How To Pay Little To No Taxes For The Rest Of Your Life
For the past 10 years, I’ve been a buffoon. Ever since I was 25, I paid more than $100,000 a year in taxes. Even though I didn’t work for most of last year, I still paid over six figures in taxes. You don’t get a thank you card if you pay over $1 million dollars in taxes in case you’re wondering. Instead, you get the government hooked on your juice with fishing letters from the IRS asking for more!
I didn’t mind paying my fair share of taxes when I was in my 20s because I was excited to progress in my career. I felt lucky to just have a job that allowed me to save like crazy and help others financially through charitable donations. As I grew older, my views on income taxes changed.
Since the turn of the century, we’ve witnessed a devastating war in Iraqistan that by some estimates have taken over 1 million lives. We’ve observed Congress do nothing to pass a balanced budget since 2008 while giving themselves pay raises every single year. During the 2009-2010 financial crisis, the government doled out massive bailouts to institutions such as AIG while allowing executives to pay themselves millions of dollars. AIG even had the audacity to contemplate suing the federal government this year for wrongful terms! What the hell.
I felt sick to my stomach supporting such atrocities by a government who also discriminates against certain citizens while displaying no fiscal discipline. Why can’t we all be treated equally? I don’t know. When it takes 18 months for the city to fix a noisy and dangerous manhole cover, perhaps paying tens of thousands of dollars in state taxes is not worth it anymore. How about $5 bucks instead?
John F. Kennedy once said, “Ask not what your country can do for you, ask what you can do for your country.” Unfortunately, those words were spoken on January 20, 1961. Most of us weren’t alive then since the median age in America is only 35. I’m afraid our society has permanently adopted a one-way take, take, take mentality.
I think I’ve paid my dues. Unless you’ve paid as much in taxes, please don’t criticize me for writing an article on how to help you legally pay less taxes. To build wealth, we must minimize our expenses. Taxes are one of the largest expenses we’ll ever incur.
THE BEST WAY TO PAY LITTLE TO NO TAXES
Besides earning less money, the best way to pay little to no taxes is to make your income equal your itemized deductions. Single filers get a standard deduction of $5,950 while married couples get roughly $12,000. Therefore, make $5,950 a year and voila! No taxes.
The problem is no single person or married couple can live off only $5,950 and $12,000 in income, respectively. Hence, forget about the pitiful standard deduction. Go for the itemized deduction which includes home mortgage interest, property taxes, and charitable givings. Obviously you need a mortgage to be able to pay mortgage interest and property taxes, so consider owning a piece of property already. The government subsidizes your ownership.
As for charity, give as much as you can. It is better to give to causes you are passionate about rather than pay more taxes to the government who ends up wasting your money. The Yakezie Writing Contest is a micro-giving example where we give 100% of proceeds to winning recipients for educational purposes.
The below are three examples with some notes on how to minimize your tax bill.
1) EXAMPLE OF HOW TO PAY ZERO TAXES ON INCOME
| Example Of How To Pay Zero Taxes On Income | |
| Passive Income (Replace With Active Income If You Like) | |
| CD Interest Income | $35,000 |
| Dividend Income | $25,000 |
| Total Passive Income | $60,000 |
| Itemized Deductions | |
| Mortgage Interest | $30,000 |
| Property And State Taxes | $20,000 |
| Charitable Giving | $11,000 |
| Total Deductions | $61,000 |
| Total Tax on Passive Income | $0 |
| Buffer for Other Income | $1,000 |
| Copyright 2013 FinancialSamurai.com | |
Notes
* To generate passive income, you’ve first got to save a lot. You can replace my passive income examples with normal wage income if you like. The effect is the same.
* What is peculiar is that one still has to pay property taxes to the state. At least property and state income taxes are deductible and the money is not going to the federal government. You can choose to move to a different state to lower your tax liability. Changing citizenship on the other hand is much more difficult.
* A $30,000 mortgage interest deduction can be calculated as a 3% mortgage interest rate off of a $1 million dollar loan. If you recall from a previous article, a $1 million mortgage is the ideal mortgage amount if you can afford it. Some may poo poo paying interest, but I say paying interest with other people’s money to build wealth is much better than paying taxes to the government.
* For 2013 and beyond, if you have a modified adjusted gross income (MAGI) of $200,000 as an individual, or $250,000 as a married couple, you’ll also have to pay a 3.8% surcharge tax on all capital gains and dividend income. The government does not have the guts to cut spending, hence more taxes are inevitable.
