How to Pay Less Taxes- A Very Cute Cartoon

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So here’s the situation- You have to pay taxes, but you don’t like it. You would rather spend your days having fun, and taxes and fun are inversely correlated- It’s MORE fun to pay LESS taxes, and vice versa. So what’s a person to do?

Answer: DON’T REPORT YOUR FULL INCOME! THEY PROBABLY WON’T CATCH YOU.

Thank you for coming to my lecture.

Just kidding. For sure be honest and pay your taxes, just don’t pay more than you have to. Here’s how we pay as little in taxes as possible.

It looks like this:

You’ve got $120,000 of earned income, and you’re very proud.

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Unfortunately, the government wants some of that sweet money and they’ll stand there just like John Travolta in Saturday Night Fever to get it.

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See?

So you do the most logical thing. You load all your money up on your Ship of Savings because you’re no fool, and also ships are easy to draw. Then this happens.

 

Everyone following so far? The government wants a big chunk of our hard earned dollars, but we don’t just hand it over. We abscond to our various pretax islands and drop off a few large chunks.

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Like so.

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Then we come on back and let the government pillage some of the leftovers from us.

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The cartoon seems self-explanatory to me, but I’m the one who drew it so maybe it is confusing.

It’s like this, if we didn’t put money in pretax accounts the government would take a bunch of it in taxes. That’s no fun. The choice is either a) save it for your future selves or b) let the government take it. Not today, Sam.

After we give much of our money to our future selves, in the form of pretax contributions, we let the government pillage the remaining amount. Jokes on them, we’re in a lower tax bracket and also write-offs.

Anyway.

That’s how it works. No offshore sketchy Cayman Island bank accounts needed.

Let’s look at some real numbers. For these examples we’re assuming married filing jointly and we’re using Oregon’s state income tax of 9% because we live in Oregon.

So, we have to pay state income of 9%, FICA tax of 7.65% and if you’re making $120,000/year then your marginal tax rate would be in the 22% bracket (effective tax rate of 10.83%)- if you’re not contributing to any retirement accounts.

Here’s where your money goes in this example:

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Table courtesy of smartasset.com/taxes/income-taxes

You earn $120,000 and the government takes $31,459 off your hands, leaving you with $88,541.

That $31,459 is gone.

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But, if you put money in your pretax retirement accounts then you don’t have to pay the government nearly as much.

If only one of you is working to earn that $120,000 then you can contribute up to $25,000 in pretax accounts in 2019 ($19,000 401(k) + $6,000 IRA). If you’re both working then you can double that amount to $50,000.

So assuming you max out one 401(k) and a Traditional IRA account your tax burden would be $24,349. This saves you a little over $7,000 in taxes.

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Which looks like this…

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If both you and your spouse are working (and you each max out your 401(k) {or equivalent} and your Traditional IRAs) your tax burden goes from $31,459 to $19,634. That comes out to $12,000 extra dollars that you get to keep.

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Which looks like this…

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But this isn’t exactly what we do. We aren’t trying to save up a bunch for a retirement several decades from now. We’re looking to save a bunch of money and get the heck out of the rat race.

My wife is a nurse, so instead of having access to a 401(k), she has access to a 403(b) and a 457(b). This means instead of being able to contribute only $19,000 (like in a standard 401(k), she’s able to contribute $38,000.

But we don’t stop there, either. I’m an independent contractor so I have an LLC taxed as an S-Corp, which gives me access to a solo 401(k). This allows me to contribute $19,000 as an employee and an additional $6,000 as employer. In addition to that I’m able to write off any work mileage as well as any tools I need to purchase to do my job.

We also contribute to my wife’s Health Savings Account (HSA) through her work. Basically, by the time we’re done shoveling money into pretax accounts we’re hardly paying anything in taxes.

That’s where frugality comes in. If we we’re spending everything we’ve earned then we wouldn’t be able to shovel nearly as much into pretax accounts, because we’d need that money to live. By lowering our expenses we’re able to put everything outside of our cost of living into pretax accounts.

Once we reach financial independence we’ll start our Roth Conversion ladder so we can access all this sweet pretax money.

Here’s the thing. We all know we should be saving for our retirement, but it’s hard to do. Once money hits our checking account it’s easy to lose track and spend it. Lifestyle inflation is something that happens to the best of us, no matter our intentions.

Our workaround for this is to put as much money as possible into our pretax accounts. That keeps us from frivolously spending more than we need, and it keeps the government from taking it off our hands.

As an added bonus, the money we set aside is invested so it keeps growing. We can calculate how quickly our invested money will double based on the Rule of 72.

So the choices really are 1) Let the government take a huge chunk of your take home pay or 2) Fund your own retirement and watch your money compound on itself. When you think of it like that, it’s an easy choice.

If you enjoyed this article please share it with people. If you hated this article please share it. Man, I’d be real embarrassed if a bunch of people hate shared it. Wow. That would really show me.

Author: MrBurritoBowl

Mr. Burrito Bowl is a 34-year-old man from Whitefish, Montana who likes to draw stick figures and say things that sometimes relate to finances, but not always.

7 thoughts on “How to Pay Less Taxes- A Very Cute Cartoon”

  1. And the unpaid (deferred) tax will grow, if your tax-deferred accounts grow. So, you’ll pay more dollars in tax later. The unpaid tax is sort of like a mortgage on your retirement accounts. Calculate your spendable net, rather than your account balance. I applaud your aggressive saving & frugal lifestyle.

  2. What if we all decide to start looking at paying taxes as a positive thing? Good for you, you had a really good year financially which means you get to help your country more by paying more taxes. You know, instead of vilifying taxes or looking for ways to avoid them. One way of looking at it is taxes go towards things we all use and things that some of us use but that improves life for everyone: eg. better schools, more educated society, less crime. Maybe we’d even end up with a more robust social security and wouldn’t need to have so much individually saved for retirement?

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