Category Archives: Taxes

One Year of Using YNAB for YNAB (the Business)

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It’s been about a year since I moved YNAB to YNAB, and I wanted to report how it’s been going.

In a word, awesome.

Speed

Monthly bookkeeping used to be the absolute bain of my existence (and I’m a trained accountant, so it’s not that the stuff is technically hard for me).  I hated it.

Now, I hate it less, because I’m done a lot faster.  What took me about 4 1/2 hours each month in 2011, took me about 2 1/2 hours in 2012.

So the speed is obviously a big win.

Tax Planning (and Preparing)

What about taxes? Well, here’s a little test to see if your accountant actually cares about your numbers, and is a tax planner instead of a tax preparer.  The two are so very, very different.  The test?  If they demand that the format you give them is importable into Quickbooks.  Yes, it saves them time, because then they can export that Quickbooks format into their tax preparation software, give it a once-over, and finish preparing your return.

I went to the Reports section of YNAB, and did an export of Last Year of the Income v. Expense report.  I gave the spreadsheet to Casey (a guy I will recommend again, and again, and again to every YNABer that needs a live person to help with their tax strategies. Here’s his book, and here’s a podcast I recorded with him recently) and did he come back and demand it be in a Quickbooks format?

Nope. He combed through the data, had questions for me, and then went on his way.

I’m generalizing here (and getting off-topic), because I’m sure there are many tax professionals that just like the time savings of having it be QB-importable, but also really do look at your numbers and try and save you money.  But if you get the feeling you’re just one of a thousand returns done by your accountant, and that he is, perhaps, running a tax prep mill more than a tax planning practice…you should probably shop around a bit more.

Anyway, doing a quick export and handing my tax data off to Casey was super easy.

So, speed has improved, and tax preparation is still a piece of cake.  That all pales in comparison to the greatest benefit of using YNAB for YNAB: The Budget.

The Budget

I’ve always been so extremely conservative with the business money, I’ve never really had to budget (your alarm should go off right there).

The business has always been profitable, except for a dark time in 2009 when we were sprinting to the finish line of YNAB 3 and I was draining every last dollar I personally had.  But besides that period that I will never repeat? It’s been profitable. (I should say, that had I been budgeting in 2008 and 2009, I likely would never have experienced the dark period that was YNAB 3 Development).

So, I never budgeted for the business until 2012.

And then I started budgeting every single dollar (duh), and saving for rainy days (double-duh) and… it’s been awesome.

A few wins, all directly related to the fact that I’m now budgeting for the business:

  • We spend less frivolously.
  • We save for big projects (like the iPad, and Other Big Things).
  • We set aside money for fun things, like our meetup this year, where we’ll be doing some wilderness survival training.
  • We set aside money for Christmas and birthday presents.
  • We set aside money for our Buffer, just in case the revenue stops flowing for some reason (My target is a three-month buffer for the business).
  • We can be more aggressive with our hiring.

That last bullet has made all the difference. I see new hires as debt, more or less.  I promise I’ll pay them indefinitely, and they promise to totally change their life, and spend (potentially and hopefully) years pouring their heart and soul into YNAB.  This is debt in my mind, and I take it very seriously.

So serious, in fact, that I was pretty afraid to hire people.  The budget has fixed that. I now see a Category in the Budget that says [redacted] and I get excited about it! I see the funds are there to hire someone, and everything’s giving me the green light.

It’s help me be more aggressive.

And for some of you swashbuckling entrepreneurs that roll in a totally different way, it may tell you to slow down a bit :)

Either way, running the business with YNAB has been one of the single best business moves I’ve made.  If your business is YNABable (you don’t have inventory, or significant AR/AP tracking needs, and you don’t need significant reporting on capital), you ought to give it a serious go. You can read how I moved to YNAB to get a step-by-step.

Your Largest Expense, Over Which You Have the Least Control

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Taxes are due very soon, if you weren’t aware. Of course, they’ve been on my mind. They’re my single largest expense (and yours as well, over your lifetime).

I caught an article in the Washington Post called “Taxmageddon” (style points: +5), and had a bit of a realization. Not only are taxes our single largest expense, but they’re also an expense over which we have very little control. A double-whammy.

You Budgeters know as well as I do, that we like to maximize our dollars, give them jobs, and put them to good use. We like to be in control, and with taxes, we’re not (well, more on that in a second).