* You might be wondering how does someone survive if their entire $60,000 in income goes to charity, mortgage interest, and property taxes? The answer lies in living off your savings.
2) EXAMPLE OF ZERO TAXES ON RENTAL INCOME
| Example Of How To Pay Zero Taxes On Rental Income | |
| Rental Income | $50,000 |
| Tax Shields / Expenses | |
| Mortgage Interest | $15,000 |
| HOA | $5,000 |
| Maintenance | $1,000 |
| Property Taxes | $8,000 |
| Depreciation | $23,000 |
| Total Deductions | $52,000 |
| Total Tax On Rental Income | $0 |
| Carry Over Loss | $2,000 |
| Copyright 2013 FinancialSamurai.com | |
Notes
* Owning a rental property is like owning a business. All expenses related to running your rental property are deductible from the rental income. Just be careful that deductions start phasing out after you make more than around $166,000 a year.
* A key part of the expense is depreciation. Depreciation is a non-cash expense to provide a fair way for the normal depreciation of your property.
* There’s no escaping property taxes again, but at least it is deductible. It’s important to convince the city your property is worth the least amount possible to pay the least amount of property taxes.
* It’s best to receive no rental income while you are in a higher tax bracket. Once you’ve retired, you’ll probably be in a lower tax bracket and should receive more rental income given your rent will be higher and mortgage intrest and amortization will be lower.
3) EXAMPLE ON HOW TO PAY NO TAXES ON A BUSINESS
| Example Of How To Pay No Taxes On A Business | |
| Revenue | |
| Cupcakes | $100,000 |
| Cost Of Cupcakes | $10,000 |
| Net Revenue | $90,000 |
| Operating Expense | |
| Marketing | $5,000 |
| Travel | $10,000 |
| Meals | $5,000 |
| Administration | $5,000 |
| Total OPEX | $25,000 |
| Operating Income | $65,000 |
| Solo 401k | $30,500 |
| Traditional IRA For You & Your Spouse | $10,000 |
| Total Retirement Deductions | $40,500 |
| Operating Income After Retirement Deductions | $24,500 |
| Tax Expense At A 30% Rate | $7,350 |
| Net Profit After Tax | $17,150 |
| Tax Shields At Your Disposal | |
| Home mortgage interest | $30,000 |
| Student Loan Interest | $2,500 |
| HSA Contributions | $3,000 individual, $6,000 family |
| Business Start Up Expenses | up to $10,000 |
| Copyright 2013 FinancialSamurai.com | |
Notes
* Starting your own successful business is difficult, but one of the most gratifying things you can do. A lot of your normal living expenses can be considered business expenses. For example, you can have annual board meetings in Rio de Janeiro if you want. The flights, meals, and accommodations are all expensable. Nobody says your annual board meeting has to be in a place of suffering.
* As an employer and employee, you get to contribute $17,500 to your 401K + 20% of operating profits. In this case, $17,500 + $13,000 = $30,500 that doesn’t get taxed. You can also contribute $5,000 for yourself and for your spouse in a traditional IRA. Eventually you will have to pay taxes on these pre-tax retirement accounts, but not now.
* The business has a net profit after tax of $17,150, however you’ve got so many more tax shields at your disposable which can easily wipe out the tax liability.
* Business taxes are one of the most complex taxes to calculate. The above is just a simple example of how a cupcake owner with $100,000 in revenue might not have to pay any taxes at all. See the WSJ article on “How To Pull A GE” as another example.
DO YOUR OWN TAXES AND TAKE ACTION
Despite a tax code over 70,000 pages in length, it’s important for everybody to understand the basics of taxes. I’ve been using H&R Block at Home Online to do my own taxes for the past 8 years so I can understand the nuances and create pro forma scenarios such as: 1) What if I donated more to charity? 2) What if I accelerated my rental property depreciation? 3) What if I generated more income through dividends? 4) What is the income level I need to make where AMT doesn’t kick in? 5) What is my effective tax rate if I did not have a mortgage? and so forth. You will only be able to understand your own tax situation if you spend the time to do your own taxes.
Nobody cares more about your money than you. Save like mad to develop passive income so you don’t have to pay W2 income tax anymore. Move to a lower tax state or country. Start a business that you care about. Whatever you do, don’t sit around and let the government treat you like a punching bag. If you have the ability to relinquish all assets to a loved one and disappear off the grid, all the better!
