Tax optimization strategies
There are 3 general ways to reduce taxes:
- Lower your tax rate
- Lower your taxable income
- Defer taxes
Reducing the tax rate
- Earn other types of income
- employment income: salary/wages (most people), often progressive tax
- business income: self-employed or incorporated
- royalty income: from IP
- rental income: lease a property
- investment income: capital gains, divs, int
- usually taxed lower than active income (see more)
- you don't pay tax until you sell (potentially, indefinitely)
- can sell for a loss to offset gains (tax-loss harvesting)
- also: margin loan with investments as collateral
- downside: WTH tax, wealth tax, proposed tax on unrealized gains (US)
- Relocate to a jurisdiction with lower tax rates (flat or zero)
- ex: UAE, Bulgaria, Cyprus, etc.
Reducing taxable income
- Use deductions and tax credits strategically
- medical expenses, child credits, pension deductions, employer match, etc.
- Become self-employed to write-off business expenses
- ex: can deduct travel expenses, equipment, rent, etc.
- limitations may apply (ex: meals only 50% deductible in US)
- Incorporate your business
- small-business deduction, credits, and incentives in some countries
- distribute profits as dividends
- typically, taxed lower than PIT and not subject socials
- beware: tax integration, also minimum tax (ex: Canada)
- control how much and when you pay salary/divs
- can leave the rest in company or reinvest
- deductible benefits: health, pension plan, education
- income splitting with partners, family, etc.
- downside: setup costs, recurring administrative costs and filing, etc.
- Retain earnings in the company
- Estonian tax model: profits taxed at CIT upon distribution (i.e. div payout)
- ex: Estonia, Georgia
- Retain income in the country of origin
- remittance-based tax: profits taxed when/if brought in the country
- ex: UK and Malta (under resident non-dom status), also Thailand