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A Less Taxing Time

Kristine Hayes

THE FEDERAL TAX code now contains over 10 million words, so it’s no surprise that most Americans score an “F” when it comes to understanding taxes. A few years ago, I would also have flunked.

But following my divorce, I knew I needed to educate myself on financial topics. While I could tell you how much I took home each month, I didn’t have a clue how much I paid in taxes, much less what my marginal tax rate was. While I’m still not a tax expert, I have become familiar with the basics of tax-deferred savings, and I’ve used that knowledge to increase my retirement account balances, while decreasing the amount I pay in taxes.

I started out learning about the different IRAs available and the tax advantages of each. I’d be eligible to deduct any contributions I made to a traditional IRA, but I’ve chosen to invest in a Roth IRA instead. Anybody with earned income can contribute to a Roth, as long as they fall below the income cutoff. While the contributions I make to my Roth aren’t tax deductible, the earnings—when I draw them out in retirement—won’t be taxed.

Next, I began to look at ways to reduce my tax liability. I discovered that if I contributed $18,000 a year to my 403(b) account, I could keep my marginal tax rate at 15%. By using Financial Finesse’s online calculator, I found that maxing out my 403(b) resulted in annual tax savings of $4,500. That means the $18,000 I’m investing each year is effectively costing me just $13,500.

Recently, while exploring the IRS website, I learned I’m among the 70% of Americans who are eligible to file their taxes electronically for free. This benefit alone will save me more than $70 in fees.

By understanding, and taking advantage, of just a few basic tax strategies, I’ve been able to significantly reduce my personal income tax burden. Paying less in taxes means having more money to spend on other activities—activities I find more fulfilling than filing a tax return.

Kristine Hayes’s previous article was From Half to Whole. Kristine is a departmental manager at a small, liberal arts college in Portland, Ore. She enjoys competitive pistol shooting and hanging out with her dog Zoey.

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