Most people don’t hate paying taxes — they hate overpaying or paying them the wrong way. Unfortunately, in the rush to “save tax,” many people end up making terrible financial decisions that quietly drain their wealth.
As your advisor, let me walk you through the 9 worst ways people try to cut taxes. We’ll go step by step. Each section reveals a new mistake, explains why people do it, and shows how much money it actually costs.
Take your time. This knowledge can save you thousands of dollars.
9 Worst Ways People Try To Cut Taxes
1. Intentionally Earning Less Money to Pay Less Tax
This is the most common — and most damaging — tax mistake.
People think:
“If I earn less, I’ll fall into a lower tax bracket and save money.”
Here’s the truth:
Paying less tax by earning less income does not make you richer.
Dollar Example
Let’s say:
- You earn $100,000
- Your effective tax rate is 25%
- Taxes paid = $25,000
- Money left = $75,000
Now you reduce work and earn $70,000
- Taxes at same rate ≈ $17,500
- Money left = $52,500
💡 Result:
- Tax saved: $7,500
- Income lost: $30,000
👉 You lost $22,500 to “save” tax.
Advisor tip:
The goal is maximum after-tax income, not minimum tax paid.
2. Borrowing Money Instead of Paying Taxes
Some people try to avoid taxable income by borrowing money instead of earning or selling assets.
Yes, loans aren’t taxable — but loans are not free money.
Dollar Example
You need $40,000 for expenses.
Option A:
- Sell investments
- Capital gains tax = $6,000
- Net cost = $6,000
Option B:
- Borrow $40,000 at 9% interest
- Interest per year = $3,600
- Over 5 years = $18,000
👉 You avoided $6,000 tax but paid $18,000 in interest.
Advisor tip:
Debt is not a tax strategy. It’s a cash-flow decision — and often a bad one.
3. Creating Losses Just to Claim Deductions
Some people deliberately sell assets at a loss just to reduce taxable income.
This sounds smart… until you do the math.
Dollar Example
- Investment loss: $15,000
- Tax savings at 20% = $3,000
👉 You lost $15,000 to save $3,000.
Net loss: $12,000
Yes, tax-loss harvesting can be useful when losses already exist.
But manufacturing losses is financial self-harm.
Advisor tip:
Never lose $1 to save $0.20 in tax.
4. Donating to Charity Only for Tax Benefits
Charity is good.
Using charity only as a tax tactic is not.
Some people donate money thinking:
“I’ll get most of it back in tax savings.”
You won’t.
Dollar Example
- Donation: $10,000
- Tax rate: 30%
- Tax saved: $3,000
👉 You gave away $10,000 to save $3,000.
Charitable giving should come from:
✔ Values
✔ Impact
✔ Long-term planning
Not desperate to cut tax at year-end.
Advisor tip:
Tax benefits are a bonus, not the purpose.
5. Buying Expensive Assets Just for Deductions
This mistake shows up when people buy:
- Large homes
- Luxury vehicles
- High-maintenance properties
All because “it’s tax deductible.”
Dollar Example (Home Purchase)
- Mortgage interest: $50,000/year
- Tax savings at 25% = $12,500
But:
- You still paid $50,000 in interest
- Plus insurance, repairs, property tax
👉 You spent $50,000 to save $12,500.
Advisor tip:
A deduction reduces tax — it does not eliminate cost.
6. Misreporting Income or Inflating Deductions
This is not tax planning — it’s gambling.
People do this by:
- Hiding income
- Claiming personal expenses as business costs
- Exaggerating deductions
Why This Is Dangerous
- Penalties often exceed 100% of tax owed
- Interest accumulates yearly
- Audits can go back several years
Dollar Example
- Hidden income: $30,000
- Tax avoided: $9,000
- Penalty + interest after audit: $20,000+
👉 You risked everything to “save” $9,000.
Advisor tip:
Legal tax planning protects wealth. Illegal shortcuts destroy it.
7. Ignoring Tax-Deferred Retirement Accounts
Surprisingly, not using tax-advantaged accounts is one of the worst tax mistakes.
People skip them because:
- “I need liquidity”
- “It’s locked in”
- “I’ll do it later”
Later is expensive.
Dollar Example
- Annual contribution: $10,000
- Tax rate: 25%
- Immediate tax saved: $2,500
Over 20 years at 7% growth:
- Value ≈ $410,000
- Taxes deferred for decades
👉 Skipping this can cost six figures in lost growth.
Advisor tip:
Tax deferral is one of the most powerful wealth tools available.
8. Choosing the Wrong Tax Strategy for Your Income Level
A strategy that works at low income can be terrible at high income.
Example mistake:
- Using only post-tax investments when your tax rate is high
- Avoiding deductions when they matter most
Dollar Example
Income: $180,000
Contribution: $15,000
- Using non-deductible option → $0 tax saved
- Using deductible option at 32% → $4,800 saved immediately
👉 Same investment, wildly different outcome.
Advisor tip:
Tax strategy must match where you are today, not generic advice.
9. Copying “Ultra-Rich” Tax Tactics Without Understanding Them
Many people try to copy techniques used by extremely wealthy individuals.
What they miss:
- Those strategies rely on scale
- Legal structures
- Long timelines
- Complex compliance
Why This Backfires
Without proper structure:
- Deductions may be disallowed
- Income may be reclassified
- Costs exceed benefits
Dollar Reality
- Setup costs: $20,000+
- Ongoing compliance: $5,000/year
- Actual tax saved: minimal
👉 Most people lose money trying to imitate the ultra-rich.
Advisor tip:
What works at $100 million rarely works at $100,000.
Also Read: How To Stop Impulsive Spending: A Guide to Take Control of Your Money
Final Advisor’s Conclusion
Tax planning is not about tricks.
It’s about alignment:
✔ Income
✔ Goals
✔ Time horizon
✔ Risk tolerance
The worst tax strategies all share one trait:
They focus on avoiding tax instead of building wealth.
If you remember just one rule, remember this:👉 Never let the tax tail wag the money dog.
