What Happens If I Don’t Pay My Taxes? Penalties And Solutions

My poker winnings after starting off with $100.If you are like me and millions of other screwed Americans, you owe taxes by April 15. I used to think that it was always better to owe taxes each year, but that was when the 10-year yield and CDs were providing a healthy 4% annual return. Nowadays, you’re lucky to get a 2% return on either instrument. We won’t even talk about the average money market savings rates at 0.1-0.2%. As a result of such low risk-free opportunity costs, I’ve been an advocate of folks getting a small tax refund since 2009 when the world was ending.

After doing my own taxes for the 10th time this year and always getting a small refund, I will finally be sending in a check for a vomit inducing five figure amount on top of an already six figure amount in taxes paid for 2012. So what happened that caused me to make such an erroneous calculation since I should be an expert at doing my own taxes by now? I didn’t make a mistake. Instead, the government and the voters of California got me.

PROPOSITION 30 PASSES: IF ONLY EVERYBODY COULD PITCH IN

The Main Reasons To Do And Not To Do Your Own Taxes

Happy giraffes grazing in the fieldIgnorance is bliss.

When you don’t know your boss is getting a huge bonus for saving the firm money by screwing your bonus, you’re happy. When you don’t know the reason why you didn’t get into the fellowship program is because the managing director is a woman who hates men with different political ideals, you’re happy. When you have no clue your boyfriend is hooking up with your best friend, you’re happy to carry on!

I’m generally a very happy go lucky type of guy. My facial expression seems to have “smile” as a a default setting. But there is one time a year where I get angry and randomly shout obscenities while no one is looking. The one time of year is during tax season.

As a proud financial masochist, I decided to redo my taxes a second time online just to make sure I didn’t make any errors. I’ve got a five figure tax bill for the first time in my life thanks to AMT, some one off incomes, and retroactive tax law changes in the state of California which I may write about more in the future.

Lo and behold I found a five figure error where I inadvertently inputted my property tax bill instead of my mortgage interest for one of my rental properties. My error makes me wonder what else I’ve done wrong. Despite my mistake, I’m a big proponent of everyone doing their own taxes. This post will highlight four reasons why, as well as five reasons why you’re silly.

THE MAIN REASONS TO DO YOUR OWN TAXES

A Savings Guide Based On The Taxes You Pay: Introducing The Total Income Tax to Total Savings Ratio (TITTS)

Big Pumelos Small TangerineThe joy of doing your own taxes is that you know where every single dollar of income goes. When our tax bill is not being optimized, we call this “leakage.” I finished up my taxes with H&R Block and realized I paid more in taxes than the total amount I spent to enjoy life. Holy Friedman Batman! Something is seriously wrong when the government is allowed to spend more of your money than you can spend on yourself. Or maybe I’m just not spending enough at all?

I’ve never thought about this ridiculous fact until I started comparing notes with a fellow tax hating friend. Everything can be explained by simple math. Given I saved around 70% of my net income after taxes last year, I have 30% in net disposable income to spend. If I pay more than a 30% effective tax rate (Federal+State+Medicaire+3.8% Medicare Investment Tax+Social Security etc), it ends up that I’ve paid more to the government than I’ve spent on myself!

This post will focus on your TITTS: Total Income Taxes paid (effective tax rate) divided by your Total Savings after paying taxes. If you can save as much as your effective tax rate, then you are on the right track because it means you are at least keeping as much of your money as the government is taking. Your TITTS ratio will determine whether you are winning or getting bent over by the government. But first, a little philosophy about taxes.

MATH, TAXES, AND THE WAY OF THE WORLD

How To Pay Little To No Taxes For The Rest Of Your Life

Save on taxes and go see Istanbul, TurkeyFor 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

Are You Getting Your Money’s Worth For The Taxes You Pay?

potholeOne of the reasons why I dislike taxes is because I frequently don’t feel like I’m getting my money’s worth. Let me highlight a short story of absurdity to illustrate a point.

There’s been a loose manhole a half block away from my house which has persistently gotten noisier over the years. What once was a dull thud turned into a CLACK CLACK as each car passed over.

The journey to fix the noisy manhole began on June 3, 2011 when I first called in to report the problem.

Would you like to leave a name and number sir?” asked the operator.

Sure, please just have someone fix the manhole, thx!” I responded.

One month later, still CLACK CLACK.  “Howdy m’aam, I’m calling back regarding the noisy manhole.

Ah yes, we have a record that you called a month ago. The ticket is open and we’re getting someone to work on it.” said the operator.

Little did I know the process to fix the manhole would make my 100 day mortgage refinance seem like Usain Bolt winning a 100 meter dash!

WAITING AND WAITING FOR THE CITY TO DO SOMETHING

How Tax Collectors Like The IRS Cleverly Rob You Of Your Money

Action Figure In HKEvery IRS person I’ve spoken to has curiously been kind. Yet, despite their kindness, I still feel my heart drop every time I get a letter from them. I’m not sure whether it’s because the movies always portrays the IRS agent as a bad man in a rain jacket, looking to shake down individuals for all they are worth. Or, perhaps it’s the fact it’s little ‘ol you vs. the omnipotent government that presents a no way out scenario. Whatever the case may be, dealing with the IRS sucks.

