If you’re anything like me, paying taxes is about as low on the list of “things I want to do” as possible. I mean, it feels like you work hard to get an education, work hard to interview and land a job, work hard to be successful at that job and earn a living, and then the government just takes whatever they deem “necessary” from you to pay for all the things they are supposedly working on. Well there is a lot of truth to that, therefore, the goal of this post is help keep things in perspective as well as help plan for that painful burden each year. Have you ever heard anyone say, “I want to pay the biggest tax bill because that means I make a lot of money”? I have, and I somewhat understand that; but, at the end of the day it makes me want to punch those people in the face. Since we live in a progressive tax system, if you make more money, they actually take more money. I would wholeheartedly agree with that comment if we all paid the same (or at least a fairly similar) tax rate. But we don’t, and that’s the world we live in for the future as far as I can see.
So, what can we do about it? Well, to start, let’s put things in perspective and look at this with optimistic eyes: Taxes pay for the things we all need and should be grateful for. Our National Defense is one of the largest expenditures. Roads and public infrastructure that we all use and enjoy are paid for with tax dollars. Health care, which understandably is a point of contention, is an extremely large expense that taxes help fund. These are all things that we, or people we know, have benefited from and use on a daily basis. The list goes on and on, but the point is to highlight the fact that we all contribute our tax dollars for the greater good.
Now for the practical side. Let’s look at different ways to minimize this burden within the confines of the overly cumbersome tax code.
- SAVE MONEY! – I emphasize this one because saving money is one of the best ways to bring down your tax burden. If your employer offers a retirement plan (401(k), 403(b), 457, SIMPLE IRA, etc.) then you should be contributing to it. The money you put into these plans are not taxed today, and instead grow tax-deferred until retirement. They are taxed in retirement, but only to the extent that you pull it out. So, you can take as much or as little as you’d like (with a few exceptions) and only pay taxes on the amount taken. IRAs work in a similar fashion. The money you put into an IRA is tax deductible today, and grows tax-deferred until you withdraw it in retirement.
- Open and Fund a Roth IRA – There are some limitations to contribution based on income levels but the great part about the Roth is it grows tax-deferred and is withdrawn tax-free! The only drawback is you don’t get a tax deduction today. However, if you look out over a longer time horizon, contributing assets to both Roth and Traditional designated accounts, you’ll be putting yourself in a great position to most effectively manage your tax bill down the road in retirement.
- Don't Forget Medical Write-Offs - You can also deduct the portion of medical expenses that exceed 10% percent of your adjusted gross income. This is often overlooked due to the emotional stress that expensive medical emergencies bring, especially for medical treatment that is drawn out over a few months. Included in this category are travel expenses like plane tickets or hotel rooms.
- Give Back – Many people derive satisfaction from philanthropic endeavors. The great news is, donating money will bring your tax bill down! So, in the words of Greg Focker, “…it feels good and I get paid”.
- Give Back (Part 2) – Most people are aware of the fact that you can write-off cash donations to charities but many are unaware of the ability to write-off out of pocket expenses incurred. Gas is probably the best example. If you volunteer your time on a regular basis, the gas used to travel back and forth can start to add up. But the same goes for any supplies you purchase for the cause you’re volunteering for.
- Actively Track Your Budget – This encompasses a few positives…first, you’ll manage your finances better if you know where your money is going; but you’ll also have a better idea of whether or not to itemize your deduction or take the standard deduction. Yes, it’s easiest to just take the standard but, if you itemize it opens up a world of opportunity to reduce your tax bill. Which naturally leads to the next item…
- Itemize! – Most people are aware of charitable gifts and mortgage interest but there are plenty of deductible expenses, especially if you consider miscellaneous expenses that add up to more than two percent of your adjusted gross income. Some of these include tax-preparation fees, home office expenses, job-hunting expenses, unreimbursed business expenses (including professional dues) and many more. This list is actually pretty long which is why the next item on my list of “to-considers” is…
- Seek the Advice of a Professional – Yes, even though you may have to pay a bit more (see above…you can write that off if you itemize), you may benefit from the advice of a tax professional. With the tax code as copious as it is, doesn’t it make sense to employ the use of a professional, rather than do it yourself? Even if that professional is Turbo Tax, get help. Talking with a person is typically preferred as they will often think through items that may be otherwise overlooked.
- File (and Pay) Your Taxes On Time – This may seem obvious but many people who file for an extension often times assume they get an extension to pay their tax bill as well. That’s not true. You end up paying penalties on money you owe the government which in turn causes you to unnecessarily pay even more!
I’m going to stop with number nine for no other reason than everyone does a top ten list. But you never see top nine lists! Which is also worth mentioning that this post is not meant to be an exhaustive “tax-filing-to-do” list but rather an optimistic point of view that if we pay taxes, we’re contributing to the greater good and that with a little bit of planning we can minimize this otherwise burdensome demand.