300 each.

An “eligible educator” is anyone who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Homeschooling parents can’t take the deduction.

This is an “above-the-line” deduction. So, you don’t have to itemized to claim it.

12 of 25

Kiddie Tax

picture of a child dressed in a suit with bags of moneypicture of a child dressed in a suit with bags of money

The kiddie tax has less bite in 2022. The first $1,150 of a child’s unearned income is tax-free if the child is 18 years old or younger, or a full-time student under 24. The next $1,150 is taxed at the child’s rate. Any excess over $2,300 is taxed at the parent’s rate. (For 2021, only the first $1,100 was exempt and the next $1,100 was taxed at the child’s rate.)

13 of 25

Adoption of a Child

picture of family with adopted childrenpicture of family with adopted children

For 2022, the adoption credit can be taken on up to $14,890 of qualified expenses ($14,440 for 2021). The full credit is available for a special-needs adoption, even if it costs less. The credit begins to phase out for filers with modified AGIs over $223,410 and disappears at $263,410 ($214,520 and $254,520, respectively, for 2021).

The exclusion for company-paid adoption aid was also increased from $14,440 to $14,890 for 2022.

14 of 25

Bonds Used for Education

picture of U.S. savings bondspicture of U.S. savings bonds

The income caps are higher in 2022 for tax-free EE and I bonds used for education. The exclusion starts phasing out above $128,650 of modified AGI for couples and $85,800 for others ($124,800 and $83,200 for 2021). It ends at modified AGI of $158,650 and $100,800, respectively ($154,800 and $98,200 for 2021). The savings bonds must be redeemed to help pay for tuition and fees for college, graduate school or vocational school for the taxpayer, spouse or a dependent.

15 of 25

Parking and Transportation Benefits

picture of a subway stationpicture of a subway station

Employers can provide a little more to their workers in 2022 when it comes to parking and transportation-related fringe benefits. The 2022 cap on employer-provided tax-free parking goes up from $270 to $280 per month. The 2022 exclusion for mass transit passes and commuter vans is also $280 ($270 in 2021).

16 of 25

Americans Working Abroad

picture of woman holding a U.S. passport and an airplane boarding passpicture of woman holding a U.S. passport and an airplane boarding pass

U.S. taxpayers working abroad have a larger foreign earned income exclusion in 2022. It jumped from $108,700 for 2021 to $112,000 for 2022. (Taxpayers claim the exclusion on Form 2555.)

The standard ceiling on the foreign housing exclusion is also increased from $15,218 to $15,680 for 2022 (although overseas workers in many high-cost locations around the world qualify for a significantly higher exclusion).

17 of 25

Payroll Taxes

picture of pay stub showing payroll deductionspicture of pay stub showing payroll deductions

The Social Security annual wage base is $147,000 for 2022 (that’s a $4,200 hike from 2021). The Social Security tax rate on employers and employees stays at 6.2%. Both workers and employers continue to pay the 1.45% Medicare tax on all compensation in 2022, with no cap. Workers also pay the 0.9% Medicare surtax on 2022 wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn’t hit employers, though.

The nanny tax threshold went up to $2,400 for 2022, which was a $100 increase from 2021.

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Standard Mileage Rates

picture of a car odometer and speedometerpicture of a car odometer and speedometer

The 2022 standard mileage rate for business driving rose from 56¢ to 58.5¢ a mile. The mileage allowance for medical travel and military moves also increased from 16¢ to 18¢ a mile in 2022. However, the charitable driving rate stayed put at 14¢ a mile — it’s fixed by law.

19 of 25

Long-Term Care Insurance Premiums

picture of nursing home worker pushing a resident in a wheelchairpicture of nursing home worker pushing a resident in a wheelchair

The limits on deducting long-term care insurance premiums are higher in 2022 for one age group. Taxpayers who are age 61 to 70 can deduct up to $4,510 for 2022, which is a $10 decrease from the 2021 amount.

The 2022 deduction limits for all age groups are the same as the 2021 amounts. Here’s the complete list of limits by age:

  • 40 years old or less = $450
  • 41 to 50 years old = $850
  • 51 to 60 years old = $1,690
  • 61 to 70 years old = $4,510
  • 71 years of age or older = $5,640

For most people, long-term care premiums are medical expenses deductible only by itemizers on Schedule A. However, self-employed people can deduct them on Schedule 1 of the 1040.

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Health Savings Accounts (HSAs)

picture of piggy bank next to HSA savings jarpicture of piggy bank next to HSA savings jar

The annual cap on deductible contributions to health savings accounts (HSAs) rose in 2022 from $3,600 to $3,650 for self-only coverage and from $7,200 to $7,300 for family coverage. People born before 1968 can put in $1,000 more (same as for 2021).

Qualifying insurance policies must limit out-of-pocket costs in 2022 to $14,100 for family health plans ($14,000 in 2021) and $7,050 for people with individual coverage ($7,000 in 2021). Minimum policy deductibles remain at $2,800 for families and $1,400 for individuals.

For 2023 HSA-related amounts, see HSA Contribution Limits for 2023 Are Out.

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Flexible Spending Accounts (FSAs)

picture of a notebook with "flexible spending account" written on the pagepicture of a notebook with "flexible spending account" written on the page

For 2022, the limit on employee contributions to a healthcare flexible spending account (FSA) is $2,850, which is $100 more than the 2021 limit. If the employer’s plan allows the carryover of unused amounts, the maximum carryover amount for 2022 is $570 ($550 for 2021).

On the other hand, workers can’t contribute as much to a dependent care FSA in 2022 as they could in 2021. Last year, as a COVID-relief measure, a family could sock away up to $10,500 in a dependent care FSA without paying tax on the contributions. But for 2022, the normal limit of $5,000-per-year on tax-free contributions applies once again.

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Alternative Minimum Tax (AMT)

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There’s good news for anyone worried about getting hit with the alternative minimum tax: AMT exemptions ticked upward for 2022. They increased from $114,600 to $118,100 for couples and from $73,600 to $75,900 for single filers and heads of household. The phaseout zones for the exemptions start at higher income levels for the 2022 tax year as well — $1,079,800 for couples and $539,900 for singles and household heads ($1,047,200 and $523,600, respectively, for 2021).

In addition, the 28% AMT tax rate kicks in a bit higher in 2022 — above $206,100 of alternative minimum taxable income. The rate applied to AMTI over $199,900 for 2021.

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Tax “Extenders”

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There’s a group of tax breaks that are constantly scheduled to expire, but that keep getting extended by Congress for another year or two. These tax breaks are collectively referred to as “tax extenders.”

But so far, Congress hasn’t passed legislation to renew the “tax extender” deductions and credits that expired at the end of 2021. Most of the expired tax breaks were for businesses, but the following expired tax breaks impacted individual taxpayers:

  • Mortgage insurance premiums deduction;
  • Health coverage tax credit for medical insurance premiums paid by certain Trade Adjustment Assistance recipients and people whose pension plans were taken over by the Pension Benefit Guaranty Corporation;
  • Nonbusiness energy property credit for certain energy-saving improvements to your home (e.g., new energy-efficient windows and skylights, exterior doors, roofs, insulation, heating and air conditioning systems, water heaters, etc.);
  • Fuel cell motor vehicle credit;
  • Alternative fuel vehicle refueling property credit; and
  • Two-wheeled plug-in electric vehicle credit.

