My wife and I just sat down with our accountant this past weekend. For the first time in a few years, we are getting a refund. Most times we owe money to both Federal and State. This post isn’t about the advantages or disadvantages about whether or not you should be getting a refund every year, but rather a post on how to get out of paying taxes altogether.
Now, most likely you will still be paying some taxes. I doubt I can help you get out of paying taxes 100%, legally speaking of course. There are all sorts of illegal routes you can take, but we won’t be discussing them here. So what are your best ways to get out of paying taxes?
3 Tricks To Get Out Of Paying Taxes
These are the easiest options since all you have to do is fill out a form and you are done. Your employer will take care of the rest for you. The two big deductions you can take are contributing to your 401k plan and to your health savings account if you have a high deductible insurance plan.
Putting money into both of these accounts will get you out of paying taxes because the money is taken out of your paycheck before taxes are. Therefore, the money you are saving is not taxed at all. While saving in these accounts will lower your take home pay, you are ahead of the game when it comes to taxes because you are taking home more of your money.
Here is what I mean by this. Note that I am simplifying these examples so you can follow along more easily. If your paycheck before taxes is $1,500 and you are in the 25% tax bracket, you are paying $375 in taxes. Your take home pay will be $1,125.
But if you save $200 between your 401k and health savings account, your paycheck is now $1,300. The tax on this amount, still 25%, is $325. Your take home pay is $975. The key here is the taxes. When you didn’t save, you paid $375 in taxes. When you did save you paid $325. You saved yourself $50 in taxes by simply saving money. The more you save in these accounts, the less money gets taxed, and the more you save on taxes.
One key point that I want to mention, you can save in a health savings account after tax too and write off that contribution on your taxes. Before you go this route, see if you can change the instructions with your employer. The reason for this is because even though you can write off the contribution you personally make on your taxes, you cannot write off FICA and Medicare taxes. When your employer makes the contribution for you through a payroll deduction, you avoid paying the FICA and Medicare tax as well. This saves you another 7.5% of your money.
You can use this online payroll calculator to get an idea of how much you can save in taxes by contributing to these types accounts.
One place where spend a lot of money on taxes is when we buy things. In this case, I am talking about sales tax. This tax is levied by individual states and as such vary in amount. Where I live, the sales tax is 6%. This means for every dollar I spend on an item, I am paying $0.06 in sales tax. While this sounds like a small amount, if I spend $20,000 a year, this comes to $1,200 in sales tax.
How do I get around this? Luckily I live close to a state that does not charge a sales tax. So, I take a short drive to the other state to do a good bit of my shopping. As of this writing, there are 5 states that do not charge a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
Before you get all excited, know that for large purchases, like a car, you will still have to pay your state sales tax. The dealer knows the state you came from as you have to register your new car in your state. If you try to game the system, you will lose because all states charge fees for changing registration so you will end up paying eventually.
The last option for getting out of paying taxes is to invest your money. Not only is the 401k plan mentioned above an option, but you also have IRA accounts, both Traditional and Roth, where you can save on taxes.
But getting out of taxes when investing doesnít stop there. You can invest in tax-free bond funds to avoid taxes. You can invest in mutual funds that take a stance where they limit tax events as much as possible. You could invest in exchange traded funds as well, since they tend to be tax friendly.
Of course, you can also just simply hold your investments for the long-term. When your taxable investments are sold for a gain, you have to pay tax on this gain. If you only hold the investment for a short time, you will pay up to your ordinary income rate in taxes. But if you hold for the long-term, then the taxes you owe is capped at a much lower rate.
Note that all of this information regarding investing is a quick overview. If you want to be successful at investing, you have to learn the basics.
Why Save On Taxes
So why am I trying to help you to save money on taxes? At the end of the day, it is your money. You work hard for it and many times we look at taxes as a necessary evil. While I am all for paying taxes to help out the good of society as a whole, I also know that at the end of the day, you have to look out for yourself as well. Having a large nest egg provides comfort and options that not having money doesnít provide. By taking some small steps and changing a few things to save on taxes, you keep more of your money, which if saved and invested will grow into larger amounts over time.
I am in no way suggesting you not pay taxes or anything like that, but rather pay only the amount you are required to. Too many people pay more than they are required to because they overlook these ways to save money on taxes.