In 2012, according to The Tax Foundation, total taxes paid to federal, state, and local governments accounted for 29.2 percent of the nation’s gross income. Much of this burden is hidden from view, because governments use agents to do most of their collecting. Merchants tack on sales taxes when you buy goods, employers withhold income taxes from your paycheck, and mortgage lenders charge a little extra each month to cover property taxes. Such indirect collecting can lull you to sleep about how much you actually pay. But you should scrutinize taxes as much as any other household expense. For when it comes to this unpopular line item, either you pay attention, or else you pay more to the government.
20.1 Minimize Sales Taxes
Sales taxes aren’t complex. Governments impose them by requiring sellers to collect from buyers a specified percentage of merchandise sales. Depending upon where you shop, your purchase can trigger sales taxes from multiple sources—the state, the county, the city, and possibly even from special districts which fund such extras as public transit and stadiums. The amount you pay depends upon how many jurisdictions are involved and where they set their respective rates. According to the Sales Tax Clearinghouse, as of 2012, 23 states averaged combined sales tax rates of 6.85 percent or higher. Wherever you live and whatever your sales taxes, fight back with these tactics.
□ 20.1.1 Spend Less Now!
At an eight percent tax rate, spending $3,000 less on goods saves you $240. So follow Appendix 1: find alternatives to buying, shop around for low prices, and avoid common pitfalls. The large cherry on top of your savings sundae will be all the sales taxes you never had to pay.
□ 20.1.2 Shop Where Taxes Are Lower
If you live near a city, you’re within driving distance of several different tax districts. Rates can vary by as much as five percent. This is a big deal. Buy a big-ticket item for $2,500, and saving five percent adds $125 to your coffers. Spend $2,000 this year at restaurants, and five percent works out to $100. Spend $900 at discount stores, and five percent is $45. From these three examples alone you save $270. Think about how much you’d save if you checked for lower taxes on all your shopping.
□ 20.1.3 Shop on Tax Holidays
Many locales offer “holidays” during which taxes on particular items are suspended temporarily. The most popular time for these suspensions occur in the fall when families shop for back-to-school items. Happily, these holidays coincide with big sales, so delay your purchases of qualifying products until then.
□ 20.1.4 On Big-Ticket Items, Choose Pick Up or Delivery
For items that require delivery, you’re taxed based upon where the item is sent, and not where it’s purchased. If the sales tax is lower where you live than at the store, have the item dropped off at your home (provided the tax savings exceed any delivery charges). Conversely, if sales taxes are lower at the store, borrow a friend’s truck and pick it up yourself.
□ 20.1.5 Repair Instead of Buy
Most jurisdictions don’t impose taxes for services provided by the likes of tailors, mechanics, and electricians. If you live in or near such a place, that’s one more reason to fix what you own instead of buying a replacement.
CODA: BYPASS SALES TAXES ALTOGETHER
I didn’t list this as a tactic because of the thorny legal and ethical issues. As tax rates have soared, many consumers have sought refuge by patronizing sellers who aren’t required to collect sales taxes, such as out-of-state websites and Craigslist users. Under most state tax codes, however, if a given seller hasn’t collected a sales tax, then the buyer by law must pay something called a “use tax,” which the state charges to recoup its lost sales tax revenue. Many states include a line on their income tax forms urging the payment of use taxes. But most filers ignore the requirement, and most states lack the enforcement resources to press the issue. To comply with the law, calculate your use tax and remit what you owe.