When It Comes To Money, Shouldn’t We Trust Rich People Who’ve Been Poor?

If you’re about to have heart surgery, you’d rather have an experienced surgeon operate rather than a first year resident wouldn’t you?  If you’re looking for some entrepreneurial advice, you’d rather pay $300 to listen to Ron Conway, the godfather of angel investing, rather than some 19 year old kid with a failed start-up correct?

Given you agree with me 100%, why on earth would you ever listen to someone who proposes tax policy on higher income earners if they don’t make much themselves?  If you make $60,000 a year, you have no business telling what someone who makes $200,000+ a year how they should spend their money, how they should feel about paying more taxes, how much they are paying in taxes and why they should pay even more taxes.  Why?  Because a $60,000 income earner has no idea!

If you are making hundreds of thousands of dollars or more a year and once made just $25,000 dollars, you have way more credibility talking about appropriate tax policy and how to make money, at the very least.  You might even be able to talk about the merits of education and work ethic.  But of course, those who make less will get all up in your face for saying work ethic, education, and tenacity aren’t correlated.  They aren’t if you don’t want to make money.  They are, if you do want to make money.

If you’re making a middle class salary, good for you!  America cannot prosper without a strong middle class.  But, if you are an honorable middle class citizen, you just don’t have a say on how to tax those who make more.  If you so happen to be one of the lucky tens of millions who don’t pay any net Federal taxes, you should consider not voting on candidates who want to tax the upper income earners more.  Just count your blessings that you don’t have to give money to a government that is skilled at wasting your money.  The more noise you make, the more you will draw attention to yourselves, and the Sentinels will find and destroy you.

No income earner is better than another.  Whether you make $50,000 a year or $500,000 a year, you have the same liberties.  There’s only a problem when someone who has no idea of what it takes to make over $200,000 complains that the “rich” should disproportionately pay even more of their income to taxes.

Readers, shouldn’t we trust all wealthy people who’ve been poor before instead of poor or middle class people who don’t know what it’s like to earn more and pay more taxes?

Why do people in the lower income tax bracket think they know what’s best for those in the highest income brackets?

* $200,000 is an arbitrary number since this is the income level that is considered rich by the current administration.  $60,000 is less of an arbitrary number as it is roughly 20% higher than the median per capita income.

Recommendation: I’ve been using H&R Block’s Premium Tax Software to do my own taxes for the past 11 years. It’s inexpensive and very easy to use for novice to advanced tax filers. The software always updates with the latest tax rules so you’re never behind. They also have audit protection service as well.

Updated 12/7/2014

Cash-Out Mortgage Refinancing As A Way To Lower Your Tax Bill

Mortgage Rates Down To All Time Lows

9,500 sqft for only $8.9 Million in Presidio Heights, SF

View: You should defer or shield as much income as comfortably possible until retirement to minimize your present tax bill.  The odds of your retirement income equaling your working income is slim-to-none.  Therefore, your retirement tax rate will be much lower.

In the process of refinancing my primary residence mortgage down to around 2.5% for a 5/1 ARM, it dawned on me to also check what the rates are for my conforming rental mortgage. I just refinanced my rental property last year from a 30-year fixed at 5% down to a 5/1 ARM at 4% because I took a stance that rates weren’t going anywhere, and that I would pay off the loan in 5-6 years time. Mortgage interest rates are back down to all-time lows as of 1/20/2015.

It turns out that I can refinance my rental property mortgage down to 3.375% from 4% with no out of pocket costs.  At 3.375%, all the costs are baked into the rate.  Conventional wisdom says to refinance your mortgage whenever you see rates 50bps (0.5%) lower than your existing loan, with a break even period of 12 months or less.  With a break even period of 0 months, and 75bps lower, refinancing now is a no-brainer!

My net income from this particular rental is around $1,000 a month.  That’s after HOA dues, mortgage interest, maintenance, depreciation and property taxes.  Not huge, but better than a poke in the eye.  If I had no mortgage at all, the net income would be closer to $2,400 a month at today’s rent, which is an income stream I’ve been planning for since first purchase.  Unfortunately, I pay about a 30-33% effective tax rate (federal + state) on the rental income thanks to the progressive nature of our income tax system.

Then a light bulb went on………….


How Long Does It Take To Become A Millionaire?

