• Ross Kline, CWMS®

Tax Strategies | 2021-2022

Updated: Feb 8

To be clear, I would never advocate or advise tax-evasion, but it is wise and prudent to avoid taxes whenever and wherever possible in order to retain and grow that wealth for your own benefit.


In this article, you will learn 4 strategies you can use to help avoid as much tax as legally possible!


Understanding "marginal" taxes (quick explanation)

Before we get into the strategies, I feel it is important to at least briefly explain the premise for why these are/can be so effective. It is largely because of the marginal tax system in the United States.


Put simply, instead of a flat tax where every dollar is taxed at the same rate regardless of income, with a marginal system, as your income passes thresholds, dollars above the thresholds are taxed at progressively higher rates. I created these infographics to illustrate how it works:

In theory, this is advantageous because it reduces the tax burden on low-income households and shifts it to high-income households, who from a socialist standpoint have greater capacity to support the governmental provisions we expect from a first world country (paved roads, fire departments, police, etc).


At the same time, it also creates an opportunity for prudent individuals to proactively position and expend their income in such a way that realizes as little earned income as possible. When executed properly, this has the potential to save you a ton of money! In the chart above, you'll notice that for 2021, there is a 10% jump in the rate charged on realized income above $81,050 (For MFJ. 2021 tax brackets). So $10,000 of income will cost $1,000 more to realize in the 22% bracket than in the 12% bracket!

Realize as little earned income as possible!

Therefore, you want to realize as little earned income as possible to avoid paying income taxes at higher tiers. There are many very effective ways of accomplishing this, some simple, and many complex. Here are 4 you can implement with relative ease that will [potentially] save you thousands of dollars in unnecessary tax!


1) Contribute to an IRA

By contributing to an IRA instead of a regular investment account, you are able to deduct your contribution from your gross income. For qualified employer retirement plans (like a 401k), the money goes straight into the account before any taxes are withheld from your pay, thus reducing the amount of income you realize in the current year. You also get the benefit of tax-deferred growth inside the account until you distribute it in retirement, which saves you a ton of taxes along the way.


Did you know? Contrary to what most advisors will tell you, Roth contributions are not necessarily better! Roth is better when you compare both options with an equal contribution, but because you must pay taxes before you can make a Roth contribution, for it to truly be an apples-to-apples comparison you must reduce the Roth amount by your effective tax rate. Since less money is invested, the pre-tax option actually comes out ahead! However if you are hitting the contribution limit and it's the same either way, Roth is the better way to go.


This of course assumes that tax rates and margins never change, and you're earning the same income the entire time, which is highly unlikely. So there's some planning and calculating to be done based on your goals and career.


Regardless of whether you choose a qualified or non-qualified retirement account, the long-term tax advantages of both are tremendous, so contribute as much as possible! If you are hitting the contribution limit, reach out to me and we'll consider a strategy to help you get around that.


2) Track ALL deductible expenses

You'd be surprised just how many things can be deducted from your income. The IRS has created many many provisions to incentivize certain behaviors (like homeownership, or being an entrepreneur for example), you just have to know about them and track them properly!


I won't try to create a list of deductible expenses in this article, because there are a LOT and many factors that qualify or disqualify you. Just do a web search, or better yet ask a CPA for a "tax deduction assessment" and start recording of all your deductible expenses to turn them in at tax time. Keep a spreadsheet with the date, amount, and description for each expense, along with a scanned copy of the receipt. This will protect you if you ever get audited.


3) Harvest investment losses

Have you enjoyed some nice investment gains this year? There's a high likelihood that you have. Chances are, there are also some loosers in your portfolio. If these investments are held in a regular investment account, you can "harvest" these losses to offset your gains! There are some rules to dance around, so I'd highly recommend you use a licensed, trained professional (😉), but it's certainly something you can do on your own if you feel confident that you'll do it right.


4) Contribute to an HSA

If you have a compatible health plan, you can contribute money to a health savings account (HSA) and take a deduction for your contribution, or have it contributed pre-tax from your paycheck (if offered by your employer). Then, when you spend the money for "approved medical purposes" it comes out tax-free! That's a massive savings considering how expensive medical care is these days. Just take a look at your budget, or review your spending, and determine about how much you typically spend on medical expenses in a year, then contribute that money periodically to an HSA first. When you need "medical care" or a "medical device", use the HSA!

Did you know? You can hold investments within your HSA account!

I max out my contribution every year and invest it both for regular medical expenses and future medical care. It's no secret that medical care is becoming more and more expensive, and I would prefer to live in some form of senior living facility in my sunset years, which will be expensive! The money I have invested will grow to help cover that expense, instead of putting it on my family.


Alternatively, you can use your HSA as an additional qualified retirement savings account. The IRS allows you to withdraw from them for any purpose penalty-free after age 59 1/2 and you technically don't ever have to reburse yourself if you pay for a medical expense from you after-tax money... As long as you keep good records. So what some disciplined people are doing is maxing out their HSA, paying for approved medical expenses from their after-tax money, and thus keeping their money invested on a tax-advantaged basis within their HSA to use in retirement! 🧠


Now go save some taxes!

For most people, taxes are our largest expense and no one wants to pay them. We'd love to reduce our tax burden wherever possible and use that money to build our wealth! So I hope this article helps you save some taxes!


I provide this information for free to help others with the knowledge I possess because I believe that doing well comes as a result of doing good. Therefore, it would make me very happy if you shared this article with someone who could benefit from the information as well!


Thank you for reading and I hope we have the opportunity to work together! 😊

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