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.
20.2 Minimize Income Taxes
You enter complicated territory when you deal with state and federal income taxes. Although SLN! doesn’t cover tax planning in any great detail, you can save thousands if you take advantage of basic opportunities. Important: consult your tax advisor before you pursue any of these tactics.
□ 20.2.1 Fund Tax Advantaged Retirement Accounts
The federal government rewards you for payments into traditional IRAs, Roth IRAs, and 401k’s, to name a few. Fund these accounts to slash your tax burden and boost your net worth.
□ 20.2.2 Fund Other Tax Advantaged Accounts
The feds also recognize other specialized accounts—including 529 College Savings Plans, Health Savings Accounts, and Flexible Spending Accounts (for healthcare and dependent care expenses).
□ 20.2.3 Act on Governmental Incentives
Governments often offer tax breaks for socially desirable spending. In 2009, for instance, I learned: (1) that the IRS would let me deduct the sales tax on any new vehicles I bought that year; (2) that my home state would issue a $2,880 tax credit for buying a new hybrid; and (3) that the “Cash for Clunkers” program would pay $4,500 for my 1998 Ford Explorer (170,000 miles with a bad transmission). Faced with these programs, which overlapped more than a little, I surrendered my Explorer (19 MPG rating) and replaced it with a new Prius (50 MPG rating). I saved $7,500 upfront, and since then I’ve saved thousands more on gas. Governments dream up new programs like this all the time, so keep your eyes peeled.
□ 20.2.4 Convert Consumer Debt into Deductible Debt
If you refinance your home mortgage, use some of the proceeds to pay off car loans and credit card accounts. This saves money. Not only are mortgage interest rates lower than those for consumer loans, mortgage interest is deductible. The downside: refinancings are incredibly complex. For a FREE guide, visit HSH.com and use the “Mortgage Refinancing Starter Kit.”
□ 20.2.5 Combine Business With Deductible Pleasure
The tax code allows deductions for many business expenses, including meals, sports tickets, and hotels.
□ 20.2.6 Deduct Mileage
Travel for business, charity, and medical care may be deductible.
□ 20.2.7 Time Your Deductible Spending
If you itemize, many expenses are deductible, including property taxes, mortgage interest, and charities. If you’re near the threshold for itemizing, accelerate any future years’ deductible expenses into the current year. If you’re not close to itemizing, postpone any deductible expenses until after January 1 of the next year.
□ 20.2.8 Pay With Pre-Tax Dollars
The IRS allows this for a few expenses only and, once again, the rules are complex. For example, employers can deduct pre-tax dollars from your paycheck and use them to cover your public transportation or parking costs. I had personal experience with this when I last changed jobs. Although my old employer had funded my parking on a pre-tax basis, my new employer didn’t, so each month I coughed up $150 to a nearby garage—all paid for with after-tax dollars. Ouch. After several months of this, I found out that my wife’s employer let its employees use pre-tax dollars to pay for onsite parking, so I began leaving the car at her building. How much can you save when you use this tactic? The answer depends upon your own top marginal tax rate. At a combined state and federal marginal rate of 40 percent, for example, parking with pre-tax dollars as described above saves $720 per year ($150 x 12 = $1800 x 40% = $720).
20.3 Minimize Real Estate Taxes
If you own real estate, you owe taxes. These tactics apply in most jurisdictions. Check your local regulations.
□ 20.3.1 Buy Less Property
Don’t buy more house than you need. The less expensive your property, the lower your taxes.
□ 20.3.2 Live Where Taxes Are Low
If you have a choice of jurisdictions in which to live, favor homes in lower tax districts.
□ 20.3.3 Seek Group Discounts
Many localities tax certain property owners at lower rates, including veterans, seniors, long-term residents, and disabled persons. Call your county clerk or assessor’s office.
□ 20.3.4 Deduct Property Taxes
If you itemize, you usually can deduct real estate taxes.
□ 20.3.5 Change Your Property’s Designation
Some states tax agricultural land at lower rates than residential or commercial properties. Cultivate an understanding of your local laws and see whether you can harvest a lower tax bill.
□ 20.3.6 Find Valuation Errors
In most counties, an assessor values your property for tax purposes. The assessor looks at many factors, including acreage, building size, construction quality, and the number of bedrooms. Obtain a copy of the assessor’s written report—it’s usually available from the county clerk—and check its accuracy. If you find mistakes that reduce your tax burden, inform the assessor’s office in writing. If the mistakes go uncorrected, appeal to the appropriate review board.
□ 20.3.7 Challenge Comparables
When valuing a residence, the assessor usually selects several recent and nearby sales that he thinks most closely resemble the property in question. These similar sales are known as “comparables.” Their selection is an art, not a precise science. You can reach a much lower valuation simply by choosing a different set of comparables. Ask a local real estate broker to supply you with the recent sales data from your neighborhood. Beware: if you mount a challenge, pay close attention to any filing deadlines. If you miss a deadline, you lose your right to appeal.
□ 20.3.8 Pay on Time
Most counties impose penalties for late payment of property taxes. Mark deadlines on your calendar.
□ 20.3.9 Pay With Plastic
Check whether you can pay your property taxes by credit card. Beware: many counties charge fees for this privilege that far outstrip the value of any card rewards.