Readers, have you ever thought of matching your income to your itemized deductions? What are other legitimate ways in which to significantly reduce or eliminate your tax bill? Do you do your own taxes?
Photo: Use your tax savings to visit potential clients in Istanbul. SD.
Regards,
Sam
I like the thought, but how does one live? The zeroing of income is using deductible expenses however eating and living etc are not deductible. In addition, there is the principal portion of the mortgage which is not deductible.
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Financial Samurai Reply:
January 31st, 2013 at 8:27 am
Through savings. Not sure why you think the principal portion of a mortgage would be deductible. then there would never be any taxes to pay as everybody would borrow up to the exact amount of their income forever.
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krantcents Reply:
January 31st, 2013 at 2:00 pm
Since you zeroed the income for tax purposes, there is no money to pay for the small portion of the payment that is the principal as well as food, clothes, utilities and other living expenses. All these things are not deductible.
The only way you can legally reduce your taxes is to use depreciation as a way to shelter your income. Unfortunately, that runs out too.
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retirebyforty Reply:
January 31st, 2013 at 8:35 am
I guess you can live on saving if your expense is low enough. That’s not an option for most people though because their saving will run out pretty quickly.
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I think anyway to reduce the amount spent to a runaway government is a good thing. I think that our government needs to start reducing the spending, and programs, and everything else that we have got and perhaps focus on the following: trade and war. Anyway, I think you’ve covered a good post here to find ways to reduce taxes overall.
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In example 2 you have a line item for HOA. Is it really possible to deduct HOA fees on an Owner Occupied home? I pay about $3000/yr and would love to be able to itemize this expense.
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Mark Reply:
January 30th, 2013 at 1:17 pm
No you can only do this for rental properties.
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econobiker Reply:
February 4th, 2013 at 12:46 pm
So you can end up renting a house from a company, which you own, so that that company can write off the HOA fees…
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I think this article is geared toward a retiree…?
Although starting a side business is a great way to optimize your taxes it seems. Despite all the rhetoric about “simplifying the tax code” … not sure that’ll happen in the next 40 years (my estimated retirement… I like working).
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Financial Samurai Reply:
January 31st, 2013 at 12:11 am
It may be, since I am retired, but it’s not. You can replace the Passive Income portion with W2 active income of $60,000 and the math still works.
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I never understood the power that owning a business brings to doing your taxes until I marred The Wife. It was amazing that first tax year!
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Great article Sam. Definitely makes me interested in owning my own business in the future.
Quick note, I think in example 2, you meant to say depreciation instead of amortization. Amortization refers to spreading the cost of an asset over a period of time; where depreciation is a non-cash expense that you prorates the cost of an asset (like you describe with the rental property).
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Financial Samurai Reply:
January 31st, 2013 at 12:09 am
Thanks Mark. I had depreciation in the writing, but amortization in the charts. Corrected.
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I love this site.
A tip as I just started a consulting business and recently discovered that section 129 and depreciation is your friend. Especially if you have other sources of income besides your startup business. Bonus depreciation is an interesting subject that people with a small business should know about.
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No complaints from me to minimize taxes.
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Carrying a huge mortgage in order to cut down on your tax bill is one of the worst pieces of financial advice I have ever heard. You are basically spending a dollar to save 35 cents (after you exceed the standard deduction), while the rest of your interest payment goes to the bank. Sure, you can make the argument that everyone needs a place to live, but that is no reason to buy more house than you need in order to get a bigger tax write off.
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Geek Reply:
January 30th, 2013 at 8:53 pm
Read the disclaimer :)
I think this is about avoiding taxes, not about saving money overall. Bonus: get a really nice place to live at a slight discount.
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Financial Samurai Reply:
January 31st, 2013 at 12:14 am
Rather pay the bank with a chance to build wealth than pay the government. Please share with us your income and tax minimization strategies. Can you afford a $1 million mortgage?
You may enjoy this article: http://www.financialsamurai.com/2012/10/16/real-estate-is-my-favorite-investment-asset-class/
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nbsdmp Reply:
January 31st, 2013 at 6:40 am
I have to agree, too much debt is what causes empires to fall. I could easily qualify and take $1M mortage on my home at some ridiculously low rate. Yes the math says do it, common sense says “are you freaking crazy, you have a paid for home”. The way to build REAL wealth is to be debt free, then build your alternative revenue streams. The goal with a home should be a roof over your head that gives you the lifestyle you want, a home is an expense, not an investment. Yes, there is a high probality that over time it will appreciate in value DO NOT COUNT ON THIS! Buy what you can afford & pay it off, once you do you’ll be shocked how fast your wealth accumulates! I love the general idea of being creative to pay less taxes, it is something I’m definitely spending time on.
