January 19, 2024 • 8 mins
Ever feel like Uncle Sam is reaching too deep into your pockets? We've got you covered! On today's lively episode, we're unraveling the complex world of taxes for our ADHD community, tackling a tough question from Yvonne in our ADHD Money Talk Facebook group. She's got a state pension and a 403(b), but no 401(k)—so how can she keep a tight grip on her hard-earned cash? Fear not, because we're not just spewing generic advice; we're serving up educational insights that just might spark some genius tax planning strategies for you.
We kick things off with a candid reminder to look at the big financial picture—because tunnel vision on tax reductions can lead to missed opportunities elsewhere. It might sound paradoxical, but we explore why paying more taxes now could actually save you a bundle in the future, especially if you're eyeing a higher tax bracket with a looming promotion. We'll guide you through the ins and outs of Roth IRAs, 403(b)s, and the often overlooked aspect of tax planning over mere tax minimization. Whether you're juggling a state pension or just trying to outsmart the taxman, this chat is locked and loaded with the financial firepower you need to potentially lower your taxable income and secure a wealthier tomorrow.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Today on the show taxes, lowering your taxes.
What can you do to lower yourtaxes and keep more money in
your pocket and give less to thegovernment, to Mr Uncle Sam?
Let's talk about it.
Welcome back to the channel, tothe podcast, to the content
that I am bringing to you tohelp you become a smarter,
stronger ADHD-er with your money.
Your money is so important toyou, it's important for your
(00:21):
life, for everything.
So we're talking about taxestoday and I'm in a funny mood,
so here we go.
So Yvonne had a question fromthe Facebook community ADHD
Money Talk.
Facebook community Links in thedescription or wherever we're
gonna put it, I don't know.
So the question is from Yvonne.
She says how can I lower my taxbill?
Four one K is not an option.
I have a state pension.
It contributes to a four orthree B, only $4,000 a year.
(00:43):
I max my FSA $2,000 a year intothat.
Do you have any other taxsaving tips?
Great question.
First thing I'm gonna say iseverything I'm about to say is
not advice, not a recommendation, just a educational opportunity
for me to talk about somethings that could be done by
someone somewhere.
Not personal advice to you,because I don't have your whole
picture, and that's what I wouldneed to ever be able to give
(01:04):
actual recommendation.
Very important to know that.
So, with that said, let's talkabout this.
So often I find people are toofocused, or just very focused,
or just very averse to payingtax, so they wanna pay less tax,
or, like ug, the thought ofpaying $1 more in taxes driving
me nuts.
But sometimes we're gonna missthe forest for the trees in this
situation, because it'simportant to keep in mind that,
(01:27):
in order to pay less in taxes,you usually have to have an
outlay of money to somewhere.
Sometimes that's giving moneyaway, sometimes that's making a
business expense for yourbusiness to lower your taxable
income, and sometimes that meanslocking your money up in an
investment vehicle, such as your403B, to get that tax benefit.
So, with that in mind, youwanna make sure that, before you
implement any strategy, you'reA talking to a tax accountant
(01:50):
and really, though, making surethat there's no more important
priority for these funds.
So, before you focus on tryingto lower your tax bill, you
wanna make sure you have youremergency fund taken care of.
You wanna make sure you have nohigh interest debt.
You wanna make sure that theextra funds that you're gonna be
using to reduce your taxes.
Don't have a higher orderpriority before you start
focusing on tax.
(02:11):
And also, tax planning issomething to think about.
Tax planning is different thanjust minimizing your taxes
because let's say that, forinstance, and within two years
or so you're expecting to getthis huge promotion, your tax
bracket's gonna jump up to a newlevel.
You know.
In that case, what you mightwant to be thinking about for
this year would be actually topay more in taxes, because maybe
(02:31):
you're going to, instead ofputting money into the 4 or 3B,
you're going to start a Roth IRA, pay tax now at that lower rate
that you're at now, get themoney in there so it can grow
tax to furl and tax free.
And then in two years, onceyour tax bracket goes way up,
you're going to say, okay, well,now if I actually put money
into a regular 4 or 3B, get thetax to furl, I'm paying no tax
(02:51):
on my high rate and that way Icould take that money out maybe
later in retirement when I'm ata low tax rate.
So with tax planning, you'realways trying to reduce or
minimize your lifetime lifetimeeffective tax rate, not just
trying to minimize your tax ratein any one given year.
You have to take a longer termzoom out picture of everything
going on.
So that's something to keep inmind or just to understand, just
(03:13):
so you can at least let thatsink in.
But yeah, so let's keep goinghere.
So, with all that said, toanswer the question more
directly about some things youcan do to reduce your tax bill
in the near term is, well, thefirst thing that I would be
looking at or thinking about.
The first thing that pops mymind is that you have this 4 or
3B and every dollar you put intothe 4 or 3B is dollar for
dollar, reducing your taxableincome.
(03:33):
So, at only $4,000 right nowthat you're contributing, you
are leaving for 2024 $19,000 ofincome deferral on the table and
if you're over 50 years old,you're actually leaving extra.
I believe it's $7,000 extradollars that you could be
contributing.
