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