Those who work at the IRS or State Tax Collectors agencies are actually on your side. Sure, some have mandates from higher ups to milk you dry. However, most are willing to help you resolve your issues because they know how complicated taxes are in America. Perhaps this is one of the reasons why so many citizens have decided to just call it quits and not work!

One acquaintance I know worked for the IRS so of course I peppered him with questions to extract all the juicy details. I am against anybody paying more taxes than they need to. It’s just not right for the government to tax more than a typical person saves a year. If the government could show they can efficiently spend our money, then fine. But, they can’t even come up with a darn budget so forget it!

For all you conspiracy theorists out there, I think you’ll really enjoy this post.

AN INSIDER’S VIEW OF THE IRS

How I Beat Economic Armageddon Using a 1031 Exchange

Pacific Heights MansionThis guest article was written by Shilpan of Street Smart Finance, Common Sense Personal Finance.

Armageddon is viewed as a spiritual battle or struggle in the present age between the forces of good, i.e. righteousness, purity and virtue, and the forces of evil. Well, my battle wasn’t spiritual, but it certainly was righteous as it involved saving hard-earned money from the hands of our wasteful government.

Let me end the suspense here. It all began when I wrote an email to Sam asking if I can write an article for Financial Samurai. I wanted to write about why most people can’t retire early. Soon I received a samurai like response from Sam, “Maybe your $500k in tax-free profit in the depths of Armageddon? How anybody can make money anytime and the boon of real estate as a great tax shelter for singles and couples?” How can I say no to the guy who has uncanny ability to find catchy titles?

Let’s rewind back to 2004. The commercial real estate — especially hotels — market was doing well. Lehman was still considered a major financial institution. I bid on a Comfort Inn that was owned by the Laselle bank. This hotel was doing well, but the owner recently refinanced it, took over a million dollars cash out and happily handed the property back to the bank. It was ridiculously easy to screw banks back then.

I knew that hotel required a few hundred thousands in improvements. But, I calculated that in the price that I bid to make sure that I can run it profitably from day one, should I get to buy it. I knew that there were many bidders, so my hopes weren’t too high.

Luck knocked on my doors

You Can Count On Social Security Benefits In Retirement

Seafood Buffet Funny FishDespite mentally writing off the value of my Social Security benefits, in the bottom drawer in the way back of my cob-webbed mind, I know it will be there to fund my early bird special seafood buffets when I’m retired.  Sure, the eligibility age for withdrawal might rise from 62 to 67, but we’re all hopefully living longer too.  Besides, who really needs Social Security benefits if we’re saving over half our after-tax income for some many years anyway?  Don’t get greedy now!

The Middle Class of America has given me a tremendous boost in conviction that Social Security benefits will be around for all, forever.  If you read the comments on my post, “Disadvantages of The ROTH IRA: Not All Is What It Seems“, people have come out in force defending the virtues of the ROTH IRA, even though I clearly telegraph why we should not be contributing to a ROTH IRA if we haven’t maxed out their traditional IRA and 401K yet.  To pay more in taxes to an inept and corrupt government that shirks on its promises is an atrocity.

We should ignore the fact that people comment on things even if they know they are wrong, to justify why they did something to make them feel better.  Instead, we should take comments at face value.  Those who support the ROTH IRA most likely have opened a ROTH IRA.  Because they’ve opened a ROTH IRA, they believe that the government will do better with their money than they can on their own.  Remember, only middle class people are allowed to contribute to a ROTH.  Higher earners be damned!

As you know, I have an open mind and always look at both sides of each debate.  My conclusion from the comments in my ROTH IRA post is this: Because so many people support the ROTH IRA, the people of America believe in the efficiency of the government and the fact that Social Security will be fully guaranteed at the age of eligibility.  If people did not believe the government would make due on its promises to fully pay for Social Security, there’s no way people would give the government more of their money to manage!

People Vote With Their Pocket Books 

The Average Tax Refund And How To Spend It

The average tax refund is roughly $2,750 for 2015. With the US per capita income at around $48,000, that’s 6% of one’s income they’ve overpaid to the evil empire. Everybody knows that getting a refund is like giving the government an interest free loan.  But, with interest rates the way they are, who cares?!

If you were to ask people to put aside $230 a month to save $2,750 a year, I bet most would fail due to the lack of discipline. As a result, I think it’s fantastic most people are getting refunds. The key is not blowing your refund on some splurge you wouldn’t otherwise spend money on if you didn’t get a refund.

In 2014, I had to pay about $1,000 more in Federal taxes, but I got several thousand back from the state of California. For the past 10 years, I’ve saved or invested every single refund I’ve received, and this year was no different. Boring! At least a philosophical post came out of it entitled, “Is Paying Taxes A Form Of Charity?

