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Q.   How can I reduce my taxes?

A.This is a common question but it isn’t the best question. Taxes have somehow become a 4-letter word. Most of us love our country and want it to continue to operate. This costs money and that takes taxes but everyone should only have to pay their share. Some people are so determined to pay less in taxes that they make other financial mistakes.

The best way to avoid paying taxes is to avoid making money. That is not a good idea for most people. Sometimes you are better off making more money, or spending less money, and paying the taxes.

Let’s look at two examples. First, I had a client that considered taking out a mortgage solely to get the mortgage interest deduction and pay less in taxes. Paying the bank $4,000 in interest would have saved him $1,000 in taxes. He would end up with $3,000 less in available cash.

Another client was considering only investing in municipal bonds funds at 2% (federal and state tax-exempt) instead of investing in corporate bonds at 5%. With a tax rate of about 5% for the state and 24% for the feds, this taxpayer would have an after tax gain of 2% for the municipal bonds versus 3.6% for the corporate bonds. (Risk is generally considered higher for corporate bonds, but that was not the issue for this taxpayer.)

The best question is: How do I make the most post-tax income?


Q.How do I make the most post-tax income?

A.One of the best ways is to contribute to your 401K at work or to an IRA. Tax reform has lowered tax rates for many Americans. Since TCJA (tax reform), it may be more advantageous to contribute to a Roth 401K or Roth IRA, which does not reduce your taxes. Instead, it lets you avoid taxes in the future. 


Q.What if I haven’t filed a tax return in a few years (or more)?

  1. A.The best thing to do is to file. If you are due a refund, then you can get that money if you file within three years of the filing date (generally April 15 after the year ends). If you owe money and do not file, the IRS will eventually create a “substitute for return” (SFR). This will show all the income known to the IRS and almost no deductions. In other words, the IRS return is likely to result in higher taxes than you actually owe. The IRS will also send a bill. If you don’t pay it, then things get worse. Just file.  For help, look for an EA at eatax.org


Q. What if I can’t afford to pay the taxes I owe?

A.If you file, then you have he opportunity to negotiate with the IRS. The IRS allows payment plans. If you truly cannot afford to pay the taxes and feed yourself, then the IRS will consider an Offer In Compromise (OIC). None of these are possible until you first file the return.


Q.What is an Enrolled Agent?

A. It is a quirky name for a very helpful professional. Enrolled Agents (or EA) are so named because they are enrolled to practice before the IRS.  They are tax professionals who can represent any taxpayer before the IRS. They are licensed through the federal government. To become an EA, one must pass a three part test (3 hours each) and pass a background check. Each year, EA’s must take continuing education and every three years, renew their license.

These are some questions that taxpayers often ask.