Straight from Boston: a small treatise on taxation (and the need to rebel!)

Aaron Williams, CFP®

My July 4th vacation was, quite simply, amazing. I’d never been to Boston before, and to tour the city during the days surrounding Independence Day made my visit particularly poignant. Truly, this is a city with history baked into every street corner. We visited sites that, until now, I had only read about. Bunker Hill. The Old North Church. The Old State House. The Boston Massacre Site. The list goes on and on. It was fascinating to be right there where one event after another led our country toward revolution. What finally pushed the people over the edge to revolt once and for all against England and Parliament? Taxes.

Simply put, the colonies were being oppressed by taxation. If you’re not familiar with James Otis (whose grave I visited just footsteps away from Paul Revere’s tombstone), you’ve surely heard his famous quote: “taxation without representation is tyranny”—the phrase he used in 1761 to argue against Parliament’s imposition of taxes on the colonists who had no representation in the House of Commons. Just a few years later, in 1765, Parliament approved the Stamp Act, which required colonists to pay taxes on every page of printed paper they used. The rest, as they say, is history. Although an organized boycott of British goods and general unrest led Parliament to repeal the Stamp Act in 1766, the Tea Act of 1773 was the straw that broke the camel’s back. Patriots (no, not those Patriots!) organized the Boston Tea Party that same year, famously tossing 18,000 pounds of British tea into Boston Harbor. Three years later, on July 4, 1776, the Declaration of Independence was adopted—the document that started the Revolutionary War. And it was all (or at least mostly) about, you guessed it, taxes.

Revisiting these stories from the past—and visiting many of the actual sites—was a great reminder of the importance of taxation. Benjamin Franklin is the one who wrote, “Nothing in this world can be said to be certain, except death and taxes.” And yet over-taxation is something even the most patriotic Americans among us would like to avoid. The good news is that, with a little wise planning, there’s no need to toss any tea into the harbor. Here are 5 simple steps to take today to help minimize your own taxes come April 15, 2020:

  1. Plan ahead. Even if you’ve adjusted your withholding rate after paying your 2018 taxes, there are a number of things that may require more fine-tuning. If you have a large income event, such as a sizable bonus, vesting of restricted stock shares, or anything else unorthodox in your income flow, contact your CPA now to avoid paying excess taxes and potential penalties in the spring
  2. Max out your retirement plan. If you have excess income to spare, increasing your retirement plan contribution can help put an impressive dent in your tax bill. Contributing the maximum amount to your 401(k) or 403(b) is easy. If you can afford to do more, ask your employer if they offer a deferred compensation plan that allows you to sock away additional income until retirement when your tax bracket will likely be lower than it is today.
  3. Take advantage of a Health Savings Account. A Health Savings Account (HSA) is the only completely tax-free savings vehicle I know of, allowing you to contribute with pre-tax dollars, grow your assets tax-free, and make tax-free withdrawals (as long as they are used for qualified medical expenses). Learn more about this powerful tool in my blog post, Announcing the King of All Savings Accounts: The HSA.
  4. Make your charitable giving tax-efficient. Even though the new tax laws have made it more difficult to receive a tax break on charitable gifts, there are strategies that can help—especially if you give $10,000 or more each year to charity. Learn all about the power of “bunching” and how a Donor-Advised Fund (DAF) can help in Jared Defore’s blog post, Want to Make the Most of Your Charitable Gifts? It’s Time for a Michigan Left!
  5. Contribute to a 529 account. The 529 plan is the most popular college savings plan today thanks to its fantastic tax benefits. While the money you put into a 529 plan can’t be deducted from your federal taxes, it grows tax-free as long as the funds are used for qualified educational expenses. Plus, Indiana residents can receive a 20% tax credit on up to $5,000/year contributed to a 529 plan, reducing your state taxes by up to $1,000. Learn more in Katie Fischer’s blog post, Parents: Don’t Wait to Start that 529 Plan!

    One last thing: don’t let confusion thwart your efforts! The Boston Massacre may never have happened if it weren’t for a very unfortunate confusion about a building fire. With protestors in the streets and British troops at the ready, a fire broke out. The church bells rang and someone yelled “FIRE!” to alert people to evacuate the burning building. When the British officers heard the yell, they confused it for an order. They fired shots into the crowd, killing five people and wounding seven others. All over a misunderstanding. Similarly (though not so tragically), stock losses aren’t always a bad thing. In today’s heightened stock market, your losses can be used to offset significant gains. Instead of yelling “FIRE!,” ask your financial advisor to explore how tax-loss harvesting might lessen the impact of taxable gains. What a great way to follow in the footsteps of our Founding Fathers!

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    Looking for ways that you may be able to decrease your taxes? Give me a call today to explore what tax planning strategies may be right for your personal situation!

    Aaron Williams, CFP®
    Senior Financial Planner


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