A couple of weeks ago I received a crazy tax bill…
After the initial knee-jerk reaction, I reminded myself that paying a lot in taxes shows that I have high income.
With this being said, I still don’t like to pay more than I have to.
Can you relate? 😉
We are getting close to the National Tax Day – this year it’s April 18th…
I think it should be declared a national holiday… 😉
Nobody likes paying a lot in taxes, let alone having to deal with unexpected tax bills that can ruin all our other plans.
Everybody wants to know how to pay less taxes, legally and ethically.
Fortunately, there’re tax strategies that make lowering your taxes possible.
Full disclosure: I am neither a certified public accountant nor a licensed financial planner. So, you cannot take any of my educational trainings as a form of any kind of personal financial advice.
I’ve researched and studied tax savings strategies because I don’t like to pay more in taxes than I have to.
In this article, I will share with you legal and ethical ideas about how you can save money on your taxes, which I use in my life.
Please note that I will not share ALL great tax savings strategies that exist, but 8 of them that I find most important for you to be aware of. For a complete and customized advice to help you with tax savings strategies, I suggest you talk to an account professional.
Strategy #1:
Use Tax-deferred Retirement Accounts
You get taxed based on the amount of your annual income, so higher income earners have to pay more tax.
Fortunately, you can reduce the taxable income every year by contributing pre-tax money to your Tax-deferred retirement accounts like 401(k), IRA, and Rollover IRA.
The amount you contribute DIRECTLY to these retirement accounts isn’t taxed by the IRS.
The contributions to these retirement accounts are capped, meaning there are limits on how much you can stash onto these accounts.
The allowed contribution amounts change almost every year, so, you can find most up-to-date contribution limits online.
To give you an idea, in 2021, you could contribute up to $19,500 into your 401K account. And if you reached the age of 50, you could stash an additional $6,500.
On top of that, the 401K retirement accounts are often sponsored by employers.
But if you are self-employed, you can still open their 401(k) if you want to.
You can also open and contribute to an IRA account to help you reduce your taxes.
Keep in mind that IRAs have their own contribution limits.
And again, to give you an idea of the allowed contributions to IRA accounts, in 2021 you could contribute up to $6,000 per year, while people 50 or older could contribute up to $7,000.
By the way, you can fund your IRA and 401K retirement accounts for the previous tax year until the deadline for filing your taxes in mid-April.
Whether you are self-employed or not, putting your money into a retirement accounts like an IRA or 401Ks shields your money against taxes.
And by the way, the most common reason why retirement accounts are overlooked and underused is because:
- These accounts have certain contribution limitations so it’s a slow but steady approach
- You can’t withdraw your money without paying penalties and taxes until you reach 59 ½ (nearly retirement age.)
However, these accounts shouldn’t be overlooked because they create a compounding effect over the years you keep contributing.
Strategy #2:
Become a Business Owner
It’s known that businesses have the most leverage when it comes to tax credits, tax deductions or tax write-offs.
Then why not find a way to leverage your interests, experiences, and your goals and frame them into some kind of a business?
As a business owner (and you can use different legal entities to represent your business – like an LLC, C-corp. S-corp, etc), you’ll be able to have more deductions than a an individual.
By the way, each time you expect to have high revenue in your business, try to coordinate this income with some kind of deductible expenses in your business: like investing in your hardware and software, investing in your education, in your team and its education, etc.
And here’s a big tax tip for you to remember: Reinvested profits are not taxed! If you have profits from your business and you reinvest them into growing your business, you don’t pay tax on the reinvested money because they are your business expenses.
Strategy Tip #3:
Become a Strategic Investor
The golden rule when it comes to paying less in taxes is to defer paying taxes on your income as much as possible.
And most wealthy people don’t take cash from their investments unless they absolutely need it. What they do – they reinvest their profits from the investments.
And here’s a big tax tip for you to remember: Reinvested profits are not taxed!
In other words, if you have profits from your investments (e.g. dividends from dividend paying stocks) and you reinvest this money into more of the stock shares instead taking this cash out, you won’t pay tax on this dividends until you decide to sell the stock share and take the cash out.
Also, if you hold the stocks for 1 year or more, you pay capital gain on this money instead of your income tax bracket percentage.
If you need to take tax deduction, it could be a good idea to sell any under-performing stocks or other assets to offset a capital gain. For more specifics, please consult your accountant or financial adviser.
