You may recall the story of Jesus being confronted by the Pharisees about whether or not to pay taxes to Caesar. This was not the first attempt to trap Jesus in his teachings. His response was surprising and enlightening. (And if you keep reading, you might find new ways to reduce what is “Caesar’s”…)
15 Then the Pharisees went and plotted how to entangle him in his words. 16 And they sent their disciples to him, along with the Herodians, saying, “Teacher, we know that you are true and teach the way of God truthfully, and you do not care about anyone’s opinion, for you are not swayed by appearances.[a] 17 Tell us, then, what you think. Is it lawful to pay taxes to Caesar, or not?” 18 But Jesus, aware of their malice, said, “Why put me to the test, you hypocrites? 19 Show me the coin for the tax.” And they brought him a denarius.[b] 20 And Jesus said to them, “Whose likeness and inscription is this?” 21 They said, “Caesar’s.” Then he said to them, “Therefore render to Caesar the things that are Caesar’s, and to God the things that are God’s.” – Matthew 22:15-21
Mic drop. (Well, pretty sure He didn’t have a microphone at the time, but if he did, a drop would be appropriate.)
How we most likely respond to this teaching is that we should pay taxes. If you believe in the Bible as the ultimate authority, there is further instruction found in Romans 13:
1 Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God…6 For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. 7 Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.
Now let me be clear: I do NOT like paying taxes. Period. However, I also prefer to not be in jail while my kids grow up into adults. Therefore, I pay taxes that are owed to local, state and federal government entities. I also constantly look for opportunities to reduce what is owed.
As one of my tax professors asked: “What is the difference in tax avoidance and tax evasion?” Answer: Avoidance = Legal; Evasion = Illegal.
Ways to Pay Less
So how can you pay less in taxes? If you’re a resident of the State of Mississippi, you have a newly established tax credit opportunity! A tax credit is a dollar-for-dollar reduction of taxes owed. A deduction lowers your overall taxable income. Bottom line: A credit is better than a deduction. You are redirecting tax dollars owed to the State to a select charity (or group of charities).
The Children’s Promise Act
The new credit allows for a State tax credit up to $400 (single) or $800 (married filing jointly) for donations made to a select list of charities. There is another $500 credit (single) or $1,000 (married filing jointly) for a separate list of charities. That’s a potential $900 total credit for single tax filers and $1,800 married filers! There is a $3 Million cap for the entire amount available. As of mid-November, there is approximately $2.8 Million still available! Click on this link to learn more. And of course, discuss with your CPA or tax professional to see if this opportunity works for your specific tax situation.
Saving for retirement in tax-advantaged accounts continues to be a significant way to reduce your tax liability. The IRS recently released the new contribution limits for retirement plans and accounts. A highlight is that 401(k), 403(b) and most 457 plans allow for a $19,500 deferral, a $500 increase from 2019. Contribution limits for Traditional and Roth IRAs are unchanged at $6,000. However, don’t forget about the age 50 and over catch up contributions! (Click here for the IRS update on contribution limits.)
Saving for college continues to be a struggle as college costs increase. Thankfully, there are several tax-efficient ways to save for college (and high school) for children and grandchildren, such as a 529 plan, Education Savings Account (ESA), Minor’s investment account (UTMA or UGMA) or a pre-paid tuition program. Each of these plans or accounts has its place in college planning. Deciding which one starts with the goal in mind. We would be glad to help walk you through the pros and cons of each option.
Hopefully, you have learned a new strategy or two that could help reduce your tax burden. The tax code continues to be quite complex. But if you look hard enough, you may find a way to better direct your hard-earned dollars.
*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.