Tax Saving Strategies that Every Savvy Tax Payer Should Know

In this world nothing can be said to be certain, except death and taxes.

“In this world, nothing can be said for certain, except death and tax.” Benjamin Franklin.
As savvy tax payers and entrepreneurs, we take any deductions and credits to lower our taxes. We’re not trying to avoid taxes, we’re just trying to minimize what we have to pay in tax legally so with the tax money we saved, we can use that to generate more wealth.

Related article: Wealth Building Strategies to Become Rich

Let’s start with the tax basics. Watch this video to learn how to calculate your taxes.

Tax Deductions vs Tax Credits

Tax Deductions are expenses that the US government allows to reduce your taxable income. For example, you make $70,000 a year, and incurred $10,000 in medical expenses. The $10,000 medical expenses are deducted from the $70,000. So instead of paying tax based on $70,000, your tax will be assessed based on $60,000 income.

Medical expense is only one of many allowed tax deductions.

Tax Credits are “free money” that the government gives you. Remember, back in 2008 when Obama was dishing out $8,000 tax credit to all new homebuyers? I’m a beneficiary of that credit.

Between tax deductions and tax credits, I’ll take tax credit anytime. It’s like free money, but, of course, you have to meet the criteria. And usually, it is a one-time deal.

Impact of Tax on Your Income

Impact of Tax and Inflation

As the above illustration shows, if you’re not careful, your income tax and inflation can eat up your savings like termites.
None of us can control inflation. But we can at least do something with our taxes to lessen the impact.

Paying Tax as an Employee vs Paying Tax as a Business Owner

Let’s see what kind of deductions employees are allowed. Let’s use me as a demo.

I have a regular full-time job as a pediatric dietitian. Each year my tax deductions in job expenses includes any fees I paid for continuing education, conferences that I attended, professional membership fees, professional re-certification exams, licensure renewal. That’s about it.

I purchase a car to commute back and forth to my job, put gas in the car so I can drive, pay for registration, safety check, insurance and whatever maintenance fee for my car, just so I can get to work. As a professional, I have to wear nice clothes to be presentable to my patients. I buy lunch in the hospital or I may bring leftover from home for lunch. All these are other expenses that I cannot deduct.

Now let’s look at my tax deduction as a business owner.

I’m a financial planning consultant and real estate investor, I have a real estate license (not active), and a life and health insurance license.

For my business, I deduct any fees I paid for continuing education, conferences that I attended to learn more about personal finance to help more families, professional membership fees, professional re-certification exams, licensure renewal, laptops and cell phones to write contracts, articles, advertising and contacting clients, legal and professional fees for professional advices, meals when I'm out meeting with clients, part of my car expenses when driving to meet clients, travel expenses when visiting my rental property in California, which happens to be where my daughter goes to college.

I can keep going on with this list. Business owners and real estate owners enjoy tax benefits that employees do not. And the impact of tax on your income can significantly affect how fast your wealth accumulates.

Related article: How to Make Money Work for You

Investing in Wealth-Building Vehicles with Tax Benefits

As a financial planning consultant, it is my duty to provide my clients with information and strategies on how to accumulate wealth so their money grow safely and be protected from market volatility and tax.

There are many wealth-building vehicles with tax benefits that can be used for personal wealth accumulation, retirement planning, estate planning, etc.

The best vehicle is an indexed universal life (IUL) insurance. This is a life insurance on steroid. Your family gets the traditional benefit of life insurance if you passes too early. The death benefit pays out to your family tax-free. You get to accumulate wealth in the cash account protected from loss (no market volatility to worry) with guaranteed growth earning a handsome return rate. You can also access your money whenever you need during your lifetime tax-free as emergency fund, such as medical expenses, long-term care or continue to pay for your life insurance premium.

This is the choice for many who has a large asset portfolio and make too much income to invest in an individual retirement account because an IUL provides excellent asset and wealth protection that no other financial vehicles can. There is no limit on your contribution, but certain guidelines do apply.

An Individual retirement account (IRA) is the another vehicle with tax-free benefits. However, an IRA limits your access to your money until you’re at least 59 1/2 or you pay a 10% penalty, which can easily eats up big chunks of your savings.

There is no income or asset protection. Your money is exposed to market volatility with no guaranteed growth and requires specialized knowledge in the stock market to make a profitable investment.

With an IRA there is limit of $5,500 a year that you can contribute.

Attend a free Financial Planning Workshops or contact us for a free consultation to learn more.

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