One of the principles I preach here on My Money Design about building your wealth is to find smart ways to KEEP more of what you earn. And in no other way can you accomplish this more than by using the right tax saving strategies to help avoid paying more than you have to.
I say that because taxes are something that eats into your finances no matter how low or high your income is. In fact the more money you make, the worse your tax bill becomes because it scales upward with your earnings to the point where it could potentially be one of the largest expenses you have.
But with the right tax planning strategies it doesn’t have to be this way. There are many ways to lower your tax bill that you probably either don’t use or simply don’t even know about.
Lots of creative people have figured out legal tax savings strategies to avoid paying more than they have to. And they’re willing to share that knowledge with you.
Surprisingly this one used to work as an IRS agent …
Outsmarting the System by Anthony Campidonica:
I LOVE to read a good personal finance book. So when an author reaches out to me and offers to send me a free copy of their work, the least I can do is accept their invitation and then share what I’ve learned with you.
That’s exactly what author Tony Campidonica did. He emailed me about his book Outsmarting the System and advertised it as being about “teaching people how to reach financial freedom by lowering their taxes in the same ways as the rich”.
What a beautiful topic! How could I resist?
About the Author:
The first thing you need to know is that Tony Campidonica is a past IRS agent. This gives him a unique perspective as to what the actual tax savings strategies really are in terms of what’s legal and what’s not.
As he describes there were many avenues and strategies “the rich” were using to lower their tax bill that most people didn’t even know they could take advantage of.
After a number of years he left the agency and now works independently as a consultant who uses his knowledge to help “the little guys” like you and me work on our own tax reduction strategies.
A Very Encouraging Message:
One of the things I love about this book is how motivational it is. Even if you don’t follow any of the advice Tony presents, the message behind the writing should still persuade you to re-evaluate your own tax situation and what you can do to improve it.
Overall I whole-heartedly agree that the average person is NOT doing everything they can to reduce their taxable income and properly take advantage of all the options that are out there.
The unfortunate thing is that most of the time the reason many people don’t is simply out of ignorance. They simply choose not to understand or take the time to get to know these rules when in fact they could be saving thousands and thousands of dollars in taxes every year.
Tony’s Tax Saving Strategies:
In general the tax reduction strategies that Tony presents fall into one of three categories:
- Being an investor
- Being a landlord
- Being a small business owner
The content goes into great detail about how each of these tax savings strategies could be applied to your situation for your own personal gain.
Being an Investor.
Making money from the stock market isn’t the only way to get rich as an investor.
Do you remember the 2012 presidential candidate Mitt Romney and what a big deal the media made out of how little he pays in taxes?
Tony describes how most of Mitt’s income was derived from qualified dividends and long-term capital gains; both of which you may be surprised to learn are taxed at much lower rates than the taxes you or I pay on the income we earn from our paychecks. When you’re talking about someone as wealthy as Mitt Romney, that’s millions of dollars in taxes saved!
This is a perfect example of a wealthy individual legally using the tax system to reduce how much they owe the IRS.
Being a Landlord.
Did you know that as a landlord you can reduce your total tax bill by claiming expenses associated with up-keeping the rental property?
It’s true. Many of the things that you wouldn’t normally get to claim on your primary residence (like repairs, home owners insurance, HOA fees, etc.) are allowed if they apply to a rental property.
Not only that, Tony describes how you may be able to also use depreciation and losses to even further lower your taxes.
Being a Small Business Owner.
This is the area that most of the chapters of the book are devoted to. In it Tony describes many advantages where being a small business owner can help you to claim certain expenses and pay yourself more in profit sharing. In addition he also helps you to lay out plans for how to get there.
Earlier this year I found that out to be true for myself. Through making an income with my blogging, I discovered I could reduce my taxable income by about $750 if I choose to saves a portion of it in a SEP IRA. You can read all about it here and see if it’s something you would qualify for as well.
More Tax Reduction Strategies:
In addition to the tax saving strategies shown above, there are plenty of other ones that I subscribe to.
401k, IRA, and Other Tax-Deferred Retirement Accounts.
One place where the book and I disagreed was in Chapter 2 where Tony presents taxable brokerage accounts as being more advantageous than tax-deferred retirement accounts (such as a regular 401k plan). He then demonstrates a very simplified example that I feel does not entirely paint the whole picture of the situation.
Make no mistake – Tax deferred retirement accounts offer you HUGE, undeniable tax savings over the course of your life!
How much? A while back I crunched the numbers for a hypothetical example and came up with almost $2 million more dollars in assets when you used your 401k! You can see my entire taxable vs tax-deferred comparison here.
Sure there are some benefits to using a regular brokerage account. For example it makes a great compliment to your overall retirement portfolio if you plan on trying to achieve an early retirement because you don’t have the same age restrictions as you do with an IRA or 401k.
However that doesn’t compare to this simple fact: The ability of a tax-deferred investment account to compound over time for years and years without any taxes being taken is and always will make it superior to most other taxable savings account options.
Flexible Spending Accounts:
As a family man another tax reduction strategy I’ve used over the years was to participate in flexible spending accounts to reduce my costs for child daycare and medical costs.
The way a flexible spending account works is a portion of your paycheck is deferred into an escrow before taxes are taken out. You then pay for your qualified daycare expenses and medical expenses using this tax-free money.
Let’s say your tax rate is about 25%. That’s basically like giving yourself an extra 25% more money in dependent and medical care expenses to cover these costs.
If you haven’t already I’d highly encourage you to check with the HR department at your employer to see if you can participate in such a plan.
529 College Savings:
If you plan to save money for your children to go to college, another tax saving strategy you can use is to do it through a. Though the contributions are usually only tax deductible through your State and not at the Federal level, the earnings do grow tax-free and are not subject to taxes when you use them for college expenses.
Understanding How the Marginal Tax Brackets Work:
Though it can be a little more complex at first, I do see a tremendous amount of benefit in understanding how the marginal tax bracket system works and what you can do with it to exploit them to your benefit.
For example: Let’s say you’ve saved a lot of money for retirement and plan to give yourself $132,500 in income each year. How much in taxes do you think you’d have to pay?
0% if you know how to structure it properly! That’s not a joke or gimmick. Using a combination of the concepts above plus knowing where the marginal tax brackets start and stop could really make this into a reality. Read here to see my complete example for how to have a completely tax free retirement.
If you’re new to understanding what kinds of tax saving strategies are out there, then I’d recommend reading Outsmarting the System. Not only is it easy to read and comprehend, but you’ll find the information just as useful as you will find the theme of the book to be encouraging.
Don’t be jealous of the wealthy. Beat them at their own game. Use these tax reduction strategies to your advantage and KEEP more of YOUR money.
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