At some point, lawmakers may swoop in and extend some or all of these tax breaks once again as they have in the past. They sometimes even make the extensions retroactive, so the tax breaks list above could still be available for the 2022 tax year. We’ll just have to wait and see what Congress decides to do with these “tax extender” deductions and credits – stay tuned for future developments.

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Self-Employed People

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If you’re self-employed, there are a couple of 2022 tax law changes that could impact your bottom line. First, a key dollar threshold on the 20% deduction for pass-through income was increased for 2022. Self-employed people (along with owners of LLCs, S corporations and other pass-through entities) can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $340,100 for joint filers and $170,050 for others ($329,800 and $164,900, respectively, for 2021).

Second, tax credits that were allowed for self-employed people who couldn’t work for a reason that would have entitled them to pandemic-related sick or family leave if they were an employee have expired and aren’t available for the 2022 tax year.

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Estate & Gift Taxes

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The lifetime estate and gift tax exemption for 2022 jumped from $11.7 million to $12.06 million — $24.12 million for couples if portability is elected by timely filing IRS Form 706 after the death of the first-to-die spouse.

The special estate tax valuation of real estate also increases for 2022. For the estate of a person dying this year, up to $1.23 million of farm or business real estate can receive discount valuation (up to $1.19 million in 2021), letting the estate value the realty at its current use instead of fair market value.

More estate tax liability qualifies for an installment payment tax break, too. If one or more closely held businesses make up greater than 35% of a 2022 estate, as much as $656,000 of tax can be deferred and the IRS will charge only 2% interest (up to $636,000 for 2021).

Finally, the annual gift tax exclusion for 2022 rises from $15,000 to $16,000 per donee. So, you can give up to $16,000 ($32,000 if your spouse agrees) to each child, grandchild or any other person in 2022 without having to file a gift tax return or tap your lifetime estate and gift tax exemption.

Source: kiplinger.com

What Is Active Trading and How Is This Strategy Different From Investing?

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The stock market is an exciting system that can help you build wealth over time, and it can become a lucrative career for some. Stories about people who made it big as active traders coupled with images of beautiful people, yachts, cars, and homes flood the internet and magazine ads. 

But everything you hear about active trading is coupled with a stark warning surrounding risk.

What exactly is active trading, what are the risks, and what rings of fire would you need to jump through to use trading to land that yacht, car, and mansion?


What Is Active Trading?

Active trading is the process of exploiting short-term volatility in highly liquid markets in an attempt to make profits quickly. Unlike long-term investing, active traders look to buy in and sell out of positions frequently, with a goal of making a profit between the price they pay and the price for which they sell.


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Traders find opportunities in the market in two ways:

  • Screeners. Traders use forex, cryptocurrency, or stock screeners to find the assets that are making the biggest moves with the highest trading volumes. 
  • Social Media. Social traders use social media to find the stocks the investing community is buzzing about. 

Once opportunities are spotted, traders use technical analysis to find entry and exit points.

Assets Active Traders Focus On

Traders look for assets that come with two key features:

  • Liquidity. Traders buy and sell large volumes of stock and other assets quickly. So, the assets must be highly liquid, meaning there are plenty of them available to be purchased and sold at a fast pace. 
  • Volatility. Volatility refers to the fluctuations in an asset’s price. Traders look for high-volatility assets — those that experience wide swings in value over a short period of time. 

Because these two factors are crucially important when trading, traders tend to stick in specific markets where liquidity and volatility are high, such as stocks, forex, and cryptocurrencies like Bitcoin. 

Traders generally avoid mutual funds and exchange-traded funds (ETFs) because their inherent diversification limits their volatility.

Trading Risk Management

Trading comes with significant risks that should be considered. When making a trade, you’re trying to predict the future in a highly volatile situation. Even the most experienced traders with the best tools get it wrong sometimes. 

The key is taking steps to manage risk. 

One of the most important risk management strategies to consider is using stop-loss orders. This order type sets a ceiling on losses. When the asset falls to a predetermined price, the stop-loss becomes a market order to exit the position. This way, when things do go bad, the pain isn’t too much to bear.  

Beginners often find a strategy and put it to the test in the real world. Unfortunately, not all strategies will work well. Experts use trading simulators to test new strategies in a real-world environment using digital cash and alleviate the risk of real losses. You should do the same to limit your risks. 


Active Trading Strategies

Active trading is a term that encompasses a wide range of different strategies for short-term profits in the market. Each strategy listed below has its pros and cons, but also a long history of generating profits for traders. 

Day Trading

The term “day trading” says it all. A day trader never holds an asset for longer than one trading session. Day traders enter and exit positions during market hours — hoping to make profits each day — and generally cash out before the end of each trading session. This type of trading can be mixed with a wide range of trading strategies to determine entry and exit points. 

Liquidating before the market closes each day protects the trader from after-hours and premarket losses. News is often released during after-hours and premarket trading sessions, during which the whales of the market can make big moves that lead to substantial changes in stock prices. Day traders avoid this risk entirely by closing their positions by the end of the trading session. 

Scalping

Scalping is one of the fastest-paced methods of trading. The strategy isn’t focused on making big gains with each trade. Instead, scalpers attempt to make several trades, each with a very small profit. Over the course of the trading session, those small profits have the potential to add up to significant returns. 

Although scalping is a tried-and-true method of generating profits as a trader, it’s crucial for a scalper to have a strict exit strategy and use stop-loss orders. One loss that’s allowed to get too far out of hand has the potential to wipe out the gains from several profitable trades in no time flat. 

Swing Trading

Swing trading is a longer-term form of trading during which positions are held for anywhere from a few trading sessions to a few months. The goal of swing trading is to profit from anticipated price movements in the short- to mid-term. 

Swing traders use tools found in both an investor’s and a trader’s toolbox. While technical analysis is used to determine trend direction and entry and exit points, swing traders also use fundamental analysis to determine why the price is likely to head in one direction or another and how significant that move might be. 


Active Trading vs. Active Investing (Position Trading)

Active investing is often considered a form of trading; in many cases it’s called position trading. However, trading and investing are two completely different beasts in the stock market. The key differences between them are in their time frames and methods of analyzing opportunities.

Unlike short-term traders, an active investor follows a long-term investment strategy. These are investors who look for high-growth or value stocks with the potential to outperform market benchmarks like the S&P 500, Nasdaq, and Dow Jones Industrial Average. 

Active investors use fundamental analysis to identify stocks on a strong growth trajectory (growth investing) or those that are undervalued compared to their peers (value investing). As investors, position traders aren’t concerned with short-term price fluctuations, focusing on the long-term benefits of owning the asset. 

By contrast, active trading is a fast-paced vehicle for accessing market profits, focused on the short term and midterm. 

Recently, active investing has come under a bit of scrutiny because data suggests that even most investment professionals fail to beat the market, according to Business Insider. This has led many investors to prefer a more passive investing approach, like a buy-and-hold strategy centered around diversified index funds. 


Active Trading vs. Day Trading

Day trading is a form of active trading, but the term active trading encompases a wide variety of trading strategies that could lead investors to hold assets for minutes, days, weeks, or even months. Day trading is a process that involves holding an asset for a maximum of one trading session. 


