Insulate from Inflation by Paying Less Tax
Have you noticed that your purchasing power has been reduced over the last couple of years? We seem to be paying more for fuel, food and other necessary goods and services. Spending more on life’s necessities reduces the amount of money that can be used for discretionary spending, savings or investment. If you reduce the amount you spend on taxes through proactive tax planning, you could choose to use the tax savings to help offset price increases or continue your discretionary spending without feeling the pinch.
The spending areas listed below are the quick hits and while the potential savings can be meaningful, they likely pale in comparison to the difference that paying less income tax can do for your financial wellbeing. Consider the total tax line from your recent income tax return, but do not forget about property tax, sales tax, and the business and occupation tax. As individual business owners, we cannot control the price increases of most goods and services we receive from others, but we can control the amount of tax we pay by implementing proactive tax planning strategies.
Effective tax planning strategies may include the following:
Maximizing legal tax deductions applicable to your activities and household.
Shifting income to others (or other entities) that enjoy lower tax consequences.
Control the timing of when you will recognize income or losses – these may include deferral opportunities, accelerating recognition and/or matching significant transactions in a specific period.
Seize the opportunities provided to you from within the U.S. Tax Code – it may not be the easiest reading material, but the rules and regulations do allow for many opportunities to reduce the amount of tax you pay.
Make use of tax-efficient financial products – this would also include holding the right type of investments within the most appropriate type of account to pay less tax. For example, if you are dead set on holding mutual funds, would you rather include them in your after-tax investment account that is subject to income tax each year or within a qualified account that would not be subject to income tax until the funds are withdrawn at a later date?
When money gets tight, it is a common practice to look at your current cash outflows and try to reduce spending. Some of the simpler and quick fixes to cinching a monthly budget are highlighted below:
Dining out (I know, the coffee fix cannot be eliminated – NON-NEGOTIABLE!) – This is often the most surprising to people when we actually “run the math” and show the monthly totals for the year.
Entertainment subscriptions – Our household is not immune to this one, especially over the last couple of years. A new movie release for family movie night may have spurred one or two new “trial subscriptions” on our account that have not been cancelled yet. Other apps for productivity, fitness and lifestyle interests may be contributing to a larger than necessary cash outlay.
Recurring orders – It turns out that convenience does have a price and may even be at a premium. Again, our household has enjoyed the automated delivery of just about everything from shaving cream to 30-pound bags of dog food. That said, we have made it a point to review the recurring order notifications timely and adjust before we end up with too much surplus. The direct-to-consumer delivery options are just about endless today but paying attention to what you have on the list can help reduce your spending.
When you read or listen to the next news headline regarding inflation, please let that be a reminder to review your opportunities to pay less tax through proactive tax planning and regain your purchasing power to further your progress towards achieving your goals.
As a boutique tax planning and taxpayer representation firm, we are happy to help you along the way. To get started, simply schedule a tax analysis to see how much tax you may be overpaying without proactive tax planning.