I hate paying taxes. It’s not so much that I don’t want to help fund public works projects, but I don’t feel the government is the best at figuring out how best to spend my tax money. After all, these are the same people that built a bridge to nowhere. Because of this, I try to keep as much of my money as I possibly can, legally of course. Here are a handful of ways to help you pay the least amount in taxes.
Fund Your Retirement
The easiest way to save on taxes is to simply contribute to your 401k plan at work. This saves you money in two ways: first, you don’t pay taxes on the money you contribute and second, the taxes you do pay on your earnings are lower because of the contribution you made. The more you can save in this account, the better off you will be.
If you don’t have access to a 401k plan at work, look into a deductible Traditional IRA. Any money you contribute to this account is not taxed today. Note that if you are covered by a 401k plan at work, you typically cannot make a deductible Traditional IRA contribution. You can still make an IRA contribution, but you can’t get the tax benefit.
A final retirement related tax savings approach is a solo 401k plan or a SEP IRA for those who are self-employed. For me, I chose to go with a solo 401k as it not only allows me to save more money for retirement, but I can sign my wife up since she has a stake in the business too. This is great for us because where she works, she is limited as to how much she can put into her 401k plan at work. This allows us to save up to the max amount each year.
From there, the next best option for saving on taxes is using a health savings account. As with retirement contributions, any money you save from your paycheck saves you on taxes twice. Note that if you make a contribution after tax, meaning you write a check to deposit yourself, you still save on taxes, but not as much. When you make the contribution through your paycheck, you save on both federal and FICA taxes. When you contribute on your own, you can write the contribution off on your tax return, saving you on federal taxes, but not FICA.
If you don’t have a health savings account, look into a flexible spending account. This is a healthcare account you contribute to each year to help cover healthcare costs for the year. Again, the money is not taxed as long as you use it for healthcare expenses. Just note that with this account, if you don’t use the money within the calendar year, you lose it.
After Tax Options
There are some options for saving on taxes after-tax as well. By this I mean ways not related to your paycheck. When it comes to investing, you have a few options. First are treasury and municipal bonds. In both cases these investments are not taxed by the federal government. However, some states do tax the income from municipal bonds. Make sure you know how your state handles the taxation before investing.
For equities, there are a good number of mutual funds that offer tax-advantaged investments. In these cases, the fund manager makes it a point to keep capital gains at an absolute minimum. This isn’t to say you won’t have capital gains, but the odds are less.
Additionally, you could look into exchange traded funds as these investments limit capital gains as well.
One last area where you can save on taxes is through charity donations. This not only includes money you gift, but also goods you donate and your time. If you donate lightly used clothes to the Salvation Army, you can write their fair market value off on your taxes. If you drive to volunteer at an event, you can deduct the miles you drove to and from the event. The key with donations though is to keep excellent records. The IRS has been cracking down on people that have high charitable donation deductions. This isn’t to say you shouldn’t donate, but rather keep records so that if the IRS comes knocking, you can back up your claims.
Overall, there are a handful of ways to avoid paying taxes legally. If you can combine some of these tips, you can save a good amount of money from Uncle Sam. Just make certain you are going about your strategies in a legal manner and not some way that will get you in trouble.