How to Avoid Paying Income Taxes

How to Avoid Paying Income Taxes

First of all, I am not advocating that you refrain from paying taxes that are due to the IRS. That would be evasion, and tax evasion is a crime. Tax avoidance, on the other hand, is perfectly legal. Just like you would avoid an accident on the freeway during your morning commute by taking side streets to minimize your commute time, tax avoidance is having efficient strategies to minimize your tax burden.

Tax avoidance accounts come in 4 basic flavors: (1) tax-deferred with no immediate deduction (2) tax-deferred with an immediate deduction (3) tax-free with no immediate deduction (4) tax-free with an immediate deduction

As you can probably tell by the names, (1) is the least advantageous and (4) is the most advantageous. I’ll discuss these one at a time and show how you can implement each of these strategies.

  1. Everyone can contribute to an after-tax traditional IRA, without regard to their income or retirement plan coverage through work. Your contributions are not tax deductible, but future earnings will grow tax-deferred.

  2. If you are not covered by a retirement plan at work, your contribution to a traditional IRA is tax deductible, plus future earnings are tax deferred. Even if you are covered by a retirement plan at work, you can still contribute to a deductible IRA if your Modified Adjusted Gross Income (MAGI) is less than certain amounts ($73,000 for single filers or $121,000 for joint filers).

  3. For many people, foregoing the immediate tax deduction in favor of tax-free growth for the rest of your life is a better deal. You get this by contributing to a Roth IRA. As longer as your MAGI is less than certain limits ($135,000 for single filers or $199,000 for joint filers), you can contribute, regardless of your coverage at work.

  4. The best, but least understood tax avoidance strategy is through a Health Savings Account (HSA). Don’t confuse this with a Flexible Spending Account (FSA). You get the best of both worlds with an HSA; an up-front tax deduction and tax-free growth. The key strategy with this account is to fund it, but don’t tap it to pay current medical bills if you can. Let the money grow, saving it until your old age when you can pay medical expenses with tax-free money.

  5. Contributions to an HSA are possible if you have a high-deductible health insurance plan. Your health plan administrator can tell you if one is offered by your company, or if you are self-employed, you can easily find one on the open market.

Talk to us about tax strategies that will allow you to keep more of your hard-earned income. No matter your circumstance, you should be able to employ one or more of the strategies discussed here. Here is a summary for your reference:

After-Tax Traditional IRA

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