I’m a recovering CPA.
So I don’t legally “know” what I’m talking about, but I can still remember a bit from when I did. And since this is my least-favorite season of the entire year, it’s also going to become a Savings Tip topic (and the focus of a free course launch I’m working on, see below for details).
You’re Trained to be Focused on the Completely Wrong Thing
The impetus of this post actually happened this morning on the treadmill. There was a commercial for Intuit’s TurboTax…how it guides you through your taxes and then they showed this really fancy image with a guarantee seal. On Inuit’s website you’ll see this front and center.
I don’t want to just single out Intuit. Not at all actually. TaxACT.com’s front page does the same thing.
Intuit’s fine print reads as follows:
If you get a larger refund or smaller tax due from another tax preparation method, we’ll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to a payment of $14.95 and a refund of your state purchase price paid.
Fair enough.
TaxACT’s fine print re: their guarantee sheds a bit more light on the problem:
If you get a larger refund or smaller tax due from another tax preparation method with the same data, we will refund the applicable product price you paid for your TaxACT Deluxe federal return.
Emphasis mine.
I won’t even go into H&R Block’s “Instant Refund Anticipation Loans.” Nasty — and a whole other story.
The focus is on that carrot dangling out in front of you. Your own money that you paid to the government in anticipation of your tax liability — your tax refund.
Even Trained Accountants Get it Wrong and Fall For the…Indoctrination :)
Back when I worked for a large accounting firm (don’t get the idea that I have tons of experience doing that — I lasted 10 LONG months), I remember sitting around the table in the cafeteria of our client. It was tax season and I was probably complaining about this very thing. One of my colleagues — a CPA said something along the lines of:
Oh, I didn’t pay any taxes this year. I got a refund.
I about lost my lunch.
If that same concept can happen to someone who passed the Reg section of the CPA exam, it certainly happens to your average Joe the…Piano Tuner.
What was the problem with my colleague’s statement? Even if they had just slipped up and really meant to say that they didn’t need to pay any additional taxes for the year…it was still alarming.
Just to be 100% clear.
1) You earn money.
2) You pay income taxes that are either withheld from your paycheck automatically (so you’re not as aware of the expense, removing you psychologically from it and encouraging just the problem we’re discussing here — a HUGE lack of awareness) or you’re required to file quarterly estimates.
3) By April 15 of each year, you calculate what you actually owe and either pay more (because your estimates weren’t enough) or you’re paid a refund (because you paid too much).
Unless you literally did not have a tax liability that year, you paid taxes. You may not have a tax liability if:
1) You’re dead or,
2) You earned only a small amount of income.
3) You have tons and tons of kids :)
I’m grossly simplifying with the above three points.
So know this: you very likely pay taxes every single year.
And I’m not even talking about the FICA (Social Security & Medicare) taxes that you can’t avoid (re: minimize) much at all if you’re a wage worker. Even if you did fall into #2 or #3 above, you still paid almost 8% of your wage in FICA. (By the way, your employer paid another almost 8% to FICA as well — the money which they just might pay to you if they weren’t paying it to the government, so you can choose to see that as a tax you pay as well).
You pay taxes. Every year of your life. And when you die, you pay again. Don’t let me ever hear you say, “Oh, I didn’t pay taxes this year — I got a refund.” Wrong. Wrong. Wrong.
This is Not About Tax Policy. It’s About Your Life’s Single Biggest Expense
This is not about political leanings, or tax policy. It’s about what will likely be (or already has become, and will only continue to be) the single largest expense of your entire life.
I’m guilty as charged. These Savings Tips that I’ve written have ranged from saving time and money with dinner groups to 29 Ways to Save a Fortune on Your Energy Bill.
If I were doing these tips according to bottom-line affecting expenditures, I’d probably be writing about tax savings two out of every five times. For almost everyone.
Going Back to the Refund Focus. Which Way Are You Facing?
At the beginning here I established that we’re trained to be refund-focused. With tax compliance software we’re trained to drop in data (what we’ve done) and have the computer spit out what we owe or are owed. We’re complying. We’re facing backward.
Over a year ago I wrote about preferring head-on to rear-end collisions (the metaphor breaks down quickly in real life, but you get my point) when it comes to making spending decisions. You want to be proactively looking forward and acting — not looking backward and reacting.
Taxes are the exact. same. way.
Remember TaxACT’s guarantee from above? How they mentioned the same data? They’re basically saying that their software will return the same result as another software because both softwares do an excellent job of looking back, crunching the numbers, considering the rules and spitting out the liability. Hang on to that thought.
