Most people I know that have a heartbeat and four limbs all wish they could pay less in taxes. As an advisor, I share some of these strategies as I come across various situations. Being tax efficient is very much a part of every financial plan that I put together for clients. Why not use these ways as a means to disinherit the IRS, especially if it’s all legal?
My advice: be proactive and employ some strategies to make it happen! I brainstormed and came up with a few things that I wanted to share, and these are things that anyone can do regardless of income or net worth. In no particular order, here’s 7 ideas for you:
Have Your Taxes Done by a Professional – I shared an article earlier this week about why most people should use a tax preparer. Whether it’s a CPA or an enrolled agent, these tax pros have more experience and awareness of how to make your tax return more “efficient”. I am all for people minimizing the costs of doing business, but spend the few hundred bucks here. Often times you will realize that money and you might even be able to deduct their fees. This is especially imperative for the small business owner – with the new qualified business income (QBI) pass-through deductions that are now in play!
Take Full Advantage of Tax-Advantaged Retirement Accounts – I do not think I have ever met someone (or read about) who wasn’t taking full advantage of their retirement accounts. We’re talking about 401k, Roth IRA, Traditional IRA, or several other vehicles available. I have written before about how awesome Health Savings Accounts (HSAs) are. Not only can you potentially get a tax break in the current year, but all dividends, interest, and capital gains are deferred until many years down the road. In the case of the Roth, you pay some tax now but potentially NONE later.
|If your employer offers a 401k match – HELLO – jump all over that “free money”.|
Donate – these deductions can come in a variety of means. You can give cash directly to organizations that you care most about, or a more fun way is to buy some tickets to their fundraising events. Play in a charity golf tourney (I am hosting one in March if you are interested!). Many of the high net worth people give highly appreciated stock. Pretty much anyone (rich or poor) has some furniture, clothing, art, or other household items they can give to goodwill…right? Be sure to save receipts of things you give and make sure you are gifting to an IRS-recognized charity.
Use Life Insurance – while the primary goal of life insurance is to provide a death benefit to survivors in the event of a pre-mature death, it can also be a nice way to put money away for tax-free growth and tax-free income. Life insurance can be used as an investment and should be used if you are looking to save above and beyond your retirement accounts. This type of insurance is more expensive than the more popular “term insurance” but when used properly could provide substantial long-term benefits. You may have heard the expression “don’t leave your kids money, leave them life insurance”, and this is because of the tremendous opportunity that insurance provides to transfer wealth tax effectively.
Start a Side Business – some of the benefits to owning your own company are that you can control the tax situation. For instance, you can deduct health insurance. You can employ a spouse and/or children and benefit from having them on the books. You can sock greater percentages away into retirement accounts. I don’t want to say the option are endless, but there are A LOT of options! I can share stories of households with 6-figure incomes yet paying $0 in taxes. Plus being a business owner can be kinda cool!
Create College Savings Accounts – only a minority of parents use 529 accounts for their children, which befuddles me because the advantages are pretty big. You can put away after-tax money in a 529 but have it grow tax-free, typically for educational purposes. But I’ve also seen savvy doctors and attorneys (without kids) fund 529 accounts not only for tax benefits but also for creditor-protection. The worst case, if the money is not used for “tuition” or related education expenses, is there is a 10% penalty to withdraw. This could be relatively minor compared to the long-term benefits the account offers.
Become More Energy Efficient – our federal government offers this little-known credit. Think solar panels, home insulation, windows/doors, heating/cooling systems, etc. Time to upgrade something in your house? Think green and energy efficient in your home, or even in your second home.
These tax breaks don’t only exist for high earners, but for most “commoners” as well – like me! As the old saying goes, it’s not what you make – it’s what you keep. And if you are paying less tax, that means more savings and more doing the things you want to do.
I hope you found this read worthwhile!