I want to give you examples to illustrate a point, not to talk specifically about the examples. Based on the information given in the Taxmageddon article, on Dec 31, 2012 (if we make it past the 21st…), some tax laws are set to expire, and others to get a slightly larger net:

  • You know those three kids you have? Your tax will increase $1,500. Just. like that. If you have five kids (like us), it goes up $2,500.
  • If you’re in the lowest tax bracket, your tax will increase 50% (this is simplified, but if you earn $8,700 in wages, instead of paying $870 in taxes, you’ll be paying $1,305).
  • The Social Security payroll tax is set to jump back up to 6.2%. If you earn $100,000 a year (easy math), you’ll be paying $2,000 more per year (again). If you have dividend income, that’ll get a huge hike. (Your employer will pay the other $2,000 for the hike.)
  • The Alternative Minimum tax (without congressional intervention) will add thousands of dollars in annual taxes to an additional 30 million households.

So, will these tax laws expire? Man, who the heck knows. The second half of the article it all political blahbitty-blah and I barely could keep down my protein shake.

And I guess that’s my point. Your single largest expense is, in large part, controlled by a bunch of other people.

So what does an enlightened, budgeting, dollar-maximizing person do? Educate yourself on the code and minimize the heck out of what’s known. You can’t deal with the unknowns, but you can deal quite adeptly with the knowns! After switching tax advisors saved me $20,000 one year (I rounded that number, but not up), I became a believer in knowing what the heck is going on with my taxes, and doing my best to minimize them.

You can do the same. Casey Murdock, my tax advsior, has his book Tax Insight still available through YNAB. It’ll save you a bundle. I encourage everyone who hasn’t yet purchased it, to check it out. (It’s updated for the 2011 tax year, so you could still apply some of the strategies if you’re a procrastinator.)

Tax Webinar On Hold

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Well folks. It’s seven minutes until the tax Webinar is supposed to begin and I still don’t have power. We’re in the thick of a snow storm and power dropped ten minutes ago. Typing this with my thumbs on my iPhone…

I’ll sit here and give it some time yet.

How to Prepare for Taxes with YNAB

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Just threw this video together because Kristen (a YNAB user) emailed me asking as much.

In YNAB:
- File -> Export
- CSV

In Excel
- File – Open -> [your file name]-Register.csv
- Delete all rows that don’t apply to your tax year (as I write this, 2010)
- Keep the date, category, payee, outflow, and inflow columns (you can delete the others).
- Highlight all of your columns (five remaining)
- Data -> Pivot Table Report .. -> Finish
- Drag the Category field from the Pivot Table Settings box to the Column section (far left of your pivot table Shell)
- Drag the Outflow field from the Pivot Table Settings box to the Data section (big area of your pivot table).
- Right-click on the Total column -> Field Settings -> Make sure Sum is selected.

That was for those of you that don’t want to watch the short video. If you get stuck, watch the video :)

Sorry the screen’s kind of small at some points. Next time I’ll do it in HD. This was supposed to be a stop-gap :)

Two Months Left for Tax Planning

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Casey, my tax guru (and author of Tax Insight (new version coming soon), has been posting some fantastic content over on the Tax Insight Blog. You should definitely check it out:

A Small Business Tax Crash Course (Two Tactics & a Clarification)

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Taxes are, far and away, the biggest excitement-sucking, demoralizing, make-me-want-to-cry, soul-crushing expense that I experience as a small business owner.

Typical conversation:

Me: Wow! Things are looking really good! I think we should maybe hire a developer to build YNAB for the [insert your favorite device] platform.

My Accountant: Yeah…about that. Quarterlies are due.

Me: Oh. I’ll go get the checkbook. YNAB on the [insert your favorite device] platform will have to wait.

[Crying begins]

I could cry and whine here for the rest of this post, or we could talk about how you can handle the cash flow ramifications of what is likely your single largest expense.

[Crying ends]

In this little Small Business Tax Crash Course, we’ll cover a few very important topics:

  • Quarterly taxes
  • Profits vs. Distributions
  • The Self-Employment Tax (FICA) (and how to minimize it a bit)

Quarterly Taxes

If you’re familiar with the YNAB Way, then you know that Rule Two calls for us to “Save for a Rainy Day”. Oh what a rainy day it is on January, April, June and September 15th!

If you’re an employee, your employer withholds your taxes from your paycheck. You determine how much is withheld by filling out the W4. At the end of the year, you get your W2 that tells you how much you were paid, how much you had withheld, etc.

