The Starting Point for Tax Mitigation
There are plenty of vague stories out there about how to save money on taxes.
For the normal working person - even someone with a very nice job, some investments, and perhaps some rental property - the reality of how to save money on your taxes is more simple.
There's one big thing that you should almost certainly be doing first, before you worry about anything else.
Max out your retirement contributions.
I know - this is the most boring thing in the world. And, to be honest, I'm not the world's biggest proponent of retirement accounts in general. Freedom of action is really important to me in overall financial planning, especially when working with business owners. That said, at some point, you really should be putting money away for the future.
By contributing to retirement accounts, you can easily save money in taxes - either now or in the future - without taking money outside of your control or having to invest in specific kinds of assets.
You can contribute on your schedule and put the money into whatever kinds of investments you like. Most people can eventually get their money into a fully self-directed account with checkbook control if desired, in order to buy directly owned real estate, participate in partnership deals, and most other types of investments.
This doesn't mean to blindly go and put money into retirement accounts if you have specific future uses in mind. I've seen too many people set tax dollars on fire by pulling money out of retirement accounts and paying the early withdrawal penalty in order to invest in real estate or businesses. (There's an entire separate conversation about whether those withdrawals themselves were wise.) If you know you're going to want to have that money to do something in a few years, don't lock it away in a 401(k) or IRA. Also make sure you have sufficient money outside of these accounts for normal reserves - six months or more of your overall life expenses.
But beyond that - your 401(k) is your first stop at saving tax money. It takes almost no effort, builds good financial habits, and keeps the money under your control.
If you're looking for significant tax savings without first maximizing your retirement contributions, you need to have a clear understanding why. This is the tax accountant version of "diet and exercise," but it's rote because it's accurate. If you have any questions, give us a call.
Photo by Damir Spanic on Unsplash