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Financial Samurai Reply:
January 31st, 2013 at 8:20 am
Exactly. The housing stock for ownership is so superior here in SF that I did not want to rent.
Folks shouldn’t be afraid of a mortgage if they have the cash. It’s just accounting. I’d rather have $1 million to invest at over a 2.6% rate of return and be liquid and have the tax benefits than tie it up in a house. Of course, if you can’t afford a mortgage, don’t get it.
Imagine living in your house and waking up 20 years later to find out you not only didn’t have to pay rent, your house actually made you money.
PK Reply:
January 31st, 2013 at 8:08 am
In a vacuum, maybe. However Sam has at least a reasonable expectation of appreciation of his Bay Area Abode. In fact, the entire Peninsula saw some pretty insane appreciation in 2012 – so if Sam’s experience is anything like mine he’s sitting on a nice (paper) increase in net worth for his troubles.
20% on a million dollar house is $200,000, enough for plenty of years of interest payments to your local credit union. your mileage may vary, of course!
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JayCeezy Reply:
January 31st, 2013 at 9:08 am
Sam’s strategy is extremely effective when the real estate property is appreciating, and the difference between the mortgage APR (i.e. 2.6%, wow! My first mortgage was 10.5%, and I thought it could never go lower after 5%) and the invested difference (stocks returned 7.5%/yr over 2011/12, for a net of 4.9%/yr) is positive. For the past two years, Sam would have benefitted at $78,400, plus whatever capital appreciation to his home would have been ($250,000 cap gains tax free for single filers, after 2 years occupancy of primary residence).
Smart!
However, when the real estate market declines 15%/yr, the equity investments also decline 10%/yr, and one realizes they are paying (in my case 5%/yr) for the privilege of losing money while paying for a home eventually sold for 30% less than one paid, I can feel pretty stupid! Um, I mean, one can feel pretty stupid!
For the risk-averse, one might consider the investment directly into paying off the outstanding mortgage, an equivalent 2.6%/yr return, while freeing up cashflow and eliminating risk to that portion of one’s net worth.
It’s like adjusting one’s sunglasses, once you get started there is no end to it!:-)
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Financial Samurai Reply:
January 31st, 2013 at 9:32 am
But your house declines in value in a down market whether you pay the entire mortgage off or not! I’d much rather have $1 million liquid and NOT tied up in a house than the other way around.
Also, the topic of this post is tax minimization not real estate investing. Up or down market, a mortgage will shield income from taxes.
JayCeezy Reply:
January 31st, 2013 at 10:38 am
Absolutely. The $800K paying off the mortgage no longer produces passive income, but an implied return equivalent to the mortgage APR; tax minimization from the other side, no longer having to be offset by deductions. I wasn’t criticizing your decision, it makes excellent sense and you are doing just fine with your strategy. My real-life example is not for most, just the risk-averse.
I do not think I could afford it. Additionally, I think the ATM is likely to not allow you to bring your taxes to zero.
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At some point I hope to reduce my taxes through legal means similarly to this, but at some point its money vs time (and you Sam have some money) so unless you find tax sheltering yourself inherently ‘fun’ it may be easier to skip some of the accounting and mortgage refis and just pay up. Not saying you should… I’m doing a refi though and its dreadfully boring. I have to remind myself about all the money were saving to do paperwork. But then in real life I make games so maybe my ‘fun’ bar is high. Or weird.
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Financial Samurai Reply:
January 31st, 2013 at 8:16 am
It actually is fun to figure out the best way to minimize expenses while trying to live the most fulfilling life possible. After a certain point, we don’t need much more to survive. Everything else becomes almost like a game. Up to us to find a balance and do something if we are out of balance.
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It really is mind boggling how complex our tax rules are. Understanding basics like the difference between standard and itemized deductions goes a long way. I love how we have software like H&R to help fill out all those confusing forms, and that we can use those programs as learning tools to see how various changes impact how much one could owe or get refunded. Each year I feel like I learn something new about taxes and even though it doesn’t make paying taxes less painful, it makes me feel more aware and smarter about how I use my money.
