How You Can Make TAX FREE MONEY Without Being Shady: Part 2

If you read my most recent article, you know that I left you hanging on the “ultimate” way to make tax free money.

I talked about credit card rewards, using a company match in your 401(k), buying discounted gift cards, and a cash back shopping site, but I didn’t tell you what the 5th way is. And the 5th way is really one of the simplest ways to save some money on taxes.

All that you have to do to make tax free money is … spend less money.

I know that you were looking for something more awe-inspiring. Like Luke Skywalker seeking out Yoda, you came to me prepared to be blown away and amazed.

And I said that you should spend less money. What … the … heck???

But give me just a few more paragraphs. Spending less money will really save you a ton of money on your taxes. I’m not just talking about saving money on sales tax. Instead, spending less money can potentially save you many thousands of dollars in state and federal income taxes.

All that you have to do is follow one simple hack!

A case study

In my last article, I wrote about a hypothetical couple that makes $100,000 in taxable income. This couple was able to save over $1,500 in before tax money by opening a rewards credit card. So instead of working for 60 hours to pay for their $1,000 trip, they got the trip for free. You can find out more about reward credit cards by checking out my travel hacking page.

Anyways, let’s look at that same couple and see how they can make tax free money. Again this couple makes $100,000 in taxable income, which puts them in the 22% federal tax bracket. This does not mean that they will pay 22% federal taxes on all of their income. Instead, their federal taxes look like this:

• 10% on their first $19,400 made or $1,940
• 12% on earnings from $19,400 – $78,950 or $7,146
• 22% on earnings above $78,950 or $4,631

This equates to a federal tax amount of $13,717.

Now here’s an important assumption that I am going to use for our hypothetical couple. Let’s assume that they spend every single dollar that they make. They don’t overspend on credit cards, but they do spend all of their money. I know that not many people really do this, but let’s assume that they do to make the math a little bit easier. We also will assume no state taxes for now.

If our couple makes $100,000 and has taxes of $13,717, then they have $86,283 left over for their spending.

However, what if they were able to lower their spending to $69,864? I’m using this very specific number because this would mean that they would only need to earn $78,950 to support their spending. $78,950, as you may notice from earlier, is the top of the 12% tax bracket.

If they were able to reduce their spending by $16,419, they could also reduce their taxable income to $78,950. This means that they could avoid the 22% tax bracket entirely!

Of course, the way to do this is not to actually reduce their income. Instead, our couple would reduce only their taxable income by putting $21,050 into their 401(k) retirement accounts

This would save them $4,631 in taxes! 

Think of how powerful this is!

1. They reduce spending by $16,419.
2. This allows them to contribute $21,050 to their 401(k).
3. They save $4,631 in taxes.

Boom! They saved $4,631 in taxes, contributed $21,050 to their retirement accounts, and only had to reduce spending by $16,419.

This is the ultimate tax hack!

Keep in mind that we haven’t even factored in any state or city income taxes in our discussion. We also haven’t talked about sales tax. If the state that you live in has a high state income tax rate or sales tax rate, $4,631 in savings can easily become $5,000 or significantly more.

Let’s make this even better!

I love saving money on my taxes. However, spending less money is such a powerful tool in our journey to become financially independent for a couple of other big reasons.

One thing that spending less money allows us to do is to contribute to our retirement accounts. Whether we are planning on retiring in 5 years or 30 years, it will definitely be nice to have some extra money when we get there.

Many studies have shown that people save less than 10% of their income for retirement. For our hypothetical couple earning $100,000, spending less money will allow them to save 21% of their income for retirement! An even cooler thing is what will happen to this money if it is invested for a few years.

$21,050 invested for 20 years at an 8% interest rate turns into $1,040,353!!!

Just like that, we can become a millionaire!

Other levels of income

Although we have been focused on our hypothetical couple earning $100,000 per year, people who are earning at other income levels can also benefit.

If you and your spouse are in the 10 or 12% marginal tax bracket, your savings would be a little less pronounced. You may even want to take a serious look at investing in a Roth IRA instead of a 401(k).

A Roth IRA requires you to invest after tax dollars, instead of before tax dollars. This means that you wouldn’t be able to get any tax savings using this method now, but you would get tax free withdrawals in the future. I would argue that the Roth IRA is probably the way to go for those who are in the lower marginal tax brackets.

However, if you are earning more than $100,000 per year, you may be paying federal taxes at a 22-37% marginal tax rate. Spending less money will definitely produce a large tax savings for those in these higher tax brackets.

How do I spend less money?

Of course, you and I both know that wanting to spend less money and actually doing it are two completely different things. If we could just snap our fingers and spend less money, then we probably would have done that a long time ago.

However, there are a lot of things that we can do to help spend less money. One thing to focus on are the large expenses that we have.

The largest expense that most people have is housing. Now I’m not necessarily suggesting that you move into a smaller house just to save money, although my family and I recently sold our huge house, but I am suggesting you don’t “need” to stay in your current house. We should never feel locked into a decision that we made many years ago. Sometimes it is good to at least have the discussion about whether our current house is actually the one we want to live in.

Another large expense that many of us have is cars. Again, we need to analyze the car that we are driving to see if we should get an option that costs a little bit less. With cars, I would strongly suggest that no one should be driving a car that costs $30,000 or more. New, expensive, cars are an absolute financial disaster and they alone can cause us to be unable to save for retirement.

I would also challenge the assumption that we have to drive as much as we do. Just by using a bike, we can get exercise while we save money by not driving our car as much.

I suppose the main thing that we need to is challenge the assumptions of typical, middle-class society. Can we get our travel for free? Do we need to spend so much on our fixed expenses? Do we really need the brand new iPhone? Those answers will be different for everyone, but just by asking the questions, we may be able to spend much less money than we have in the past.

And this will allow us to make TAX FREE MONEY without being shady!

Let us know in the comments how you are able to save money on your taxes. Also, thanks for stopping by! Feel free to subscribe to get more great content sent directly to your inbox.

And thanks for reading!

~Nathan

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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!