5 ways to avoid taxes...legally

What's up, you guys? It's Graham here. So, the time is fast approaching, and that would be the dreaded April 15th tax deadline. This is the deadline for filing your tax return and submitting any payment you might owe to the IRS or to the state.

I get it; this is a very, very sad time for most of us. Even with the new tax code that went into effect in 2018, many of us are still unknowingly paying more than we actually need to in taxes, mostly because we aren't aware of all of the options that we have to bring down our taxable income and therefore pay less money in taxes. That means that when it comes to building your wealth, just understanding these very basic tax reduction strategies can help keep more money in your pocket at the end of the year.

So, in a way, it's almost like you're getting paid to understand and utilize some of this information. Now, when it comes to doing this, the secret to paying less in taxes is to make your income look as low as possible without actually reducing your income. I'm first gonna start with the strategies that are going to work for pretty much anyone watching, and then I'll move on to the more niche techniques towards the end.

And really quick, I just got to mention YouTube's disclosure here; really important stuff. But this is not financial or tax advice. This is all for entertainment purposes only. Do not listen to some random dude on YouTube for your very important tax advice. Always consult a licensed CPA for your own specific situation. Your results may vary and will depend heavily on your state, your income, and your tax bracket, your marital status, and whether or not you smash that like button if you haven't done that already. That helps!

With that said, let's get into the video.

Number one, in terms of reducing your taxable income, one of the most widely used and most popular methods of doing this is through what's called a traditional 401(k) contribution. This is a retirement account that's created through your employer that lets you contribute money and then reduce that from your total taxable income.

For example, let's just say that your total taxable income is $80,000 for the year, but then you contribute $10,000 to a traditional 401(k). That reduces your total taxable income down to $70,000. So now you're not taxed on that extra $10,000 worth of income. And with a 401(k), you're allowed to contribute $19,000 per year into this account, which means that if you do this, the IRS will tax you as though you've just made $19,000 less. For someone who does this in a 24 percent tax bracket, this means that should save you about $4,500 in taxes.

Now, it's even better than this: if you're self-employed, you could open up what's called a solo 401(k) that allows you to contribute up to $56,000 per year. That could be a substantial reduction in your taxable income by a lot. However, keep in mind that with a 401(k), there is no such thing as a free lunch, so even though you're not paying taxes now, you'll end up paying taxes later upon retirement after the age of fifty-nine and a half.

But the strategy when doing this is that hopefully you'll be in a lower tax bracket by the time you retire and aren't working full-time, and therefore you end up paying less in taxes later than you would pay in taxes right now.

Number two: the second way of reducing your taxable income is through what's called a traditional IRA. Now, this one is very similar to the 401(k) except anyone can go and open up one of these accounts, contribute up to $6,000 per year, and then reduce that from their taxable income.

So, this means, just like our last example, if you're making $80,000 a year and you contribute $6,000 to a traditional IRA, your taxable income is now reduced to $74,000, and that should save you about $1,320 in taxes. And also, very similar to the 401(k), even though you don't pay taxes on this money now, you will end up paying it later in retirement. But this could still be another really great account to use for anyone who's already maxed out their 401(k) and just wants to stash away a little bit more money to save a little bit more on taxes.

Now, of course, another YouTube disclosure here: there are limits to doing this depending on your filing status and how much money you make. So if you're interested in learning more, I will link to some other resources in the description.

Now, the third way of reducing your taxable income is something that not a lot of people know about. It's not really widely used; it's not really widely talked about. But in terms of practicality, it's probably one of the best options in this entire video, and that is what's called an HSA, which stands for Health Savings Account.

This is probably one of the best-known secrets out there, even though it's not really a secret; it just seems like no one really talks about this and it's not really widely used, even though it really should be. Now, the thing is, in order to qualify for this, you must have a high deductible insurance plan. This means that you have a $1,350 deductible per year as a single filer or a $2,700 deductible for a family. The plan must also have an annual limit on out-of-pocket expenses that cannot be more than $6,750 per year for single coverage or $13,500 for family coverage.