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Financial Samurai Reply:
January 31st, 2013 at 8:14 am
My biggest annoyance is that the gov’t keeps CHANGING the tax code every single year, so that means there are more booby traps the gov’t can lay to penalize us.
The IRS are really nice folks though. They know the tax code is ridiculous, but they won’t stop to charge sky high interest rate penalties and wait 3 years before they ask to maximize their returns!
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Complex tax rules? Ha, I come from the country which produces about 2/3 of the world’s tax literature, or so they say. Someone will have to test if it works similarly in a country like Germany. (Go Steffen! Do it!)
I hate taxes!
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Financial Samurai Reply:
January 31st, 2013 at 8:13 am
Which begs the question, which country do you come from?
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Steffen Reply:
January 31st, 2013 at 8:15 am
Socialist Republic of Germany ;)
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Financial Samurai Reply:
January 31st, 2013 at 8:29 am
I thought Germany is like the America of Europe! Strong, powerful, and ready to bail out everybody?
Germany has to be better than Norway, Sweden, Holland, Belgium no? I took a business trip there last year, but folks were so happy there!
http://www.financialsamurai.com/2012/10/04/learning-from-the-worlds-happiest-people/
Steffen Reply:
January 31st, 2013 at 10:05 am
Germany might be the least ugly of those by fiscal and economical data. But still broke, like the others. Some day someone is going to have to eat the losses. Actually sorry…the savers of the world are already paying the bill.
Btw, if you believe in freedom and individualism the “happiness of a people” doesn’t make much sense, right? Who made this happiness statistics? Someone campaigning for office, planning new handouts?
I can tell you that at least once a month as an employee you shed some tears when about 50%-60% of your salary end up in political coffers.
Great write up.
I also feel sickened at the way in which governments waste money and support corrupt corporations rather than looking out for the people who put them into office.
I always try to minimize my tax as best as I can, but I really need some good tax accountants like Google or Apple…
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I don’t mind paying taxes but I would definitely like to pas as little as possible!
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I pay 25% payroll taxes on my Canadian pay cheques but I get a lot from it (free health care).
When I was watching your recent election I was amazed at how little taxes Mr. Romney paid. Your tax system is so different than ours that I did not understand it all but he makes a tonne (Canadian measure) of money but doesn’t seem to pay much tax. Lots of shelters and things off shore.
Perhaps you need to find out who Mr. Romney’s accountant is?
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Financial Samurai Reply:
January 31st, 2013 at 8:12 am
Jane, is 25% your top marginal tax rate? What’s your total effective tax rate? I’ve always heard Canada is higher, around 40%. If you’re only paying 25% in total income tax, that is GREAT! Exect a migration from Americans up north for free health care.
Romeny makes money through long term capital gains. That is what we all need to move towards. Working for money is for fools, according to the gov’t.
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Jane Savers @ The Money Puzzle Reply:
January 31st, 2013 at 4:44 pm
Tax deducted is based on income. I make less than 50k per year so I am at 25%. A coworker makes just under $100,000 and is taced at 40%. That is taken from every pay cheque.
Then you try and reduce the amount of the tax that the government will keep by using deductions on your federal income tax forms.
If you invest in registered retirement savings plans you can reduce the total amount of your income that will be taxed. Our government really wants us to save for retirement.
Not sure about marginal and effective. Not words I use when discussing taxes.
The main words we do discuss are deductions. Retirement, child care, child activities, public transit, etc. Lots of ways to reduce taxable income. We are not able to deduct mortgage interest.
I am hoping some other Canadians jump in here with better explanations. I think we do pay more bet we get a lot more as well. My parents have higher health care needs now and they get to visit the doctor frequently and the government pays for most of their drugs. They don’t need help in the home yet but they can get that too if they want to stay in their home.
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Financial Samurai Reply:
January 31st, 2013 at 6:52 pm
It’s very important to differentiate between margina and effective.
The effective tax rate for someone making $500,000 is around 30%. But, the highest marginal tax rate for someone making $500,000 is now 39.6% (anything over $400,000). Effective tax is your tax bill divided by total income.
Jane Savers @ The Money Puzzle Reply:
February 4th, 2013 at 3:24 pm
You ‘Mericans have us out numbered and we would be bankrupt in no time.
We have pretty liberal immigration rules. If you are persecuted or hungry in your country you can apply to enter. If you have a skill we need or money to invest you are welcome.
