How To Reduce Your Tax Bill?

I can’t stand tax season.  I know taxes are necessary to keep the country running but the last few years I’ve owed over $2,000 every April, which got me looking for ways to knock this down to $0.  While taking a look around I’ve come to the conclusion that I can either take a job that pays much less money or I could find a way to legally reduce my taxable income.  I chose the latter for obvious reasons…

So How Do I Reduce My Taxable Income?


You have to itemize your deductions rather than take the standard deductions in order to take advantage of these write-offs:

  • Retirement Savings: Contributions made to a 401k are tax deferred contributions which means that your taxable income will be reduced by the amount you contribute (the limit is $18,000 for 2016). You can also deduct up to $5,500 in contributions to a traditional IRA ($6,500 if you’re 50 or over. And, if you’re self-employed, you can deduct up to $52,000 (or 25% of compensation) in SEP IRA contributions for 2014.
  • Flexible Spending Account: A FSA allows an employee to set aside a portion of earnings to pay for qualified expenses as established in the employers cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into a FSA is not subject to payroll taxes, resulting in substantial payroll tax savings.
  • Paying for dependent care: According to The dollar limit on the amount of the expenses you can use to figure the credit is $3,000 for the care of one qualifying individual or $6,000 for two or more qualifying individuals. The amount of your credit is between 20 and 35 percent of your allowable expenses. The percentage you use depends on the amount of your adjusted gross income.
  • If you’ve made certain energy-efficient home improvements: Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property. Credits are worth up to 30% of the cost, with no cap. This will expire in 2016.

  • Paying for college: The American Opportunity Credit takes up to $2,500 off your tax bill per year for four years if you’ve paid eligible costs towards a post-secondary degree program.
  • Student loans: You can deduct up to $2,500 in interest, though benefits begin to phase out for joint filers with modified adjusted gross income over $120,000 ($60,000 for singles).
  • Save for your kid’s college education:  You can save up to $2,000 tax-free every year through an ESA (Education Savings Account).  This can reduce your taxable income by up to $2,000.
  • Health savings account as part of a high-deductible health insurance plan: Families with qualified plans can deduct up to $6,500 ($3,300 for singles) in contributions made to HSAs. The money can be rolled over to other years and used for a range of qualified expenses.
  • Expenses related to moving or a job search: If you moved more than 50 miles for a job within a year of starting a new job, you can deduct expenses related to the move, including mileage, lodging, moving services and supplies.
  • Mortgage Interest: You can deduct interest on your primary residence and a second home that is used primarily for personal use.
  • Points on a mortgage: If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.
  • If you paid taxes: Odd as it seems, you can deduct certain taxes, including property tax on your primary residence, vehicles (depending on the state), and state and local income taxes.
  • If you gave money to charity: You can deduct your charitable contributions every year but make sure you save the documentation proving that you donated to a charity and how much you donated.  For those of you that tithe to a church, it also counts.

What are some ways you use to lower your tax bill?

*These are just some ideas to help you reduce your taxable income and get the most out of your deductibles.  I’d like to point out that I’m NOT a tax professional or tax attorney so please consult with one if you have any questions related to taxes.

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Build Wealth and Gain Financial Freedom!

Congratulations!  If you’ve reached this step, you’re now living the good life!  You have zero debt and no payments of any sort.  Can you imagine what you can do with your life now?  Anything you want!  You’ve been investing 15% of your income into retirement and threw everything else at the house to pay it off as quickly as possible.  Well guess what?  It’s paid off!  You’ve been dedicated, disciplined, and intentional with your money so that you could be so close to accomplishing your goals of financial freedom and retirement.  Now what!?!

3 Steps to Building Wealth

You’re going to watch your net worth begin to skyrocket.  Now that you’re in this final step you’ll continue contributing the 15% you have already been saving towards your retirement but you’ll also begin to add your house payment and the extra money you were throwing at the house to your retirement and other investments.  Here’s how you want to go about investing:

  1. MAX OUT YOUR 401K– You’re allowed to contribute $18,000 in 2016.  If you have the money, DO IT!
  2. MAX OUT YOUR ROTH IRAIf you qualify for a Roth IRA, you should max out the $5,500 allowable contribution after you max out your 401K.
  3. INVEST IN STOCK INDEX FUNDS– I’ll go into this in depth in a future post but an index fund is a type of mutual fund who’s portfolio of stocks is built to mirror a component of a market index, like the Standard and Poor’s 500 Index (S&P 500).  You’ll want to invest any money you have left over after investing in your retirement accounts in stock index funds.  Look for index funds that mirror the entire market (or at least the S&P 500) while I write a more thorough review of index funds and recommendations for you.

If you can come up with enough money out of your budget to follow these 3 steps, you will become wealthy extremely fast.  If you can’t do all 3, it’s not a problem.  Work your way down the list and do the best you can!  Can’t max out your 401K?  That’s o.k., contribute as much as you can and work on building up your income so that you can invest more money.  The same goes for all of the steps!  Even if you’re on step 3, you want to increase your income so you can invest more money.

