Financial Freedom: Individual Tax Planning

Tax Deferment

Various opportunities exist to help you save personal tax dollars by deferring payment of taxes. It is to your advantage to become familiar with the basic rules of each option and to keep abreast of any changes to them. Several such options are discussed below.

401(k) Accounts

The most common method that people use for long-term savings and tax deferment is to invest in a company-sponsored 401(k) account. The most important aspect of the 401(k) is the company match. Most companies that have a 401(k) program will contribute (match) a percentage of what the employee contributes. For example, if you contribute 4% of your salary to the 401(k), your company might also contribute 4% (each company decides what percentage of an employee’s income it is willing to contribute). In addition, there are limits to how much of your salary you may contribute, and most companies will only contribute up to a certain percentage while the employee is allowed to contribute more. For 2026, an employee can contribute as much as $24,500 pre-tax into a 401(k). The money is tax-deferred until it is withdrawn; therefore, one’s tax burden is immediately reduced!

Many financial planners share a commonly-held belief that until a person is primarily free from ALL consumer debt, he or she should NOT contribute more to a 401(k) program than the employer will match. It is believed that any additional funds should be used to accelerate the debt and to establish an emergency liquid cash fund. Once these goals are accomplished, then the employee is free to contribute more to their 401(k) account. It would be foolish NOT to participate in a program that offers a company match, which essentially is FREE MONEY to you from your company! Additionally, because of the advantages of compound interest, you often gain a high rate of return on your immediate investment with 401(k)s.

Individual Retirement Accounts (IRAs)

Once you have maxed out a 401(k) option, and are still looking for other ways to invest or to lower your tax liability, the next step is to invest in a traditional or a Roth IRA. In a traditional IRA, all contributions, accumulated interest, dividends, and capital gains are tax-deferred until the money is withdrawn. However, with a Roth IRA, your contributions are made with post-tax money and your contributions and earnings (after five years and age 59½) are not taxed when they are withdrawn.

A unique advantage of the Roth IRA is once an individual has reached the age of 59½, and his or her account has existed for more than five years, all withdrawals are tax-free. There is no age limit on contributing to either type of IRA as long as you have taxable compensation. For 2026, an individual may contribute $7,500 to an IRA, or $8,600 if age 50 or older. See the IRS page on IRA contribution limits.

With a traditional IRA, you are not contributing with after-tax dollars, but your invested money may result in a tax deduction during the year in which it is invested because your overall taxable income will be less. Your contributions, earnings, and interest are only subject to income taxes when withdrawn. As previously mentioned, there are age rules for withdrawing from a traditional IRA, including required minimum distributions that begin at age 73.

Annuities

Another option for tax deferment is the annuity, which is an insurance product that grows tax-deferred until you begin to withdraw the funds. A nice benefit about the annuity is the provision for life-long income: once you select the monthly payments, the insurance company will guarantee that your income will last as long as you do. There are many factors to consider when setting up an annuity, and a competent insurance agent should be helpful in guiding you through the process.

Flexible Spending Accounts

Another strategy is to eliminate the payment of some taxes altogether. You may do this by using tax-free money to pay for specific expenses. Some businesses offer cafeteria plans, which are also known as 125 Flexible Spending Plans. These plans allow you to use your earnings, before taxes are deducted, to pay for specific expenses, such as childcare and out-of-pocket medical expenses (prescriptions, office co-pays, dental visits, mental health care needs, eye care, etc.) In many cases, you can also use this money for over-the-counter medications. This plan can save you 15% or more on your plan-related expenses (in comparison with paying for your expenses with after-tax dollars). In addition, some insurance premiums may be paid with tax-free money as well.

Higher Education Accounts

Many parents and grandparents look for ways to create college savings accounts for their dependents and descendants. A good way to accomplish this task is to invest in a 529 plan (also known as a qualified tuition program). Such accounts are established specifically for paying for college costs, and there is no restriction regarding income for individuals who wish to participate in these plans. Additionally, you may wish to investigate state savings plans in your state, and Coverdell Education Savings Accounts (CESAs), which were created specifically for investing in educational expenses. This helps reduce taxes by eliminating the tax on accumulated growth and distributions that are used for educational expenses.

