Thomas J. Stanley studied America’s wealthy for decades. One of the observations he made was that the top wealth holders, those who kept a larger portion of their income, only realized 3.66 percent of their wealth in taxes compared to 6.7 percent for those those who consumed it.
In other words, those who pay less in taxes do so by spending less and saving more.
When spending money we pay:
- Sales and local tax
- Income tax
- Property tax
If I want to pay lower taxes then follow these three simple suggestions:
A simple way to save on sales tax is to spend less.
That makes sense: The more I spend at Target, the more my checkbook is hit with an 8 percent sales tax.
For example: When I buy a $100 item (non-food) then I have to give the cashier $108.00. If we were to cut our consumption spending by only $1,000 a year then we could avoid paying $200 in taxes. Hold off buying an iPad Mini and we’ll avoid spending an additional $80. Of course, that means I won’t have an iPad Mini so I’ll have to re-think that decision. 🙂
Another idea to consider is taking it to the next level and donating some belongings that you no longer use. Depending on the value of your donation, you could save a sizable chunk of money during tax season. Don’t just donate old clothes, either. Think big. Donate your boat or RV to a charitable organization and use the receipt as a tax write-off. The process itself is very simple. Just go online and the charity will mail you a few papers to fill out, mostly for tax purposes. It’s a win-win situation; you get to help out a great charity while saving money on taxes.
The side benefit of consuming less (spending less) is that I’ll have more for the next step:
Invest In Tax-Favored Accounts
Every American can save in tax-favored accounts.
This helps shelter the money from taxes.
- 401(k), 403(b) and Traditional IRA accounts allow us to put money into a retirement account before it is taxed
- Roth401(k) and Roth IRA accounts don’t save us on taxes today but allow you to take all the money out, including the compounded growth, without having to pay taxes
- Many cafeteria plans and the Health Savings Accounts (HSA) are also treated as a shelter from income tax
Saving in these types of accounts could help the average American household avoid paying between $2,000 to $4,000 of taxes in a year!
Buy More Appreciating Assets
We have a 1st Generation iPad. It’s a bit old but still works great as a web surfer, email checker, and Candy Crusher.
I paid $400 plus sales tax (there it is again!) back in 2011. Do you know how much it is worth today? Less than $100!
In other words, we lost $300 of value on a $400 item in just 36 months.
The same can be said for cars: Purchase a new car for $29,873 today and it will be worth $17,406 in three years – a loss of 42 percent according to Edmunds.com and James Kinson from the Cash Car Convert podcast.
However, if I can delay purchasing a new car or drive a less expensive used car then I’m able to invest more into assets that appreciate. I like mutual funds and index funds, similar to what we save into my Roth.
I figure we will be saving over $3,000 in taxes by keeping my wife’s 8 year old SUV a few years longer and gained a few dollars in our Money Market account by saving ourselves a car payment – literally.
Doing It Debt Free Is The Only Way To Be!
This is Enemy Of Debt, so of course I would be remiss if I didn’t tie this to an anti-debt conclusion.
You don’t have to be debt free to save on taxes, but having the freedom to use your entire after-tax paycheck without the burdens of paying Sallie Mae or MasterCard sure makes it easier.
The Stewart household is doing all of this without debt except for our house. In 18 months our home will be paid for! This will allow us to save more for my daughter’s first car/college/wedding (in that order please). I expect our taxes will go up without the home mortgage interest deduction but we can compensate for it by stashing more money into retirement accounts and living on a money plan.
Now, if I can just find a way to avoid paying more in property taxes…. got any suggestions?