It’s no secret that one of the reasons your money is “Easy Go” is because a good chunk of it goes toward taxes of one kind or another. You can’t really avoid them completely. But did you realize at least some of the taxes you pay are a choice within your control to one degree or another? You can legally reduce some of the taxes you pay by changing a few simple behaviors, and it’s perfectly legit. Below are a few resourceful moves to save taxes that I use that you might find useful.
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Reduce Your Tax Withholding
It’s common practice to have extra taxes withheld from one’s paycheck in order to receive a decent refund come tax time. By over-withholding, you guarantee that your taxes are properly paid and that you get money back each year for bills or some other item(s) you want to splurge on. Some see it as a great way to save up temporarily for fun money, to catch up from behind on bills, or to use as a rainy day fund.
But that’s not really the most efficient use of your money, even if it helps psychologically to fulfill your tax obligation and to have something left over.
Instead, you should only withhold as much tax necessary to nearly break even when you file. That way, you will have extra money in each paycheck. Then, immediately put that extra amount into your emergency fund, pay off your debt(s) or channel it to other savings vehicles. The money will be working for you during the year, rather than having it work for someone else (in this case the government). This is in line with the PYF (Pay Yourself First) rule. If you’re concerned that you’ll spend that extra money, automate your savings or debt payments so you never see it, just as if you had the money withheld for taxes.
So, at least indirectly, you are saving on taxes because you are putting that money to work for you now, which allows you to save more. You could gain interest on that money in a high-yield savings account. The money could be growing in an investment fund. Or, you could pay down interest-accruing debt to your benefit. Better than having the government gain interest on the 0% loan you’ve given them.
If you habitually rely on that “Refund Windfall” to pay bills each year, if you need the government to save your money and reimburse you during tax season, you miss out on the “magical compounding” with that money, or you hinder your own debt relief by allowing interest to accumulate that you could be whittling down. And it adds up over the years.
That’s the rub. Have you conditioned yourself to depend on that refund? Can you resist spending it if it’s not withheld from your paycheck? If not, what you’re really saying is that you can’t save your own money. You have to pay Uncle Sam to save it for you. You pay in opportunity costs for this arrangement. Easy Go, go figure!
If the government paid a certain percentage for the time it held your money, payable along with your refund, then it might be worth the loan. But I wouldn’t compete in a breath-holding contest waiting for that to happen.
Drive Efficiently / Drive Less
This is admittedly an unpopular idea for many. But since it’s helpful for me (especially since I drive a hideously long commute), I’m giving it a mention here. Plus, it’s a good frugal tip.
Drive a fuel-efficient car, and keep as close to the speed limit as possible (without endangering yourself). Or, simply drive less. Even if you don’t have a fuel efficient vehicle, drive more carefully and slow down. The less fuel you buy for your vehicle, the less taxes you pay that go into the government coffers because there are sizable taxes levied on gas. This, by the way, is why some states are (or are considering) imposing additional taxes on fuel-efficient hybrids and EV’s. There are moves to charge road-use taxes by the mile instead. They lose tax revenue on these no- and low-fuel consumption vehicles. So you know they make a
killing decent sum on this.
To be fair, this money goes toward infrastructure construction and repair, so it’s not for an unworthy cause. Nevertheless, you can reduce your personal contributions and up your safety habits by driving slower. Speeding fines are also used for worthy causes, but that’s no reason to collect them.
This highlights something about speeding to some extent. Sometimes the police will stake out a section of road to ticket speeders for safety reasons. But more often than not, you have to drive pretty fast and recklessly (or pull some stunt move in front of a cop) before you’d be pulled over. Cars routinely travel 80 mph in a 65-mph zone and the police just roll along with them. They could easily bump up their fine collections if they wanted. In past years, you could only push the limit ~7-10 mph before you would be tagged.