If Things Were Simpler, It’d Be Easier. But They’re Not, so Let’s Move On
We can lament and moan (I do my share of it) about how economically costly tax compliance is. How it’s a huge drain (as a whole) on the economy with no value-add. How a client I worked on employed 35 people full-time to make sure their M-1 (that’s a C-Corporation’s return, that has maybe…12 boxes to fill out) was correct…
But we won’t.
Things aren’t simple. Life is complex. In honor of the season premier of Lost tonight, I’m going to say it’s a lot like that black cloud that haunts the island. It’s always there. Nobody knows what it is or how it works. And it kills you.
At the end of Lost this season, perhaps we’ll know how it works. At the end of this tax season, we still won’t know how the tax code works.
So, let’s just get comfortable with the idea that the tax code will always be complex.
Even for those situations where the tax scenario really is simple, we have divergent voices. The New York Times wrote a very interesting article days ago, “Why Can’t the I.R.S. Help Fill in the Blanks?” that cast some of the large tax preparation software backers in a negative light.
The gist: California uses ReadyReturn, where they send eligible Californians a pre-filled return. The data can then be validated by the person, but it “gets the ball rolling”. It costs the state $.34 to process a ReadyReturn, while a paper return filed in the traditional way costs $2.59 (not including the taxpayer’s savings in both time and possibly money).
The tax preparation software lobby pushes against this for obvious reasons. Intuit’s response is here.
Whichever side of that debate you’re on, it’s clear that there are interests hard at work on both sides, furthering their own agenda. What I want you to take away from this Savings Tip is that you need to have your own agenda.
What To Do About Your Single Largest Expense
The agenda is simple. Minimize it. Minimize your tax liability. Educate yourself.
My real awakening to this situation happened last year during preparation of our 2008 personal return. Before I get into that, let me tell you about my brother-in-law, Casey.
Casey is a tax preparation…guru? Yeah, guru’s the right word. He might be partially insane as well — he loves this stuff. Absolutely loves it. I’ve seen him become giddy over some strategy. It’s a sight to behold.
He’s also a straight-arrow. He deals in blacks and whites. Prior to using Casey, I used another CPA to prepare my taxes and heaven only knows how much money I overpaid (he was lousy, and I should have fired him immediately. Plenty of warning signs told me as much). This was all apparent once Casey got a hold of my tax documents for the 2008 return.
It’s the kind of thing where taking an expense here instead of there saved me over $10,000. I’ve been trained in taxes. The Reg section of the CPA exam was my shining moment (a 94 baby! Nothing to show for it now). I had class after class in school. I know enough to know that I need help.
$10,000 (and change)!
We used the money to help us pay down the mortgage.
But that money would have been gone. Forever. There’s literally nothing that you’re given in return for the extra you pay on your taxes. You are flushing money down the toilet. Stop doing that.
Casey’s in the know about this stuff though. He soaks it up. He prepares return after return and sees different situations. He dives into the tax code — discusses strategies and knows the forms inside and out. He’s a phenomenal resource.
I don’t think he’d want me to disclose what it cost me to have him prepare our 2008 taxes, but I will say it was a bargain (and I didn’t get any family discount :). An absolute, no-brainer bargain.
But here’s where the real value comes. Casey now can sit down with me and help me look forward and begin planning. For the 2008 return, he hadn’t seen anything going on prior to having my documents in hand. He was forced to comply and we still did phenomenal.
So the real value comes in being able to plan and structure things in such a way that your tax bill is minimized. Having that ability is, as Michael Scott (The Office) would say, “Incalclacable.”
I led into this talking about tax preparation software. I think, on net, it’s a positive thing. But don’t be deceived. No consumer-facing software is forward-looking. No tax prep software would have told me that I just needed to take my health expense here instead of there. It would have just accepted my answer and moved on. Did you hear that flushing sound? :)
The savings we found had to do with how we were handling health insurance premiums in relation to adjusted gross income (AGI) that was on a threshold of causing phaseouts for Roth contributions, child tax credits, and I believe some itemized deductions. Sound like a foreign language to you? Embrace it.
Remember, you need to have your own tax policy: Educate yourself. Pay as little as possible and use the savings to reach your financial goals.
And please, please, please people: Do not turn this into some raging political discussion. I’m not talking about tax policy. I’m talking about taking the tax hand you’ve been dealt and proactively making the most of it.
Excellent article, and in harmony with what I have preached for a long time. I am looking forward to your free course to see if I can pick up some additional pointers.
whyncha tell us how you really feel? :)
Thanks for all you do. I love that I always get the feeling that you care as much as I do about me staying out of the hole.
I wonder if you are talking about a health savings account. If more people were aware of this little savings vehicle, our health industry would turn around, just like my reduced AGI!
Not too many people know about it unfortunately. Look into it – 100% of my medical expenses (including cough drops) are used to reduce my taxable income – it’s awesome! And what’s leftover, I get to rollover again and again and take it out at retirement if there’s any left.
