How Tax Efficiency Accelerates Financial Independence

Tax Planning Can Expedite Your Path To F.I.

Certainly tax planning is a dreaded topic for nearly everyone. Yet taxes are mistakenly overlooked when considering overall annual expenses.

Taxes on income, property, and consumer goods adds up to a significant enough total to likely be the biggest expense category for any given household. After accounting for federal, state, and local taxes, further including FICA taxes, you will take home significantly less than you originally expected to be paid.

​Consider however, that these taxes can be reduced through some very simple strategies that impact your financially independent future as well. Reducing your taxes now (legally of course) will keep you in control of a greater percentage of your dollars

Tips for Cutting Your Tax Bill

Nerdwallet posted a solid article on 12 tips to cut your tax bill. 

Some of the most common strategies involve contributing to employer-sponsored retirement plans, qualifying traditional IRA contributions, and contributions to health insurance premiums and HSA's. Charitable donations are also valuable ways to positively impact the community and receive a tax deduction in the process.

The Impact of Having a Plan for Reducing Your Present Taxes 

Let's imagine a hypothetical example of Mr. and Mrs. Gibson. The Gibson's have an expected total household income of $150,000 for the year 2021. This firmly puts you in the 22% federal tax bracket (again, as of 2021).

In this example, keep in mind that the upper limit for the 12% tax bracket is $81,050. This means that every dollar over that $81,050 (12% tax bracket upper limit) will be taxed at 22% instead of 12%, a 10% difference. This is how a progressive tax system works.

So in our hypothetical example, how would the Gibson's save 10% on federal taxes in this year?

• If this couple took the 2021 standard deduction of $25,100, they would fall to $124,900 in federally taxable income
• If they further contributed to 401(k) or 403(b) plans up to the maximum amount of $19,500 per individual, which is $39,00 total for this household. This would then further reduce their federally taxable income all the way down to $85,500.
• Further, if their household health insurance premiums totaled $4,800 for the year ($400/month), they would drop to a federally taxable income of $80,700. 

​In this hypothetical example, all of their earnings above $81,050 would have been taxed at 22% up to their the full $150,000. When accounting for all of their deductions above, the Gibson's would have completely avoided the 22% tax bracket thus keeping more of their money working for them in retirement vehicles earning compounded growth.

Keep in mind that NONE of this is tax advice and you still need to consult with a financial professional if you do not feel comfortable planning on your own. This is for educational purposes only.

Tax Efficiency Gets Your Money to Work Quicker, If You Plan

In the above fictional scenario of the Gibson's they would be able to use their federal tax savings to make greater retirement contributions while they are young, thus dramatically improving the power of compound interest over time.

Imagine year after year, as the tax rules change, learning about ways to avoid higher taxation and keep more of your money working for you instead of being handed out in taxes. These are perfectly legal strategies that are published in our tax code, but the rules do change often. For that reason, if you do not have the stomach to keep abreast of U.S. tax code, you must consult with a financial professional such as a certified public accountant (CPA) as well as a tax attorney who specializes in your state.