Active Trading Pros & Cons

Trading is an exciting concept. Not only do traders have the potential to make jaw-dropping amounts of money, they work in a fast-paced environment that can be fun in itself. However, there are drawbacks to consider. Here are the pros and cons:

Active Trading Pros

Trading wouldn’t be such a popular topic if there weren’t attractive benefits to it. Here are the most significant perks to becoming a trader:

  • The Potential to Make Serious Money. Some traders really do hit it big, going from rags to riches on Wall Street. Although doing so requires significant dedication and a willingness to take risks, you have a real possibility of making a significant income as a trader. 
  • Excitement. At first, trading in financial markets may seem daunting. However, it’s an exciting, fast-paced process that keeps even the most seasoned traders on their toes. 
  • Make Your Own Hours. Once you get the hang of trading, it’s possible to earn a living wage from it, giving you the ability to make your own hours. Some traders work 40-hour weeks, and some only work a couple of hours per day. The only limitation to your working hours is the fact that the market is only open weekdays from 9:30am to 4:00pm, although after-hours and premarket sessions offer extensions to these hours.  

Active Trading Cons

Although there are plenty of reasons to consider becoming a trader, there are also some pretty serious drawbacks to consider as well:

  • Risk. Trading is a risky business. Not only will you be taking a shot at predicting the future, you’ll be doing so with assets that are known for wide price movements. If there’s potential for significant returns on Wall Street, there’s also potential for significant losses. 
  • Technical Analysis Required. The best traders spend their time combing over charts, looking for technical indicators that suggest where the price of the asset is headed next. The best traders have a detailed understanding of technical analysis and can spot patterns in charts like hawks spot mice in fields. This type of expertise can take years to develop. 
  • Tax Implications. Trading exposes traders to short-term capital gains taxes on the profits they earn because their investments are held for less than one year. This means traders will pay taxes at their standard income tax rate, rather than enjoying the benefits of a lower long-term capital gains tax rate. 

Should You Be an Active Trader?

This is a tough question, and there’s no one-size-fits-all answer. Whether you should become a trader in financial markets depends on multiple factors:

  • Your Risk Tolerance. Trading is a risky process that could lead to significant losses if things go wrong. A trader has to live on the wild side, being willing to accept large risks in exchange for the potential to generate big gains. 
  • Your Ability to Set Emotions Aside. Emotions like fear and greed have the potential to devastate your returns. Traders must be able to check their emotions at the door and strictly adhere to their trading strategy to be successful. 
  • Your Bank Roll. If you make more than four round-trip trades — opening and closing your position during the same day — in any five-day period, your brokerage will label you as a pattern day trader. Under FINRA guidelines, pattern day traders must maintain a minimum of $25,000 in their trading account at all times.
  • Your Willingness to Learn. Trading requires an intricate understanding of technical analysis that may take some time to develop. To become a highly skilled trader, you must have a willingness to learn and a can-do attitude. 

How to Start Active Trading

Starting your trading career is a simple process. Use the steps below to get rolling:

  • Step #1: Learn. Before you even consider choosing a strategy, you’ll want to learn everything you can about trading. Consider signing up for trading courses and joining chat rooms. Get to know the market and the people in it for your best chances of success. 
  • Step #2: Choose a Trading Strategy. Strictly adhering to your trading strategy is the name of the game. Research the different strategies that are known for creating the most compelling gains with the least risk, and decide which direction you’d like to go. 
  • Step #3: Test Your Strategy. Using one of many free trading simulators, test your strategy in a real-world environment with digital cash before putting your hard-earned dollars in the ring. 
  • Step #4: Open a Brokerage Account. There are several brokers to choose from, each offering access to different assets, different trading tools, and different perks. Each will also determine its own fee schedule and promotions. Compare brokers and open an account with the one you believe provides the best offering.  
  • Step #5: Start Trading. Once you’ve opened and funded your brokerage account, you’re ready to start trading. Use stock screeners, signal services, and social media to hone in on the types of stocks you’re looking for. 
  • Step #6: Limit Your Risks. When you start trading, make sure risk management is at the forefront of your strategy. Trading comes with risks, but there are also plenty of ways to limit them. Take advantage of stop-loss orders to limit your downside potential and always do adequate research before making any trades. 

Final Word

The allure of a nice car, house, or boat may have you ready to start trading today. However, before making the decision to become a trader, it’s important to consider the risks and the type of personality you need to have to be successful. 

If you decide to give it a shot, do your research and test your strategies before risking a dime in the market. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

What Is Crypto Lending and How Do Cryptocurrency Loans Work?

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Borrowing money against your investments is a great way to access your wealth without selling your assets, as well as deferring capital gains taxes. Many wealthy investors have used portfolio loans to access cash in taxable brokerage accounts without needing to sell any of their investments. 

Now, cryptocurrency exchanges are starting to offer the same service for investors. Crypto lending platforms allow users to deposit cryptocurrency and borrow against the value of those assets. Funding is typically very fast, and users can borrow fiat currency (such as U.S. dollars) or stablecoins. 

Although crypto lending is becoming a popular option for long-term investors, it is important to understand how it works, what advantages it provides, and the risks involved.


What Is Crypto Lending?

Crypto lending is a type of secured loan, with crypto assets like Bitcoin or Ethereum being used as collateral to borrow crypto- or fiat currency, such as U.S. dollars. Crypto lending is provided by some crypto exchanges, as well as decentralized applications that use smart contracts to automatically lend crypto to users.


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To borrow funds, users can join a crypto lending platform or exchange, deposit whatever cryptocurrency they wish to pledge as collateral, and then choose from the loan terms that are available. Crypto loans are designed to allow investors to keep their crypto assets while borrowing a portion of their value to use for other investments or simply to access cash.

Crypto loans charge interest on borrowed funds, with interest rates generally higher as the loan-to-value (LTV) rises. For example, taking out a loan for 25% of the value of your pledged crypto may carry a much lower interest rate than taking out a loan that is 50% of your asset value.

Crypto loans come with risks, including the risk of a margin call or liquidation of your collateral. If the value of your pledged assets drop below a certain threshold, the crypto lending platform may issue a margin call, or even liquidate a portion (or all) of your collateral to satisfy the loan. 

Because cryptocurrencies are highly volatile investments, borrowing a higher LTV increases your risk of margin calls.


How Crypto Lending Works

To sign up for a crypto-backed loan, you will need to sign up for a crypto lending platform or connect your digital wallet to a decentralized crypto lending application. You are required to deposit a supported cryptocurrency, such as Bitcoin, which will act as the collateral for your loan.

Once you deposit the funds, you can borrow up to a certain percentage of your digital asset value. Most lending platforms allow you to borrow up to 50% of the currency value of your pledged collateral, with some allowing you to borrow more. 

The loan is typically paid out in fiat currency like U.S. dollars or in stablecoins, such as Tether (USDT). You can then choose your loan term length, with longer terms typically available for lower LTV loans.

Crypto lenders charge interest on your loan, and repayment terms typically require a monthly payment, similar to a mortgage or auto loan. If the value of your collateral drops too significantly during the repayment period, you may get a margin call to deposit more collateral, or the lender may liquidate a portion of your collateral to satisfy the loan obligation.

Overall, crypto loans offer a quick way to access cash or stable crypto assets without the need to sell your original collateral.