If you’re a self-employeed small business owner (ranging from an Avon rep to a Zebra Whisperer), you don’t have an employer to withhold the taxes for you. You’re required to withhold them yourself. You do this with quarterlies. Quarterlies are basically estimated tax payments. You figure out what you’ll owe for the year, divide that by four…and then pay that amount when the quarterlies come due (on the 15th of January, April, June, and September).

YNAB saves the day here, because we know exactly what to do with those larger, less-than-monthly expenses. I don’t want you realizing suddenly that quarterlies are due and you have virtually no funds left in your checking account!

At the beginning of each month, you’ll do your monthly bookkeeping. One of those tasks absolutely must be to make sure you’re squared away with your quarterly filing. Here’s how:

1) Go to Reports -> Net Income/Net Worth and find the month’s Net Income:

2) Multiply the month’s Net Income by your average tax rate (Total Tax / Gross Income from last year…you could also let your CPA figure this out).

3) Budget the answer from #2 into your Quarterlies category.

4) When quarterlies are due, pay the balance of your Quarterlies category.

If you follow this, you’ll be well-equipped to handle the acid tax rain that comes four times per year. Do things this way and your cash flow will be zipping right along without any issues.

Profits vs. Distributions

If you’re a sole proprietor, you are the business. Whatever profits the business makes, those are your profits. Done. A piano teacher is paid $80,000 and has $20,000 in business expenses. The teacher’s profits are $60,000.

If you’re running things as an LLC, you’re not the business. You’re a member/owner. If the LLC makes $80,000 and has $20,000 in business expenses, the LLCs profits are $60,000. What if you decide to live frugally and you only pull $30,000 of the $60,000 out of the business as a “distribution”? You still pay tax on the $60,000 in profits. The business passes through its profits (all of its profits), to you.

You’ll hear people that don’t know, acting like they do know, and they’ll say something like, “Yeah, just don’t take as much of a distribution and you can keep your taxes low.” Wrong. When you’re dealing with a pass-through entity such as an LLC, you’re taxed on profits. The IRS doesn’t care about what you took out of the business.

The Self-Employment (SE) Tax

At the time of this writing, the Social Security tax is 12.4% and the Medicare tax is 4.9% — 15.3% in total. The employer pays half, and the employee pays half.

Remember: this tax is above and beyond the income tax. If your income tax rate is 15%, and you’re self-employed, you’re really looking at 30% (give or take, it’s not quite that exact because you can deduct half of your self-employment tax)!

The profit from your LLC has the SE Tax levied against it. If you’re a sole-proprietor, you pay the SE tax on your profits as well. However, if you’re an S Corp (or an LLC electing to be taxed like an S Corp), your profits are not subject to the SE tax. This is a big deal. Here’s why.

Let’s compare two scenarios where the only difference is on paper:

How’d we suddenly save $7,650 in SE tax? We took 50,000 of the 100,000 in profits from the S Corp (or LLC taxed like an S Corp) and made them a wage–the kind you’d get on a W2–for you, the owner. The other 50,000 we left in there to pass through (from above, remember Profits vs. Distributions…) to your tax return as self-employment income.

This is just a reclass of income when it comes down to it. Your taking $100,000 of general income and classifying $50,000 of it as a wage (subject to the SE tax) and the other $50,000 leaving as profits that simply pass through. This is where the difference between a distribution and profits really matter.

Now imagine that! You save $7,650 because you change things on paper just a little bit! (You actually need to run payroll — that is, pay yourself as an employee of your own business).

What will the IRS look for? Excessively low wages. You can’t have $100,000 in S Corp profits and pay yourself a wage of $10,000 unless that’s considered “reasonable”. Whatever’s reasonable is your call.

What We Covered

Quarterlies. Use YNAB as it’s intended and plan for those large, soul-crushing outflows in advance!

Profits vs. Distributions. They’re likely the same when it comes to taxes…unless you’re operating as an S Corp.

Self-Employment Tax. This is a big cahuna. Minimize it if possible by making yourself an employee of your S Corp and managing your wage (subject to SE tax) there.

If you want to get a better grasp of taxes overall (high-level, fairly entertaining stuff), check out YNAB’s Tax Insight course. (Free & Fun).

More on Taxes. Upcoming Course Attendees Speak Up (and I debate their points)

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I’ve been combing through the survey responses given by attendees to the upcoming tax course (enrollment ends this Friday at midnight — the course is entirely free). The course begins in exactly one week and it’s going to be fantastic! Educational, to say the least.