Here’s a neat infochart with more ideas of what to do with your refund. I like the rocket ship chart of investing your refund every year until you retire with a 7.5% return. Buying a nice Macbook Pro would be sweet too, however, that’s a corporate expense, baby!

If you are like me, you should be motivated to invest and pay down more debt with your refund, rather than spend it on superfluous things. Although buying 1,000 lottery tickets sure sounds like way more fun!

Make Money with Your Tax Return Infographic

HERE’S HOW TO INVEST YOUR REFUND

1) Take your boss out to lunch (10% / $300 over the year). Your number one money-maker is your job; hence, it behooves you to invest as much as you can in making yourself the most compensated employee possible. One of the best ways to get paid and promoted is to build a tremendous support network of individuals predisposed to root for your success. When it comes time for a raise and a promotion, your name will float to the top of the list because managers tend to take care of people they like and disregard people they don’t really know. It doesn’t matter how rich somebody is — nobody can resist a free lunch!

Estimated return on lunch: 1,000%+

2) Donate to a charity that matters most to someone whom you want to impress (10% / $300). If for some reason you feel bad about taking your boss out to lunch, support her in a different way by volunteering your time or money to a charity that she cares about deeply. (Ideally, you will sincerely care about the charity as well, for congruency purposes.) Nothing builds better relationships than finding something shared in common that greatly matters. Because his mother had died from lymphoma years before, a friend of mine supported a client’s lymphoma marathon charity. The client was raising money for lymphoma research because his close friend had also died from lymphoma. Not surprisingly, the two men formed a very tight bond,and from then on my friend was perennially ranked #1 with that client.

Estimated return on donation: A lifetime connection + 1,000%+

3) Take your loved one on a weekend getaway (30% / $900). Money doesn’t matter much if you don’t have somebody you love with whom to spend it. Assuming there’s someone special in your life, you probably neglected, upset, disappointed, or saddened that person at some point during the year. Use some of your refund to apologize and show them you still love them deeply. If you don’t have someone special, then offer to take your best friend somewhere to catch up on good times and make new good times. Poll after poll shows that having a good circle of friends is the number one source of real happiness.

Estimated return on friends and partners: Priceless.

4) Thank your parents (30% / $900). Without our parents we would not be where we are today. Although most of our parents don’t expect any special thanks for raising us, it’s always nice to give back to those who may have sacrificed the most for us. Some parents are financially struggling due to unlucky breaks or poor decisions and are too proud to ask their children for help. Touch base with them and allocate part of your refund to those who could use the money most. They’ve spent a lifetime working to provide not only for you, but also for themselves in retirement. Help make their golden years the best years possible.

Estimated return on thanking our parents: Priceless.

5) Treat yourself (20% / $600). A tax refund isn’t new money; it’s money that you earned and that was owed to you all along. Most financial advisors would encourage you to save your refund, invest your refund, fund a ROTH with it, or use it to pay down high interest debt. By now, however, you’ve already invested 80% of your refund in steps 1-4, with returns that range from 1,000% to priceless; go ahead and treat yourself with the remaining 20%! A 1,000% return on a lunch investment blows away any historical 8% S&P 500 return average.

Estimated return on thanking yourself: Sanity and motivation.

FOCUS ON GIVING INSTEAD OF RECEIVING

Because the average refund is a relatively small absolute dollar amount, going the traditional route of investing or paying down debt is not an exciting proposition. Even if your entire $3,000 refund returned a healthy 10%, that’s only a $300 pre-tax return… and how much would that really change your life?  Focus instead on using your refund to improve existing relationships or make new relationships. Not only does it feel better to give than to receive, you’ll likely end up receiving way more down the line anyway!

RECOMMENDATION TO BUILD WEALTH

Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.

The best feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging!

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Retirement Planning Calculator

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A Look Inside Australia’s Education, Investment, Tax, Healthcare & Retirement System

Australian CurrencyYou’ve heard about Bondi Beach, the Great Barrier Reef, Elle McPherson and the Australian Open.  You know that Australia has a great “walkabout” culture where college graduates take a gap year to go explore the world and expand their horizons.  As far as you can tell, Australia is a wonderful land down under!

Unless you’ve been to sunny Australia, everything is hearsay.  I’ve never been, but fortunately for all of us,  Shaun from Money Cactus is a regular reader who hails from Australia and has decided to provide some insights into what it’s really like living and working in Australia.

One of my friends from San Francisco moved to Sydney five years ago and he loved it so much he decided to start a business there and become an Aussie citizen!  After looking more into the Australian healthcare and social safety net system, there’s no wonder why people love Australia!  In fact, I might consider retiring there myself if they have me.  Then again, why would they since I haven’t paid any of their taxes!

Here’s Shaun’s perspective on Australia.  For other Australian readers and those who’ve spent some time there, please feel free to share your thoughts as well!

Australian Boom: Where The Money’s At