Taxes: what do you need to know?

Taxes should be something that you understand. Why? Well what if I say

that you can literally save (tens of) thousands of dollars each year by makings “tweaks” to how you save. Taxes can make a significant difference on your total net worth. Rich peoples’ habit of not paying taxes has contributed significantly to their net worth. Let’s discuss how you can use it yourself.

With some small changes in your planning you could save (tens of) thousands of dollars annually. The

View after a beautiful wedding in Key West, Florida.
View after a beautiful wedding in Key West, Florida.

re are great benefits in applying these savings whether you make a little or a lot. I use them all and I encourage you to do the same. First, lets talk about the basics and go through a few simple scenarios.

Understanding Tax Rates

In the United States, taxes increase based on how much you make. The more money you earn, the higher your marginal tax rate is. That means the higher your income, the higher your marginal tax bracket on the additional dollar earned. It is known as a progressive tax rate. In some countries in Europe, they have a flat tax rate, which means that the percentage of the tax you pay does not increase as you earn more money.

Progressive tax rate:

  1. You make $15,000 / year and you pay 15% tax on the last $1 you earned or $0.15.
  2. You make $150,000 / year and you pay 28% tax on the last $1 you earned or $0.28.

Flat Tax Rate

  1. You make $15,000 / year and you pay 15% tax on the last $1 you earned or $0.15.
  2. You make $150,000 / year and you pay 15% tax on the last $1 you earned or $0.15.

Notice how the amount of taxes per dollar increases with a marginal tax rate vs a flat tax rate.

It is better to earn more money and pay more tax, as you are earning more money! – IMPORTANT

Another key item to pay attention to is that your marginal tax rate does not affect your total tax already paid.

You are probably interested in knowing more about the marginal tax rate since you are most likely in the United States. (Let me know in the comments if you are not in the US.) Due to the nature of a marginal tax rate, tax planning offers some great benefits, especially in the system where taxes increase as your income increases. You can never pay more money than you make, remember that. There are very few scenarios where an additional dollar earned would cause you to pay more taxes than money you earned.

Updated tax brackets

New tax brackets for 2018 were recently published by IRS. If you do not want to read the IRS news release, then here are the basics. Standard deduction, personal exemption and the tax brackets for 2018 are below.

You can see that all items in the table went up for 2018 slightly compared to 2017.

Every individual gets a personal exemption. Lets say there are 4 people, two adults and two children in a family who file their tax return; then personal exemption is multiplied by 4. In this example the personal exemption is $4,150 * 4 = $16,600. Our personal exemption is $8,300 as we do not have children and there are two of us. A single person without children receives one personal exemption amount of $4,150 for 2018 tax year given they are not being claimed on someone else’s tax return (meaning they are a dependent).

Standard deduction works a bit differently and it can be claimed only once per tax return. It does not depend on the number of individuals in the family like it did for personal exemption. Standard deduction for a single person who does not support children/family in 2018 is $6,500. The deduction is $13,000 for married couples with or without children. We get $13,000 as standard deduction since we are married.

There is also a category known as a head of household who is considered a primary breadwinner in a family. They could be a single adult who supports children, family or relatives. IRS has more information about the head of household here.

Tax bracket is the income range which is taxed at a specific tax rate. In the table above, you can see that if your taxable income is $5,000 and you are filing taxes as single then all of your taxable income is taxed at 10%. To illustrate this example, I will show how income taxes for a single individual differ depending on taxable income based on 2018 tax rates.

Tax calculation for an individual with a taxable income at $35,000:

Tax calculation for an individual with a taxable income at $50,000:

Now you can see how your income tax rate changes according to the tax bracket that income is earned in. First $9,325 is taxed at 10%, next $28,625 (the following max limit for tax bracket minus previous max limit or $37,950 – $9,325) is taxed at 15% and so forth as you can follow in the table.

Pay attention to this interesting example though. In the example, the individual’s income increased from $35,000 to $50,000 or total of $15,000 or 43%. Taxes on the other hand increased from $4,783.75 to $8,238.75 or total of $3,455.00 or 72%. This is a good example to see how your taxes increase at a higher rate as the income moves up to another tax bracket.

Make no mistake though. We have been talking about taxable income, but is that just your earnings from your work? NO! This is where you have to pay close attention.

How to reduce your taxable income AND pay less in taxes

Taxable income equals all income for the tax year less all deductions. 

What is a deduction? Well I am glad you asked! These are generally pretax retirement contributions and health savings account contributions. I also include personal exemption and standard deduction into this category for simplification purposes. This all reduces your taxable income. Deductions can also include losses from a business, losses from investments, travel expenses from work and other expenses that are not relevant to most people. I strongly dislike these secondary deductions. Let me explain why.

Why you do not want to qualify for odd deductions that I do not like?

I truly hope you or I do not need to use them. The problem with these other miscellaneous deductions is that you have to pay out a significant amount of money or occur losses only to get a marginal tax break. Yes, you can pay less in taxes, but then  you actually have to pay out much more money than the tax break you are getting. Let’s look at the example including loss from investments and business:

In both scenarios you are the loser.