On the survey, one of the questions I asked was whether the respondent uses a tax preparer (human, not software) and if they don’t, their reasoning. I want to discuss the main reasons why a human preparer isn’t used. Some of the responses scared me a bit. Others made sense. :)

(Before I dive into this, let me be clear that I am not directly trying to make the case that everyone should use a tax preparer — hardly. I am trying to make the case that everyone needs to be much better informed about the black box we call the tax code.)

I’m worried about the cost. It’s expensive. Benefit doesn’t outweigh the cost.

The first two sentences there don’t make sense. To be worried about the cost isn’t a real reason. I’d have to ask why they’re worrying. My guess is that it’s because they feel it’s too expensive, or that it’s not worth the potential savings.

To “it’s expensive”–that needs to be qualified. Do we say something is expensive based on some fixed number in our head? Is a car expensive, but a tricycle inexpensive? Or do you need to evaluate “expensive” as it compares to the value of what you’re getting? That’s why I like that third related reason, where the respondent is weighing the cost and benefit of a tax preparer and making a decision.

Be careful about this. My hope is that the course will help people see that they would be benefited by help, or that they clearly wouldn’t be. But either way we’ll be making an informed decision and that’s what matters.

My situation is simple (straightforward, easy, etc.)

Simple because you understand it and have managed to file your taxes without ever being audited? How do you know you aren’t leaving money on the table? How do you define simple? Is your understanding of The Code great enough that you’re confident in saying you have a simple situation?

This is a tough one. How do you know what you don’t know? Scary! I imagine there’s someone out there operating a sole-proprietorship where they’re leaving thousands of dollars in tax savings on the table because they’ve had a “simple” situation for 10 years and nothing’s changed.

Again, my hope is that the course will help you understand “simple” a bit better, and motivate you to educate yourself more re: The Code.

I don’t trust my finances to someone else. I like the control.

It may just be a control thing — that’s fine. But the same person that doesn’t trust their finances to a tax preparer will trust their finances to a software package? I see a huge disconnect here. If you have privacy concerns, that’s a different story, but just know that the software was written by “preparers” in a sense.

What’s scarier about this isn’t the software side of the equation. It’s the you side of the equation. I would imagine that the odds of you making an error are much higher! Do you know the implication to your answering question 13c that way?

I tried an advisor and felt like they were simply doing data entry on my behalf.

People that have had this experience definitely need to find a new advisor! I had that same experience for two years and you’re right — it’s awful. You’re paying them to do nothing more than you could do yourself–except you’d be faster at it because you’d know all the answers to the questions.

I’d encourage you to hunt for a new advisor if you feel that the only thing they’re doing is simply plugging and chugging numbers. Your advisor should be informing you frequently about possible tax strategies you can employ that will save you money. If your advisor is in touch multiple times outside of the tax season then you’ve probably found yourself a gem.

I shouldn’t need an advisor. The tax code should be rewritten.

The tax code is absolutely crazy in its complexity. It truly is mind-boggling. But this answer just doesn’t cut it! This upcoming tax course will have nothing to do with policies or politics and everything to do with the situation we’re currently in, and what we can do to keep more of our hard-earned dollars in our own pockets.

You may hold a very strong belief that the tax code needs a rewrite, but that doesn’t change the fact that today, you’re being taxed under that code. You should be aware enough to minimize your taxes, and then continue your fight for tax reform as needed.

I don’t have anyone to prepare my taxes that I trust.

This one’s huge. At YNAB we’ve had the hardest time finding good developers that 1) share our vision and 2) can code to our standard. It’s a time-consuming process to find the “right fit” — trust your gut on this one. If you have any doubts about a preparer that you’re interviewing, walk out! (And yes, you interview them).

These are just a few of the reasons people aren’t looking to a preparer. Some of them are quite valid. Participating in next week’s tax course will certainly arm you with the knowledge you’ll need to knowingly decide if the benefit of a tax preparer will be worth the cost.

To those reading this that haven’t yet signed up for the free tax course, you can do that below. The course starts next Tuesday and will run through the week. It’ll be… easily digestible to fit any schedule :) Signup closes Friday at midnight.

You can now view the tax course on demand, during your lunch hour :) It’s educational and entertaining (and yes, it’s about taxes). Check it out!

Get ready to gain new tax insights beginning next Tuesday :)

Update 2/24/10: You can see my comment below, but based on some feedback I received, my apologies if I came across as condescending or belittling in this post. That was NOT my intention.