We have very strict gun laws and no second ammendment so you would have to leave your guns at the border.
FinanceGuy Reply:
January 31st, 2013 at 10:45 am
In 2010 Romney paid $6.2 million in federal taxes. Seems like plenty to me.
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JayCeezy Reply:
January 31st, 2013 at 5:36 pm
@Jane, Mr. Romney has paid more than 13% of his income to charities for the past 20 years, including $4 million (more than 29%) in 2011. That is on top of the 13.5% in Federal Income tax, plus he paid State, Property, and other tax. Hope this is of interest to you.
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Jane Savers @ The Money Puzzle Reply:
January 31st, 2013 at 6:46 pm
I think I would be very happy if Mr. Romney was my neighbour or if my sons were friends with his sons. A very nice guy with a great family but he didn’t seem to have the fire in his belly to win an election.
Canadians can deduct a per centage of charitable donations on the federal tax return.
I am on the outside looking in at your economy and political situation. You are all fascinating but I am happy to live on the north side of the 49th parallel.
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Financial Samurai Reply:
February 4th, 2013 at 8:42 am
A lot of Americans are wondering whether we can migrate up north during retirement to take advantage of free healthcare without having to pay a lifetime of income taxes. Thoughts on whether we’d be welcome?
I think what the goverment doesn’t get is that the people who are smart enough to be the top earners in our society will either figure out how to circumvent a the system, or just generally be disenfanchised and quit working so hard to earn more. Why be responsible and work hard to give to a goverment that proves they cannot grasp fiscal responsibility? I used to be happy paying my fair share, but when I hear our Pres. explaining how he wants to expand our goverment and entitlements it makes me sick to my stomach. My tax bill will go down guaranteed, my income will not.
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Financial Samurai Reply:
January 31st, 2013 at 8:10 am
I read a study that a flat tax of 15% above a certain income level is the best tax rate to generate the most revenue because it is low enough for tax cheats to stop cheating, low enough for people to stay motivated, and high enough to maximize returns. Makes sense to me. Take out all deductions, tax at 15% and watch revenue surge.
Just look at Hong Kong and Singapore with their 15-20% flat tax rate. Budget surpluses and their economies are booming. Unfortunately, we aren’t as small and nimble as them. So let’s look at RUSSIA! Huge country and also a flat tax of under 15%.
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JayCeezy Reply:
January 31st, 2013 at 8:51 am
Sam, you had mentioned that rate before, and I have read it elsewhere. Not asking for info you are uncomfortable discussing, but your conversation with the Undersecretary of the Treasury sounds very compelling. If you ever had thoughts on implementing that rate, and reconciling it with expenditures, I would love to read your analysis.
So many variables outside of the ‘lab’, though, including population growth/decline, existing debt, and mainly the ability to enforce payment.
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The First Million is the Hardest Reply:
January 31st, 2013 at 9:36 am
A flat tax sounds like a great idea, but I just can’t see it happening. Beyond the ineptitude of the gov’t, there is a huge tax preparation and help industry that doesn’t want to see their business dry up when everyone only has to compute 15% of income to do their taxes!
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Sam,
I’m about to turn 25, I’m helping my mom (claimed her as a dependent, and myself as Heads of Household), and have been saving as much as I could. I work full-time and run a business on the side for modest additional income. My mom found a part-time job last year and may have earned just about enough to push her outside the qualified dependent bracket, which suddenly changes my whole tax situation from Head of Household to Single. I thought that number was around $5,000, but it seems they lowered it to $3,850…sigh.
Sadly I haven’t been able to save enough yet to buy a house (though I am gunning for it!), so no real option there to claim a deduction.
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David M Reply:
January 31st, 2013 at 10:00 am
Just remember – for each $ spent on interst – your taxes decrease by your top maringal tax rate. Thus, if you spend $10,000 a year in interest, your taxes decrease by only $2,500 (assuming your top rate is 25%). Addtionally, the “savings” only relates to $ above the standard deduction. If the standard deduction is $8,000 and your itimized deductions are $10,000 – your savings is only $500 (25% of $2,000).
What I’m trying to say is – paying interest on a mortgage is not all its cracked up to be.
Pay as little mortgage interst as you possibly can!!!!!
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Financial Samurai Reply:
January 31st, 2013 at 10:20 am
It depends on income. Which is why around a $200,000 AGI is the best balance imo to take advantage of the deductions, stay under the populace and gov’t radar, and live a merry life.