Dawna,
Be careful with how you handle that cough drop expense in your HSA. Starting in 2011, over the counter meds are no longer eligible expenses unless you have a prescription. If you can get your doctor to write an Rx for those cough drops or Tylenol, then go ahead and claim them. Otherwise, you could be in for a surprise if the IRS decides to look closely at your return.
Watch out! The expenses paid for out of you HAS now have to be a prescription. No more covering over the counter drugs. If you do it will be taxed plus penalties.
I am continually amazed at how awesome this company is. Seriously.
Incredible Jesse, incredible.
Wow, Jesse — you’re a kindred spirit, but with greater focus and clarity of vision than I have yet achieved. Thanks for sharing this.
I feel ya but I don’t really hear ya.
What are you saying? Get a Casey? Keep using TaxAct? never use TaxAct? where can I find a Casey? Educate yourself how? I have pianos to tune I don’t have time to become a Casey.
I’m all exited with nowhere to go.
Lol…you put my thought into words. Yes!
looking forward to see if this can help me
Interestingly, I JUST completed my taxes using TurboTax. I’m retired now but I taught AP Calculus for 20 years and yet I struggled at times to understand what I was being asked to provide and why they needed to know it. I also have no idea what to do this year to minimize my tax liability. All I did was provide true data and trust that the software would submit it accurately. Very frustrating! I really don’t believe the governments (state or feds) are hoping we deduct every legal dollar. I’m sure millions of $ are collected that gov’t doesn’t have any right to take from citizens.
Yes I want a Casey too! Where can I get a Casey? I do all my own taxes using the aforementioned tax software products. Not because I think they’re the best – but because I don’t trust someone else to do it. And by NO MEANS am I even CLOSE to a cpa or something along those recognizable lines… (I’m an artist.) Personally, I like the software programs, but maybe if I can figure out how to lower my AGI from some of the tips in the free course, that would help justify the cost.
If you are getting a refund, it also means you’ve been giving the Gov’t an in interest-free loan for the past year.
Great post Jesse, but finding that fabulous CPA/tax preparer is the hard part. I’m still searching!
Sounds like it could be related to an HSA (Health Savings Account) or an FSA (Flexible Spending Account). I have an FSA, which is a “use it or lose it” account; I contribute the amount of money I think I’ll spend on health expenses for the coming year, and pay for those expenses using pre-tax dollars (as opposed to “out of pocket” dollars which will be a part of my AGI).
The HSA sounds better, as you get to keep your contributions if you don’t spend it all on health expenses for that year, but federal law requires I be on a high deductible health plan (HDHP) for that, and I’m not sure that’s something that works for us right now.
I’m curious as to what this advice will end up becoming.
Mike,
If your insurance is through your employer, you might just want to run the numbers. In our case, our employer pays the full cost of the High Deductible plan and we use the money that a PPO would have cost us in payroll deductions, to fund our HSA. In the end, we would spend that money either way, but this way the money is ours not the insurance company’s. We are a family of 3 with no significant health problems (knock on wood). Your situation may be quite different
I am a tax attorney, but I don’t specialize in income tax, and I am certainly not a tax preparer. But I have had the same reaction when hearing others say “I didn’t pay any taxes this year.” Uh, yes you did.
I’ve tried to keep the big picture in mind when making finanical decisions. For example, like most homeowners, my single biggest deduction is my mortgage interest. When we decided to refi this year, I tried to calculate how much the loss of the additional interest (by getting a lower rate) would “cost” us, to determine the true savings of the refi.
But I agree that specific steps we can take, or things we can look out for, to decrease our tax liability, would be helpful.
Amy,
Since the mortgage interest is a deduction and not a credit, you will always come out ahead with a lower rate. If you are in the 28% bracket, for every $1 less interest you save, you end up with 72 cents in your pocket. I prefer to think of the mortgage interest deduction as just an additional “discount” on my interest rate.
Thank you so much. This help would be great. Us small guys need all the tax breaks we can get. Looking forward to it.
Hey Jesse,
Am eagerly awaiting this course. Last year I lost my job (paid taxes), went on unemployment (paid no taxes), and am dreading the wrestling match known as “filing.”
I had planned to use the software programs you mentioned and may still have to do so.
But am so hoping to have some future control–thanks much for this post! It is heartening!
Since this is not a forum on tax policy, I will refrain from expanding the discussion to ask why people not currently employed (e.g., retired) are not eligible for health savings accounts. But I wonder.
I’d probably have Casey do my taxes if I could.
Love it – great article….how about fishing around for someone that could help with something similar for all the Canucks out there that are using the software and reading your articles. i know there are lots out there because I have seen them in the webinars.
Cheers,
Cw.
