How to Minimize your Federal Taxes while Maximizing your Wealth

As the title suggests, I saw this social media post regarding taxes. While it wasn’t the worst thing that I had ever seen, it wasn’t good or better yet not accurate. Most Americans have no idea how the US tax system works.

From tax brackets, exemptions, adjustments, etc; the system seems intentionally convoluted. Maybe that’s why a lot of people love to truncate the information into negligent but bit-sized elements. Don’t worry you will not get the tax book here, just a general understanding of why it’s better to cut down your taxes to improve your wealth velocity.

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From casual financial education negligence to full incompetence and worst fraud, social media runs a gamut of bad takes and opinion-based advice. To clear things up, the US has one of the best and cheapest tax structures for a developed country. Even 30 percent beats a base tax rate of 45% similar to other famous tourist destination countries in Europe. We might not have universal healthcare but we do have more room and freedom to use our money as we see fit.

Admittedly, taxes aren’t easy to master. At the same time, the core concepts aren’t that difficult. For example, the tax code is based on biblical principles. It benefits education, productivity, family and business creation, charitable giving, and home ownership. Using the code you can avoid paying taxes based on the tax credits, provisions, and phaseouts.

While it might seem counterintuitive, you are better served by not spending every dollar you earn. Instead, make sure you are maximizing available financial strategies that offer mitigation techniques.

The social media post that sparked this blog post, featured a person making $100,000 in Maryland. By the way, I also live in Maryland. That person pays nearly 30 percent in Federal, State, and Local Taxes and FICA. In dollar figures that’s close to $30,000.

That person making $100,000 should have managed his/her money differently. Ultimately, they pocketed a respectable sum of $70,000, which is still 40 percent more than the median US net income. Assuming that the person has the typical Millennial $5,000 monthly spending for a single person, the person would have $10,000 remaining at the end of the year.

Screenshot from Maryland at a Glance, MD Median Income vs National Median Income

A better way to Build Wealth while Avoiding Federal Taxes

Here’s a better way to use your money (refer to the graph). If you have a 401k, this is how you use it. You opt into your employer’s sponsored plan, pick up the matching contribution (on avg. 3 percent), and contribute as much as possible.

In this example, a person making $100,000 should aim to avoid as much taxes as possible with the $23,000 contribution plus the $3,000 match.

This would help them save as much as $6,873 (6.8 percent less). An extra perk would be the investment growth increase of $2,080 (annualized avg. of 8 percent).

	Regular Total	Percentage of Total	Tax Avoidance Adjusted	Diff.
Gross Income	$100,000	100%	$100,000
– 401k Contribution Limit for 2024 ($23k)	$0.00		$23,000	-$23,000
– Taxes	$29,889	29.89%	$23,016	-$6,873

Federal Taxes	$15,009	15.01%	$11,558	-$3,451
State Taxes	$4,299	4.30%	$3,311	-$988
Local Taxes	$2,931	2.93%	$2,256	-$675
FICA	$7,650	7.65%	$5,891	-$1,759

Net Income	$70,111	70.11%	$53,984	-$16,127

*Making $100k in MD

In total, that person would have less in net income however if you add the wealth component of $28,080, that’s a grand total of $82,064.

This represents nearly $12,000 more than the original example. Everyone wants more money and there it is, an extra $1,000 average monthly in wealth. Over a working career of 30 years at the historical average of 8 percent, the investment portion alone would be up to $3 million (Refer to the graphic below). As stated before, this isn’t a full breakdown of taxes, just an understanding of why you need to minimize your burden and build real wealth.

If you want a deeper dive into taxes for 2024, check out “Here are the Latest 401k, IRA, HSA, and Other Contribution Limits for 2024.”