if you ever wanted to avoid or pay less in taxes chances are you had no idea where to start but here are 4.5 of my favorite strategies to pay less in taxes that anyone can understand first you need to understand how the tax process actually works about 2 years ago my friend told me that he was going to turn down a pay raise because he said and I quote it was going to put him in a higher tax bracket and he'll have to pay more in taxes but this is the biggest misunderstanding people make about taxes when you work a typical job the tax process looks like this get paid pay taxes spend your money in the US we use a progressive tax system with marginal tax brackets basically the more income you earn the higher the tax rate you pay but the higher tax rate doesn't apply to your entire income if your taxable income in 2023 is $60,000 and you file as single you'll fall into the 22% tax bracket but it doesn't mean you're paying 22% on that entire $60,000 imagine the brackets on this table as a row of buckets each bracket is a different bucket that you're going to fill with money you'll start at the first bucket and after you fill it to the top you'll move to the next bucket and so on until you don't have any money left to fill up an entire bucket if your taxable income is $60,000 you can easily fill up the first bucket since it just needs $111,000 to be filled once filled you'll move on to the next bucket the capacity of the next bucket is33 $3,725 after the second bucket is full you'll still have about $1,275 remaining which is going to go into the third bucket now you won't be able to fill up the entire third bucket so this is where you'll stop each bucket has its own tax rate everything in the first bucket gets taxed at 10% everything in the second bucket gets taxed at 12% and everything in the third bucket gets taxed at 22% meaning for a single filer in 2023 with $60,000 of tax bill income you'll end up paying 8,586 th000 of taxable income not a $60,000 salary or $60,000 of income the secret is you could technically have a salary of $100,000 but only have a taxable income of $60,000 but how do you lower your taxable income it's a lot easier than you actually think but you do have to be very strategic about it basically we need to do something with our money before we get paid X get paid pay your taxes spend your money so it's not viewed as taxable income to the IRS there are two ways to do this but it's a second way that helps me save the most in taxes first there's these things called qualified retirement plans that will shrink your taxable income the most common plan is a 401k plan but your access to one depends on your employer but even if you don't have access later on I'll show you some alternative options that you can use a 401k plan is basically a bucket that you can fill with pre-tax money which you can then use to invest in 2024 you can contribute up to $23,000 to your 401k but that's not even the best part some employers will match a portion of your contribution meaning they'll give you free money to do this but another benefit is your taxable income is reduced by how much money you contribute to your 401k but there is a catch when it comes to qualified retirement plans most of the time you can't access this money until you retire it's sort of locked away and growing over time but there are some exceptions where you can take the money out before you retire major events like when you need to buy your first house or you need to pay back certain bills although the 41k plan is fantastic it's really the second strategy that helps me save a ton more money but first here are some other tax advantage accounts for you to check out first there's HSA which is a savings account that's us used to pay for current and future medical expenses like doctor visits or medicine you can contribute up to and reduce your taxable income by $4,150 in 2024 then there's a traditional Raa which is similar to the 401K except you can open one up at any time and you can contribute up to and reduce your taxable income by $7,000 if you're under 50 and $88,000 if you're over 50 next the 457b plan for government employees nonprofit organizations and some for-profit companies you can contribute up to and reduce your taxable income by $23,000 when it comes to the second strategy remember how I said the typical tax process looks like this get paid pay taxes spend your money but there is a way to change the tax process to get paid spend money pay taxes the first thing you need to understand is the US tax code is rigged in favor of people who can earn money outside of a full-time traditional job meaning you have more control over the amount of your money that get gets taxed if you have a side hustle freelance or own your own business when I started one of my many side hustles a few years ago I still had a full-time job at the time I was super overwhelmed with taxes because it was my first time earning a real amount of money outside of a traditional job naturally I had absolutely no idea what to do I was really stressed out I was losing sleep and I didn't want the IRS to start knocking on my door but thankfully one of my CPA friends they shared two major tax saving strategies with me first there's cple 401ks to think about in addition to contributing to my employer 401K I could open up a thing called a solo 401K which is like a 41k but for side Hustlers Freelancers and business owners basically I can contribute up to $23,000 to my 401k and then contribute up to $69,000 to my solo 401K significantly cutting my tax bill income next anything that I buy that's used for the business could be used to lower my taxable income income since I work from home I could deduct a portion of my apartment from my taxable income I could deduct $5 for every square foot of space I used in my apartment for qualified business purposes if I have a 300t home office and I work from home the entire year I could reduce my tax bill income by $1,500 I could also track the electricity I use the business meals I eat educational courses I take and depreciate certain equipment like laptops iPads business Vehicles the core as long as it's a qualified business expense there are some nuances to this but the tax code is filled with hidden deductions that you can start using to your advantage next there's a strategy Warren Buffett uses that lets him pay a lower tax rate than his secretary even though Buffett is worth more than $120 billion let's say you're single and earned $40,000 of taxable income a year at your job depending on the state you'd pay around $6,000 in taxes and walk away with 35,000 $420 post tax not great but what if I told you you could end up with $440,000 a year and pay $0 in taxes the secret is you need to be invested in Something Real Estate bonds or stocks which is actually kind of perfect timing because one of my favorite investing platforms Mumu is giving away stocks for free for a limited time if you open a new account and deposit $100 they'll give you five free stocks despite the funny name they are a registered broker dealer with the SEC and is a member of sipc meaning you're covered up to $500,000 get your five stocks for free with the link below and you'll also be supporting the channel when it comes to investing you generally want to sell your Investments at a higher price than what you purchased it for but when you make a profit you trigger this event called a capital gain unfortunately profits or capital gains are taxed but the amount of tax you have to pay depends on how long you held the investment for before you sold if you sell a stock after holding it for less than a year you'll face a short-term capital gains tax but if you sell a stock after holding it for more than a year you'll face a long-term capital gains tax the problem with the short-term capital gains tax is it's tax like ordinary income meaning any short-term capital gains must be included in your total taxable income for the year if you're filing a single in 2021 and you earn $35,000 from your salary and then gain $10,000 from selling Tesla stock after holding it less than a year your taxable income will be $45,000 this puts you in the 22% tax bracket in 2021 and you'll end up paying around $564 in taxes overall the $10,000 you made from the Tesla stock sale was taxed at $1,647 or 29% of the total federal income taxes you paid but what if I told you you could pay 0 from selling stocks the cool thing about this strategy is that it plays with long-term capital tax rates meaning you'll need to hold the stock for more than a year if you file a single the long-term capital tax rates they come in three flavors first if you sell your stock after holding it for a year and your taxable income is less than or equal to $4,400 you don't pay any taxes if your taxable income is more than $4,400 but it's less than or equal to $445,900 then you'll pay a 15% long-term capital gain tax and anything above $445,500 long-term capital gain tax now same scenario if you filed single in 2021 and you earn $35,000 from your salary gain $10,000 from selling Tesla stock but this time you held it for more than a year since your total taxable income of $35,000 is below the first long-term capital gain threat threshold of $4,400 you will be in the 0% tax bracket for the first $5,400 the remaining $4,600 of capital gains will be taxed at a rate of 15% or $690 which saves you $957 in capital gains tax compared to the first scenario but here's what wealthy people do to pay $0 in taxes and still make $40,000 a year basically if you were in $0 in income throughout the entire year but sell your stocks worth $40,000 in capital gains after holding them for a year you technically don't have to pay any taxes since you're under the taxable income threshold but there are some nuances depending on the state you live in and the available deductions when it comes to Warren Buffett the bulk of his income is paid as dividends and long-term capital gains which is how he pays a lower tax rate than his secretary but there's another strategy that some of the wealthiest people use to access millions of dollars and still pay little to no taxes on it when it comes to most people they view debt as a terrible thing and when it's not handled correctly it definitely is but debt is one of the easiest ways to take advantage of the tax system and that's exactly what the wealthy do in finance they call this strategy sblock Securities back line of credit basically this lets you borrow money against your stock portfolio and use that money however you like but the best part interest rates for S blocks are lower than what you can get with a traditional loan from A bank or credit card but here's how the wealthy uses debt strategically it signals three essential steps first let's say you have $200,000 sitting in your stock portfolio and you want to access $100,000 from it but you don't want to sell $100,000 worth of stock well you can do an S block suddenly you have access to $100,000 that you can spend however you like but the best part is you don't need to pay taxes on the $100,000 because it's technically a loan that you have to pay back with interest but that's where interest rate Arbitrage comes in Imagine you have $200,000 invested in an S&P 500 Index Fund earning a historical average return of 10% now let's say you decide to take out a $100,000 loan from your portfolio at a special interest rate of 3% you then invest this borrowed money in another S&P 500 Index Fund while you need to pay $3,000 in interest for the loan keep in mind that your $100,000 investment is earning the historical average of 10% meaning your investments will generate an average of $10,000 in return leaving you with an extra $77,000 in your pocket there are some nuances that you want to account for but this is just the tip of the iceberg the wealthy don't usually invest this entire amount they could take a portion of the loan and use it as spending money to pay for Wendy's buy Mr Magic lambs and pineapple pizza and then simply use another portion of it for Investments that grow at a faster rate than the interest that they're being charged for the loan then they can start paying back the loan with the profits they make from the invested amount basically allowing them to access money taxfree but there are some risk involved the reason interest rates are typically lower for S blocks is because they use your stocks as collateral the problem is if something happens and you can't repay the loan the lender could sell your stocks to recover the money and that leads me to something you've got to start accepting and it's that even if you're doing everything you can with your money you might feel like you could be doing even more and that might be because you don't know the aid essential steps you need to do every time you get paid click here to discover the best paycheck routine