Here it is in a nutshell. I just want you to make an informed decision about how you handle your taxes. Remember, it’s likely your single largest expense (if you’re on a wage, it’s 7.65% from every paycheck, forever), so it deserves some attention! If you gather information, educate yourself, and feel comfortable using tax preparation software (personal preference, knowledge of your own situation, etc.) that that is the correct choice. On the flip side: if you gather information and, through learning more, decide you should be going about it a different way, that’s the correct choice.

There are certainly cases where you don’t need a tax preparer. After reading this over again, it sounds like I’m saying that a preparer is the only way to go. Not hardly! I just don’t want people blindly going one direction without having their eyes wide open. Hopefully that makes more sense.

About the Course
This will be on demand. I’ll be presenting a video each day for five days beginning next Tuesday. It will be mainly video and just a little bit of text. My goal is to keep each video to less than ten minutes. Also, my goal is to have these tax videos be not boring :)

The course will be high level. As I looked at the survey responses it was very apparent that we can’t drill down to specific situations because so many people have so many different situations. It just isn’t feasible. At this high level though, my goal is to have you understand the framework and then make decisions from within that framework. I’m hoping you’ll learn some principles that will help you make decisions in a more informed way.

And of course I hope you love the course and that it meets your expectations. I think most everyone will walk away learning something that will help them have their eyes more wide open concerning taxation.

Ignoring Your Single Largest Expense is Folly

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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.

blackcloud

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.

Save a Small Fortune in Taxes re: Charitable Giving

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This tip is specifically written to comply with US tax law. I’m not a tax attorney, or qualified tax professional, so seek competent, professional advice before actually implementing this suggestion.

Giving to Charity — the Normal Deduction
When you give to a charitable organization, the IRS allows you to deduct that contribution from your taxable income. For instance, if I had $60,000 of taxable income and donated $6,000 to a qualified charitable organization, my taxable income would be $54,000 ($60,000-$6,000).

What are the tax savings from this? It depends on my marginal tax rate. For the sake of this example, let’s say it’s 20%.

Without the charitable contribution, my taxes would be $12,000 ($60,000 * .20).

With the charitable contribution, my taxes would be $10,800 ($54,000 * .20).

Total tax savings as a result of the contribution: $1,200.

(The quick way to calculate the savings associated with any deduction is to multiply the deduction by your marginal tax rate. In this case, we would do: $6,000 * .2 and get $1,200.)

But this isn’t the Savings Tip.

Giving to Charity — the Souped-Up Deduction

Let’s suppose that instead of giving $6,000 in cash to a charitable organization, you gave $6,000 of an appreciated asset. For our example, let’s pretend you bought into XYZ stock at $1,000 and it has now appreciated to be worth $6,000. Let’s also assume that you had held the XYZ stock for three years.

First, let’s do an example without the charitable contribution.

You decide to sell the stock, in order to donate the $6,000 to a charity. Because you’ve sold a capital asset, you’re subject to the capital gains tax (remember, governments tax us buying, earning, growing, and dying). In this instance, your capital gain is $5,000 ($6,000 – $1,000). The capital gains tax is either 15% or 5% depending on your situation. For this example, let’s assume it’s 15%. The tax due on this sale of XYZ stock would be $750 ($5,000 * 15%). (Special Note: If the XYZ stock had been held less than a year, it would be classified as a short-term capital gain and would be taxed at our example person’s ordinary tax rate of 20%, so the tax on the realized gain from the sale would be $1,000, not $750).

BUT, you can completely avoid the capital gains tax if you simply donate the stock to the charity. The charity can then sell the stock and have the $6,000 in cash (less a tiny selling fee probably). So, you avoid a $750 capital gains tax because your basis increased from $1,000 to $6,000, but you get the full deduction available to you of the current value of the stock at $6,000.

This is the scary thing about taxes. You can do something one legal way and pay more. Or you can do it another legal way, and pay less.

This is also why you should get great advice. TurboTax is fine and everything, but it would never tell you what you should have done, only what the tax ramifications are from what you have done. I’m actually working with an extremely knowledgeable tax person about putting together some fantastic ways to save on taxes. We’re still in the concept stage, but I’m pretty excited about it.

Takeaway: If you’re going to be selling some stock, and you give to charities, considering giving the appreciated stock (or a portion of it) to the charity to avoid the capital gains tax.