Pot o' Gold

T-minus 1 month!  To what, you may ask?  Why, Tax Day of course!  For the most part, we feel that “tax” is shorthand for “government theft” (sure, we agree with the principle of a certain level of taxation in order to fund certain iterations of social benefit programs, but without getting real deep down a policy and government bloat rabbit hole, let’s just agree that taxes are a pain and move on), and yet Tax Day fills us with a giddy sort of joy.  Why, you may ask again? Freebies!

Great American Cookies is giving away a free birthday cake cookie.  Schlotzsky's is apparently giving away a sandwich with the purchase of a drink and a bag of chips.  And we have no idea what a HydroMassage from Planet Fitness is or if we would even want one, but evidently those will be free too.

In the “not free, but I see what you did there” department, Bruegger’s is selling a baker’s dozen bagels and two tubs of cream cheese for $10.40.  Or $10.47, if you want to include the sales tax that will be applied. A little bit ironic, don’t you think?

Most people are thrilled to receive a tax refund in April.  It feels kind of like free money, right? Consider the flip side of that coin for a second though - a tax refund really means that you loaned your money to the government last year at a zero percent interest rate.  Actually zero, too, not the 0.01% “zero” that your checking account is getting you. If you owe taxes, on the other hand, you essentially got an interest-free loan from the government.  Mmmhm.  Morty’s Mind Blowers has nothing on us.

So.  In honor of St. Patrick’s Day, let’s take a look at how to keep a little more green in your pockets and out of the clutches of the vampire squid of government.

At a high level, here’s how taxes work:  Start with your gross income; subtract “above the line” deductions to arrive at a number called your “adjusted gross income”; subtract “below the line” deductions to get your taxable income; look up your tax in the tax tables (TurboTax et al. do this look up part automatically, but trust us, such tables do exist); compare to how much you actually paid during the course of the year; done.

Above the line deductions are generally more favorable than below the line deductions, as there tend to be fewer restrictions around them and you have more control over them.  Which is super vague, we know, but it’s the tax code - blanket statements are few and far between. If you want a detailed list of all the possible deductions out there, Wikipedia is a good place to start.  Then hit up the IRS website, but have a good supply of your caffeine source of choice handy.  We are not going to go through and tell you why planting trees in your backyard won’t qualify for the reforestation expense deduction.  Nor are we going to focus on things that you (largely) don’t have control over, like student loan interest. Yes it’s a deduction, but no, you don’t go and take out student loans just to reduce your taxes.

We are instead going to highlight a few broadly applicable courses of action that tend to reduce the amount of taxes you pay:

1) Retirement plan contributions

Bump up your Traditional 401(k) contribution by a couple percent if you’re not maxing it out already.

Contributions to a Traditional 401(k) plan at work or a Traditional IRA are tax deferred, meaning you pay no tax now but will at some point in the future when you withdraw the money (as opposed to a Roth, in which you pay taxes now instead of when you withdraw).  (nb - we are well-versed in the Traditional vs. Roth debates that dominate retirement plan literature, but are expressly notopening that can of worms here.  This is about lowering your current tax bill only.  Give us a call this month and we’ll happily discuss the Traditional vs. Roth merits of your particular situation with you if you have specific questions.)

Let’s say you make $100,000 and are taxed at 20%, because we like working with nice round numbers.  Contributing 10% to a Roth means you pay $20,000 in taxes over the year, and your monthly take-home pay is around $5,800.  If you contribute to a Traditional 401(k) instead, you pay $18,000 in taxes (because the 401(k) contribution comes out pre-tax), and your monthly take-home is $6,000.

So if you find yourself in a position where you’re not maxing out your contribution ($18,500 in a 401(k), $5,500 in an IRA for 2018) and have some excess savings lying around at the end of the year, consider bumping up that 401(k) contribution by a couple percent.

2) Healthcare Savings Accounts

Max out HSAs and MSAs.  Contribute as much as you’re going to spend in the course of the year to an FSA.

There are three types of tax-advantaged medical savings accounts:  FSAs (flexible spending accounts), HSAs (health savings accounts), and Archer MSAs (medical savings accounts).  Contributions are either tax deductible or funded with pre-tax money to begin with. Either way, it will reduce your tax bill, and as long as the funds are used on qualified medical expenses, what you spend is never taxed.  Never.  Maxing out contributions to these funds is a great idea, unless it’s an FSA - you have to be careful with FSAs, that money doesn’t roll over year-to-year like HSAs and MSAs, which means you could lose it if you contribute more than you spend.

3) Cluster expenses for itemizing

Pay attention to timing.

Below the line deductions are those things you’ve heard referred to as “itemized deductions” - medical expenses, property taxes, mortgage interest, charitable donations, etc.  When doing your taxes, you either take the standard deduction (a set amount that varies year to year) or you itemize your deductions.  The new tax bill that passed last year bumped the standard deduction to $12,000 for a single filer, up from $6,350 ($24,000 for married filing joint, up from $12,700), meaning that it’s less likely you will get a benefit from itemizing.  But! Suppose your itemized expenses run around $10,000 per year. Might it be possible to front-load or back-load expenses to bump yourself over that $12,000 threshold?

Say you’re sitting at $10,000 in itemizable deductions come December.  Say also that you give $3,000 per year to various charities. Why not use a year-end bonus to give next year’s $3,000 charitable donations this year?  That way you get to itemize deductions of $13,000 this year and still get the full $12,000 standard deduction next year, saving yourself $1,000 in taxable income.

Bonus: 529 plans

This one is listed as a bonus because you can’t lower your taxable income by contributing to a 529 plan.  However, similar to the health savings accounts mentioned earlier, all gains are tax-free provided the money is used on qualified expenses.  Any other investment account (except for a Roth) will make you pay tax on some combination of interest/dividends/capital gains when you take the money out.  That tax gets avoided on college expenses if those expenses are paid out of a 529 plan.

There you go.  No need to rely on the luck of the Irish or a Leprechaun’s pot of gold to lower your tax bill.

​Reduce future years' taxable income by contributing to Traditional retirement plans, HSAs, FSAs, Archer MSAs, and 529 plans (kind of).  Also, take a look at your itemized deductions around Thanksgiving - if you’re close to the standard deduction, see if there is anything from next year you can bring forward into December to get over that itemization threshold.

But for now, breathe a nice sigh of relief if you’ve done your taxes, do them if you haven’t, and in either case enjoy your St. Patrick’s Day.  Sláinte!