A refund is an interest free loan you gave the government on top of the taxes you paid.
Man. You rock hard.
I’m with Mashurst. What does this mean for me? I’m ready to file with TurboTax. Do I wait? For what? I want to know how you saved so much, but I don’t know where to begin, and I don’t think I know any Casey’s.
Just want to second what Kathleen said: “If you are getting a refund, it also means you’ve been giving the Gov’t an in interest-free loan for the past year.”
So true! That’s why I shudder when people brag about their refunds. But I’ve also been a hypocrite — I don’t exactly complain about that chunk of refund cash whenever I get it. Point being, the forward-thinking reminder is a good one for everyone.
Jesse, this was a great article, and timely, too, because I just finished doing my 2009 taxes. On a couple of entries I basically just flipped a coin because I had no idea what to do. I’m self-employed, and pay quarterly estimated taxes, and my goal is to neither get a refund nor have to pay additional tax at tax time, so I’m looking forward to whatever advice Casey has.
Taxes intimidate and confuse me and I try to steer clear as much as possible…..if this could take some of the mystery out, then I’m interested. Will it be a e-course…..so many pearls of wisdom a day or a webinar?
Cathy
Maryland
Years ago at a Charles S. Givens seminar several items to financial freedom were mentioned, savings on insurance, real estate, and taxes were all mentioned.
The above mentioned article is excellent. If I had my way payroll deductions would be abolished and taxes would be due Oct. 15th instead of April 15th, that would put people paying taxes just a few weeks before elections. By the time elections roll around most people’s payment of taxes is a distant memory. The present system of payroll taxes is like boiling a bullfrog in water, it never knows just when to jump out.
One way I have found to consistently knock off about 10% a year on taxes is via a home based business, an idea suggested by Givens. It has been working for over 20 years now for me.
How about we abolish the Income Tax altogether! Then we won’t need a free class to help us minimize our tax liability.
Check out the FairTax at http://www.FairTax.org
Thank you!!! This article gave me the extra nudge I needed to find a CPA that will help me with tax planning and not simply plug and chug the numbers i give him into a form. I am excited for your class. Thanks again!
My family and I are JUST finishing the process of buying a small business. Our first. Tax liability will become a huge issue to me in the next year and your timing is pretty damn good. We just filed our return in the last week.
Thanks!
Jesse, is there any point signing up for the tax minimization course if we’re not in the US?
@Heather H, it could still be very useful on a principles basis, but the “meat” will be completely US-focused.
I am an enrolled agent (IRS tax preparer designation). I do my best to be a “Casey” to all my clients. I find the work stimulating, almost like big game hunting. “We’re on the trail of the elusive Empowerment Zone tax credit!” That aside, I find it incredible that certain sources claim that “40% of Americans pay no tax” (or some similar number). What are they talking about? Do they mean that 40% of Americans owe no additional tax on April 15? If you have a job, you pay tax through your withholding. And I’m just talking about income tax. There’s also FICA taxes, sales taxes, excise taxes, real estate taxes, and a whole host of other ways the government picks our pockets. Those 40% need to wake up and realize that they are in the same boat as the rest of us.
The government uses fear of the dreaded audit to get us to meekly hand over cash whenever there’s any ambiguity regarding the eligibility of a deduction. As long as a valid case can be made for taking a deduction (and I’m not talking about employing disingenuous creativity), I make a few notes in my file, take the deduction, and sleep soundly.
Most CPA’s, however, wish to completely avoid any client seeing additional taxes owed during an audit that uncovers no new information.
I would like to have my own casey too. I had used H&R Block in the past and realized they were doing what I could do at home just entering information and pushing next (Like I did on their tax act website) except they were getting way over paid to do it. Maybe if I had a tax guy who really cared about saving my money it would help. But until then I think I will save just a little money and use tax act. Hopefully casey’s tips will help.
Looking forward to it. Would even pay for it. :)
Will this course be available before April 2010?
@Kathie,
That’s definitely my goal. Though honestly, with 2009 already closed for most tax strategies, it’ll be more focused on educating you for a less-expensive 2010 :)
Yeah the idea of the government getting people all excited about having given THEM an interest-free loan turns my stomach. I’m glad this article is here to help shed light on what’s really going on. Thanks, Jesse! That course sounds fantastic – I’ll definitely be watching for it.
I had no idea I’d be getting so much just from signing up for a budgeting software, even one with such good reviews :-).
Can’t wait for the tips. I’ve known for a long time it’s all in where you put the information. It will be fantastic to be able to glean this hard-earned knowledge from someone whos’ already an expert. I would gladly pay for this information. ;)
Have Used H&R Block and got badly burned. Have been using Turbo Tax and I’m still not happy. Found through other sources, places we could have been claiming and didn’t know about. But gosh folks, finding a Casey is a crap shoot too! I’ve had a CPA who evidently wasn’t as good. Cost me a fortune and didn’t mention the fact that my medical might be 7% on Feds but where I live it’s only #% for state. I missed years of deductions and I’m not a happy camper. But where does one go to get a decent or good or excellant CPA or tax preparer?