Pros & Cons of Cryptocurrency Lending

Although crypto loans have become a popular way to “cash out” your crypto without having to sell it, there are also some risks involved. The volatile nature of cryptocurrency may put your collateral at risk, and loans may also charge high rates depending on the loan terms. Here are a few factors to consider when looking to use a crypto lending platform:

Pros of Cryptocurrency Lending

Crypto lending can be a great way to protect your investments while saving on taxes. There are other advantages as well. Here are a few great advantages of crypto loans:

  1. You Don’t Have to Sell Investments. Crypto loans allow investors to deposit a valued cryptocurrency, such as Ethereum or Bitcoin, and borrow against its value. This helps long-term investors hold onto the original investment while accessing a portion of the value to use however they wish.
  2. No Capital Gains Taxes. Similar to investment portfolio loans, investors who use cryptocurrency loans do not have to sell their collateral, and thus can avoid paying any capital gains taxes on their digital assets.
  3. Fast Funding. Crypto loans are typically approved quickly, and funding can even be received the same day. When using a decentralized lending app, funding is instantaneous.
  4. Reasonable Interest Rates. When comparing some lending platforms to personal loan rates, crypto loans offer decent interest rates, with some platforms offering very low interest rates (under 2% APR) to borrowers.
  5. No Credit Check. Borrowers on crypto lending platforms do not have to pass a credit check to apply for a loan, which helps speed up approval and avoids any hit to your credit score.

Cons of of Cryptocurrency Lending

Although holding onto your crypto investment may be a good long-term investment, crypto loans come with a few risks. Here are some of the downsides of using crypto lending:

  1. Risk of a Margin Call and Liquidation. With the volatility of some cryptocurrency assets, the risk of your collateral losing value and receiving a margin call is high. If you borrow against a high percentage of your cryptocurrency, the risk increases, and you may be forced to deposit more funds or even sell your crypto while the price is down.
  2. No Insurance on Deposits. Unlike investment or bank accounts, deposited crypto funds are not insured, which means if the lending platform fails, your funds may be lost.
  3. Limited Crypto Eligible for Loans. Although popular cryptocurrencies like Bitcoin and Etheruem are typically available to be pledged on crypto lending platforms, not all crypto can be used. Some platforms only support a handful of select crypto, which means you may be required to exchange your crypto for an eligible asset to participate, which is not ideal.
  4. High Interest Rates on Some Platforms. Some crypto lending platforms charge very high interest rates, occasionally charging 10% APR or more. These rates are much higher than most lending products and may be cost prohibitive to borrowers.

How to Borrow & Lend Cryptocurrency

To borrow cryptocurrency, you can sign up for a crypto lending platform, deposit your collateral, and select your loan terms. Once you apply, approval happens fairly quickly, and funding is paid out in fiat currency or crypto stablecoins. 

Loan repayment is typically on a monthly schedule, and repayment term lengths can range from a few weeks to five years or more. Payments can be made in the same currency that was borrowed, but some lending platforms allow you to pay back the loan with other currencies or cryptocurrency.

Crypto lending platforms typically allow you to earn interest on deposited funds that are not pledged for collateral on a loan. Users can deposit from a selection of eligible crypto and begin earning interest right away. The interest rate depends on the crypto deposited, with stablecoins typically paying the highest rates, sometimes over 10% APY. 

When you deposit funds onto a crypto lending platform to earn interest, the platform lends out your cryptocurrency to borrowers, much like a bank handles cash deposits. You still have access to your funds, and most platforms allow you to withdraw your crypto at any time.


Crypto Lending FAQs

Crypto lending platforms offer a great way for crypto investors to borrow against their holdings, saving on taxes and paying a reasonable interest rate on the loan. But is crypto lending right for you? Here are a few of the most common questions about crypto lending:

What Are the Best Crypto Lending Platforms?

The top crypto lending platforms available today offer a relatively wide selection of crypto, low interest rates on loan, and longer loan term lengths. Companies like Celsius allow users to easily deposit funds, post collateral, and apply for a crypto loan. Decentralized apps like Aave and Compound allow users to borrow funds immediately, using smart contracts to quickly set loan terms and repayment options.

Crypto lending also allows users to deposit cryptocurrency to earn interest on those funds. Because the platform can loan out user deposits (similar to a bank), it can pay fairly high interest rates, and users can use crypto lending as a source of passive income.

What Are the Interest Rates on Crypto Loans?

The interest rates on crypto loans vary by the type of collateral pledged, loan terms, and platform being used. Celsius, for example, allows users to borrow up to 25% of their collateral for a 1% APR, which is far lower than most personal loans. But users who want to borrow 50% of their crypto asset value will pay a much higher 8.95% APR.

Is Crypto Lending Safe?

While crypto lending is typically a safe financial instrument, there is no FDIC or SIPC insurance on cryptocurrencies. If the lending platform fails, you may lose access to all your deposited funds. That being said, most crypto lending platforms employ bank-grade security and data encryption, as well as crypto storage and encryption on all funds. Loans are over-collateralized, meaning users cannot typically borrow the total value of their deposited assets, ensuring you should never lose more than what is deposited for the loan.

What Happens if You Default on a Crypto Loan?

If you default on your crypto loan, most lenders will charge additional fees until you repay the loan. If you do not repay the loan, the crypto lender has access to your pledged collateral and will liquidate your position to satisfy the loan, refund any collateral that is left after paying off the balance of your loan.

What Are Some Alternatives to Crypto Loans?

Although crypto loans are an attractive solution to long-term investors who want to hold onto their crypto assets, they do carry their fair share of risks. 

As an alternative to crypto loans, investors may want to explore traditional portfolio loans or lines of credit. Companies like Wealthfront allow users to borrow against their taxable investment accounts; the invested funds are SIPC insured and borrowed funds are in cash, not crypto.

Another alternative to crypto loans is a home equity line of credit (HELOC). These loans allow you to borrow against the value of your home and typically offer low interest rates and long repayment periods.

Borrowing against your assets is a great way to access cash and save on taxes, but always weigh the risks with the rewards of collateralized loans.


Final Word

Crypto lending continues to rise in popularity, with platforms such as Celsius boasting over $19 billion in pledged assets, and over $800 million in interest rewards paid out on crypto deposits. These loans help users hang on to their long-term crypto investments while offering a safe way to access a portion of their crypto portfolio’s value.

Crypto loans carry some risks, though, and users need to be careful of borrowing too much, potentially putting themselves at risk of a margin call or liquidation of their collateral. With the volatility of the crypto market, cryptocurrency is more likely to suffer large swings in price than most other assets, making crypto loans a risky bet.

Overall, crypto lending companies serve users who want to “hodl” their crypto assets while enjoying some of the value of their assets in the meantime.

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Active Trading Definition – Short-Term Stock Market Trades for Profit

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The stock market is an exciting system that can help you build wealth over time, and it can become a lucrative career for some. Stories about people who made it big as active traders coupled with images of beautiful people, yachts, cars, and homes flood the internet and magazine ads. 

But everything you hear about active trading is coupled with a stark warning surrounding risk.

What exactly is active trading, what are the risks, and what rings of fire would you need to jump through to use trading to land that yacht, car, and mansion?


What Is Active Trading?

Active trading is the process of exploiting short-term volatility in highly liquid markets in an attempt to make profits quickly. Unlike long-term investing, active traders look to buy in and sell out of positions frequently, with a goal of making a profit between the price they pay and the price for which they sell.