So let's say that you make $125and have a 24% effective tax
(03:56):
rate and have a 24% effectivetax rate and you contributed the
whole $23,000 that is available.
Should I do it the other way?
23?
I don't know.
That is available for 2024.
Then your tax bill would bereduced by somewhere in the
neighborhood of $6,000 becauseyou've reduced your taxable
(04:17):
income by $23,000.
And that means that on that$23,000, you aren't paying 24%
effective tax.
Okay, so let's see what we cando all besides that.
So, apart from this idea, youknow ways to reduce your tax
bill potentially could come fromseeing if there are any tax
credits available.
(04:37):
For you know, maybe it's likean energy efficient improvement
to your home.
So maybe you know, you, youneed to do some work to your
house and you're like, okay,well, we got to do this and
there's a chance to improve ourenergy efficiency.
So let's see if we can qualifyfor the federal tax credit,
which I believe is up to $3,200could be available to you.
Or maybe if you need a new carand you like cars and you've
(05:00):
kind of had your eye on an EVand you're in a financially
strong position to be able to dothat, then maybe you could
consider buying an electricvehicle because there are still
tax, federal tax creditsavailable for that.
And just as a quick educationalpoint, a tax deduction lowers
your taxable income and a taxcredit lowers your tax bill,
(05:23):
your tax due.
Dollar for dollars, the taxcredits are more valuable than
tax deductions.
Just as a rule, just assomething to remember.
And then you know beyond that.
You know there's things likecharitable giving, starting a
529 for a kid.
Just keep in mind, with a 529,which is a educational account,
it's not federally taxdeductible, so the amount you
put in won't be reducing yourtaxable income on a federal
(05:46):
level.
But I think most states willgive you a tax deduction Not all
states.
It varies by state, so that'ssomething you'd want to look
into for your state.
And then the last thing that'scoming to my mind as a
reasonable thing to consider andexplore is getting a high
deductible health insurance planwhere you could then attach a
health savings account, alsoknown as an HSA, to that,
(06:08):
because HSAs are a beautiful,beautiful, beautiful thing.
Hsas are amazing, like amazing.
Like amazing because it's theone place where you can earn
money, have money come to youand have the government not
touch it and then invest it andthe government never touches it,
(06:30):
and then you can take the moneyand you can use it for
qualified health expenses andthe government never touches it.
So it's like the one place inlife, financial life, where the
government never gets his handsin the cookie jar ever.
It's beautiful and so it's notfor everybody though.
(06:53):
For instance, if you have healthissues and you have to go to
the doctor a lot, then you'relikely going to have to be
hitting up to that deductibleevery year and every dollar you
put into the HSA is going tocome right back out for health.
So HSAs make a lot of sense forpeople that are healthy and
believe that they're going to beable to get through several
years of having it where theydon't need to use all of, or
(07:16):
even most of the money that getsput into it.
So for single people you canput in tax deductible, tax
deferred and ultimately tax freefor health expenses 38.50 a
year and for families 77.50.
And it's a triple tax benefit.
It's underappreciated and it'ssomething to really consider
(07:36):
that will be able to reduce yourtaxable income and your taxes.
Today on the show taxes, lowering your taxes.
What can you do to lower yourtaxes and keep more money in
your pocket and give less to thegovernment, to Mr Uncle Sam?
Let's talk about it.
Welcome back to the channel, tothe podcast, to the content
that I am bringing to you tohelp you become a smarter,
stronger ADHD-er with your money.
Your money is so important toyou, it's important for your
(00:21):
life, for everything.
So we're talking about taxestoday and I'm in a funny mood,
so here we go.
So Yvonne had a question fromthe Facebook community ADHD
Money Talk.
Facebook community Links in thedescription or wherever we're
gonna put it, I don't know.
So the question is from Yvonne.
She says how can I lower my taxbill?
Four one K is not an option.
I have a state pension.
It contributes to a four orthree B, only $4,000 a year.
(00:43):
I max my FSA $2,000 a year intothat.
Do you have any other taxsaving tips?
Great question.
First thing I'm gonna say iseverything I'm about to say is
not advice, not a recommendation, just a educational opportunity
for me to talk about somethings that could be done by
someone somewhere.
Not personal advice to you,because I don't have your whole
picture, and that's what I wouldneed to ever be able to give
(01:04):
actual recommendation.
Very important to know that.
So, with that said, let's talkabout this.
So often I find people are toofocused, or just very focused,
or just very averse to payingtax, so they wanna pay less tax,
or, like ug, the thought ofpaying $1 more in taxes driving
me nuts.
But sometimes we're gonna missthe forest for the trees in this
situation, because it'simportant to keep in mind that,
(01:27):
in order to pay less in taxes,you usually have to have an
outlay of money to somewhere.
Sometimes that's giving moneyaway, sometimes that's making a
business expense for yourbusiness to lower your taxable
income, and sometimes that meanslocking your money up in an
investment vehicle, such as your403B, to get that tax benefit.
So, with that in mind, youwanna make sure that, before you
implement any strategy, you'reA talking to a tax accountant
(01:50):
and really, though, making surethat there's no more important
priority for these funds.