Now, assuming you qualify for this, you can contribute up to $3,500 per year completely tax-free into this account. This account is specifically meant to pay for any out-of-pocket medical expenses or charges that you incur. And if you don't spend all of the $3,500 in a year, that's totally fine; it all rolls over to the next year.

Now, this one is really great because in my opinion, this is probably one of the best tax-advantaged accounts in the entire world. First of all, you don't get taxed on any money you contribute to that account, so that's all tax-free. And secondly, you don't get taxed when you spend that money on any health-related expenses, so that is also tax-free. It's pretty much like you're just getting completely tax-free money that you will never be taxed on when you spend it on any medical-related expenses, which just, let's be real, at some point or another, we will all have some sort of medical-related expense.

This potentially means that you can reduce your taxable income by another $3,500 and save just a little bit more in taxes. Now, of course, there is some extra fine print and details that you must know depending on your state's. So if you're interested in learning more, I will link to some of the resources down below in the description.

Now, the fourth way of reducing your taxable income that not many people know about because it's a little bit more niche is what's called a 457(b) plan. Now, this one is designed for people who are employed by a local government or a state, so not everyone can go and get one. But if your employer offers one of these, you're very lucky.

Now, with this account, you're allowed to contribute up to $19,000 per year and reduce your taxable income by that amount - exactly like if you had a 401(k). However, the benefit with a 457 account is that you don't need to wait until the age of 59 and a half to withdraw your money. You can take out your money at any age without paying a penalty upon retirement.

So, this means if you plan to retire before the age of 59 and a half, well, you're in luck; you can just begin withdrawing your money. So, this account is pretty much very similar to the 401(k), except that you don't need to wait until you're 59 and a half to withdraw your money.

Now, number five: the fifth way of reducing your taxable income, and I have a feeling that pretty much everyone is going to be doing this anyway, but I figured I would mention it because why not, is what's called the standard deduction. This is pretty much the basic amount that anyone is able to deduct from their total taxable income.

This means that if you're making $60,000 per year and you're single, you could just go ahead and take the $12,000 standard deduction, and you will be taxed as though you've now only made $48,000. So it's super simple, very easy. And also, if you're married filing jointly, that number jumps to $24,000. So there you go, congratulations, you just doubled the standard deduction.

So anyway, for most people, this is fairly straightforward, and it's just a very simple, easy one to take. Now, let's pause here really quick for one moment to smash that like button if you haven't done so the first time, and we'll go ahead and we'll add some of these numbers up.

First, you can reduce your taxable income by $12,000 by taking the standard deduction. Next, you can reduce your taxable income by another $19,000 by contributing to a 401(k) or a 457(b). Next, you can reduce your taxable income by $6,000 by contributing to a traditional IRA. Next, you can reduce your taxable income by another $3,500 by contributing to an HSA.

Just right there, that alone can give you a reduction in taxable income of $40,500. That could be a tax savings of $10,000 or more depending on your tax bracket. But wait, there’s more! If you're self-employed, you have a few other options available to you, and this is where it gets pretty interesting.

Now, I say this as someone who is self-employed, but one of the methods that I have used to reduce my taxable income is by setting up an S Corp. This is pretty much just a legal entity that you create to run your business through. This means that all of your business income that you generate goes into the S Corp, and then all of those expenses come out of the S Corp.

By doing this, the S Corp really becomes your main hub of doing business, and then you are paid directly from the S Corp into your own personal account. In very basic terms, with an S Corp, you become the employee and the S Corp that you create becomes the employer. This means that you just get paid a base salary as an employee of the S Corp, and then any additional money that's left over after that salary is given to you in the form of what's called a distribution.