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Traders find opportunities in the market in two ways:

  • Screeners. Traders use forex, cryptocurrency, or stock screeners to find the assets that are making the biggest moves with the highest trading volumes. 
  • Social Media. Social traders use social media to find the stocks the investing community is buzzing about. 

Once opportunities are spotted, traders use technical analysis to find entry and exit points.

Assets Active Traders Focus On

Traders look for assets that come with two key features:

  • Liquidity. Traders buy and sell large volumes of stock and other assets quickly. So, the assets must be highly liquid, meaning there are plenty of them available to be purchased and sold at a fast pace. 
  • Volatility. Volatility refers to the fluctuations in an asset’s price. Traders look for high-volatility assets — those that experience wide swings in value over a short period of time. 

Because these two factors are crucially important when trading, traders tend to stick in specific markets where liquidity and volatility are high, such as stocks, forex, and cryptocurrencies like Bitcoin. 

Traders generally avoid mutual funds and exchange-traded funds (ETFs) because their inherent diversification limits their volatility.

Trading Risk Management

Trading comes with significant risks that should be considered. When making a trade, you’re trying to predict the future in a highly volatile situation. Even the most experienced traders with the best tools get it wrong sometimes. 

The key is taking steps to manage risk. 

One of the most important risk management strategies to consider is using stop-loss orders. This order type sets a ceiling on losses. When the asset falls to a predetermined price, the stop-loss becomes a market order to exit the position. This way, when things do go bad, the pain isn’t too much to bear.  

Beginners often find a strategy and put it to the test in the real world. Unfortunately, not all strategies will work well. Experts use trading simulators to test new strategies in a real-world environment using digital cash and alleviate the risk of real losses. You should do the same to limit your risks. 


Active Trading Strategies

Active trading is a term that encompasses a wide range of different strategies for short-term profits in the market. Each strategy listed below has its pros and cons, but also a long history of generating profits for traders. 

Day Trading

The term “day trading” says it all. A day trader never holds an asset for longer than one trading session. Day traders enter and exit positions during market hours — hoping to make profits each day — and generally cash out before the end of each trading session. This type of trading can be mixed with a wide range of trading strategies to determine entry and exit points. 

Liquidating before the market closes each day protects the trader from after-hours and premarket losses. News is often released during after-hours and premarket trading sessions, during which the whales of the market can make big moves that lead to substantial changes in stock prices. Day traders avoid this risk entirely by closing their positions by the end of the trading session. 

Scalping

Scalping is one of the fastest-paced methods of trading. The strategy isn’t focused on making big gains with each trade. Instead, scalpers attempt to make several trades, each with a very small profit. Over the course of the trading session, those small profits have the potential to add up to significant returns. 

Although scalping is a tried-and-true method of generating profits as a trader, it’s crucial for a scalper to have a strict exit strategy and use stop-loss orders. One loss that’s allowed to get too far out of hand has the potential to wipe out the gains from several profitable trades in no time flat. 

Swing Trading

Swing trading is a longer-term form of trading during which positions are held for anywhere from a few trading sessions to a few months. The goal of swing trading is to profit from anticipated price movements in the short- to mid-term. 

Swing traders use tools found in both an investor’s and a trader’s toolbox. While technical analysis is used to determine trend direction and entry and exit points, swing traders also use fundamental analysis to determine why the price is likely to head in one direction or another and how significant that move might be. 


Active Trading vs. Active Investing (Position Trading)

Active investing is often considered a form of trading; in many cases it’s called position trading. However, trading and investing are two completely different beasts in the stock market. The key differences between them are in their time frames and methods of analyzing opportunities.

Unlike short-term traders, an active investor follows a long-term investment strategy. These are investors who look for high-growth or value stocks with the potential to outperform market benchmarks like the S&P 500, Nasdaq, and Dow Jones Industrial Average. 

Active investors use fundamental analysis to identify stocks on a strong growth trajectory (growth investing) or those that are undervalued compared to their peers (value investing). As investors, position traders aren’t concerned with short-term price fluctuations, focusing on the long-term benefits of owning the asset. 

By contrast, active trading is a fast-paced vehicle for accessing market profits, focused on the short term and midterm. 

Recently, active investing has come under a bit of scrutiny because data suggests that even most investment professionals fail to beat the market, according to Business Insider. This has led many investors to prefer a more passive investing approach, like a buy-and-hold strategy centered around diversified index funds. 


Active Trading vs. Day Trading

Day trading is a form of active trading, but the term active trading encompases a wide variety of trading strategies that could lead investors to hold assets for minutes, days, weeks, or even months. Day trading is a process that involves holding an asset for a maximum of one trading session. 


Active Trading Pros & Cons

Trading is an exciting concept. Not only do traders have the potential to make jaw-dropping amounts of money, they work in a fast-paced environment that can be fun in itself. However, there are drawbacks to consider. Here are the pros and cons:

Active Trading Pros

Trading wouldn’t be such a popular topic if there weren’t attractive benefits to it. Here are the most significant perks to becoming a trader:

  • The Potential to Make Serious Money. Some traders really do hit it big, going from rags to riches on Wall Street. Although doing so requires significant dedication and a willingness to take risks, you have a real possibility of making a significant income as a trader. 
  • Excitement. At first, trading in financial markets may seem daunting. However, it’s an exciting, fast-paced process that keeps even the most seasoned traders on their toes. 
  • Make Your Own Hours. Once you get the hang of trading, it’s possible to earn a living wage from it, giving you the ability to make your own hours. Some traders work 40-hour weeks, and some only work a couple of hours per day. The only limitation to your working hours is the fact that the market is only open weekdays from 9:30am to 4:00pm, although after-hours and premarket sessions offer extensions to these hours.  

Active Trading Cons

Although there are plenty of reasons to consider becoming a trader, there are also some pretty serious drawbacks to consider as well:

  • Risk. Trading is a risky business. Not only will you be taking a shot at predicting the future, you’ll be doing so with assets that are known for wide price movements. If there’s potential for significant returns on Wall Street, there’s also potential for significant losses. 
  • Technical Analysis Required. The best traders spend their time combing over charts, looking for technical indicators that suggest where the price of the asset is headed next. The best traders have a detailed understanding of technical analysis and can spot patterns in charts like hawks spot mice in fields. This type of expertise can take years to develop. 
  • Tax Implications. Trading exposes traders to short-term capital gains taxes on the profits they earn because their investments are held for less than one year. This means traders will pay taxes at their standard income tax rate, rather than enjoying the benefits of a lower long-term capital gains tax rate. 

Should You Be an Active Trader?

This is a tough question, and there’s no one-size-fits-all answer. Whether you should become a trader in financial markets depends on multiple factors:

  • Your Risk Tolerance. Trading is a risky process that could lead to significant losses if things go wrong. A trader has to live on the wild side, being willing to accept large risks in exchange for the potential to generate big gains. 
  • Your Ability to Set Emotions Aside. Emotions like fear and greed have the potential to devastate your returns. Traders must be able to check their emotions at the door and strictly adhere to their trading strategy to be successful. 
  • Your Bank Roll. If you make more than four round-trip trades — opening and closing your position during the same day — in any five-day period, your brokerage will label you as a pattern day trader. Under FINRA guidelines, pattern day traders must maintain a minimum of $25,000 in their trading account at all times.
  • Your Willingness to Learn. Trading requires an intricate understanding of technical analysis that may take some time to develop. To become a highly skilled trader, you must have a willingness to learn and a can-do attitude. 