Real Estate Investments

There are various ways to defer taxes by investing in real estate. For example, if you purchase a home (or refinance an existing home), you may often deduct the entire mortgage interest from your taxes. In addition, you may even deduct some of the closing costs involved in the purchase of the real estate. Real estate investments also allow for the deferment of taxes. Investments in real estate have to be depreciated over time and this depreciation will reduce the owner’s taxable income for the current year. However, the depreciated value will have to be recaptured upon the sale of the property if the proceeds are not used to purchase another property.

Real estate investing also offers the possibility of acquiring capital gains—increases in the value of a property. If you live in the homefor more than two years, the gains can be tax-free. The tax on capitalgains can also be eliminated when the property is sold and the gains are invested into another like a property through a 1031 Tax- Deferred Exchange.

The greatest benefits of the preceding options are their tax savings.Because the money for some of the plans is deducted from your earningsbefore taxes are calculated, your adjusted taxable income is lowered;therefore, your overall tax burden is reduced every time you arepaid! Not only can these options save you tax dollars, but the savingscan also help pay for the services that saved you the tax dollars in the first place!

Tax Savings Through Home-Based Businesses

As discussed in the Cash Flow Management Course, there are many reasons to start a home-based business. The following are excellent incentives:

Additional Streams of Income
With additional ways to make money, you may no longer have to be dependent upon one source of income.

Tax Advantages
Such advantages are often not emphasized enough. Even if you do not make much money from your business at first, you may secure tax savings by writing off many business-related expenses. The techniques are legal, versatile, and effective. Tax laws were written to benefit business people and entrepreneurs in order to build the economy. The key is to qualify many of your personal expenditures as business expenses. (Consult with a qualified professional about specific tax benefits.)

Note: Business tax strategies and business entities are discussed in greater detail in the Wealth Building Course Series.

Professional Advisors

In order to realize your personal financial vision statement and achieve your financial goals, you may end up seeking advice from various sources, such as financial planners, accountants, lawyers, tax experts, insurance agents, and investment management specialists. The financial world is full of people who specialize in these areas. Know what you need before you allow anyone to become involved with your personal finances. A well-chosen advisor can help you achieve your goals.

In addition, before your first appointment with a financial professional, it is best to prepare a list of topics and questions you wish to discuss (including the advisor’s experience, education, credentials, licenses, area of specialization, and references). Following your initial meeting, perform an evaluation of the professional by asking yourself the following questions:

1. Did the advisor listen to me and understand my particular needs and specific situation?
    2. Does the advisor have experience in dealing with my issues?
    3. Did the advisor make any suggestions or offer any advice?
    4. Do I feel comfortable with the advisor?

If you are satisfied with the answers, you may have identified someone to help you. To assist you in determining what professional help may be necessary, below is a list of different financial professionals and the services they provide:

Tax Advisers

There is a world of difference between a tax preparer and a tax adviser. A tax preparer is usually an individual with limited knowledge who focuses on tax filings and their accompanying paperwork. They are often seasonal workers associated with entities such as H&R Block. A tax adviser is a well-educated individual with years of tax experience whose main focus is to save you money on your taxes.

Greg Orr shares the following 10 considerations for choosing a good tax adviser:

• Hire an adviser who specializes in taxes.
• Ask for credentials and learn what they really mean.
• Choose an adviser that will meet your needs regardless of cost, but be a smart consumer and shop around.
• Choose a tax adviser that matches your personality.
• Are you squeamish about a possible audit, or do you want an aggressive adviser?
• Make sure your adviser is available year-round.
• Avoid tax advisers who want to sell you products. The best advisers stick to advising!
• When you interview, look for knowledge rather than a sales pitch.
• Don’t go looking through a phone book. Ask a family member, friend, or colleague for a referral.

