How to Reduce Your Tax Burden

12/30/2021


Looking for a Way to Pay Less Taxes?

Don’t wait for April 15: Any time of the year is a good time to learn how to reduce your tax burden. Newgate School has valuable information to help lower your taxes and save you money.

A Good Place to Start: What is a Tax Burden?

Cambridge Dictionary defines a tax burden as the “total tax paid by a particular group of people, an industry, etc., compared to what other groups, industries, etc. pay…” (https://dictionary.cambridge.org/us/dictionary/english/tax-burden) Although it is formally defined by groups (ex: the middle class, senior citizens, corporations), the term “tax burden” is starting to be used more often to describe an individual’s tax obligation.

What Kinds of Taxes You Pay

Taxes in the United States typically fall into one of the following categories:

  • Regressive: a “flat” tax on goods, services, and utilities where the rate is the same for everyone regardless of income. Examples include sales and gasoline taxes.
  • Progressive: a tax where the amount of the obligation is based on income. Although tax brackets and rates are subject to change, there are currently seven brackets for ordinary income: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Proportional: a “flat” tax on income where the rate paid is the same regardless of income. For example, a proportional tax of 20% means that a person making $25,000/year pays $5,000 in income tax. In contrast, an individual making $100,000/year pays $20,000 in income tax. Many states implement a proportional tax on income.

How Do You Determine Your Tax Burden?

If you think about your tax burden, chances are you’re thinking about your federal and state income taxes. But your overall tax burden encompasses all of the taxes you pay. These can include:

  • Federal income tax
  • State income tax (where applicable)
  • Capital Gains taxes
  • Sales tax (where applicable)
  • Property tax
  • Gasoline taxes (federal, state, and local)
  • ”Sin” taxes (tobacco, alcohol, soft drinks)
  • Wireless/cellular and utility taxes
  • Estate and gift taxes
  • Small business taxes
  • Other fees such as vehicle registration and hunting licenses

Your individual tax burden is all of the taxes and fees you pay to government entities relative to your income.

So, You Want to Reduce Tax Burden

When you look at that list above, it seems like there are a lot of hands reaching into your wallet. Even if it looks like some taxes don’t apply to your situation, you may still have the burden passed along to you. For example, if you rent your home, there’s a good chance your landlord is adding the cost of property taxes (not to mention sales tax on maintenance and repairs) to your monthly rent. And then you read stories about billionaires like Jeff Bezos, whose “true tax rate” amounted to less than one percent (remember, the lowest rate for the rest of us is 10 percent), and it sets your teeth on edge. So, naturally, you want to stem the flow of your hard-earned money to the government. The good news is you don’t need to be rich enough to afford an army of accountants and attorneys to lower your income tax obligation.

What is the Best Way to Reduce Your Tax Burden

From Health Savings Accounts to Home Office Deductions, several options are available to help you lower your taxable income. For instance, you can keep track of the sales tax you pay and itemize that on your federal tax return. You can also open or add to a retirement account such as a 401(k) or a traditional IRA. (Your contribution to a Roth IRA is taxable now, but you won’t have to pay taxes when you retire and withdraw money from the Roth account.)  But if you’re community-minded (or you don’t have a bunch of extra cash hanging around to drop into an IRA or HSA), you might want to consider donating to a charity. Despite the COVID-19 pandemic spurring an economic meltdown and demonstrations for racial justice throughout the country, charities took in $471.44 billion in 2020. Individual gifts to non-profit organizations rose by 2.2 percent in 2020. Donations from individuals hit the highest dollar amount on record, totaling around $324.1 billion. By contrast, corporate contributions dropped by 6.1 percent in 2020. Among the big beneficiaries of increased giving are education-oriented organizations (up 9.0 percent) and environmental and animal charities (up 11.6 percent).

Why Donating to Charity is a Great Way to Lower Your Taxes

Unlike many other ways to reduce your tax burden that require a substantial cash outlay, you can donate cash or goods to a qualified 501(c)(3) non-profit organization. You need to follow specific rules for non-cash donations to claim your tax deduction. First, you need to be sure any clothing, household appliances, or furniture you donate is “gently used” and in good condition. In other words, scrutinize your donation and consider whether you would be willing to pay money for it. If it’s stained or broken, you (and the charity) are better off throwing it out. Second, make sure you get your receipt. Especially if you donate $1,000 or more in items, such as a vehicle. You’re going to need documentation to verify your donation. And if you donate an item that is not in “good used condition or better,” you’ll be required to submit a qualified appraisal with your tax return . You’re entitled to a tax deduction equal to the fair market value of the property you donate to charity (a big plus if you’re donating high-value or appreciated items such as antiques, collector’s items, or designer clothing). So you must have your documentation in good order when it’s time to file your tax return.

Finding the Best Charity to Donate To

With over 1.8 million non-profit organizations qualified as tax-exempt by the IRS , finding the right charity can be overwhelming. Of course, you’ll want to donate to one that aligns with your values and interests. But you also want to be sure that your donation will go to helping those in need. Ideally, the non-profit you choose should use no more than 30 percent of donations for administrative and fundraising costs. Sites like GuideStar.org and Charity Navigator are valuable tools to help you research non-profit organizations in your area. Both have searchable databases with advanced options to search by city and state. GuideStar and Charity Navigator also provide profiles of individual organizations using information from trusted sources, including IRS 990 forms and annual reports. Charity Navigator also offers a rating system based on an organization’s finance and accountability score and its leadership and impact.

Maximize Your Tax Deduction: Donate Your Old Car

Chances are, one of the highest value items you can give to a charity may be in your driveway. If you’ve got an old car you no longer drive, you may get more value from it by donating it rather than trying to trade it in or sell it. Under IRS regulations, the amount of your tax deduction is determined in one of the following ways:

  • The amount the charity receives on the sale of the car. If the charity sells the vehicle for $4,000, then that is the amount of your deduction.
  • You can claim a deduction based on the fair market value of the car if the charity retains and uses it or if they sell it at a steep discount or give it to a person in need.
  • You can claim a deduction of the lesser of $500 or your vehicle’s fair market value. For example, if your car is valued at $800, but the charity sells it for $400, you can claim a $500 deduction.

An organization like Newgate School can help you get the maximum value from your vehicle donation. The school uses donated cars in its auto mechanic and auto body repair programs. The reconditioned and repaired vehicles command more money when they’re resold. And you’ll get all of the paperwork you need to file your tax returns.

KonMari Your Way to Lower Taxes

If you’ve got stuff around the house or a car in the driveway that doesn’t spark joy, donate it to charity. It’s a great way to reduce clutter and your tax burden. And when you give to an organization like Newgate School, you're helping disadvantaged people in the Twin Cities train for a fulfilling career.