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Dear Liz: My husband and I have worked very hard and paid off our mortgage and all other debt. However, we find ourselves with no deductions now and are getting killed on income taxes. What can we do to lower our tax burden without incurring mortgage or student loan debt, child-care expenses and so on? We are in about a 33% tax bracket and it seems like we are being punished for being frugal and responsible.
Answer: There’s an old saying, “Don’t let the tail wag the dog.” Incurring expenses just to get a tax break is usually absurd. When you were paying mortgage interest, for example, your tax break was only a fraction of what you paid out. In essence, you were getting about 33 cents back for every dollar you spent in interest.
Better ways to reduce your tax burden may include maxing out retirement plan contributions, taking advantage of flexible spending accounts if your employer offers them and installing alternative energy equipment in your home. (The credit for installing solar panels and similar systems equals just 30% of the cost, but the long-term energy savings may offset the rest of the bill.) If you own a business, consult with a tax pro about the many ways to cut your tax bill when you’re self-employed.
Just remember that you’re not being punished for your frugality. Your reward is more money in your pocket year-round.