Looking for any help we all can get!
Sarah
Many thanks Jesse. This one is definitely relevant to us all, and I’m quite interested to find out what we can do to help ourselves since so much regarding taxes is in that black box understood by a select few.
As mentioned by others, my goal over the last few years (once the clouds cleared and I realized the hope for that annual refund was truly a hope of getting my $ back that I’d loaned Uncle Sam interest free) has been to neither owe additional or receive come tax time. That’s been difficult with various life events during that time: arrival of children, job changes, home sale & purchase, etc. I’m awaiting a couple of tax docs before running through our standard tax software (TurboTax), and we’ve no idea whether we’ll owe or receive this time around. Any light directed into this black hole will much appreciated by man, I am sure.
While a Health Savings Account can definitely be a good thing, it’s certainly not a silver bullet or necessarily a bright shining star. It can help, but only to the degree of accuracy you have in estimating. Estimate too little and you’ll find yourself dipping into your regular pockets; estimate too much and at least the worst you’ve done is save for later in the event you underestimate a following year. Again, the difficulty here is in the estimation process & the unknown. I’ve found it can work quite great for a single individual with a small chance of unexpected medical situations, but those of us with families (especially young children) know how often the unexpected becomes reality. Again, not a bad option to have, but having gone from HMO to HDHP to PPO and back to HDHP (usually required for HSA) I’ve found that the choice between the latter two can sometimes be a crap shoot. Though the major potential advantage of the HDHP/HSA option is lower premiums and, if you’re lucky, nice employer contributions.
Sorry…didn’t mean to hijack…but it’s something that CAN be used to reduce your AGI and isn’t a “use it / lose it” scenario.
Thanks Jesse for this awesome post! Just what we needed!
I’m a CPA too and I specialize in taxes, although not individual income taxes, and I have a hard time with this whole individual tax season too. My cousin calls me for advice and I feel bad that I cannot answer her question (don’t want to give her bad advice) because the tax code is just so darn complicated – too complicated for most people to truly understand
I second the person who mentioned the fair tax above! ME! A CPA! A tax specialist! I would lose my job if the fair tax came into existence yet I am ALL FOR IT because it would simplify our taxes on so many levels. That is how screwed up our tax regime is.
One solution for people looking for a Casey is to check out Dave Ramsey’s website. He has a network of CPAs (called “Endorsed Local Providers” or “ELPs”) that he endorses across the country. Apparently, they have to have a boatload of experience and the heart of a teacher in order to even be considered for the ELP designation.
I am not an ELP and I have not yet sought one out (I know enough from school and the CPA exam to do my own, simple return), but I have heard good things about them when people call in to Dave’s show on the radio. It may not work for everyone and may not be in everyone’s price range, but it may be a good way to find the other Caseys out there if you are trying to find one.
Jesse, you’re the best. very excited to see what the tax minimization course is going to be… and LOST, tonight??? Oh YEAH!!! Can’t wait for this season to begin!
I work full time but I have been a Home Based Business as well for about 12 years now… look into it folks! I do my own tax prep every year…so I am looking forward to some instruction on how to handle the tax situation better.
Thanks Jesse,
We are retired professionals that only have passive income from pensions and paid for rentals. Managing the tax bite is very important to us also. We have more than enough and I want to pay every tax that is due but no more.
We will be out of the country between 13 Apr 2010 and 23 April 2010 so I want to have my taxes taken care of hopefully before 1 Apr 2010. We use a professional tax preparer that has done a good job for us for at least 20 years.
Brad & Margie
sounds fascinating – however as I am in AU I will have to do my own research . . . thanks !
When I remark that I owed just a few hundred dollars (no penalty) and someone tells me they got back $4000, I’ve learned to only think “moron” and not say it out loud. I used to launch into the “you’ve just lent Uncle Sam money…….” speech, but now I smile and say, “wow, that sure is something.”
To be fair to the TurboTax marketers, they needed to stay with brief sound bites, no space to spell out the whole story.
Good advice. I must be a very rare bird because we really don’t pay any income tax. As a pastor I have opted out of SS tax, so noting is withheld. In fact–and I don’t really agree with this–but I actually get a fairly sizable refund … ur handout. I know, I should probably just send it back…
The thousands of dollars many of my coworkers are getting back is due to earned income credit and (as stated in the article above) having a ton of kids. I too just say “wow that’s great” while silently calculating that I’ve just handed over my and my spouse’s taxes to that person. Yes, I want more knowledge NOW about reducing my tax liability, just to take the sting out of hearing about someone else’s “good fortune:.
