Minimize Your Taxes

According to CTU (2006), there are four major tax minimization strategies. Maximizing deductible expenses, tax-exempt investing, maximizing pretax contributions, and utilizing tax deferrals are all excellent methods, but which one is the most efficient? The point of this document is to discuss all four methods in detail and then recommend which one I feel is the most efficient.

The first tax minimization technique is called maximizing deductible expenses. This is the method my husband and I currently use in order to decrease the amount of taxes we owe. A few examples include mortgage interest expense, relocation expenses, job search expenses, equity loan, educational expenses, capital losses (limit), and tax advice, services, or software (CTU, 2006). The way tax minimization works is that your deductible amount is taken off the amount you owe the government. This method is not pre-tax either.

The second tax minimization technique is called tax-exempt investing. Municipal bonds are only one of the tax-exempt investing options. Most states and local governments sell these bonds to the public. The interest that the bonds accumulate is typically free from income tax as long as you purchase the bonds in the state you reside.

The third tax minimization technique is called maximizing pretax contributions. My husband and I also use this method as well. My husband and I both contribute the maximum amount our employment company matches into our 401K. This means that money is taken out of my check before the taxes are taken out. This money is therefore, pre-taxed. Your tax liability will decrease the more you invest in your 401K or health insurance.

The last tax minimization technique is called utilizing tax deferrals. This is exactly what it sounds like in that your items are taxable at later date. IRAs are great examples of tax deferrals. While you invest your money, it compounds at a faster rate since you are not using it. On the contrary, later in life when you decide to withdraw some of that money, you will be taxed on it. I have not used this method of tax minimization before.