How to Start Active Trading

Starting your trading career is a simple process. Use the steps below to get rolling:

  • Step #1: Learn. Before you even consider choosing a strategy, you’ll want to learn everything you can about trading. Consider signing up for trading courses and joining chat rooms. Get to know the market and the people in it for your best chances of success. 
  • Step #2: Choose a Trading Strategy. Strictly adhering to your trading strategy is the name of the game. Research the different strategies that are known for creating the most compelling gains with the least risk, and decide which direction you’d like to go. 
  • Step #3: Test Your Strategy. Using one of many free trading simulators, test your strategy in a real-world environment with digital cash before putting your hard-earned dollars in the ring. 
  • Step #4: Open a Brokerage Account. There are several brokers to choose from, each offering access to different assets, different trading tools, and different perks. Each will also determine its own fee schedule and promotions. Compare brokers and open an account with the one you believe provides the best offering.  
  • Step #5: Start Trading. Once you’ve opened and funded your brokerage account, you’re ready to start trading. Use stock screeners, signal services, and social media to hone in on the types of stocks you’re looking for. 
  • Step #6: Limit Your Risks. When you start trading, make sure risk management is at the forefront of your strategy. Trading comes with risks, but there are also plenty of ways to limit them. Take advantage of stop-loss orders to limit your downside potential and always do adequate research before making any trades. 

Final Word

The allure of a nice car, house, or boat may have you ready to start trading today. However, before making the decision to become a trader, it’s important to consider the risks and the type of personality you need to have to be successful. 

If you decide to give it a shot, do your research and test your strategies before risking a dime in the market. 

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GME is so 2021. Fine art is forever. And its 5-year returns are a heck of a lot better than this week’s meme stock. Invest in something real. Invest with Masterworks.

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

Source: moneycrashers.com

Crypto Lending Definition – How Do Cryptocurrency Loans Work?

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Borrowing money against your investments is a great way to access your wealth without selling your assets, as well as deferring capital gains taxes. Many wealthy investors have used portfolio loans to access cash in taxable brokerage accounts without needing to sell any of their investments. 

Now, cryptocurrency exchanges are starting to offer the same service for investors. Crypto lending platforms allow users to deposit cryptocurrency and borrow against the value of those assets. Funding is typically very fast, and users can borrow fiat currency (such as U.S. dollars) or stablecoins. 

Although crypto lending is becoming a popular option for long-term investors, it is important to understand how it works, what advantages it provides, and the risks involved.


What Is Crypto Lending?

Crypto lending is a type of secured loan, with crypto assets like Bitcoin or Ethereum being used as collateral to borrow crypto- or fiat currency, such as U.S. dollars. Crypto lending is provided by some crypto exchanges, as well as decentralized applications that use smart contracts to automatically lend crypto to users.


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To borrow funds, users can join a crypto lending platform or exchange, deposit whatever cryptocurrency they wish to pledge as collateral, and then choose from the loan terms that are available. Crypto loans are designed to allow investors to keep their crypto assets while borrowing a portion of their value to use for other investments or simply to access cash.

Crypto loans charge interest on borrowed funds, with interest rates generally higher as the loan-to-value (LTV) rises. For example, taking out a loan for 25% of the value of your pledged crypto may carry a much lower interest rate than taking out a loan that is 50% of your asset value.

Crypto loans come with risks, including the risk of a margin call or liquidation of your collateral. If the value of your pledged assets drop below a certain threshold, the crypto lending platform may issue a margin call, or even liquidate a portion (or all) of your collateral to satisfy the loan. 

Because cryptocurrencies are highly volatile investments, borrowing a higher LTV increases your risk of margin calls.


How Crypto Lending Works

To sign up for a crypto-backed loan, you will need to sign up for a crypto lending platform or connect your digital wallet to a decentralized crypto lending application. You are required to deposit a supported cryptocurrency, such as Bitcoin, which will act as the collateral for your loan.

Once you deposit the funds, you can borrow up to a certain percentage of your digital asset value. Most lending platforms allow you to borrow up to 50% of the currency value of your pledged collateral, with some allowing you to borrow more. 

The loan is typically paid out in fiat currency like U.S. dollars or in stablecoins, such as Tether (USDT). You can then choose your loan term length, with longer terms typically available for lower LTV loans.

Crypto lenders charge interest on your loan, and repayment terms typically require a monthly payment, similar to a mortgage or auto loan. If the value of your collateral drops too significantly during the repayment period, you may get a margin call to deposit more collateral, or the lender may liquidate a portion of your collateral to satisfy the loan obligation.

Overall, crypto loans offer a quick way to access cash or stable crypto assets without the need to sell your original collateral.


Pros & Cons of Cryptocurrency Lending

Although crypto loans have become a popular way to “cash out” your crypto without having to sell it, there are also some risks involved. The volatile nature of cryptocurrency may put your collateral at risk, and loans may also charge high rates depending on the loan terms. Here are a few factors to consider when looking to use a crypto lending platform:

Pros of Cryptocurrency Lending

Crypto lending can be a great way to protect your investments while saving on taxes. There are other advantages as well. Here are a few great advantages of crypto loans:

  1. You Don’t Have to Sell Investments. Crypto loans allow investors to deposit a valued cryptocurrency, such as Ethereum or Bitcoin, and borrow against its value. This helps long-term investors hold onto the original investment while accessing a portion of the value to use however they wish.
  2. No Capital Gains Taxes. Similar to investment portfolio loans, investors who use cryptocurrency loans do not have to sell their collateral, and thus can avoid paying any capital gains taxes on their digital assets.
  3. Fast Funding. Crypto loans are typically approved quickly, and funding can even be received the same day. When using a decentralized lending app, funding is instantaneous.
  4. Reasonable Interest Rates. When comparing some lending platforms to personal loan rates, crypto loans offer decent interest rates, with some platforms offering very low interest rates (under 2% APR) to borrowers.
  5. No Credit Check. Borrowers on crypto lending platforms do not have to pass a credit check to apply for a loan, which helps speed up approval and avoids any hit to your credit score.

Cons of of Cryptocurrency Lending

Although holding onto your crypto investment may be a good long-term investment, crypto loans come with a few risks. Here are some of the downsides of using crypto lending:

  1. Risk of a Margin Call and Liquidation. With the volatility of some cryptocurrency assets, the risk of your collateral losing value and receiving a margin call is high. If you borrow against a high percentage of your cryptocurrency, the risk increases, and you may be forced to deposit more funds or even sell your crypto while the price is down.
  2. No Insurance on Deposits. Unlike investment or bank accounts, deposited crypto funds are not insured, which means if the lending platform fails, your funds may be lost.
  3. Limited Crypto Eligible for Loans. Although popular cryptocurrencies like Bitcoin and Etheruem are typically available to be pledged on crypto lending platforms, not all crypto can be used. Some platforms only support a handful of select crypto, which means you may be required to exchange your crypto for an eligible asset to participate, which is not ideal.
  4. High Interest Rates on Some Platforms. Some crypto lending platforms charge very high interest rates, occasionally charging 10% APR or more. These rates are much higher than most lending products and may be cost prohibitive to borrowers.

How to Borrow & Lend Cryptocurrency

To borrow cryptocurrency, you can sign up for a crypto lending platform, deposit your collateral, and select your loan terms. Once you apply, approval happens fairly quickly, and funding is paid out in fiat currency or crypto stablecoins. 