If you want to make sure your taxes are done correctly, always have a CPA to them. When I started my business four years ago, that was one of the suggestions to find a qualified CPA. They will be your best friend. After my CPA (which I still have currently) did my business taxes for one year and helped me out – the following year they did my personal taxes. I will never go back to doing them myself.
Sounds like Jesse would be a big supporter of the FairTax! :)
Great article Jesse – sign me up!
Having previously lived in the UK, your payroll deductions were determined by filling in a form BEFORE you start the year, thus (I would have hoped) your tax deductions per paycheck were likely to be more accurate – very few people file annual tax returns there – you just PAYE (pay as you earn) and are done with it.
Nevertheless, this too may not be accurate by the end of the tax year – what if you have another child, get married (or divorced), etc.
I agree with Christine – do away with payroll taxes altogether. I’d rather pay as I spend.
Hi:
I enjoyed your long article. And, yes, we could all use some help in this area.
I do not have the new YNAB, and it has really changed our lives. It is the best thing since sliced bread.
I would like to throw out a suggestion. I really need a spread sheet type account to record all Doctors and Dentists, what Medicare pays, what supplemental insurance pays and then to record our co-pays, etc and etc.
Do you think that you can ever come up with a bonus like this or give me some suggestions of how to make my own.
Thanks for all your work and this great program.
Regards,
Lesta Craig
I would like to put in a request that, if possible, you and Casey also cover the idiosyncrasies of being a clergy person. We are considered self-employed even though we are paid by a congregation. We get a housing allowance which is not taxed but Social Security more than makes up for that.
Maybe this can be a new area for Casey to explore and become expert in. He wouldn’t have any trouble finding clients, believe me!
Thanks for the article; looking forward to the class.
Sue
Several comments…as a former tax preparer (Enrolled Agent) & financial planner (CFP)
1. To Mike – the clergy who has opted out of Social Security – you need to make sure that you will be able to get into the Medicare program either through your work credits or through a spouse’s work credits. I don’t know the details but your premiums will be higher than for people who have been in the Social Security/Medicare system. Also…what provision have you made for providing for yourself or a family for retirement/disability/death benefits if you have opted out of Social Security. Most people simply never get “A Round Toit” (or say they can’t afford it) & leave their families without a safety net. While some sources list the Social Security & Medicare tax as FICA (Federal Insured Contributions Act?) another name is OASDI (Old Age, Survivors, Disability).
2. To Sue – re income taxes for clergy…you are correct…it is an extremely difficult area & not many people know the in’s & out’s…look up the website for B.J.Worth (www.worthfinancial.com) & order her book or hire out your taxes to her. She advertises that she does them for people everywhere.
3. To Bob who referenced the Charles Givens information – Glad you got some good info there – I worked in his organization for several months doing some of the telephone consultations with members who had purchased memberships. I, too, thought there were some good nuggets of information there but I did talk somebody out of beginning a lawn mowing business (he had a real job too) just for the “write offs”.
4. Jesse – I am curious as to how you were able to save $10,000. Several have mentioned Health Savings Accounts but I’m wondering if you incorporated and became an S Corporation.
Looking forward to the info. Be glad for Casey as many CPA’s won’t go out on a limb to help you do tax planning!
I would LOVE information to help me with taxes. We have an HSA account and I am now worried that we will be losing money this year – as we met our out of pocket maximum last year and have paid $7000+ for medical expenses. Any info to help me I would LOOOOVE!!
I saw the picture associated with this article and I thought it was a slave. That is my mindset about taxes. If I work for a dollar, and the government points a gun at my head and demands $.25, am I free? To me, personal income is sacred. It is one’s own blood, sweat and tears. It is wholly derived from personal initiative. In my mind, no one has a claim on it. In fact, taking money from people without their permission is immoral. I learned that from the bible. But I understand that I do not live in a vacuum. I am not alone. I live in a community, my community lives in a city, my city in a state, my state is one of 50 that contributes to the federal government that protects and provides for our general welfare and defense. Still, taking my money by armed measures bugs me for some reason. There must be a better way to for the government to get income. I know how, but I’ll be quiet for now.
Excellent stuff.
I’m just curious how applicable this might be to us Northern negihbours. Our tax code is filled with a different slew of acronyms, but there may be some general strategies that could be applied.
Count me in.
