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I probably shouldn’t tell you this, especially if you are about to leave for work or if you are sitting in your cubicle after having slept for only a few hours last night. But you are working for the government right now instead of working for yourself.
I know this sounds weird and rather depressing, but the first few hours that you spend at work every day are not spent to build a better life for yourself and your family. You are not buying freedom in the form of early retirement, paying for your kid’s college, or even working to pay off that hefty cable bill.
Instead, you are spending your first few hours at work each day to help build new roads in your state, fund the army, and even pay for that new library that your town just constructed.
Now those are all great things to be working for, but wouldn’t it be nice if we could choose who we wanted to give money to and when we wanted to do it? Wouldn’t it be nice if we had more of those hours at work to pay for our expenses instead of the government’s?
Of course, the thing that I’m talking about is taxes! Now I’m not going to argue that taxes should be lowered or even comment on some of the good and bad things that we pay for with our taxes.
However, I will suggest that we should do whatever we can to keep more of the money that we make for ourselves and not give it all to the government. And, of course, we want to do this without being shady and hiding our income from the IRS!
So I came up with a few legal, ethical, and non-shady ways of making money without paying any taxes on it. This is not meant to be an extensive list and it isn’t meant to take a deep dive into the tax code. Instead, these are just simple, no nonsense things that almost anyone can do to make tax free money.
And I will give you a hint. Ways 1-2 are excellent and could save you a lot of money. Ways 3-4 are good, but they will only save you a bit of money. But way #5 is the ultimate tax hack! This truly is the best way to save money on your taxes!
Intrigued?
I hope so : )
Way #1: Credit card rewards
I have already written about how much I love credit card rewards for their travel hacking possibilities. I have even written about a free anniversary trip to New York City and saving thousands of dollars on my family´s trip to Disney World.
But one thing that I have only mentioned briefly is that all of these credit card rewards are completely tax free. You do not have to pay payroll, federal, or even state taxes on them. You also do not have to pay those annoying hotel taxes and fees that turn a $99 hotel room into a $115+ expense. Even when we fly with reward points, we often, but not always, save all of the taxes (except for the $5.60 fee on all domestic travel in the United States).
So what does this actually save you (or the hypothetical “you”). Well let’s hypothesize that you and your spouse have taxable income of $100,000 this year. This puts you in the 22% tax bracket for your marginal tax rate for federal taxes. I also assumed state taxes of 4.25% based on the state I live in (Michigan), but you can substitute your own state tax rate for our hypothetical person.
As you can see, this gives us a total marginal tax of 33.9%.
| Tax | Federal | State | FICA | Total |
| Percentage | 22 | 4.25 | 7.65 | 33.9% |
After doing a bit of math, I realized that a $1,000 trip costs $1,512.86 in money that we earn before taxes!
So if you make $25 per hour, it will take around 60 hours or 1.5 weeks of work before you can pay for this trip!
I´m not telling you this to discourage travel because I feel that travel is one of the most worthwhile things that we can do. However, instead of paying for travel with after tax dollars, just use credit card rewards to get it for free!
For instance, the Ink Business Preferred Credit Card gives you 80,000 bonus points after an initial spend of $5,000 and 3 points per dollar spent in travel. This 80,000 bonus points is equivalent to $1,000 worth of free travel when redeemed through Chase Ultimate Rewards.
When factoring in taxes, this $1,000 travel reward is like earning $1,512.86!
Tax free earnings are way better than taxable earnings!
Way #2: Company match in 401(k)
Many companies offer a company match on the first 3 or 6% that you contribute to a 401(k) or 403(b) plan. This is to encourage you to save at least this percentage in your 401(k) and it is a pretty great benefit to have.
No matter what your financial situation is, it is always a good idea to contribute to your 401(k) so that you at least receive the full company match. I know that Dave Ramsey will tell you differently, but this is one situation where he is definitely wrong! After all, who would pass on free money!
One thing that you may not know about the company match is that it is partially tax free and partially tax deferred.
Tax free: If a company puts $1,000 into your 401(k) because of a company match, this amount of money is not subject to FICA taxes of 7.65%. This saves you $76.50 for every $1,000 contributed.
Tax deferred: Unfortunately, you will still have to pay state and federal income taxes on the company match. However, just like with the rest of the 401(k), you do not have to pay taxes until this money is withdrawn.
Hopefully you are already taking advantage of the company match in your 401(k)! If not, the tax benefits should provide another great reason to encourage you to do so.
Way #3: Buying discounted gift cards
One of the worst ways to try to save money on taxes is by spending more money. Itś kind of like those people that decide not to pay off their mortgage strictly because of the tax savings on the interest payments. There are good reasons to not pay off your mortgage, but tax savings shouldn´t be the driving force!
So you should never try to “save” money by going shopping. “I saved so much money when I was out shopping today,” is typically not true.
However, you and I both buy some stuff from stores, so it makes sense to save as much money as we can when we actually do go shopping.
One of the ways to do this is by purchasing discounted gift cards through online retailers like Raise and Cardbear. Typically you can find discounts of 5-40% on store, hotel, and restaurant gift cards.
Again, the best way to save money is just by not going shopping, but if you are going to shop anyways, you might as well save a bit of money while you do it!
Of course, all of these savings are tax free!
Way #4: Cash back shopping sites
Just like the last idea, cash back shopping sites should only be used on shopping that you are going to do anyways. For instance, the best way to save money is to do a no-spend day, week, or month, not by using a cash back shopping site.
When you are going to shop online however, it is a good idea to save as much as possible. This can often come in the form of a percentage given back to you on your online purchase.
The site that I use is called Ebates. I like it so much that I have even written an article about it and showed you an easy hack that you can use to instantly get $45 back on your shopping.
Similar to the discounts that you get on gift cards, the money that you save on any cash back shopping site is tax free!
Way #5: ?
Okay, here´s the thing about way #5. It is honestly so good and easy that it deserves it’s very own article. Click here to check it out.
I know, I know, this kind of sounds like I am just trying to get you to read the next article that I write. And I suppose that I am!
But I started writing this section and doing some math … and I realized just how awesome this idea actually is. I also realized that it deserved its very own article because it is so simple to implement and can save so much money in taxes!
I really felt that I could not do justice to this topic if I just wrote a few words about it. I had to expound and explain how easy it is for our hypothetical couple earning $100,000 to save $4,631 on their taxes.
I promise that you won´t be disappointed!
Even though I kind of left you hanging on way #5 to save on your taxes, you have to admit that the first four ways weren´t too bad! Let us know other ways that help you to save on taxes or if these ways have helped you to save!
And thanks for reading!
~Nathan
Let’s keep living a great life … with the help of money. So what’s next?
- You can travel for free by using rewards credit cards.
- You can get motivated and get out of debt.
- You can check out the next post or the previous post and continue to learn.
But no matter what you decide to do, let’s leave the ordinary behind and take action today!
2 Comments
Dan
I agree, Nathan I would much rather choose where my money is allocated rather than let ScoMo or Bill decide. For me, investing in super is a no brainer. I’m going to invest anyway, and the govt will give some tax back….for something I was going to do anyway. For travel having, we need to look out for credit card promotions and do full balance transfers etc. and they give a bunch of points. I haven’t done this yet as it is a real hassle to update all my direct debits.
Life Before Budget
Thanks, Dan! I agree that we should never let our taxes tell us what we are going to do anyways. But since I want to invest, I might as well take advantage of the tax benefits.