So, before you focus on tryingto lower your tax bill, you
wanna make sure you have youremergency fund taken care of.
You wanna make sure you have nohigh interest debt.
You wanna make sure that theextra funds that you're gonna be
using to reduce your taxes.
Don't have a higher orderpriority before you start
focusing on tax.
(02:11):
And also, tax planning issomething to think about.
Tax planning is different thanjust minimizing your taxes
because let's say that, forinstance, and within two years
or so you're expecting to getthis huge promotion, your tax
bracket's gonna jump up to a newlevel.
You know.
In that case, what you mightwant to be thinking about for
this year would be actually topay more in taxes, because maybe
(02:31):
you're going to, instead ofputting money into the 4 or 3B,
you're going to start a Roth IRA, pay tax now at that lower rate
that you're at now, get themoney in there so it can grow
tax to furl and tax free.
And then in two years, onceyour tax bracket goes way up,
you're going to say, okay, well,now if I actually put money
into a regular 4 or 3B, get thetax to furl, I'm paying no tax
(02:51):
on my high rate and that way Icould take that money out maybe
later in retirement when I'm ata low tax rate.
So with tax planning, you'realways trying to reduce or
minimize your lifetime lifetimeeffective tax rate, not just
trying to minimize your tax ratein any one given year.
You have to take a longer termzoom out picture of everything
going on.
So that's something to keep inmind or just to understand, just
(03:13):
so you can at least let thatsink in.
But yeah, so let's keep goinghere.
So, with all that said, toanswer the question more
directly about some things youcan do to reduce your tax bill
in the near term is, well, thefirst thing that I would be
looking at or thinking about.
The first thing that pops mymind is that you have this 4 or
3B and every dollar you put intothe 4 or 3B is dollar for
dollar, reducing your taxableincome.
(03:33):
So, at only $4,000 right nowthat you're contributing, you
are leaving for 2024 $19,000 ofincome deferral on the table and
if you're over 50 years old,you're actually leaving extra.
I believe it's $7,000 extradollars that you could be
contributing.
So let's say that you make $125and have a 24% effective tax
(03:56):
rate and have a 24% effectivetax rate and you contributed the
whole $23,000 that is available.
Should I do it the other way?
23?
I don't know.
That is available for 2024.
Then your tax bill would bereduced by somewhere in the
neighborhood of $6,000 becauseyou've reduced your taxable
(04:17):
income by $23,000.
And that means that on that$23,000, you aren't paying 24%
effective tax.
Okay, so let's see what we cando all besides that.
So, apart from this idea, youknow ways to reduce your tax
bill potentially could come fromseeing if there are any tax
credits available.
(04:37):
For you know, maybe it's likean energy efficient improvement
to your home.
So maybe you know, you, youneed to do some work to your
house and you're like, okay,well, we got to do this and
there's a chance to improve ourenergy efficiency.
So let's see if we can qualifyfor the federal tax credit,
which I believe is up to $3,200could be available to you.
Or maybe if you need a new carand you like cars and you've
(05:00):
kind of had your eye on an EVand you're in a financially
strong position to be able to dothat, then maybe you could
consider buying an electricvehicle because there are still
tax, federal tax creditsavailable for that.
And just as a quick educationalpoint, a tax deduction lowers
your taxable income and a taxcredit lowers your tax bill,
(05:23):
your tax due.
Dollar for dollars, the taxcredits are more valuable than
tax deductions.
Just as a rule, just assomething to remember.
And then you know beyond that.
You know there's things likecharitable giving, starting a
529 for a kid.
Just keep in mind, with a 529,which is a educational account,
it's not federally taxdeductible, so the amount you
put in won't be reducing yourtaxable income on a federal
(05:46):
level.
But I think most states willgive you a tax deduction Not all
states.
It varies by state, so that'ssomething you'd want to look
into for your state.
And then the last thing that'scoming to my mind as a
reasonable thing to consider andexplore is getting a high
deductible health insurance planwhere you could then attach a
health savings account, alsoknown as an HSA, to that,
(06:08):
because HSAs are a beautiful,beautiful, beautiful thing.
Hsas are amazing, like amazing.
Like amazing because it's theone place where you can earn
money, have money come to youand have the government not
touch it and then invest it andthe government never touches it,
(06:30):
and then you can take the moneyand you can use it for
qualified health expenses andthe government never touches it.
So it's like the one place inlife, financial life, where the
government never gets his handsin the cookie jar ever.
It's beautiful and so it's notfor everybody though.
(06:53):
For instance, if you have healthissues and you have to go to
the doctor a lot, then you'relikely going to have to be
hitting up to that deductibleevery year and every dollar you
put into the HSA is going tocome right back out for health.
So HSAs make a lot of sense forpeople that are healthy and
believe that they're going to beable to get through several
years of having it where theydon't need to use all of, or
(07:16):
even most of the money that getsput into it.
So for single people you canput in tax deductible, tax
deferred and ultimately tax freefor health expenses 38.50 a
year and for families 77.50.
And it's a triple tax benefit.
It's underappreciated and it'ssomething to really consider
(07:36):
that will be able to reduce yourtaxable income and your taxes.
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