If you have to live somewhere, you might as well live in a nice place and take advantage of government gifts. The mortgage interest deduction is a secondary or tertiary benefit. The biggest benefit is living in a place you love where nobody can kick you out or tell you what to do.
What’s your homeownerhsip situation again David?
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David M Reply:
February 4th, 2013 at 12:40 am
I own a condo that I bought 5 years ago with a 15 year mortgage.
I have been paying extra on my mortgage and thus have paid off more than half of the principle in 5 years.
I refinanced to a 10 year mortgage 3 years go.
I was just trying to make the point that the mortgage interest deduction is not the panacea that some people think it is.
I hope they come w/ a fruit basket and find some unclaimed expenses and refunds they owe me!
One of the government’s biggest worries is people waking up to see the truth. It’s kind of like the Matrix. The government needs to keep the people in a zombie-like stake in order to maintain control.
The smartest thing the gov’t did was allow for massive ROTH IRA conversions to trick citizens into paying more taxes up front during the financial crisis. Genius by them. Silly rabbits for those who fell for their trick.
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Sam, you should write a post about what you did for a living and tips for recent grads who want to follow in your career footsteps! It seems like you made a lot more money than the average Joe.
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ristlin Reply:
January 31st, 2013 at 1:17 pm
He worked really hard, saved up tons of money, and never really tried keeping up with the Joneses. Each of those is tough as hell to pull off, heh.
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Financial Samurai Reply:
January 31st, 2013 at 4:33 pm
Sure. But let me collect all my deferred compensation first. Might take a while though!
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Sam, These posts get better and better man! I paid very close attention to this one, since I am about to go from a six figure government job to a six figure CONSULTING gig for myself. And I am extremely worried about taxes! I’ll be reading this one over and over…
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Financial Samurai Reply:
January 31st, 2013 at 4:33 pm
Congrats on the new gig Tony! I hope you do get those six figures in consulting. You’ll pay less taxes for sure due to the business expenses, however, just make sure you compare what you have in cash or on the balance sheet after each month.
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I’ve been considering a retirement vehicle for my TCI earnings to shelter them from the tax man while saving for retirement. I see you mention a solo 401k, but what other options are there? Do you use anything?
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Financial Samurai Reply:
February 1st, 2013 at 10:09 am
Solo 401K and pertinent expenses are the best way I’ve found. After you max out your solo 401K to around $50,000, then you can use your mortgage interest shield.
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Thailand has dropped all their tax rates for 2013… my effective tax rate is down to 23% or so… still over what I’d pay in the USA with the foreign income exclusions so all is well!
Here’s to starving the beast a little bit more!
-Mike
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Financial Samurai Reply:
February 1st, 2013 at 9:50 am
23% ain’t bad at all Mike! What would you pay in the US if it was apples to apples?
Skinny beast, here we come!
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Mike Hunt Reply:
February 1st, 2013 at 5:53 pm
I would guess that, including state taxes and social security / medicare, I’d be at an effective tax rate of 30%…
-Mike
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“Ever since I was 25, I paid more than $100,000 a year in taxes.”
So basically >$300k/year in income from 25 onward? That’s very impressive. What was your past life again (IB, HF, or PE)?
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Financial Samurai Reply:
February 1st, 2013 at 9:52 am
Check this post out: How To Make Six Figures At Almost Any Age
There’s a good chance if you live in a free world, and want to make more money, you can do it. The post shares some guidance.
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the best way is to move to HK :P
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Financial Samurai Reply:
February 4th, 2013 at 8:43 am
But then one might die early from the pollution from China! And the fact that it costs $10,000 a month for a 1,700sqft 3 bedroom in mid levels.
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What a great article. I haven’t paid as much as you in taxes but I’ve come considerably close and find it atrocious. I personally would have no reservations paying taxes if I knew they were going towards a worthy endeavor but as you have eloquently displayed they are not! We are looking to move our family’s expenses and income in this direction.
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Financial Samurai Reply:
February 4th, 2013 at 8:44 am
Make the move Marvin! I definitely plan to no longer feed as much to the beast as possible. It feels great not working anymore and being able to finally enjoy some of my contributions.
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When it comes to business, it depends on the type of entity you form — LLC vs S-Corp. With LLC, every penny in income is subject to payroll taxes. But, with S-Corp, you will get K-1 from your company and you pay taxes on the income shown in K-1 along with your other personal income. So, it’s always better to form S-corp as pass through entity to avoid payroll taxes.
