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.
Taxes are not a punishment for wrongdoing, first of all.
Second, I’m not sure how you can be left with “no deductions” when anyone can deduct state and local income taxes or sales taxes. Based on your tax bracket, I make a lot less than you do, and my state taxes get me almost all the way to the standard deduction. But maybe your situation is different.
Third, if you own any investments that are worth less than what you paid for them, harvesting capital losses can offset a few thousand dollars of earned income.
Fourth, consider donating to charity if you’re not already. It won’t save you money overall (every dollar you donate will save you 33 cents in taxes) but those of us who are lucky enough to be doing well for ourselves these days can do something to help those who’ve been less lucky.
I try very hard to believe that I am not being punished for my frugality, but forced distributions and the taxes on the money I from cashing in mutual funds to pay my taxes (because I can’t afford to pay them out of my earned income) make that VERY difficult.
I continue to scrimp by because I HAVE savings that I am afraid to access because of the taxes on them when I do!!!!
If you can’t pay your taxes without selling shares of mutual funds, it sounds like the problem isn’t with your frugality or your tax rate, but with the way you’re managing your money throughout the year. Can you adjust your withholding (or your quarterly estimated tax payments) so you’re not met with such a big bill on April 15? And can you keep enough money in a regular savings account (that won’t trigger capital gains taxes) to cover all of your irregular expenses over the course of a year?
33% tax bracket puts u in the 200 to 400k annual income. You’re dying from taxes? Lmao.