Important Year End Tax Moves To Make

Year End Tax Moves SunsetThe good thing about having multiple income streams is the financial security it provides. The bad thing about having multiple sources of income is a much more complicated tax structure. With 70,000+ pages to the tax code, things can get confusing.

My income sources come from investment income, rental income, W2 income, deferred income, K1s, and 1099 income. My goal is to shield as much income from taxes as legally possible and keep Adjusted Gross Income to no greater than $250,000 a year due to AMT and deduction phaseouts that completely go away after this level.

But as my online business grows, it gets harder to shield income. For example, one can only contribute so much to a 401K and SEP IRA. Meanwhile, I can’t eat $300 business steak dinners every night with clients nor am I willing to buy a luxury car to write off or pay 4X the price for first class flights. Maximizing ROI and minimizing waste is the way I like to run my business and my personal finances.

The majority of actions to reduce your taxes must take place during the calendar year unless you’re filing as a business entity on a fiscal year. So if you want to pay less taxes, it’s worth setting aside some time during the holidays to wrestle this beast to the ground.

How Europeans See Money Differently From Americans

Stonehenge Sideways View

After almost finishing my loop around Stonehenge, I stumbled across a French woman who was lying on the ground sideways. She adjusted herself a little bit to get more comfortable, but paid no attention to fellow tourists wondering what she was doing.

She made me want to lie down sideways as well to see what she was seeing. I didn’t because I felt a little silly copying her in broad daylight. So instead, I took this picture and tilted my phone. Perhaps you are now bending your head sideways or lifting your laptop sideways to see what she sees.

What do you see?

At What Income Level Does The Marriage Penalty Tax Kick In?

Marriage Penalty Tax In HawaiiOne of the most disappointing things about the government is their institution of the marriage penalty tax. The government is smart to laud the act of marriage in order to collect more taxes. When you’re in love, what’s an extra $1,000 or $10,000 a year in taxes you’ve got to pay? Love is blind and the government tries to take full advantage of you.

Lucky for us, we are not blind. We don’t mindlessly follow everything our politicians have to say. We question why the government suddenly allowed Roth IRA conversions during the height of the financial crisis. We think for ourselves, and that’s why the lot of us are going to be much better off than the rest.

This post will present examples of various fictitious couples with various income levels and deductions to give you an idea of how much extra you must pay the government in order to get married. All data comes from this marriage penalty tax calculator by the Tax Policy Center.

I encourage you to input your own numbers and see what happens after this post as well. Remember, please take your anger out on the government, not on me. I’m just the investigator trying to shine a bright light on this ludicrous situation. Just the fact that I had to spend loads of time figuring out various income permutations to see when the marriage penalty tax kicks in is maddening. 

The Benefits Of A Backdoor Roth IRA

Backdoor Roth IRA - Horseback ridingIs A Backdoor Roth IRA A Good Move?” on Daily Capital is probably the best post on the internet that explains who should do a backdoor Roth IRA, how to do a backdoor Roth IRA, who is allowed to do a backdoor Roth IRA, the risks of a backdoor Roth IRA, and who doesn’t need to do a backdoor Roth IRA. Have a read and I’m sure you’ll agree.

Long time readers know that I’m one of the biggest detractors of the Roth IRA program. The main reality is: most people will make less in retirement than during their working years. Therefore, taxes should be lower, all things being equal. I present many more arguments as to why a Roth IRA is suboptimal.

But after spending some time editing the Daily Capital post, I’ve come around to the idea that for some people, a backdoor Roth IRA is a good move. Here are three main reasons why a backdoor Roth IRA should be considered.

Investing Your Tax Refund For A 1,000% Return

Mauna Kea, HawaiiIn the article, “How To Get Over Your Fear Of Investing” I mention how your risk tolerance decreases the more capital you accumulate. When you were rocking a $100,000 net worth as a 30-year-old, you had no problems investing 30% of your net worth in your employer’s promising stock. But now that you’re 50 and less enthusiastic about working for decades more, investing 30% of your $1 million nest egg doesn’t seem like a good idea.

The tax refund actually provides for a great opportunity to swing for the ROI fences every single year, no matter your age or net worth. Given that the average tax refund is only around $3,000, many people just blow it on material things like shoes, clothing, gadgets, and LED TVs. It’s not necessarily a bad idea to use your “bonus” money to buy something tangible: any of these things can provide solid utility until next year’s refund. Alternatively, going the traditional route of paying down debt or increasing a depleted emergency fund is also fine, just terribly unexciting.

Now if your tax refund was a whopping $100,000, I’m willing to be that your approach to spending it would be substantially different! Some would unwisely go out and spend the money instantly on a luxury automobile; most, however, would probably give considerably more thought to the question of how to deploy such a large sum. Things like paying down a mortgage, investing for retirement, buying a home, putting money away for a child’s education, or helping out a loved one all come to mind with this level of money. But most people will never receive such a large refund, so the point is moot (sorry!). The $100k refund simply provides a mental exercise that highlights how our spending habits shift when dealing with different levels of money.

Although a tax refund often feels like a nice windfall each year, it’s actually been your money all along. And how boring it is to just invest that money (now that you finally have it) in the stock market for a potential 8% historical return. Of course if you’ve got revolving credit card debt with interest rates in the teens or higher, certainly give that a whack. But as a Financial Samurai reader, I’m thinking you guys are savvier than this.