As Jesse noted, this is not a debate about policy– everyone has a right to their fair and legal tax deductions and savings. But, in spite of Jesse’s warning, this thead of comments is still permeated with a kind of anti-tax, anti-government attitude, which I think too often comes not from a sense of legality or fairness but from just plain selfishness and/or ignorance. Fairness and justice will just have to be something for every individual to reflect on, but while the line between legality and cheating is a very fine line, and a line often obscured by our selfish instincts, it is a real line, an ethical line, and a moral line. I am not as religious as Jesse and many on this website, but it is true that “love of money is the root of all evil.” Good luck in staying on the ethical side of the line.
A woman I knew from H&R Block had the following credo – “I want to owe as much as I can without incurring a penalty.” What she meant was – she wanted to hold on to as much of her money throughout the year, investing it and using it as she pleases, then pay her actual amount due when she filed. Not an estimate, and without incurring any penalties for holding on to her money if any applied. I now do the same. For all H&R Block’s issues, the tax class was helpful. I know my way around the forms and the code for my tax situation. I know how to estimate how much tax I will owe, what credits and deductions to shoot for, and how much to set aside. I then jack up the number of my dependents on my W-4 (through employer) even though I don’t have any dependents so I won’t incur any withholding throughout the year and simply pay my actual tax due (after credits and deductions) when I file, if any.
Another place where there is a big difference in what you keep is whether you qualify to use Schedule A or not. This is form you use to itemize your deductions. If your deductions are higher than the standard (default) deduction, then this form becomes available to you. For most people, this doesn’t happen until you own a home. Your interest and property taxes on the home are what tip you over the standard deduction amount. Once this happens, a whole other set of deductions become available to you including being able to deduct your state income tax, or you state sales tax that you paid throughout the year when shopping if you don’t have a state income tax. Renters, non-owners, don’t have this option. This is also where you deduct your charitable contributions. If you don’t qualify to use Schedule A, you can’t deduct your charitable contributions and donations, e.g., Goodwill or to your church (Just make sure you have documentation- they are more strict about this now). There are many more deductions on this form. Worth checking out and bearing in mind…
Thanks so much for sharing this concept with everyone!
Forgot to mention how much I appreciate that you are offering this course! This is why I took the H&R Block class in the first place. We are all legally allowed to pursue tax avoidance, just not tax evasion. ;) Can’t wait to see what you guys come up with…
Could I get Casey’s contact info? I’m serious–I really need a good tax preparer this year. I already sent an email to your SavingsTip account.
I am a Tax Pro for H&R Block. I HATE Refund Anticipation Loans. I do eveything I can to encourage clients to just wait the 8-15 business days to get their refund, but so few do. They see their refund as “found” money and “paying 50 bucks to get it a week sooner” makes perfect sense to them. Drives me crazy.
I definitely look not to give the government a free loan. However, finding the balance on exemptions and deductions with a two-income family is insane!! I always find myself changing exemptions (whether up or down) near the end of the year trying to meet estimates i find on the IRS website.
Hopefully this new offering will help keep tax planning to once a year (outside any major changes like moving, baby, etc.) and something i don’t have to pay someone else to do. It would be great to setup each year ourselves and be confident we’re paying just what we need to and no more.
I disagree that the amount of time spent on tax compliance is “wasted effort with no positive return”, as well as disagreeing with those who believe we would be all better off with lower taxes across the board (no income tax!).
Having a functioning society with schools (partially funded by federal taxes), police, FBI, EPA, military, and courts at both the federal, state, and municipal levels requires funds. It is inherently much, much less efficient to try to perform all of these governmental functions on individual or small group/community level than it is on the national level.
The issue of tax compliance is part and parcel of levying taxes in a fair way in the first place (making sure some people are not failing to pay).Taxes fund all of that, and tax compliance is part of what makes it possible to have a country in the first place. Don’t forget that.
JESSE! There’s no apostrophe in the plural of “accountant”! I’ve gotten used to this on the rest of the Internets but you’re a good writer so you have no excuse. Please, fix it for the children.
@Ratliff, Fixed. for the children.
Several have floated different tax policy ideas – imagine the alignment of interests in this scenario:
The federal government only collects one tax from each of the 50 states – essentially an annual subscription for protecting boarders, commerce, etc.
The states collect taxes from the counties for it’s services.
An individual pays one tax to the county (instead of sales, property, income tax, etc. ). This tax is paid on election day in November as a single payment. Those wishing to spread payments throughout the year may do so, but they need to make their own arrangements. The employer’s only involvement is to report income to the county.
Thoughts?
I have done my own taxes since my first job. Of course, back then it was the EZ form with no qualifying deductions, but as things got more complex, I studied each new twist and turn and was able to understand how to deal with investments, complicated deductions, and even rental property. I think I would draw the line if I ever started my own business. The complex interactions between business tax benefits and personal tax benefits would surpass my amateur understanding of government red tape.