Loan repayment is typically on a monthly schedule, and repayment term lengths can range from a few weeks to five years or more. Payments can be made in the same currency that was borrowed, but some lending platforms allow you to pay back the loan with other currencies or cryptocurrency.

Crypto lending platforms typically allow you to earn interest on deposited funds that are not pledged for collateral on a loan. Users can deposit from a selection of eligible crypto and begin earning interest right away. The interest rate depends on the crypto deposited, with stablecoins typically paying the highest rates, sometimes over 10% APY. 

When you deposit funds onto a crypto lending platform to earn interest, the platform lends out your cryptocurrency to borrowers, much like a bank handles cash deposits. You still have access to your funds, and most platforms allow you to withdraw your crypto at any time.


Crypto Lending FAQs

Crypto lending platforms offer a great way for crypto investors to borrow against their holdings, saving on taxes and paying a reasonable interest rate on the loan. But is crypto lending right for you? Here are a few of the most common questions about crypto lending:

What Are the Best Crypto Lending Platforms?

The top crypto lending platforms available today offer a relatively wide selection of crypto, low interest rates on loan, and longer loan term lengths. Companies like Celsius allow users to easily deposit funds, post collateral, and apply for a crypto loan. Decentralized apps like Aave and Compound allow users to borrow funds immediately, using smart contracts to quickly set loan terms and repayment options.

Crypto lending also allows users to deposit cryptocurrency to earn interest on those funds. Because the platform can loan out user deposits (similar to a bank), it can pay fairly high interest rates, and users can use crypto lending as a source of passive income.

What Are the Interest Rates on Crypto Loans?

The interest rates on crypto loans vary by the type of collateral pledged, loan terms, and platform being used. Celsius, for example, allows users to borrow up to 25% of their collateral for a 1% APR, which is far lower than most personal loans. But users who want to borrow 50% of their crypto asset value will pay a much higher 8.95% APR.

Is Crypto Lending Safe?

While crypto lending is typically a safe financial instrument, there is no FDIC or SIPC insurance on cryptocurrencies. If the lending platform fails, you may lose access to all your deposited funds. That being said, most crypto lending platforms employ bank-grade security and data encryption, as well as crypto storage and encryption on all funds. Loans are over-collateralized, meaning users cannot typically borrow the total value of their deposited assets, ensuring you should never lose more than what is deposited for the loan.

What Happens if You Default on a Crypto Loan?

If you default on your crypto loan, most lenders will charge additional fees until you repay the loan. If you do not repay the loan, the crypto lender has access to your pledged collateral and will liquidate your position to satisfy the loan, refund any collateral that is left after paying off the balance of your loan.

What Are Some Alternatives to Crypto Loans?

Although crypto loans are an attractive solution to long-term investors who want to hold onto their crypto assets, they do carry their fair share of risks. 

As an alternative to crypto loans, investors may want to explore traditional portfolio loans or lines of credit. Companies like Wealthfront allow users to borrow against their taxable investment accounts; the invested funds are SIPC insured and borrowed funds are in cash, not crypto.

Another alternative to crypto loans is a home equity line of credit (HELOC). These loans allow you to borrow against the value of your home and typically offer low interest rates and long repayment periods.

Borrowing against your assets is a great way to access cash and save on taxes, but always weigh the risks with the rewards of collateralized loans.


Final Word

Crypto lending continues to rise in popularity, with platforms such as Celsius boasting over $19 billion in pledged assets, and over $800 million in interest rewards paid out on crypto deposits. These loans help users hang on to their long-term crypto investments while offering a safe way to access a portion of their crypto portfolio’s value.

Crypto loans carry some risks, though, and users need to be careful of borrowing too much, potentially putting themselves at risk of a margin call or liquidation of their collateral. With the volatility of the crypto market, cryptocurrency is more likely to suffer large swings in price than most other assets, making crypto loans a risky bet.

Overall, crypto lending companies serve users who want to “hodl” their crypto assets while enjoying some of the value of their assets in the meantime.

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Source: moneycrashers.com

5 Different Types of Taxes and How to Minimize Them

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Income taxes may be on your mind during this time of year, but they’re not the only taxes you’re required to pay. Americans are on the hook for several different types of taxes throughout the year.

While most of us would prefer to minimize the taxes we pay — or not pay any taxes at all — the truth is that paying taxes confers several important benefits. Still, nobody wants to pay more than their fair share. Fortunately, there are opportunities to reduce your tax burden and spread out the impact taxes have on your overall financial picture.

Here are five types of taxes you may be subject to at some point, along with tips on how to minimize their impact.


1. Income Taxes

Man Filling Out Tax Forms

Most Americans who receive income in a given year must file a tax return. Only if you earned less than the IRS-designated gross income limits can you forego filing a federal income tax return. For the 2021 tax year (returns filed during 2022), the gross income limits are as follows:

  • Single: $12,550 ($14,250 if age 65 or older)
  • Head of Household: $18,800 ($20,500 if age 65 or older)
  • Qualifying Widow(er): $21,500 ($26,450 if age 65 or older)
  • Married Filing Separately: $5
  • Married Filing Jointly: $25,100 ($26,450 if one spouse is age 65 or older; $27,800 if both spouses are age 65 or older)

Many taxpayers who file a return are lucky enough to receive a refund on their taxes because they overpaid as a result of paycheck withholding. Of course, it’s also possible to owe more money at the end of the year, in which case you may need to adjust your withholding so you don’t find yourself in the same position next year.

Although writing a check to the IRS is never fun, keep in mind your taxes serve a purpose. The funds you pay are an important source of revenue for federal, state, and local governments because they’re paid regularly throughout the year, thus helping to balance budgets and keep smaller governments from having budget crises.

So the next time you’re feeling down about how much you’re paying Uncle Sam, consider the roads you travel to work each day, the military members who protect our country, and your grandparents who depend on their Social Security check each month. That’s your tax dollars at work.

What You Can Do to Ease the Burden

If you’re looking for ways to reduce your federal income tax bill, you have several options.

Tax Credits & Deductions

One of the most effective ways to lower your tax bill is by taking advantage of tax deductions and tax credits.

Although not everyone qualifies for credits, and the tax breaks you’re eligible to claim may change from year to year, they’re worth looking into or asking your tax preparer about.

Some of the more popular tax credits include:

Some of the more popular tax deductions include:

Investing

Another way to offset your income tax burden is to make tax-advantaged investments. The Tax Code incentivizes investing in several ways:

  • Capital Gains. If you’ve invested before, you’re probably familiar with capital gains, or the profit you make when selling appreciated stocks, bonds, and property. If you hold an investment for one year or more, any gain you make on the sale is taxed at long-term capital gains tax rates. For 2022, those rates are zero, 15%, or 20%, depending on your taxable income. That’s significantly less than the highest marginal tax bracket on ordinary income, which is 37% in 2022. If you sell an asset you’ve owned for a year or less, any gain is considered short-term and is taxed at your ordinary income tax rate.
  • Capital Losses. Not every stock pick is a winner. And while nobody wants to lose money on their investments, at least you can use those losses to lower your tax bill. When you file your tax return, you can use long-term losses to offset long-term gains and short-term losses to offset short-term gains. If you have more gains than losses, you can deduct up to $3,000 of capital losses from ordinary income, such as wages or profit from a business. Any remaining losses can be carried forward to the following year.
  • Dividends. If you invest in stocks and mutual funds, you’ve probably received a Form 1099-DIV at year-end that breaks down your dividend income into qualified and ordinary income. Did you know you might pay a lower tax rate on those qualified dividends? Qualified dividends come from shares of domestic corporations and certain qualified foreign corporations that you’ve held for at least a specified minimum period. These dividends are taxed at long-term capital gains tax rates, while ordinary dividends are taxed at ordinary income tax rates.
  • Tax-Exempt Interest. Some investments pay interest that’s exempt from federal income taxes. The most common way to earn tax-exempt interest is to invest in municipal bonds. Keep in mind, though, that interest from municipal bonds may be subject to the alternative minimum tax (AMT) and may be taxable at the state level.

