The Average Household's Lifetime Tax Bill: $3.6 Million
According to recent estimates, the average American household will pay an astounding $3.6 million in taxes over their lifetime. This figure includes federal, state, and local taxes. That's a significant part of any family's lifetime earnings.
As a result, it's more important than ever to understand the various financial vehicles available to save on taxes. Let's discuss some of these in detail.
Roth IRA
Think of a Roth IRA as a special savings box for retirement. You put money in after you've paid taxes on it. The good part? When you take it out during retirement, you don't have to pay any taxes on it, not even on the extra money you've made from the initial amount.
This can be a significant saving, especially if you expect your retirement tax rate to be higher than it is now.
You can learn more about Roth IRA accounts here.
Traditional IRA
A Traditional IRA is another type of retirement savings box. The difference here is that you put money in before you pay taxes on it, which could lower your tax bill right now. But, you do have to pay taxes when you take out the money during retirement.
If you expect to be in a lower tax bracket in retirement, a Traditional IRA could save you more money in the long run.
You can learn more about Traditional IRA accounts here.
Real Estate
Real estate can be a highly effective way to save on taxes. Property owners, for instance, can deduct mortgage interest, property taxes, operating expenses, depreciation, and repairs.
When selling, homeowners can exclude up to $250,000 ($500,000 for married couples) of capital gains on the sale of their primary residence, provided they've lived in the home for at least two of the last five years.
You can learn more about Real Estate tax benefits here.
Owning a Business
Business ownership provides numerous tax advantages, including the ability to write off business expenses, home office deductions, and self-employment retirement plans.
Certain business structures, such as S-corporations, can also provide ways to minimize self-employment taxes.
You can learn more about Business tax benefits here.
Health Savings Account (HSA)
An HSA is an account that allows for tax-free savings for future medical expenses if you're enrolled in a high-deductible health plan.
Contributions are tax-deductible, the money grows tax-free, and withdrawals for qualified medical expenses are also tax-free. This triple-tax benefit makes the HSA a powerful tool for tax savings.
You can learn more about HSA accounts here.
401(k)
A 401(k) is a retirement savings plan offered by many employers.
The money you put in comes out of your paycheck before taxes, reducing your current tax bill. But you'll have to pay taxes when you take the money out during retirement.
You can learn more about 401k accounts here.
529 Plan
A 529 plan is a special account for education costs. The money you put in grows over time, and when you take it out to pay for things like tuition or books, you don't have to pay taxes on it.
You can learn more about 529 plans here.
Gift Giving
The gift tax exclusion allows you to give up to a certain amount ($17,000 per recipient per year as of 2023) without having to pay gift tax. Additionally, the lifetime gift tax exemption, which is considerably higher, allows you to give away substantial wealth during your lifetime without incurring gift tax.
You can learn more about the Gift Giving tax benefit here.
Final Thoughts: Lowering Your Tax Bill
Each of these tax-saving vehicles has its own set of rules and restrictions, so it's important to do more research before making any investment decisions. With careful planning, it's possible to significantly reduce the amount of tax you pay over your lifetime. I am not a CPA. This article is only meant for educational purposes.
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I recently put together a master list of 88 different ETFs designed to support different investment goals. You can grab it here.
And as always: Buy things that pay you to own them.
-Josh
Blog Post: #114
