Is there a way to pay less income tax?

Question

I make over $130,000 a year. My accountant just notified that I will need to pay over $20,000 in income tax. I am a strong believer in saving money, and therefore don't spend that much money (I guess you could call me cheap). But now I need to spend money in order to pay less income tax. What should I buy in order to pay less income tax. Should I buy a car and if I do, how much will it effect my income tax? What else should I buy (or do)?

I forgot to metion that I am married with 3 children. I own a property that I get rent from, little over $11,000 a month.

I don't work at all. All I do is collect the rent each month. So I really can't stop making money.

Answer 1

The best way to reduce your income tax:

1) invest in a 401K, 403B or other tax deferred program.
2) Invest in a traditional IRA - although you cannot deduct from your wages, the money earned is tax deferred
3) Make your income come from lower taxed entities - dividends versus interest (dividends you'll pay 15% on, interest 35%).
4) Have a business which loses money - like a farm - you can deduct each loss of the farm dollar for dollar against your income - and if you buy farm equipment, you can do section 179 depreciation legally and get your tax bill down - that's why most farmers have day jobs.
5) Only buy things associated with your business - for example, if you're a CPA, have a side business, go to seminars, training, et al, and you can write all of those things off.
6) Adopt children - they're little tax deductions!

Answer 2

There are two sure fire ways to reduce your tax burden to the government, however they come at a cost. The first is to buy a home and take out a mortgage on it. However, while typically real estate appreciates (present time excluded) the amount of interest you pay over the life of the loan typically is more than what you will sell the house for when you factor in the purchase price. Therefore, paying the taxes is cheaper if you do not want to do this.

The second is to have kids. They are great tax deductions. However, they ain't cheap either.

You can also put some money away tax deferred for retirement...however you will pay tax on the money when you withdraw the money. Hopefully your tax rate is lower at that time.

The bottom line is that if you are paying allot in taxes, you are doing well. The options that exist come at a cost.

Answer 3

Well, in my book, there's always a way. But to me, it depends on if you want to worry more about saving money on income tax or making more wealth, overall. I always tell my clients that you can't let the tax "tail" wag the wealth "dog."

Sure, you can do the basics, like maximizing contributions to your tax-deferred retirement plans and getting married and having little tax deductions running around the house. But are you going to do that just for the tax savings? I don't think so. (Well, maybe the retirement things you might).

You're probably at the peak of your earning power. Maximize that! You'll not pay more than a third of your income in tax. So the question is, if you have an hour right now, are you better off using that hour to SAVE $100 on your taxes, or to EARN $400 more income? Some hours you may have a different answer than others, and that's OK!

-- A Damn Fine Tax Advisor

Answer 4

If the car is a personal (non-business) expense, it won't do you a lot of good, tax-wise unless it's a hybrid or uses alternative fuels.

Maybe investing in tax-exempt bonds. Also, look into how much interest you're making per year on your investments. Maybe you should pull some funds out of CDs or other higher-yield investments and put it into plain-jane savings accounts. If you're going to have to spend it in tax payments, there's no need to get those higher returns. "Hide" some of it in Traditional IRAs.

If you're needing to spend money, get a much larger, more expensive home with high mortgage payments. Those will reduce your tax burden, somewhat, assuming you have other deductions to itemize.

Set up a charitable foundation with part of it, maybe. There may be some kind of write-off for that. Also, there may be a way to set up a scholarship grant for underprivileged students or whatever criteria you choose to use. Yes, you've lose the ability to purchase things with it, but at the same time you'd be doing something for the community and not putting it into the treasury department.

Just some thoughts.

Answer 5

You're looking at it the WRONG way! Your goal should NOT be solely to minimize your tax bill but to maximize your total wealth. Tax considerations factor into the equation but should NEVER be the driving force behind your financial decisions.

Keep in mind that even if you're in the highest tax bracket, spending a dollar on something deductible will only save you 35 cents. You'll STILL be 65 cents POORER for grabbing that $1 deduction! That just does NOT make ANY sense at all! Conversely, if you EARN an extra $1.00, you still get to keep 65 cents of it for yourself.

If your accountant isn't well versed in investment advice -- and many of them are not -- consult with an independent investment advisor about maximizing the returns on the money you have and earn. You want to find a fee-based independent advisor who does NOT sell investment products. Someone who also sells investment products is trying to maximize HIS income at your expense and cannot have YOUR best interests in mind.

A fee-based adviser will analyze your finances and help you structure an investment strategy that will maximize your wealth while keeping the tax bite in check. His bill will be based upon the amount of time spent working with you, NOT something he's trying to sell you. It may run you several hundred or more for the initial session but it will be money well spent. Annual check-ups will be much less expensive than the initial review and are a good idea. An annual checkup by your doctor is good for your health, an annual checkup by your financial adviser is good for your WEALTH.

Re-focus yourself on maximizing wealth, NOT just minimizing taxes. If you're solely focused on the tax bill, you'll be much poorer in the long run.

BTW, buying a car won't help your tax situation at all unless you're using it in your business. Buy it if you want or need it, but NOT because of any tax consequences.

Answer 6

We have 7 walking and talking tax deductions, made 138k last year and we still paid 12k in income tax. They cost more than the deduction they are worth. So I wouldn't recommend having more!

Answer 7

at this point, the only thing you can do about the tax you owe is a charitable contribution, but that is only an addition to your itemized deduction and you would have to give over 2% of your AGI to see any benefit at all. Buying a car is about the dumbest thing you could do to save money on taxes. If you think about it, you will have to pay tax on the car you are buying, and the only benefit you would receive is in next years taxes, and that is if you pay more in taxes for large purchases than you do in state and local taxes (which I highly doubt for your income bracket).

Answer 8

LOL! Buying a car will not lower you income taxes unless it is for a business (and even then the business has to buy it!)

I am astonished that anyone could earn over $100K/year with no apparent understanding of deductions! Well done! You must be very, very good at whatever esoteric thing it is you get paid for!

Fire your tax accountant and get one who has a clue!

Answer 9

Buying a car won't help you tax-wise unless you own your own business and the car is just used in the business.

Downloan schedule A and its instructions to see what you can deduct. But at an income of $130K, you're going to owe a lot of tax.

Answer 10

Try working only one day a month. That should cut your income down to the point where not only will your Federal tax be zero but THEY will send YOU money instead.