Gaining Financial Freedom


So how much do you need to save to consider yourself financially independent?  25 times your annual expenses.  If you can save 25x your expenses and only withdrawal 4% of your money every year, you will be able to live off of this money forever.  This is the reason you need to keep your expenses as low as you can.  The higher your annual expenses are, the more money you need to save.  For example, if I spend $40,000 per year and wish to continue spending $40,000 per year during my retirement years, I will need to save $1 million ($40,000 x 25=$1,000,000).  Now you can withdrawal 4% every year.  You’ll have $40,000 to spend and the rest of your money will continue to grow.  Don’t worry about the details right now, just start to invest and continue to read these articles.  This blog is mainly about lifestyle transformation and attitude adjustments in how people think about finances.  You’ll learn common sense for your personal financing and investing over time and see that you will change as you save and grow financially.

Remember, you need to know that you’ll never become financially independent if you don’t keep your expenses low.  If you made $5 million per year and spent $4.9 million of it you would never achieve financial freedom.  Keep your expenses low and save as much as you can.  This will make you rich!

*Leave a comment to let us know how your investing is going!  Do you have ideas other than what is listed here that’s working well for you?

**If you like talking about Money, Paying Off Debt, Building Your Net Worth and Retiring Early…This is the place for you!  Subscribe to receive emails of new blog posts!!!

How Much Should You Invest In Your 401K?

You’ve figured out how to budget, destroyed all of your debt, and built up a solid emergency fund with up to 6 months’ worth of expenses.  You’ve arrived, and now comes the fun part!  It’s time to finally start building some serious momentum and investing in retirement.

According to a recent survey conducted by the Employee Benefit Research Institute, 57% of working Americans have less than $25,000 saved for retirement.  This includes 28% of the individuals who had less than $1,000 and 17% who had between $1,000 and $9,999.  But guess what?  You’re already ahead of the majority of Americans, and you haven’t even started saving for retirement yet.  You’ve set a solid foundation for your financial house and now you can finally begin growing your net worth.

Not many people can embrace the idea of cutting back their lifestyles and becoming disciplined enough to sprint through the first 3 steps of our plan with a focus on the future.  Give yourself a huge pat on the back!  You’ve settled for the basics and lived frugally to accomplish a goal…you want to get rich.  Anytime you want to accomplish something big in your life, you need a plan to make it happen.  You have OUR plan; let’s get started!

Simple is Effective!

Right now, you want to invest 15% of your overall income into your 401K sponsored by your employer and if your employer doesn’t have a 401k you should invest in a Roth IRA.  I want you to invest in your 401K first because it is important to take advantage of every tax advantaged account the U.S. Government gives you (This will help lower your taxable income and hopefully get you into a lower tax bracket).  You’re allowed to invest a MAXIMUM of $18,000 in your 401K during 2016.  *This DOES NOT include your employer match!* Your employer match is gravy on top of your $18,000.  If 15% of your income happens to be more than $18,000 you can look into contributing the rest into a Roth IRA.  The maximum contribution for a Roth is $5,500.  Contribute until you hit 15%.

Many of you may be asking, “We just paid off all of our debt and we’re only investing 15%?  And the answer is yes, we are only investing 15% of your income because we want to make sure that you have money left over to pay off your house QUICKLY!  Once that house is paid off you’ll be able to invest A LOT of money and build some serious wealth.  We’ll talk about this in Step 6.

Time + Compound Interest= FREEDOM!

Now you just have to be patient.  Continue making your contributions whether the stock market is up or down and let time work its magic.

I also want you to understand that no matter what, do not take your money out until you’re retired.  If you do, you lose the power of compound interest.

Anyone Can Retire Rich

Hypothetically, if you start investing at 30 years old and you have a household income equivalent to the national average of approximately $50,000, you can retire a millionaire.  Here’s how:

  • You start with $0 in savings but contribute 15% of your income for 35 years.  15% is $625 a month.
  • Assuming an average compounding interest rate of 8% per year you’ll have $1.396 million dollars at the end of 35 years.
  • If you happen to average a 10% interest rate over the course of 35 years you will end up with $2.236 million
  • What if you only have 25 years to invest?  No problem, you’ll be fine.  You’ll still have over $800,000 and that doesn’t include what your house is worth.

Do you think 10% is impossible to achieve?  It’s not.  The stock market has averaged a growth rate of just about 12%.  There are plenty of mutual funds that can be found with a track record of 12% average growth.  Sure they have down years but they have more positive years.  The down years are an example of why you shouldn’t sell.  When stocks are dropping in value you want to buy MORE!  Realistically, I like to plan on an 8% return. If it’s more? I’ll be surprised and happy.  If it’s less?  I won’t be too far off.

P.S. Have any questions?  Leave a comment/reply below and I’ll get back to you as soon as possible.

*If you like talking about Money, Paying Off Debt, Building Your Net Worth and Retiring Early…This is the place for you!  Subscribe to receive emails of new blog posts!!!