Certified Public Accountants (CPAs)

Not all CPAs are tax experts. Many spend the majority of their time performing audits. CPAs who specialize in taxes for larger firms are likely to be highly qualified, but more attuned to helping larger businesses. A smaller CPA business or a sole practitioner is more likely to spend a majority of their time with tax preparation and bookkeeping and are more likely to work with you.

Enrolled Agents (EAs)

An enrolled agent is a person who has taken extensive tests, administered by the IRS, to determine if they are qualified to represent taxpayers. Taxes are their main business. In general, most enrolled agents are accountants who did not become CPAs. Some have Master’s Degrees in tax law. An EA may be a much better-qualified tax preparer and advisor than a CPA or an attorney.

Attorneys

Attorneys, like many other professionals, usually specialize in specific areas. Attorneys may be specialists in tax law, entertainment law, marriage and family issues, litigation, estate planning, business entities, bankruptcy, etc. The best way to determine which attorney is right for you is to determine if his or her specialty meets your needs. On the other hand, an attorney who is a general practitioner may be less expensive than a specialist and exactly what you need. Always check experience and references when choosing an attorney.

Stock Brokers

A stock broker’s job is to buy and sell securities (stocks, bonds, etc.). A stockbroker is a salesman. Brokers work on hefty commissions, so make sure that the broker you work with HAS YOUR BEST INTEREST AT HEART. Every time brokers buy and sell securities on your behalf, they make a commission. Do not expect a broker to be an objective financial (or tax) advisor. Look for disclosures on fees and ask for references and brokerage histories. Always get a second opinion from your tax specialist before placing a hefty order with a broker. An ethical stockbroker will not pretend to be a tax expert or a financial planner to entice you to purchase their commodities.

Insurance Agents

There are two types of insurance agents: those who sell casualty insurance (such as homeowner’s and automobile insurance), and those who sell life and health insurance (as well as various kinds of annuities). As with stockbrokers, insurance salespersons make their money on commissions. The life insurance industry consistently comes up with the most creative products to help people reduce their taxes. For example, annuities (as covered earlier in this course) offer tax benefits.

Insurance agents can represent multiple insurance companies and can work for the consumer to find the best offerings for them (stockbrokers can only represent one company at a time).

A competent insurance agent will shop the market to find the best insurance products for their clients. Some agents also offer financial planning services. Make sure you know what you want and have all of your questions answered before you purchase any insurance policy.

Financial Planners

It has been said that a financial planner is an insurance agent who also sells securities or a stockbroker who also sells life insurance and annuities. You may be hard-pressed to find an individual who is successful at selling equities (which are designed for a higher return but come with higher risks) and insurance products (which are generally low return, low-risk investments). Some financial planners are able to represent both kinds of products and present a wide variety of choices to a potential client. In addition, they may work on a fee-for-service basis (like CPAs and attorneys). The majority offee-for-service financial planners are primarily investment managers who receive a fee based upon a percentage of the assets that they manage. For example, a typical annual fee might be 2% of the first$500,000 of assets under their management and 1% of the excess.If your financial planner can also show you how to reduce your taxes each year, you can justify the fees you are being charged for their services.

Wrapping up

British economist John Maynard Keynes wrote, “The avoidance of taxes is the only intellectual pursuit that carries any reward.” As this course has taught, there are numerous legal ways to avoid, defer, or eliminate tax burdens.

Tax planning should be an integral part of your financial foundation. You should consistently look for the best methods to lower your tax liabilities through such things as real estate investing and long-term investments. The more you learn, plan, and prepare, the better your future situation will be.

Answer 1

As discussed in the course, tax avoidance is not only legal but it should be a common pursuit of every tax-paying citizen. You should actively seek out and implement the various methods of lowering your taxable income through investments and business interests.

Answer 2

In financial circles, it is a commonly held belief that Americans over pay their taxes by billions of dollars each year because they lack the knowledge to lower their obligations and tax liabilities. (Refer to the course for plans and methods to defer taxes.)

Answer 3

As you assess your current needs and situation, refer to the list of specialists in the course and evaluate the specifics.