So why then is this important? And hopefully none of this sounds too confusing. Now, the reason why this has so many advantages is that the distributions from an S Corp are not subject to Medicare or Social Security taxes. Just doing this alone can save you about 15.3% on taxes, and this adds up very, very quickly.

Like if you have a business that's making you $200,000 a year in distributions, that alone can save you about $30,000 a year in taxes. Now, this one is really meant to be something that you discuss with a CPA if this is something you're interested in because this is way beyond the scope of what I can discuss and what I can say on YouTube because it's so specific depending on your income, your business, and so many other variables.

So, talk this over with a CPA. The whole point of this video is really just to give you ideas; it's like planting the seed, and then it's up to you if you want to grow the seed into a tree. By doing so, that is looking into this further and seeing if this might work for you.

Now, in addition to running an S Corp, reducing your taxes even further is really just about becoming as tax-efficient as you can with your income. These are two very popular examples of doing this. The first one is by taking advantage of what's called long-term capital gains. Here's an example: when it comes to this, let's say you go and make an investment, but you sell that investment within twelve months for a profit.

That profit that you make will be taxed at your normal income level as ordinary earned income. This means that if you're in a 24 percent tax bracket, that profit that you make will be taxed at 24 percent. However, if you just keep that same investment for longer than a year and then you sell it, it's taxed at the long-term capital gains rate.

That means for anyone making less than $434,000 a year, the long-term capital gains rate is only 15 percent. That is a 9 percent savings in taxes just by holding your investment for longer than one year. This is why I personally really like the buy-and-hold investment strategy. Not only does this tend to be a little bit more stable, but also the tax treatment by holding an investment for longer than a year is amazing.

Now, the second method to becoming as tax-efficient as possible is by depreciating assets within your business. So, this means that hypothetically, if I have a business that makes $10,000 in profit, I can offset that by showing $10,000 in depreciation and therefore wiping out any tax that I might owe. The same also applies with real estate and with rental income. This is how on my rental income I really don't pay much tax on that because I could depreciate the value of the property over twenty-seven and a half years to offset that income.

Again, this is really something that you need to bring up with a licensed CPA because every single business asset has its own depreciation schedule that you must follow, and that's impossible for me to get into in one YouTube video. So, of course, consult a licensed CPA for all of your financial advice.

And that brings me to the best way to save on your taxes by far of this entire video. This is it, and all it is, is just to hire a good CPA. The reality is that the current tax code is so unbelievably complicated, and there are a million moving parts depending on so many variables, and especially if you run any sort of business and you're buying assets and you're depreciating things, hire the best CPA that you can.

I pay mine about $2,000 just to file my taxes, and it is worth every single penny. In fact, I think it pays for itself. And also, when it comes to filing your taxes, there are so many things that might work for you but won't work for someone else and vice versa. The whole thing is just way too stupidly complicated. Hiring a good CPA is really the best tax reduction strategy in the entire world; just go ahead and do it. It's so worth it.

Lastly, one more tip, just as a thank you for everyone who watched into the very end, this is awesome! So, one last one for you. Now, one final way of reducing your taxable income that is very popular is to make any tax-related business expenses by December 31st of that tax year.

For example, if you're thinking about going and buying some new equipment for your business, it's best to probably do that by December 31st so you can go and get that tax write-off immediately in April. With this, you can show that you've now made less income with money that you're going to be spending anyway, and you get the tax benefit in just a few months instead of making the charge in January and then waiting the full year to then go and deduct that off your taxes.

And again, I sound like a broken record when I say this, but I just want to make it very clear: not financial advice for entertainment purposes only. Consult with the CPA for your own specific situation. But with that said, thank you guys so much for watching. I really appreciate it! If you guys enjoy videos like this, make sure to smash that subscribe button, hit that notification bell so YouTube notifies you anytime I post a video.

Also, feel free to add me on Instagram; I post there pretty much daily. So if you want to be a part of it there, feel free to add me there. Thank you again for watching, and until next time!