I know this is a boring topic – I hear ya – but drink a little coffee and let’s contemplate this exciting and esoteric issue – okay, okay, not so much . . . but it’s important nonetheless.
One of the traits that millionaires have in common is that they strategize to minimize their taxes (from Thomas Stanley’s book “the millionaire next door”).
see below a link to previous post about other millionaire traits
How do they do it? (you might ask, in a Brian Regan voice). I’ll give you a hint – It’s not an ancient chinese secret. The key is to plan early in the year and setup your income and expenses to take advantage (legally of course) of existing tax laws.
If you go to an experienced tax planner (I prefer a CPA – but I’m inherently biased) after the fact – he or she can only keep you out of jail – that’s it; CPAs are good and all but they can’t change the past. If, instead, you go to a tax planner before the fact – he or she can you help you set up your affairs in such a way as to minimize your taxes in the coming year, as well as going-forward.
Congress passed significant tax changes in late December 2017. Regardless of your political leanings, I encourage you to better understand these changes – specifically how it will impact your particular situation. I will provide a link (at the bottom of the post) to a good summary of these changes (it’s worth your time to read and understand). Depending on your situation, I strongly recommend you reach out to your tax professional (if you haven’t already done so) in the next few weeks to do some tax planning based on the new tax law.
I believe the recent change to the tax law is over 1,000 pages long, so tax planners are probably still processing how this new law will impact their individual clients. I guess my point is this blog post couldn’t possibly address each person’s individual situation; so I strongly encourage you to reach out to your tax preparer/planner, (even if you do your own taxes). This particular year is a great time (biggest change to the tax code in over 30 years) to have a face-to-face meeting with your planner to discuss what you should be doing, going-forward, to minimize your taxes (plan . . . plan . . . and then plan some more). Think of it this way, you pay a lot in taxes, every year!
Let’s look at some of the most common:
1) income taxes – Federal and State
2) payroll – i.e., social security, medicare, etc.
3) property taxes on real estate
4) gasoline/road taxes
5) vehicle registration and property taxes
6) sales taxes – state and municipal
7) miscellaneous – taxes included in your cell phone bill, other utility bills, etc.
I encourage you to calculate your total tax payments (at least once a year) and how much tax, as a percentage of your income, you pay. I believe my effective tax rate is about 30%, (when I consider all taxes); that’s more than my housing expense – say what?! (Ron Burgandy voice).
I know many of you will say there isn’t much you can do about some of these taxes, especially the usage taxes (like road taxes) – maybe so – but if you are aware of how much in taxes you pay each year – do some strategic planning to minimize each of these taxes and consider alternative ways that might reduce your taxes in the future. For example, you could get a more fuel efficient vehicle and reduce the amount of road taxes you pay each year.
At the risk of sounding preachy, let me ask you to consider the following 3 tax reduction ideas (to get your brainstorming started):
1. contribute more to your 401K – this tried and true method reduces your taxable income and also helps build up your nest egg for retirement.
2. contribute more to your health savings or flexible savings account – this reduces your taxable income and helps setup a health-care emergency fund.
3. contribute more to charity – hey, it’s the right thing to do; and you might be able to get a deduction on your taxes too.
Tax foundation summary of new tax law