The Best Way to Reduce Tax and Increase Your Net Worth
I often get asked by my clients, ‘what’s the best way to save big on taxes?’ Well, for most people, here it is. Saving for retirement saves on tax and improves your net worth immensely. There are a lot of numbers below, and for the most part I’m going to let them speak for themselves. If you have a little extra cash in your business (<$20K in this example), you can reduce your tax $18K and better your net worth by $56K….$56K!! That adds up over the years. Some (but not all) of this relates to a change in the tax code, QBI, which allows S-Corps, which most of our clients operate, to deduct up to 20% of their net profit from taxable income. But this deduction fully phases out once you surpass $415K of taxable income (Married Filing Jointly). So reducing your taxable income by putting it into a qualified retirement program can make you “re-eligible” for this deduction and other credits like the Child Tax Credit. To recap, putting money into a retirement program does triple duty:
- It reduces your tax
- It builds your net worth
- It can unlock tax credits and deductions (like QBI) that phase out if your income is too high.