Real Estate investing is one of the most popular tax-saving options because you can deduct repairs, property management, property insurance, depreciation, etc.
That’s one of the main reasons I love Real Estate investing.
Strategy #4:
Take Depreciation Deductions
on Hard Assets
To be financially independent requires having passive income.
So how do you get passive income?
There’re different ways to generate passive income.
One of the ways is to own hard assets like a piece of real estate, or business equipment like computer or other equipment, that you can depreciate year after year.
And you can deduct depreciation on your property or equipment year after year.
For example, you make $1000 passive income, and you have $1500 in depreciation on your assets, which referred to as passive loss. So, in this case, your tax return will show $500 in passive losses.
This is one of the reasons why people love real estate investing, some love it more than stock investing.
Please note that you can only write off passive income with passive losses.
You can’t write off active income with passive losses.
Tip #5:
Take Shares Instead
of Dividend Payments
If you have dividend-paying stocks in your stock portfolio, and you don’t need the cash from your dividends to pay for your lifestyle, then consider reinvesting these dividends into more shares of the same stock, so you can avoid paying taxes on the dividends you receive.
Why?
Because your stock shares that you reinvest your dividends into, will create a compound effect AND will worth more in the long run (if the investment appreciates.)
And you’ll only pay Capital Gain tax on these stock shares when you decide to sell them after holding stock shares for a min of 1 year.
Note that you pay MUCH less on your stock shares sale if you hold them for over 1 year because you pay Capital gain tax instead of income tax, which is usually higher than capital gain tax.
For example, if you’re single and your Long-term gain is less than $41,675, the capital gain is 0%!
And if your LT capital gain is under $459, 750 – you only pay 15% in capital gain tax!
That’s pretty good, would you agree?
Tip #6:
Move to low or no income-tax states
There are places like Bahamas, or Dubai, or Monaco where you don’t have to pay any taxes!!
But that may require a change of citizenship…
OK, I’m teasing you here 😉
In the US, in Puerto Rico, you literally don’t have to pay ANY federal income taxes.
And there are states in the U.S. like Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, where you don’t pay state income tax !
Yep, NO state income tax in these states !
That’s one of the reasons I moved to Florida from New Jersey, the state that has high state income tax.
Tip #7:
Make Charitable Donations
Money that you donate to charity is not taxable.
This is usually why you will see very wealthy people donating a lot of their money to either their own foundation or someone close to them.
A great thing about having your own charity is that these foundations, like the 501(c)(3), have deductible expenses!
Because charities need “things” to operate as charities and these “things” are deductible expanses!
Note that you can donate land, cars, equipment, or other assets to a charity that you own, and still count it as a charitable contribution.
But that’s not all….
If you manage the charity yourself, you can still use the car that you donated on paper.
Pretty creative, right?….and legal!
Tip #8:
Track Your Medical Expenses
Always keep your receipts if you were in the hospital and had a very pricey medical bill.
The medical expenses can be deducted if they are more than 7.5% of your adjusted gross income for that particular tax year.
Now…
…you can contribute to FSA (Flexible Spending) Account
You can use pre-tax money to fund your FSA account annually, which allows you to lower your tax payments. And you can use the FSA money for medical expenses.
Note that there is a cap on FSA… I know that you can contribute up to $2,850 in 2022.
…you can also contribute to your HS (Health Saving ) Account
An HSA account will also allow you to pay less taxes by contributing pre-tax money to an HSA account that can help you pay for your medical expenses.
HSA contributions are tax-deductible and withdrawals don’t come with any taxes or penalties if you use them for medical expenses.
The cap for HSA contribution in 2022 is $3,650.
I invite you to consider most of these 8 Money Saving Tax Strategies!
Although these strategies are based on the U.S. Internal Revenue Service (IRS) requirements, a few of the presented strategies can be used in other countries (just adjust the names of the retirement accounts).
With the inflation being at 8.5 % (40 years’ high) and with potential recession on the horizon, you’ve got to be savvy with your money!
To your Health, Wealth and Freedom.
P.S. This is not the time to be wishy-washy about your money and financial future.
If you want to start investing strategically, DOWNLOAD the FREE BEGINNER INVESTOR TOOLKIT now!
Until next time – be mindful, be discerning, be well!