In the first scenario where you are in the 10% marginal tax bracket  where your taxable income is between $9,525 for singles or less than $19,050 for married couples in 2018. Let’s say you lost $1,000 in investments based on the table above. Then government gives you total of $100 (marginal tax bracket * loss amount) back for your loss, so your net loss is still $900. I would definitely not be happy about this, but it is better losing $900 than $1,000 due to the tax benefit.

In the second scenario, you are in the 25% marginal tax bracket that means your taxable income is between $38,701 and $93,700 as a single taxpayer. For a married couple the taxable income is between $77,401 and $156,150. You lost $10,000 in your business and you get $2,500 (marginal tax bracket * loss amount) back on taxes. You are still out $7,500. Again, not a good spot to be in.

Taxes to FIRE or otherwise: free money
Being FI or FIRE gives you the opportunity to do whatever you would like. This is a view from Park City, Utah.
Being FI or FIRE gives you the opportunity to do whatever you would like. This is a view from Park City, Utah.

When we put aside the deductions that we want to avoid, there are still deductions that we can use. All of us get a standard deduction and an exemption. That means that first $10,650 for singles or $21,300 for married couples of income you earn in 2018 is TAX FREE. Yeah! This is something that you should understand. This does not even benefit from retirement contributions or health savings accounts. It really means that if you bring in $20 / hour (or $3,600 a month or $38,400 a year) then as a single taxpayer your taxable income is only $27,750 after we deduct the $10,650 that is tax free regardless.

Now if you open an HSA and contribute to your retirement accounts then you can reduce the taxable income even further where you may pay very limited amount in taxes.

Total tax one pays to the government depends on their taxable income and tax credits.

The truth is that the lower your taxable income, the better. There are lots of benefits to keep your taxable income low. You can put money into 401k (retirement accounts at work), IRAs (Individual Retirment Account through an investment company) and HSAs (Health Savings Accounts). I will talk more about those options in another post. Eventually when you take out distributions from these investment accounts, then you may have to pay tax on the funds that go into these accounts.

Tax planning & Optimization

There are always ways to minimize taxes through smart tax planning. There will be another post on tax planning including retirement accounts. Proper planning makes a significant impact on total savings and net worth and provides you a possibility to retire. It even gives you an opportunity to become Financially Independent (FI) or even become Financially Independent and Retire Early (FIRE).

We have been optimizing our taxes based on our situation but really this is what most people should do. Put money into 401k + IRA + HSA. Once I found out that saving for retirement also reduces your taxable income, I saw that it is a WIN-WIN. Once retirement savings are combined with a health savings account then you can put a lot of pretax money into “sheltered” accounts where the growth of the investments is not taxed.

Planning for taxes is like healthy lifestyle. Knowing what are you willing to put yourself through. Like me eating this delicious burger.
Planning for taxes is like healthy lifestyle. Knowing what are you willing to put yourself through. Like me eating this delicious burger.

401k account limits you to a $18,500 annual contribution, IRAs limits you to $5,500, and the HSA limit is $3,450 annually. This means another $27,450 per person that can go to tax sheltered accounts. For married couples without children it is a total of $54,900 annually that you can save! When you have children then there are additional tax credits available. There are also credits you may qualify for due to your savings in retirement accounts. (Savers Credit)

Tax Credits vs Deductions – Hint: I like Tax Credits

Deductions are deducted from your taxable income that is used to calculate income taxes. Credits on the other hand are taken off the total tax owed.  More on credits in another upcoming post.

We covered a couple of different scenarios that can help you save significantly in taxes. First off, you don’t want to qualify for deductions such as health expenses, moving etc. It means that you have to pay out a lot of money beforehand. If you are in that position then, yes, it helps to get a little deduction. Secondly, I covered the personal deduction that is provided per family. I also wrote about the personal exemption that every individual gets. Finally, I discussed options for 401ks, IRAs and HSAs. This is a lot of income which can be sheltered from taxes and can save you tens of thousand of dollars, all depending on your tax bracket.

I hope you find this post useful. Please let me know in the comments what you think.

Until the next time,

Mr. A


An introduction to Mr. A – path to Financial Independence

Hello Friend!
Hike near Park City, Utah - This makes me think of my path to financial independence.
Hike near Park City, Utah – this can be your view when you have achieved financial independence.

You must have stumbled upon my website SavedCapital. I am sharing my journey through FI (Financial Independence) or FIRE (Financially Independent Retire(d) Early) to hopefully encourage you to start doing things in your own life so that you can join me on this path.

I have a passion for optimizing everything, including personal finance, taxes, spending, saving and so forth, and I would love to share my knowledge with you so you can benefit as well! This means there will be some tips, tricks, and recommendations coming up on the blog. I am also hoping that you can help me provide better content for you.

I have already made progress on this journey to FIRE and now I am really buckling down and getting serious. Hopefully this blog provides you a taste of my experience. I intend to stay Mr. A on this site as long as possible as I still have a while to go on my journey. Well, lets get started!

