Only you have the power to reduce your taxes! This is because you have to know which actions will result in the ability to write off a cost as an expense. You have to know enough about how to apply the tax code to your situation in order to use it to your benefit.
For example, you don’t have to know all of the rules of a 1031 exchange, just that you know what one is and when you might be able to take advantage of one.
Similarly, you don’t have to know the exact tax form you need to write off a recent home energy efficiency purchase (e.g.insulation). You just need to know that you can lower your tax burden and reduce your utility bill by adding insulation to your home.
In fact, adding adequate insulation is one of the most cost-effective home improvements that you perform on your property.
Tax Credit Amount: 10% of the cost, up to $500.
You Are Your Own Bookkeeper:
To take advantage of this tax credit, all you have to do is keep track of the expense on a spreadsheet and give it to your tax accountant at the end of the year. You are your own bookkeeper, which can be a good or bad thing.
It’s great if you know which expenses to keep track of or terrible if you don’t know what you are doing.
If you don’t know what you are doing, the result will be that you will pay the most you can possibly pay in taxes.
Why You Need to Understand the Principles of the Tax Code:
The government uses incentives to get the free-market (entrepreneurs, homeowners, and investors like you and me) to focus on projects that it wants us to invest in, build, and/or fund.
When we do want the government wants, the government rewards us with tax breaks!
Luckily, you don’t have to memorize all 2,600 pages of the tax code. You just need to understand the principles behind them.
Once you understand the tax code principles, you’ll know when you may be in a situation to write an expense off. When you get good at recognizing these kinds of situations, you will edit your actions so that you purposely take the path of putting yourself in more of these kinds of situations.
The saying, “You don’t know, what you don’t know” rings true in this situation.
If you spent time learning about the principles behind the tax code, then when you find yourself at a crossroad, you can ask your tax advisor how to navigate the situation to your advantage.
With the tax code principles in hand, you can apply this knowledge to your daily actions.
For example, you can write off meals with a business partner or a friend who consults in your industry.
You just have to write down:
- What you talked about
- Who you eat the meal with
- Save your receipt (take a photo and store it electronically)
Then you can write it off as a marketing or consulting expense.
The two areas that our government gives the most tax incentives are in the areas of owning a business and in real estate. This is because these two areas provide jobs, housing, products, and services.
Sustainable Business Practices: Upcycle, Recycle, and Downcycle
It is becoming an indisputable fact that the future of business prefers ESG companies.
The world’s economies are slowly moving from a linear to a circular economy. The main driver is due to the fact that the “old way of doing things” is just no longer a viable option.
The transition toward a circular economy has to occur because our linear economy of “make, use, and dispose” is unsustainable.
The goal of a circular economy is to use raw materials more efficiently, resulting in a reduction in waste. When a product reaches the end of its life, its materials are kept within the economy wherever possible. By doing this, we can continue to use the same materials over and over again.
In a circular economy, we would “make, use, and return”. Here is a great video by CNBC that quickly explains how a circular economy works.
Upcycling, also known as creative reuse, is the process of transforming by-products, waste materials, useless, or unwanted products into new materials or products of better quality or for better environmental value.
In other words, upcycling is the process of converting old or discarded materials into something useful and often times more beautiful with more value.
Conversely, downcycling is a recycling practice that involves breaking an item down into its component elements or materials. Once the elements or materials are recovered, they are reused if possible. Usually, the reused materials are created into a lower-value product.
The main take away is that resources are limited because our planet does not have the capacity to produce an unlimited amount of natural raw materials.
For example, not only is the amount of copper in the ground is finite. But, pulling new copper out of the ground results in deforestation and the use of transportation fuel (which is bad for the environment and our Global Warming problem). Instead, it would be better for us to reuse the copper that is already in circulation.
Why We Need to Move to a Circular Economy:
The human population continues to grow at an incredibly fast rate. In fact, the UN reports that “roughly 83 million people are being added to the world’s population every year”.
The latest world population projections indicate that the global population will reach 10 billion people in the year 2055 and 11 billion in the year 2088.
To see a website dedicated to the global population growth visit worldometers.info. It is pretty scary to watch how many people are born every second and know that each one of those people needs to be fed, clothed, and bathed. Now imagine that each one of those people wants to buy a house, car, and iPhone.
How to Reduce Your Carbon Footprint While Increasing Your Income?
Eco Economics is devoted to helping you learn about personal finance while creating a more sustainable future.
Remember, saving is the core of investing. One way you can save money is by buying reusable and sustainable products. A second way to save is by insulating your home.
Start saving money today so that you can purchase income-producing assets to secure your financial future.
Becoming a minimalist will inherently help you save more money (because you are buying less). This, in turn, will allow you to invest more. The zero-waste lifestyle has many health and budget benefits.
How to View the Tax Code:
By learning the tax code you can keep more of your hard-earned money.
Think about your financial IQ, financial report card, and financial freedom like it is a game. Once you shift your perspective, you will love learning about how to win the Financial Freedom Game of Life.
Treat the tax code as if it were a treasure map. As you follow the map, your taxes will go down. In turn, you get to keep more of your money, which you will then re-invest to make more money!
The Financial Freedom Game of Life is exactly that… A Game, so use all of the tools you can to ensure that you have the best chances of winning.
Are you saving for retirement? Hopefully, the answer is yes. If it is “Great”!
Are you invested in mutual funds? Like a Target Date Fund?
If the answer to this is yes, you are likely paying too much in fees!
To quote Nerdwallet,
“A 1% Fee Could Cost $590,000 in retirement savings over 40 years.”
Be a Life-Long Learner:
There are many ways to learn throughout life, all of which cost money, time, or a combination of both. Typically, there are 3 ways to learn. You can pay to learn a subject, ascertain knowledge from a mentor, or you can go through the-school-of-hard-knocks.
With a mentor, you are limited to the time that you are able to physically spend with them and you need to coordinate your schedules. Your mentor has their own life, so you will likely need to conform your schedule to theirs.
The difficult part with the “learn-as-you-go” through the trial-and-error method is that you may not know what you should have done instead.
More importantly, you cannot undo mistakes (you can only learn from them because the damage is already done). Typically, there is a cost for fixing a mistake, whether it be a monetary or time cost.
Another result of the “learn-as-you-go” through the trial-and-error method is that you will constantly get blindsided by obstacles and have serious feelings of uncertainty.
Invest in yourself and take the time to learn about the tax code.
Like what you see? Stay a while!
- Tax-Free Income: A Guide to Reducing Your Taxes Legally (Part 1)
- How to Invest in Socially Responsible Companies while Timing the Market
- Financial Freedom: Investing in Sustainable Companies
- Financial Planning: Tax-Free Benefits from a Life Insurance Policy
Feedback is always welcome, so feel free to comment below!