How to Maximize Your Tax Benefits?

Tax and Death

“In this world, nothing can be said for certain, except death and tax.” Benjamin Franklin.

As savvy tax payers and entrepreneurs, we take any deductions and credits to lower our taxes. We’re not trying to avoid taxes, we’re just trying to minimize what we have to pay in tax legally so with the tax money we saved, we can use that to generate more wealth.

Let’s start with the tax basics. Watch this video to learn how to calculate your taxes.

Tax Deductions vs Tax Credits

Tax Deductions are expenses that the US government allows to reduce your taxable income. For example, you make $70,000 a year, and incurred $10,000 in medical expenses. The $10,000 medical expenses are deducted from the $70,000. So instead of paying tax based on $70,000, your tax will be assessed based on $60,000 income.

Medical expense is only one of many allowed tax deductions.

Tax Credits are “free money” that the government gives you. Remember, back in 2008 when Obama was dishing out $8,000 tax credit to all new homebuyers? I’m a beneficiary of that credit.

Between tax deductions and tax credits, I’ll take tax credit anytime. It’s like free money, but, of course, you have to meet the criteria. And usually, it is a one-time deal.

Impact of Tax on Your Income

Tax and Inflation

As the above illustration shows, if you’re not careful, your income tax and inflation can eat up your savings like termites.
None of us can control inflation. But we can at least do something with our taxes to lessen the impact.

Tax now

Tax now…

Brokerage account

Checking account

Certificate of deposit

Savings account

 

Tax later

Tax later…

401k/403b

Annuity

Pension

SEP IRA

Traditional IRA

Tax never

Tax free…

529 College Savings Plan

B.Y.O.B. (life insurance)

Coverdell

Health Savings Account

Roth IRA

Roth TSP

Author: Anna

I believe in the power of applied knowledge - learning something new and using that knowledge to do good. We live in one of the wealthiest countries in the world, and yet most of us work hard for our money and have nothing to show. My mission is to educate families from all walks of life about the importance of financial planning...