Why is this? Well, it’s partly because there’s a disincentive to slow traffic down too much. Otherwise, the government loses out on tax revenue, especially if your state has a high tax rate on fuel. I know that sounds a little crazy, but it’s true. It generates extra money as a byproduct of higher fuel sales when they partially enforce maximum speed laws.
Even if that weren’t the case, they don’t usually catch most speeders anyway. But you are still paying to satisfy your “need for speed” even if it’s not in fines and points against your driving record, even if you fly home-free to your destination. And, again, it really adds up over time — and it’s something within your control.
Of course, if you get a ticket, the fine you pay is a penalty for breaking the law and not a tax. But that’s another way slowing down avoids having to pay the government (and in this case, your insurance company).
I might add that keeping your tires properly inflated and your engine tuned helps with your gas mileage as well.
Don’t Drink Or Smoke
Ok, I admit this isn’t a simple behavioral change for many. My apologies. But … if you really want to save money you’re giving to the government — these are two items within your control that are fairly heavily taxed. This is one of those “vice” or “sin” taxes where the government has deemed that a product is harmful for you, so they tax you on it to
get you to reduce consumption make a bundle off your habits (pick your toxin). You may not believe these taxes are justified, or that they even work to reduce consumption. Nevertheless, the consumer bears the cost.
Contribute More To Your 401k If You Aren’t Maxing Out
This is one of the alternative things you might do with your money if you reduce your tax withholding. How does this help you save more in taxes? Well, first, since your 401k contribution is pre-tax, it reduces your taxable income. It’s even more crucial if you’re teetering between two tax brackets, or if your income affects your health care reimbursement. This may be a solution to keep your taxable income in the lower bracket or qualify for a larger reimbursement. Simply increase your pre-tax contributions to your retirement account.
So you’re really saving 2 ways! Once by putting more money into your 401k, and again by reducing your taxable income. True, you’ll still have to pay tax on that money when it comes time to make withdrawals against the account. This could wind up being a bad move, though, if you end up in a higher-tax bracket during retirement. So make sure you make decisions like this carefully.
Invest In Other Tax-Advantaged Funds or Accounts
While you’re at it, you might consider investing in a Traditional IRA (if you don’t have a 401k), Roth IRA or other tax-advantaged vehicles like municipal bonds or a low-turnover index fund. If you have the extra money, you can even fund a Roth IRA for a non-working spouse. (Even though Roth contributions themselves are not pre-tax, the gains accrued in a Roth are tax-sheltered. Thus you only pay tax later on the gains and not the principal.)
Consider A FSA / HSA for Health Care Costs If Available Through Your Employer
This is something else you might do if you reduce your tax withholding, which is totally worth it. If your employer offers a Flexible Spending Account (FSA) or a Health Savings Account (HSA), you might consider contributing to one (or both under limited circumstances) for your healthcare-related needs.
With a Flexible Spending Account, you have money withheld pre-tax for health-related expenses that you incur throughout that year, thereby saving taxes on that money. Rules for this year’s FSA contributions can be found here.
A Health Savings Account is only available through a high-deductible insurance policy. It also offers you the ability to contribute to an account tax-free for medical expenses, along with some other great benefits. More information can be found here with regard to an HSA. [These are non-affiliate links.]
Live In An Unincorporated Area
If you live in an unincorporated area outside of city limits, many times you pay less property taxes and no city taxes. Of course, there may disadvantages or other costs associated with this, such as not having city water, sewer and other services. These incur their own costs. But, since this is about saving money from the government, this is one of the ways to do so.
You can’t get away without something related to frugality on this site. How does spending frugally save you in tax money? This one is obvious, of course. You reduce your sales taxes. Have you ever been excited to purchase something on sale — it seemed like such a great deal — just to be deflated once the sales taxes were included? If you buy less, if you go cheaper, or if you don’t buy something at all, you win! If you simply don’t buy something, you save 100% of the cost for that item along with the accompanying sales tax.
What about you? This is by no means an exhaustive list, so what other great ideas do you have?
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