Taxes
Can you name 10 different ways you can reduce your yearly tax bill?
Can you name 10 different ways you can reduce your yearly tax bill?
1. Invest in a pre-tax retirement plan like a Traditional 401(k) or Traditional IRA.
2. Buy more groceries with no sales tax and reduce eating out where the sales tax applies.
3. Drive less often and thereby pay less federal and state gas taxes.
4. Buy a smaller home thereby paying less property tax.
5. Buy less stuff and thereby pay less sales tax.
6. Save more money and earn passive income that is not taxed by the FICA tax.
7. Invest in a Roth IRA where the earnings are tax free after 5 years.
8. Go through the car buying process as little as possible to avoid the large one time registration of tags and title (hidden sales tax).
9. Invest in tax efficient index mutual funds outside of retirement to avoid short-term capital gains and instead end up with long-term capital gains that could end up costing 0%.
10. Start a business to tax shelter earned income and deduct expenses doing something you love thereby reducing your taxes in some pretty big ways.
Great list! A few follow up questions:
4. What if you rent a home? Is there any tax benefits to that?
6. Since I’m in Canada, I’m not familiar with FICA tax. As far as I know, don’t you get taxed on your income? Is there a way to minimize being taxed on your overall income? If you save more in a regular savings account, won’t you get taxed on the interest? Re: passive income, are you suggesting a side-hustle that pays cash? But won’t you have to report that as an extra income when filing taxes?
9. In Canada, we don’t have Vanguard mutual funds, at least not yet. Can the same principal be applied if I just buy & hold Vanguard ETFs?
10. What if I already make a 6 figure income, can I funnel some of my income into a business to reduce my taxes?
You ask many good questions, Denny. My answers are below.
4. There is minimal benefits when renting, but you can make the case you are saving on property taxes as the landlord pays them and not you. Someone could argue though, that the landlord will pass those cost along to the renter.
6. FICA is the tax in the U.S. that is used to fund Social Security and Medicare. FICA only applies to earned income in America. Passive income (your money making money like interest from the bank or bonds and dividends and capital gains from stocks and bonds) is not taxed with the FICA tax in the U.S. I don’t know whether you have a similar situation or not in Canada, Denny. Review your pay stub for the different taxes that come out.
9. Yes, Vanguard ETF’s are very tax efficient. They can serve you well when Vanguard admiral share index funds are not available. Focus on broad market ETFs like a Total International ETF, a Total U.S. stock ETF, or maybe a S & P 500 ETF and the equivalent in Canada.
10. Always focus on maxing out the retirement accounts first. Next up, starting a small business can be a wise option for many. Identify what it is that you love to do and then start a business helping people with what you love to do. It can certainly serve as a tax-shelter with the many expenses that go into running a business. Onward!