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“In this world nothing can be said to be certain, except death and taxes.” - Benjamin Franklin
Death and Taxes are the two things we can’t escape. Luckily, there are some ways to “legally” minimize the amount of taxes we send to our favorite uncle.
This page is here to help you “legally” minimize your taxes.
Investing
Tax Tips
Tools
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Need help deciding between Roth vs. Traditional?
Quick recap:
Roth - You pay income tax today on what you invest, but all the ”earnings” are tax-free when you withdraw the money in retirement (typically age 59 1/2 and older). This account does not lower your tax bill today.
Traditional - You do not pay income tax today on what you invest, but you pay ordinary income tax when you withdraw the money in retirement (typically age 59 1/2 and older). This account lowers your tax bill today.
If you are confused between investing in Roth vs. Traditional, a good rule of thumb to use:
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If your combined Federal and State tax rate is 25% or below, Roth (Post-Tax) can be a good option, especially if you will be in a higher tax bracket upon retirement.
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If your combined Federal and State tax rate is 30% or above, Traditional (Pre-Tax) can be a good option, especially if you will be in a lower tax bracket upon retirement.
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If your combined Federal and State tax rate is 26-29%, this is the gray area.
No matter what, you should always contribute up to your employer match because their match is free money (100% return on investment).
IRA's do have income limits to qualify, but 401k/403b do not have income limits. If you are in a high tax bracket (over 30%), you most likely don’t qualify for IRAs but can still contribute to an employer-sponsored 401k/403b. You can get creative if you are in a high tax bracket. You could contribute to a Traditional Account to bring your income lower (below 30% rate) and then contribute after that to a Roth Account. Keep in mind the income limits on IRAs and contributions limits on both IRAs and 401k/403b. A quick internet search will give you up-to-date amounts.
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With a taxable brokerage, you have access to the funds at any time. It’s a great place to save/invest for future expenses and freedom money.
Plus, equity investments (e.g., stocks) we sell in our taxable brokerage that we have held longer than a year (i.e., long term capital gain) are taxed at favorable rates.
An example of this in action: say we sell some long-term investments in 2021 and our taxable income is under $80,000, we pay $0 on the gain (For Federal Taxes). We file a joint return. If you file as single, the threshold is $40,000 as of 2021. A simple internet search will give you the tax brackets for capital gain tax.
Investments held over a year are long-term (favorable tax rates).
Investments held less than a year are short-term (unfavorable “ordinary” tax rates).
A taxable brokerage account is separate from a Traditional/Roth 401k & IRA. With Traditional 401ks & IRAs, you receive a tax deduction in the year you contribute & pay tax when you withdraw the money. A Roth 401k & IRAs are basically the opposite, you do not get a tax deduction in the year you contribute, but it’s tax-free when you withdraw the money.
Keep in mind, the rule of thumb is to max out tax advantage accounts first like 401k, IRA, HSA - if you have one. After you have funded these, move on to investing through a taxable brokerage.
⚠️ - Informational Purposes Only - Not Personal Advice
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Health Savings Accounts are one of the best-kept secrets in the financial world, and they are one of the most advantageous ways to “legally” stick it to our favorite uncle.
For a comprehensive video on Heath Savings Accounts (HSAs) (Click Here).
Health Savings Accounts are a great way to build wealth and pay for qualified medical expenses tax-free.
An HSA (Health Savings Account) is kind of a mix between both Roth and Traditional. Money contributed to an HSA you don’t pay tax on today, and your money grows tax-free if the distributions are made for qualified medical expenses. At age 65 or older, you can take distributions and spend the money on whatever you want. Money withdrawn at age 65 or older and not used for qualified medical expenses are subject to ordinary income taxes, like a traditional IRA or 401k.
An HSA is a triple tax-advantaged account. You get a Tax deduction when you contribute. You can invest the money within your HSA to grow tax-free. If you use the money to pay for qualified medical expenses, you do not pay income tax on the distribution.
Bonus tip, you can pay for your spouse and dependents qualified medical expenses even if they are not covered by your health plan. It doesn’t matter if they have a high or low deductible plan; you can still use your HSA to pay for them. Just make sure the expenses were incurred after the HSA was established.
Anyone can open an HSA as long as you have a high deductible health plan. A high deductible is an annual minimum deductible of $1,350 for individuals & $2,700 for families. The yearly out-of-pocket maximum cannot be over $6,750 for individuals & $13,500 for families.
There is no income limit to qualify for an HSA.
HSAs do not have required minimum distributions.
You can open a Health Savings Account through any brokerage like Fidelity or Charles Schwab.
If you are single, you can contribute up to $3,550 per year to a Health Savings Account and $7,100 for families.
Unlike FSAs (flexible spending accounts), a Health Savings Account is not a use it or lose it account. Money put into your HSA stays there and continues to grow if the money is invested until you take a distribution.
Finally, the icing on the cake of a Health Savings Account is you can take distributions from it penalty-free at the age of 65 or older and use the money for whatever you want. You will pay ordinary income taxes on the money just like your traditional 401k or IRA, making health savings account’s an additional tax-advantaged retirement account. You pay income tax on this type of distribution because you get a tax deduction upfront. Remember, no income taxes are paid if money is used for qualified medical expenses.
The numbers mentioned above are as of 2020. They are adjusted slightly every year or so. A quick internet search will give you up to date amounts.
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If you work for an employer (aka W-2 employee) and/or have few investments, you can most likely save some money by preparing your own taxes. I used Turbo Tax for over a decade to file ours before switching to my current software. I still recommend it to most of my family and friends.
If you own a business, have rental properties, have complex investments, are a beneficiary of a trust, the IRS contacts you, or you just don’t want to think about taxes, you may find the expense of hiring an accountant to be worth it.
Also, if you are organized and like to prepare your own taxes but want someone looking over your shoulder, a good tax preparer might be worth it.
Questions to ask a tax accountant before you hire them:
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What are your credentials? (Tax professionals are usually certified public accountants (CPAs), enrolled agents (EAs) or unenrolled prepares).
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How much continuing professional education in tax do you get annually? (You need to know your tax preparer is getting enough education and is up to date on the most current tax policies).
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How do you charge for your service? (Usually either a flat rate or an hourly rate).
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What’s your experience with the IRS?
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Why should I use you? (You should feel your CPA/tax preparer cares about your success and not just about making money for themselves).
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The CARES act has expanded what is considered a qualified medical expense to include over the counter (OTC) medication & feminine care products for Flexible Spending Accounts (FSA), Health Savings Account (HSA), & Health Reimbursement Arrangements ((HRA). The coverage is retroactive to January 1, 2020, and doesn’t expire until Congress changes it!
Medicine like Tylenol & Benadryl, now counts, along with feminine care products.
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