Tax Freedom Day

capital small[dropcap1]D[/dropcap1]id you know that the “average” working American worked from January 1st of this year through April  17th to satisfy the total tax bill of their State, local, and Federal government?  By this, I mean that every single dollar earned (by the average working American) during this period went towards taxes…and not a cent went towards household income.

According to the Tax Foundation (, this is 5-days later than in 2012.  It is 5-days later because of the increase in Federal taxes mandated by the ‘fiscal cliff’ deal.  This means that the average worker works nearly a third of the year just to pay their taxes.  So what might you be able to do about this to help ‘soften’ the impact of our tax laws?

  • Save in your tax-qualified retirement account.  Depending on you and or your spouse’s employment status and income levels, you may be able to save money in an IRA, a 401k, 403b, 457, Section 79, Defined Benefit Pension Plan, or one of many other options in the defined contribution realm of retirement accounts.  Annual contribution limitations on these accounts range from $5,500/year to more than $200,000.
  • Most of these accounts afford you the benefit of deferring taxes right off of the top of your income for that particular year.  Additionally, the growth on these accounts through successive years is not recorded as taxable income.  Upon withdrawal however, you will typically receive this money as ordinary income, and be taxed according to your current income tax bracket.
  • Purchase a high deductible health plan and invest the premium savings into a Health Savings Account (HSA).  Gaining more control on your health plan (and their accompanying premiums) can reduce the amount of income taxes owed.  HSA accounts are tax-qualified accounts that allow you to contribute on a tax-free basis (up to $6,450 for a family in 2013) and can reduce that amount from your taxable income.

Money in this account also grows tax-deferred, and when withdrawn for a qualifying medical or health related expense, may be withdrawn tax-free.  In short, this is one of the only types of accounts where you might receive a tax benefit immediately, during growth, and upon withdrawal.  This is a very powerful, yet much underutilized strategy in tax planning.

  • Save in a Flexible Savings Account (FSA).  A flexible savings account allows a pre-tax contribution (like an IRA or HSA account) and can be used for a variety of medical expenses (i.e. eye-glasses, prescriptions, co-pays, etc.)  in addition to Dependent Day Care for your children.  Yes, you can set aside money from your paycheck (2013 contribution limits have reduced this amount from $5,000/year to $2,500/year) and apply that towards your day-care or child care expenses on a tax-deferred basis.  Yes, the fiscal cliff has invaded this area of tax-advantages as well!!
  • Buy a home and write off the interest expenses of your primary mortgage.  In the United States, we still have the benefit of deducting the interest expenses of our primary mortgage from our tax liability at the end of the year.  This can significantly reduce your tax liability, and may even be enough to drop you into the next lower tax bracket.  There are limitations to the amount of interest you can deduct, and this is based on personal income, the alternative minimum tax (ATM), and several other factors.  You should seek the advice of a tax professional when attempting to utilize this strategy.
  • Tax-free investing can be a powerful way to earn income without the burden of taxes (State, Local, and Federal).  You will typically receive a lower amount of interest from these bond issues (typically called Municipal Bonds**), but the computed taxable difference might be worth it.

As always, being ‘smart’ with your money through tax-wise decisions is just one step in building (and retaining) your wealth.  Spending habits and personal consumption monitoring will also go a long way in making each dollar work more for your benefit, and yield a greater reward for your discipline.  I help my clients formulate plans to achieve these goals.  Call my office to see what strategies are right for you.


  • Qualified Plans (IRAs, TSA, 401k, 403b)—Distributions may be subject to tax and 10% penalty if withdrawn before age 59 ½.  HSA withdrawals used for non-qualified medical expenses may be subject to ordinary income tax, and if taken prior to age 65, may also incur a 10% federal penalty tax.  Excess contributions are taxable and may incur a penalty.
  • NPC does not provide tax or legal advice.
  • In general, the bond market is volatile and municipal bonds carry interest rate, inflation, and credit risk.  Interest income generated by municipal bonds is generally expected to be free from federal income taxes and, if the bonds are held by an investor resident in the state of issuance, state and local income taxes.   Such interest income may be subject to federal and ‘or state alternative minimum taxes.  Investing in municipal bonds for the purpose of generating ax-free exempt income may not be appropriate for investors in all tax brackets.  Short and long-term capital gains and gains characterized as market discount recognized when bonds are sold or mature are generally taxable at both at the state and federal level.