Let me properly introduce myself. I am in my 20s, married and I love trying out new things–like writing this blog. My wife and I currently live in Utah but we are not from here originally. I love technology and I am an absolute believer in using technology to make your life easier and more convenient. I am casually athletic as I enjoy working out, hiking, camping, doing yoga,

Colosseum in Rome, Italy
Colosseum in Rome, Italy

riding a bicycle, playing tennis or playing basketball. Traveling with family and friends is another hobby of mine. Mrs. A and I own our home (+ mortage) and I find it fun to work on house projects over the weekends. Gardening is fun too! I have lots of interests and I truly love learning something new. Except cooking. I am terrible with that.. maybe one day. LOL.

Financial Independence + Minimalism

I learned about the concept of Financial Independence (FI) a couple years back when I graduated from college and back then I did not really know what I wanted from life. I still have my doubts but at minimum I believe that FI gives you a direction to move towards to that you can set for yourself. It can be at a pace that you are comfortable with. For me it is hopefully approximately 10 years from now. I discovered over the years that I don’t truly get enjoyment out of material goods that might make you feel like they bring happiness at a point in time (Yay, a new SUV!). I value my own time and freedom and I aim to spend my hard earned money on something much more valuable to me – buying my financial freedom.

The reason FI is so important to me is because I view it as an opportunity to be able to spend time with my children when they are young, being able to travel, to visit family during holidays or important events, being able to take care of my own well being such as emotional and physical health. Or start my own business and not worry about financial resources. So it is selfish as well. Often times I feel that I work so hard that I forget to remind myself to take care of my needs. For example drinking water. Has this ever happened to you where you go almost all day without drinking water because you were extremely busy? Basically, being FI gives you an opportunity to view the world from a different angle and live a life that has less stress and more fun. Much more fun.

Why am I writing this blog?

I have recently been struggling a bit with juggling several responsibilities in my personal and professional life. Time management is key and I keep learning more about it. Even when working long days over weeks, months, years, I remind myself that this is just temporary. Some days I am not sure if the direction I am heading in my career is correct or if I should be even at my position at work. Regardless, I keep pushing forward and making progress with FI. I have been prioritizing learning about personal finance and taxes, leveraging technology, saving, and DIY to help make progress towards my ultimate goal of FI. I hope to help others pursue their financial goals.

Financial Independence (FI) vs Financial Independence Retire(d) Early (FIRE)

You might ask, what is the difference between FI and FIRE? In short, FI or Financial Independence means you are financially free, have sufficient financial resources so that you are comfortable walking away from a job to change your lifestyle. Perhaps you can pick up a fun hobby that brings excitement and some income. It also means you are leaving your current job. FIRE or Financially Independent Retired Early is a more extreme version of FI where you would be OK never working again, but if you do, then it is just cherry on the top.

Giraffe with mom at the zoo
Giraffe with mom at the zoo

If you have done FIRE then this means that you must rely on your portfolio for rest of your life at least until Social Security kicks in. In this case I am making an assumption that you are retiring early. Of course, you can start the path of FIRE and then realize that you want to be involved with something else. You can always call it FIRE and still work on something you love.

For FIRE to work, of course there has to be a lot of planning. I had my doubts when I first started with saving for FI/FIRE as it meant putting a large portion of my income in various types of retirement vehicles that I may not see for decades. I probably planned for approximately 6 months before I even started with any saving for that purpose. And once I started, I started small, so the process has been very natural to me over the years. I can truly say that I am so happy that I started working towards FI a couple of years ago. I have a less stressful life than if I would have blown my money on random things like the newest iPhone, a laptop, a car, a brand new house, etc. These are all nice possessions to have, but are not always compatible with the dream of FI/FIRE.

Saving capital… or SavedCapital 🙂

As you can imagine, I am a pretty frugal person–a quality which has helped me with savings–most likely because I did not come from a wealthy family. Throughout college I worked while attending school, with the exception of the freshman year. I was very fortunate to have a scholarship to cover my tuition and I ended up getting a few smaller scholarships based my on grades that covered most of my fees + books. This allowed me to graduate without student loans which provided a great advantage. I was also really careful with expenses throughout college, despite making my fair share of mistakes. This early practice of saving my earnings has helped me to start building up capital and I am hoping to use all of my saved capital for FI/FIRE down the line.

Hopefully, now you have a better understanding of me as an individual. My goal is to keep writing content and see what you think of it. Check out other posts if you want to know how you can speed up your progress towards financial independence. I am confident you will learn more about me and get ideas to help get you started or continue your path on FI/FIRE. Please provide any suggestions and feedback you have to improve your experience as I would love to hear from you.

Hope to see you soon,

Mr. A

Welcome to


This website includes a list of information to help you with financial planning, investment goals, financial independence or retirement. If you are looking to make an new purchase or learn more about budgets, taxes, investing or personal finance, then this is your resource.

Please do not hesitate to contact me with suggestions or feedback.


Mr. A