​10 Unspoken Truths About Taxes ​​

3. If you earn your money the old-fashioned way (with a salary) saving is your best tax-cutting option … ​

For all those years when you’re collecting a paycheck, you have just a few levers you can pull to meaningfully reduce your tax bill. The best of them are 401(k)s, 403(b)s and IRAs — accounts that let you set aside large chunks of earnings for the future without having to pay taxes on them first, or as they grow in value. Yes, you’ll have to pay taxes on them someday, but often at a lower rate than you’re paying now. In 2022 you can contribute up to $27,000 to a 401(k) or 403(b) if you’re 50 or older; up to $7,000 to an IRA; or both. ​ ​

A Health Savings Account (HSA) is another useful tax-planning tool. It offers triple tax benefits: You don’t have to pay taxes on the money you put in, the account grows tax-free, and withdrawals are tax-free, too, as long as you use the money for qualified medical expenses. You can fund an HSA only if you have a high-deductible health insurance plan, which is increasingly common; 58 percent of people offered health insurance at work have access to a high-deductible plan, according to the Kaiser Family Foundation. In 2022 you can contribute up to $3,650 to an HSA if you have an individual health plan; up to $7,300 if you have a family plan — plus another $1,000 if you’re 55 or older. ​ ​

4. … but making financial moves solely to lower your tax bill can lead you to make costly mistakes. ​ ​

A lot of financial professionals — both legitimate and less so — will latch on to your desire to avoid taxes, plus your wishful thinking, to sell you expensive and complicated products that promise to protect your money from the IRS. Watch out! Picking financial products for tax purposes does you no good if the investment is a dud. “When the pitch for an investment opportunity leads with the tax savings, it’s usually a bad idea,” says Scott Bishop, executive director of wealth solutions at Avidian in Houston. “Invest in something only if you would do so without the tax incentive.”​ ​

​5. The tax system is complex, and that’s by design.​ ​

The tax code has two purposes: to provide the government with the money it needs to operate and to create incentives for taxpayers to do certain things lawmakers would like them to do, such as save for retirement, pursue an education, give to charity or even buy an electric car. ​

Whether taxes really change behavior, however, is open to debate. Take the mortgage-interest deduction, which was meant to encourage people to buy a home by lowering their annual income taxes. Economists widely argue that all the policy did was inflate home prices. At the same time, a 2014 study by the Center for Retirement Research found that the higher retirement-plan contribution limits that kick in at age 50 lead to only slightly higher savings rates.​

​Effective or not for society, these kinds of targeted provisions are popular with legislators — and they aren’t going away. “Simplification is discussed a lot, but Congress is better at creating new programs than getting rid of old ones,” Luscombe points out.​ ​

​6. Tax filing has become simpler, especially for people with modest incomes …​

​The 2017 tax-reform bill, while not delivering the promised “taxes on a postcard,” did streamline filing for many taxpayers by nearly doubling the standard deduction, which 9 out of 10 taxpayers now claim. There’s no reason to go through the wearisome exercise of itemizing your taxes if your itemized deductions are less than the standard deduction. The result is no more time spent chasing down every medical bill or donation receipt. “For the average working individual, I would argue that taxes are simpler,” Steffen says.​ ​

7. … but diving into the complexity can sometimes pay off.​ ​

Given all the fine print that taxes entail, the path of least resistance is to just enter your wage information into your 1040 and be done with it. But if you’re actively avoiding the complicated stuff, remember this: “Most of the complications are things that help you reduce your taxes,” Luscombe notes.​ ​

For example, if you’re not paying attention to the changing rules about charitable donations, you might miss out on an easy deduction. In 2020 you could deduct up to $300 in cash donations per tax return, even if you took a standard deduction; a married couple filing jointly for the 2021 tax tear can deduct up to $600. To make sure you’re not missing out on a chance to save money or even get a refund, you may have to put in some time.​

8. Unless you’re private-jet-level rich, don’t sweat the estate tax.​ ​

Because the first $12.1 million you leave behind is exempt from federal estate taxes, this is one tax you can probably ignore. The threshold is so high that few will pay it; 0.2 percent of estates triggered estate taxes in recent years. Sixteen states and the District of Columbia have estate and/or inheritance taxes, but most don’t kick in until the estate size is in the multiple millions of dollars.​ ​

Perhaps one reason people unnecessarily worry about estate taxes is that they have long memories; the exemption was only $600,000 in 1997, which today would be a relatively easy-to-reach number if you own a home. You’re unlikely to see so low a threshold again — though in 2026, absent new legislation, the exemption will revert back to where it was in 2017: around $6 million to $7 million and indexed to inflation.​ ​

​9. Moving may cut your taxes, but don’t count on it.​

​Countless lists get published about America’s most tax-friendly places to live, as if one of the top things you can do to lower taxes is to move. It’s true that at the state level, taxes vary widely, and nine states don’t even levy income taxes, making them alluring potential destinations for retirees. Before you get excited about moving to a supposedly low-tax state, however, keep a few things in mind. ​

For starters, states have to raise revenue somehow, so states with low or no income taxes may charge higher sales or property taxes. For a retiree who owns a home and buys stuff, that may matter more than the income tax rate. “If you don’t earn a lot in income, a low or no income tax doesn’t matter,” explains Richard Auxier, a senior policy associate at the Urban-Brookings Tax Policy Center. “That’s not the only tax you’ll pay.”​

​“Taxes are important but just one factor in a myriad of considerations,” says Troy Lewis, a CPA in Draper, Utah. “It may be a low-tax state, but maybe it’s not close to family, not great for your health or doesn’t have the recreational opportunities you care about.”​ ​

​10. Your tax picture will change as you age, and that’s OK. ​ ​

Once you’ve paid off your home, the mortgage-interest deduction goes away. With an empty nest, any tax benefits from having dependent children go away. Don’t get hung up on the tax benefits you’ve lost. ​ ​

In fact, your taxes could be lower than you expect in retirement. Some or all of your Social Security will be tax-free. Your state may not tax your pension (all the more reason to defer income into retirement). “The tax code tries to do a lot of social engineering to get you to buy a home or have kids,” Luscombe notes. “After those life events are behind you, taxes do become simpler.”​