Taxes and Your Lifestyle

Reduce Taxes with Lifestyle Changes

Recently I received a question from a reader about her family’s financial problems. One of the things she mentioned was that she worked and her child care costs were more than her income.

Her problem is worse than it looks on the surface. She and her husband work. I have no idea how much either makes, but the way the tax system works, unless they are very low wage earners, both their incomes are combined, triggering set offs (or cut outs) in the use and/or value of tax deductions and credits as their income goes up.

Also this is a common scenario that activates the Alternate Minimum Tax, which was originally passed to ensure that the highest earners paid at least a little tax, but which has morphed into a monster that is dragging more and more middle class earners into its clutches every year.

In any event, once taxes are taken into account, a much larger percent of her husband’s wages than than they probably realized were also going toward child care. There might be a tax credit available for the child care, but it might not be fully usable, depending on this couple’s income.

Everything you buy and almost all the money you save involves the use of after-tax dollars. Your nominal pay might be $50,000, but after social security, state and federal withholding and who knows what other taxes are deducted, you may only have $35,000 left to spend.

Then there are the non payroll taxes – property taxes, sales taxes, utility taxes, school taxes, etc – which further reduce your available income.

Then there are the costs of working. Child care is just one. There are transportation costs, work clothes, take out lunches, etc.

The point is that by the time you do the math, this couple might have more spendable income if the wife quit her job and took over the care of her children.

This is a rather extreme, but real result of a lifestyle choice.

Do you plan your life taking taxes into account? Do you know about all the tax sheltered ways you can save for retirement, education and health care? If you do, do you use them all to the fullest?

In many states, you can make mail order or internet purchases without paying sales tax. That’s an immediate savings of 4 to 8.5%. Some states want you to pay a use tax, but rarely enforce the law. I am not advocating tax avoidance, but if the tax man giveth, take advantage.

If you live in an area near the border of your state, sometimes a half hour ride can save you thousands when shopping. Thus it is common to see the malls in New Jersey, across the bridges from New York City, jammed with New York plated cars. Taxes are less and prices are lower.

When you consider the cost of credit are you taking your tax rate into account? If you are in the 15% bracket, your interest rates are actually 15% higher after tax than it says on bill.

Although not necessarily a smart move, many people convert non-deductible interest into deductible interest by using a home equity line of credit, a second mortgage or by refinancing. This is a perfect example of tax planning, if nothing else.

What about the time value of your money? If you use your credit card and pay the full balance at the end of the grace period, you’ve enjoyed an interest free loan for 25 to 30 days. If your money earns interest during this period, you are slightly lowering the cost of your purchase. If you do this all the time, savings can be substantial.

If you can pay a bill annually or monthly, the monthly option is the better deal, if extra service fees aren’t tacked on to the monthly payment. Why: because you have the use of at least part of your money over the course of the year, which, again, is hopefully earning interest.

There are many things you might take for granted that you can control – sometimes a little, sometimes a lot. It’s up to you to take control.

If you are making $50,000 or more a year, you should meet at least once with a Certified Public Accountant or Certified Financial Planner to see if there are ways you can save money on your taxes by changing your lifestyle choices.

It could be as simple as moving a few towns over, where property taxes are lower or one spouse staying at home with the kids.

It’s your money - you worked hard to earn it. So make it go as far as possible.

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