As far as planning ahead, I have not had a “typical” year for the past three tax seasons. Too many “one-time events in a row”, and too late in the year to really adjust the withholding. So, I am expecting a $900 refund this year which I will use to pay down debt. I simply pause in disbelief when I hear someone brag about the big-screen TV they are buying with their $5000 refund. Gosh, if I had $400 less per month in my paycheck due to overpaying my taxes, I don’t know how I would feed my children. I am too “rich” to get all the government handouts, but not rich enough to have many luxuries.
I am looking forward to your free course. The YNAB way has removed a lot of stress about the budget, and teaching people how to keep their own money is a great idea consistent with everything taught here. Thanks for everything!
I totally agree on taking a proactive approach — this is something I stumbled onto myself about a month ago. Since I’m in Canada rather than the US our tax systems are different, but what’s true across the board is that there are ways of minimizing what we pay. For example the government gives us tax-free or tax-deferred savings options. In my case I realized that I could pay considerably less in taxes just by shifting my planned savings into an RRSP. This is money I was *already* planning to save, just outside of an RRSP. By shifting it into one I can lower my taxable income considerably, and those savings will still be available for home buying through the Home Buyer Plan.
I also looked at a 5-year summary that my accountant gave me and worked out how our tax system seems to work (where I’m concerned anyway). Then I plugged in my numbers for this tax year to see how things looked, and then tried a couple different possible scenarios for next year. This taught me a lot, and if I’m right could save me $7K/year just by planning ahead.
Thank You again for being so helpful. Your company is a rare find these days. Keep it up.
I am eager to educate myself, I hope the course is ready soon! Thank you for doing this!
Bring it on, Jesse!!!
Love the first item on list of ‘may not have a tax liability if’. ;-)
I would be so lost in my finances without you. For the first time in my life I actually feel like I’m driving. Thank you for everything you do!
Just in case, wouldn’t hurt to CYA and place something to the effect of the below at the end of newsletters having to do with tax: I(I just copied and pasted what my tax accountant puts at the bottom of his newsletters:)
“To ensure compliance with requirements imposed by the IRS, we inform you that any [U.S. federal] tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed within.”
Will this course be good for Canadians?
On February 9th, Ratliff wrote: “JESSE! There’s no apostrophe in the plural of “accountant”! I’ve gotten used to this on the rest of the Internets but you’re a good writer so you have no excuse. Please, fix it for the children.”
RATLIFF! There’s only one Internet! You spelled it as a plural. Please, fix it for the children.
(smile) Sorry, I couldn’t resist. I am teasing, of course.
Many of you are assuming that when one receives a “refund” of $5000 that they have been over paying taxes in order to receive that amount back at the end of the year. However, in our case, we have in the past always had a low enough income and large enough family to receive earned income credit and child tax credits, thus we receive large “refunds” which are actually “gifts” from the government. We are a hard working family, but until my husband finishes his training to become a surgeon, our income will probably stay in this bracket…..Just food for thought.
Also, Jesse, how would you suggest finding a trustworthy tax preparer who will actually put out the effort to find the extra deductions one qualifies for vs. just the average preparer who is trying to finish as many returns as possible and survive tax season.
@Our Family, I’ve actually thought a lot about this. We need some type of questionnaire or something. When Taylor and I are looking for developers, we give them a quiz. Why not do the same for a tax preparer? Hrm…
The main thing to remember with tax is the rules are rules… AND the rules almost always have exceptions.
Some refunds ARE “negative income taxes”.
BEWARE the broad brush.
@Thomas, that’s true. But in the case that I’m specifically recalling with my colleague, it was not. Unfortunately!
Late to the party, as usual…
One of the black holes in the way most people use budgeting software (including YNAB?) is they don’t account for taxes deducted from their paychecks. My approach is that I set up an account that serves as the financial “in box” for everything we receive in paychecks, interest, dividends, etc. For example, when a paycheck comes in, I enter the gross amount, then divvy out the various disbursements, including amounts to FICA and other federal taxes, state taxes, 401(k) and other retirement accounts, deductions for medical, dental, life, and other insurance. This way I can see the actual expenses for everything, rather than just “what they want you to see”. The balance on this account is always 0, but it shows me the whole picture.
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It’s interesting that many people do not know about Enrolled Agents. You should check out or find a local Enrolled Agent. These guys are specially trained and certified by the US Treasury to handle federal income taxes for individuals, corporations, foreign, gift, estates and trusts. They are the nation’s leading tax experts and are able to work anywhere in the world as they are federally licensed unlike CPA’s or attorneys who are licensed on a state level. Also not all CPA’s are required to learn tax law and that’s why the varying results. Go to an EA. They have to know tax law.
Wow, very cool. I have wondered where I could even start gathering information and this course seems like it will get me on my feet and “educate myself”. :) Thanks a mill!
Joe
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