Ever find yourself wondering, “How can I lower my taxes?” Well, there’s a new book out to help people do just that. It’s called "The Investment Tax Guide: How to Slash Your Taxes," written by Bill Harris, the former CEO of PayPal, TurboTax, and Intuit, now at Evergreen Money, who recently discussed ten tax strategies with us on Financial Sense Newshour (listen here) for everyone from employees to retirees to high-net-worth individuals and business owners.
The first strategy Harris recommended for employees is to take advantage of any employer's 401(k) match. If your employer offers a 401(k) match, you should contribute at least enough to receive the full match. This is essentially free money that can help you save for retirement while lowering your taxable income. However, Harris advises against contributing more than the match amount to your 401(k), as you may have better investment options with an IRA at a financial institution.
The second strategy he discussed with us on Financial Sense Newshour that applies to nearly everyone is to consider asset location when investing. Many people wrongly assume that they should put their long-term investments, such as growth stocks, in their 401(k), IRA, or Roth accounts. However, this may not be the best approach, as capital gains and dividends are taxed at lower rates than interest. Therefore, it may be more advantageous to put high-tax assets, such as bonds, in tax-deferred or tax-exempt accounts, and low-tax assets, such as stocks, in taxable accounts.
The third strategy Harris discussed is to maximize tax-loss harvesting. If you have investments that have lost value, you can sell them to offset your capital gains taxes. This can help you reduce your tax Harris and potentially increase your after-tax return. However, it's important to be aware of the wash sale rule, which prohibits you from buying a substantially identical security within 30 days before or after selling it at a loss.
The fourth strategy Harris told listeners to consider was on charitable donations. If you itemize your deductions, you can deduct charitable contributions from your taxable income. Donating appreciated securities can be particularly advantageous, as you can avoid paying capital gains taxes on the appreciation while still getting a deduction for the full value of the donation.
Along those lines, Harris outlined a fifth strategy with us on the podcast, which he called a “tax bonanza,” and said, “just about everyone should have a donor-advised fund.” A donor-advised fund is a charitable investment account that allows you to make a tax-deductible donation and then recommend grants to charities over time. This can be a useful tool for managing your charitable giving and maximizing your tax benefits.
“The great thing about a donor advised fund is that you can time the donations you make to the charity and then the distributions to the people that you want or the organizations you want to have the benefit of that. You can separate the timing of those two. And that means that at the end of the year, as you're looking at your tax situation in December, you can make a contribution to your donor advised fund and get the tax benefit this year… so it's a tax bonanza, and it's got a tremendous flexibility in terms of how you use your charitable capability. In fact, it's even better and more flexible than a private foundation, and it's very easy to set up.”
The sixth strategy Harris discussed is to consider a Roth conversion. If you have a traditional IRA or 401(k), you may be able to convert it to a Roth account. This can be beneficial because Roth accounts allow for tax-free withdrawals in retirement, whereas traditional accounts require you to pay taxes on withdrawals. However, you will have to pay taxes on the converted amount in the year of the conversion, so it's important to consider your tax situation carefully.
The seventh strategy is to be mindful of your tax bracket. Different types of income are taxed at different rates, so it's important to understand your tax bracket and plan accordingly. For example, if you are in a lower tax bracket, you may want to consider realizing capital gains or taking distributions from retirement accounts.
The eighth strategy is to consider tax-efficient investments. Some investments, such as index funds and ETFs, are designed to be tax efficient. This means that they are structured to minimize the amount of taxes you owe on your investments.
The ninth strategy Harris spoke with us about is to be aware of state and local taxes. Depending on where you live, you may be subject to state and local taxes, in addition to federal taxes. It's important to understand the tax landscape in your state and plan accordingly.
If you live in California, Nevada is the closest zero tax state, Harris said. However, Texas and Florida are still the big opportunities from a cost-of-living and tax-minimization standpoint.
Also, if you are thinking about moving overseas, make sure that you move to a low tax state first as your primary residence and then go overseas, Harris said, since certain high tax states like California, New York, and others will try to hold onto you as best they can.
The tenth and final strategy recommended for nearly everyone is to work with an advisor. While there are many strategies you can use to lower your taxes, tax laws are complex and constantly changing. Advisors and tax experts can help you navigate the tax code and develop a customized plan to minimize your tax liability.
In conclusion, there are many strategies that individuals can use to lower their tax bill, regardless of their income level or employment status. Some of the key strategies discussed in Harris’s book include maximizing contributions to tax-advantaged retirement accounts, taking advantage of tax-loss harvesting, importance of asset allocation, and utilizing donor-advised funds for charitable giving.
For high-income earners, it is especially important to consider strategies such as backdoor Roth conversions and municipal bond investments to minimize their tax liability. Additionally, business owners and those with substantial wealth may want to consider more advanced strategies such as setting up trusts or utilizing tax-efficient investment vehicles.
It is also crucial to consider the impact of state and local taxes on overall tax liability. Depending on where you live, certain states may have more favorable tax laws for retirees or high-income earners. It may be worth considering relocating to a more tax-friendly state in order to minimize your overall tax burden.
Ultimately, the key to minimizing your tax Harris is to be proactive and strategic in your tax planning. By working with a financial advisor or tax professional and staying informed about changes to tax laws and regulations, you can make the most of available tax-saving opportunities and keep more of your hard-earned money in your pocket.
Buy "The Investment Tax Guide: How to Slash Your Taxes" on Amazon by clicking here.
To speak with any of our advisors or wealth managers, feel free to Contact Us or give us a call at (888) 486-3939.
To listen to this full podcast interview, see How to Slash Your Taxes – Interview with Former PayPal and TurboTax CEO Bill Harris for audio.
For a link to our full podcast archive, see Financial Sense Newshour (All) and don't forget to subscribe on Apple Podcast, Spotify, or Google Podcasts!
Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. Investing involves risk, including the loss of principle. Past performance is not indicative of future results. This material has been provided for informational purposes only. Financial Sense does not provide tax or accounting advice, and this is not intended as such. Clients or prospects should consult with their own tax, accounting, or other advisors to determine the potential benefits, burdens and other consequences of engaging in a particular strategy or transaction.