By the way, Dr Robert Reich is suggesting a cap on the home mortgage deduction. So, I wouldn’t be surprised if these skillful politicians find it an amusing idea to spend more.
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Financial Samurai Reply:
February 4th, 2013 at 8:46 am
S-Corp does seem better to save on the 12% in payroll taxes. Just gotta pay yourself a reasonable amount though. I wonder why entrepreneurs can’t get unemployment benefits…. or can they.
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It seems the only way to do this is to own property. But I also imagine that owning property is more expensive than renting. Even though you’re saving on the tax deductions, you’re still saving on “interest” that is money you are losing to the bank. The business concept makes more sense, albeit requiring a lot of time. I make about $110k a year right now, s/o makes $0, so I don’t know if this would be a valuable exercise for me. I’m considering buying a condo right now and don’t fully understand the cost benefits versus renting, so need to do my research. Everyone says that the tax benefit of owning is so great but I try to do the math and it just doesn’t add up.
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Financial Samurai Reply:
February 4th, 2013 at 8:47 am
Depends on where you are. It would literally cost 2X more to rent my house now that the interest and property tax I’m paying. Of course, I bought my house years ago. In SF, the breakeven is about 2.5 years. In many other places, it’s cheaper to own.
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I wish we had the same options in the UK. Like Steffen in Germany, we have it rough!
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Financial Samurai Reply:
March 9th, 2013 at 6:53 am
I’m sure you do! Who is the Financial Samurai of the UK to write this similar article for you?
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A quick note on German taxes, it’s based generally on family income, so my wife earning 6 figures takes home approx 64%, of I worked I would lose over half of it. A single person usually loses around 50% to tax.
Secondly while Germany is hurting due to an ageing population (mostly on healthcare), overall it’s doing very well, everyone and their brother from Spain is moving here.
Very odd but Germans are a nation of renters, not unusual to meet people who’ve rented the same place their whole life.
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Financial Samurai Reply:
March 9th, 2013 at 6:53 am
Best to get married then it sounds like! In the US we have a marriage Penalty tax. It’s crazy.
Interesting insight on renters vs owners. Might want to check that to corroborate. In US about 62% own.
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BTW what about the minimum alternative tax?
Secondly depending what province you live in you can earn up to 75,000 dollars almost tax free in Canada.
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Financial Samurai Reply:
March 9th, 2013 at 6:50 am
The AMT is a tough one, but doesn’t really start hitting until after making $150,000 or thereabouts. With $150k you can bring your AGI down to around $100k or less and AMT will be minimal if nothing. It’s case by case.
$200k is my ideal income for Max happiness. Much more and the government starts getting you and deductions start getting phased out.
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Great post, I’ve been thinking along the exact same lines recently.
After the standard deductions I have been thinking to donate increasingly large amounts to charities that fit my purpose, rather than allow the Govt to waste more of my tax dollars. I believe that you can donate up to 50% of your AGI which will wipe out taxes from all but the highest income earners.
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Financial Samurai Reply:
March 9th, 2013 at 6:48 am
Better to donate to someone in need rather than donate to the Goverment of greed.
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Well, I will soon be paying taxes on 6.4% less of my paycheck, since I’ve bumped my 401k up another 1% (http://www.richintheheart.com/work-overtime-if-possible-and-is-it-worth-it-to-max-401k/).
Many thanks for the thoughts you post here and on Yakezie, trying to push everyone to put away as much as they can every year!
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Financial Samurai Reply:
February 28th, 2013 at 7:36 am
Congrats! Careful. Saving massive money will become addicting!
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Rich In The Heart Reply:
March 8th, 2013 at 7:52 pm
It has become a very fun indeed!
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What percentage of the 1 percent own businesses? I feel that many of the one percenters make way more than 380,000, but use tax shields as the ones you described to show less income.
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Interesting post Sam. I’m just not sure how capital efficient it would be to save up $100-$200k to sit around in a saving account earning no interest which you draw down to live on. I assume you aren’t suggesting selling capital assets like your shares that are producing dividend income, which you’d incur capital gains on, nor other capital assets that you would incur tax on from a sale. The potential “lost income” from that $100k sitting there possibly something like $5-10k /yr? But perhaps, based on the example illustrated, you have $60k passive income coming in anyway that this isn’t such an issue :)
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