State Income Taxes

Speaking of state income taxes, you can avoid them entirely if you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming. While you can’t escape federal income taxes no matter where you live, these seven states levy no state income tax on their residents. However, they might make up for it with higher sales taxes, property taxes, and excise taxes.

Two other states, New Hampshire and Tennessee, have no taxes on income from wages. However, these states do tax interest and dividend income.


2. Excise Taxes

Excise Tax Letters Blocks

Speaking of excise taxes, you pay these when you purchase specific goods, and they’re often included in their cost. So if the product you buy is also subject to sales tax, you might be paying tax on a tax. A common example is the federal gasoline excise tax of 18.4% (24.4% on diesel fuel). States also impose taxes on gasoline, the highest being California at 66.98 cents per gallon. The lowest is Alaska at 14.98 cents per gallon.

Excise taxes are also charged on products such as tobacco and alcohol and activities such as wagering, road use by trucks, and tanning salons. Some states charge an excise tax on the sale of a home, which is usually paid by the seller. Excise taxes are not sales tax, so you can’t claim them as an itemized deduction on your federal tax return.

What You Can Do to Ease the Burden

Excise taxes are difficult to avoid, and they’re not usually apparent because they’re included in the price of the product. If you’re not interested in tobacco, alcohol, wagering, or tanning salons, you can avoid federal excise taxes on these products and activities. Driving a hybrid or electric car, relying on public transportation, or switching to a bicycle will help you avoid excise taxes on gasoline, at least in part.

Some states also impose an excise tax on public utilities, which the utility companies pass along to consumers. Unless you want to move to a cabin in the woods with no power, phone, or running water, you’ll have a tough time avoiding these taxes entirely.


3. Sales Tax

Small Grocery Cart And Money

Otherwise known as consumption tax, sales tax tends to affect the wealthy more because the more you consume, the more you are taxed. Because sales tax is assessed as a percentage of a product or service’s sales price, it’s a simple equation: The more you buy, the more you pay.

The federal government doesn’t get involved in setting sales tax rates. Instead, each state and local government sets its own. If you’ve traveled the country at all, you may have noticed that sales tax varies from place to place. Every state except Delaware, Montana, New Hampshire, and Oregon assesses sales tax.

While the income tax is considered a progressive tax (the higher your income, the higher your tax rate), sales tax is considered a regressive tax (the tax rate is higher for those with lower income). To illustrate, consider the following example:

Consumer #1:

  • Income: $500 per week
  • Groceries: $150 per week
  • Sales Tax on Grocery Purchases: $9.00
  • Sales Tax as a Percentage of Income: 1.8%

Consumer #2:

  • Income: $1,500 per week
  • Groceries: $150 per week
  • Sales Tax on Grocery Purchases: $9.00
  • Sales Tax as a Percentage of Income: 0.6%

For Consumer #1, who has an income that’s one-third that of Consumer #2, the amount of sales tax they pay, expressed as a percentage of their income, is three times higher than Consumer #2’s for the same purchase amount. That’s what is meant by a regressive tax: It falls more heavily on lower-income earners.

In most states that have a sales tax, prescription drugs are excluded to reduce the overall tax burden on essential items, as well as to reduce the regressive effect. The only exception is Illinois, which taxes prescription drugs at the state level but at a reduced rate of 1%. Even there, all prescription and over-the-counter medications are tax-exempt at the local level.

Most states also exclude groceries, but the sales tax treatment of groceries varies from state to state. Some fully exempt groceries; some exempt most groceries but tax candy and soda. Some have tax credits or rebates to offset the tax on groceries, and some tax groceries at a lower rate than other goods.

What You Can Do to Ease the Burden

Unfortunately, there aren’t too many ways to escape sales tax apart from making fewer purchases, shopping at garage sales, or using the barter system.

However, you might be able to get a tax deduction for the sales tax you pay. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) made permanent the provision to claim general sales taxes instead of states’ income taxes as an itemized deduction. 

This may be especially helpful to taxpayers who buy a new car, boat, or home addition and end up paying more in sales taxes than in state income taxes in a given year. It’s also a benefit for people who live in those states with sales tax that don’t have a state income tax.


4. Property Taxes

Piggy Bank And Miniature House

Property taxes, also called real estate taxes, are one of the oldest forms of taxation. In the United States, the funds typically go toward local concerns, such as sewage treatment, road maintenance, drinking water, and schools.

Property taxes are calculated based on the value of your property, which includes the value of the land itself plus the value of any buildings you have on it. Property taxes go up by predetermined amounts set by your county assessor or equivalent office.

Property taxes vary widely from state to state and are most often expressed as a percentage of property value. New Jersey, for example, has the highest median property tax rate at 2.47%, while in Hawaii, the median rate is just 0.27%.

What You Can Do to Ease the Burden

You could rent instead of buying a home, but you’ll still pay property taxes indirectly through your rent. If you’re considering buying a home but are flexible about where you live, it makes sense to do your homework and find out where the lowest property tax rates are. 

No matter where you own a home, you may be able to save money on property taxes by appealing your home’s assessment. You may need to get your home appraised by a professional appraiser to prove that it’s not worth the value the county is using to calculate your tax bill. The process for appealing your taxes varies from state to state, so check with your local tax assessor or board of equalization.

Also, don’t forget you can claim your property taxes as an itemized deduction on your federal income tax return. However, keep in mind the Tax Cuts and Jobs Act of 2017 (TCJA) limited the deduction for state and local taxes to $10,000 ($5,000 if married filing separately). That includes deductible state income taxes, property taxes, and sales taxes.


5. Estate Taxes

Estate Tax Gavel Scale Planning House

Federal estate taxes are one area in which most people can rest easy.

For 2022, the estate tax exclusion amount is $12.06 million per person. That means a person who dies in 2022 can leave up to $12.06 million to their heirs tax-free. A married couple gets twice that amount. Any money inherited beyond this amount is taxed at a top tax rate of 40%.

Of course, through gifting, trusts, and other estate planning strategies, many wealthy individuals structure their estate in such a way that they’re subject to very little estate tax.

What You Can Do to Ease the Burden

If you’re lucky enough to be worried about passing more than $12.06 million on to friends and family, it’s time to involve a professional. You can avoid or at least minimize the impact of estate taxes through estate planning, such as establishing a trust or taking advantage of the gift tax exclusion.


Final Word

Remember, the tax filing deadline in April isn’t the only day you’re taxed as an American citizen. By learning more about the types of taxes you pay, you can reduce the amount you pay all year long. Get educated and maximize your savings.

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Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

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Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

Source: moneycrashers.com