Generally it’s pretty poor taste when a billionaire tells other people to contribute more money to anything.  It’s like sharing a cab ride with Warren Buffet and he asks you to pay with your last $10 bill when he’s got a wad of $100s.  Not cool.  However, Warren’s New York Times op-ed piece finally highlights what Americans everywhere have been wondering all along.  Who are these “millionaires” President Obama and the Democratic party in Congress keep targeting?

In practically every speech on taxes, President Obama likes to pit the wealthier population against everyone else by using the term “millionaires” to pay their “fair share” of taxes.  Class warfare is unnecessary.  As you know, President Obama wants to raise taxes on individuals making $200,000 and families making $250,000.  First of all, why does $200,000 + $200,000 = $250,000 instead of $400,000 as a couple is beyond me.  Is one spouse supposed to suddenly make only $50,000 from $200,000?  Give me a break.  Talk about blatant sexism.

What’s more interesting is how President Obama keeps on referring to those individuals making more than $200,000 as “millionaires”.  Last time I checked, if you make $200,000 a year, you aren’t necessarily a millionaire.  In fact, you are likely far from being a millionaire!  But according to President Obama, it takes you a nanosecond to become a millionaire once you make $200,000 a year.


Helping Out A Father In Need

I recently had a really long conversation with a reader who asked me for advice on what to do about his ailing father who is in debt.  I have some opinions here and really want to help, but I’m no lawyer or tax accountant. So perhaps the Financial Samurai community can come together and provide the best course of action.

If you are to read this post, please leave the judging to a minimum and open your hearts and intellectual minds instead.  I’ve written the post in a way that best reflects our conversation and the dilemma at hand.

The Situation

My father is 61 years and has been out of work for the past year and a half.  He hurt his back, and is currently on disability leave from his job as a construction worker.   He lives in rural Pennsylvania, where the cost of living is low, but so are the wages.  The most he’s ever made was $35,000, and that’s if he was fully employed all year, which often times, he was not.

My grandmother passed away three years ago, and as the good son, my father paid for the $6,000 funeral himself, even though he has an older sister who could have helped pitch in.  My grandma left my father her house, even though he has a small house of his own.  With the little remaining money he had post the funeral, he’s been fixing up the house to sell.  It’s been a rough road thanks to the economy, and his funds have run out.  That was last year.

We had a heart-to-heart last Thanksgiving, and I discovered that not only did my father have no savings, he was $13,000 in credit card debt.  His disability insurance of $1,200 provides him enough to scrape by every month, but without a healthy back, he can’t get back to work.  He wants to pay off his credit card debt, finish up everything in the house, and just lead a simple life.  I sent him some money then, and one more time again this year, but something just feels a little off.

He is eligible for Social Security next year, which I think will provide a boost to his income, but I’m not sure.  Are you allowed to receive disability insurance and social security at the same time?  I’ve also read that it’s better to wait a little longer to collect social security so that his monthly checks will be higher.  But, I’m stressed too, because he has other serious health issues which I’d prefer not to get into.

My father has a lot of pride and he doesn’t want to ask me for money.  I know it embarrasses him to ask, even though I am happy to help.  I’m not that wealthy myself, but I could afford giving him an extra $500 a month if I had to.  I’ll just save less for my own retirement.  He feels bad taking my money, but after helping raise me and pay for my tuition, I want to help. I need to help!

The Dilemma

Mortgage Interest Deduction Limit and Income Phaseout

According to the IRS, the maximum mortgage amount you can claim interest on is $1,000,000 on first or second homes if the loan was taken after Oct 13, 1987. You can also deduct interest on $100,000 for a second mortgage loan used for anything other the purchase of your first or second home. More specifically, home equity debt means “any loan whose purpose is not to acquire, to construct, or substantially to improve a qualified home“.  Interesting right?  In other words, you can take a $100,000 home equity line of credit to buy a Porsche 911, an incredible home theater system, and do a little landscaping and all the interest is deductible!  No wonder why everybody took out so many Home Equity Lines Of Credit (HELOC)!

You already know that the government is sexist because the maximum mortgage interest deduction limit stays at $1,000,000 even though both people could have $1,000,000 mortgages. It’s beyond me why the government thinks two people who want to marry with $1,000,000 mortgages each, don’t deserve to keep their deductions. But at any rate, just be aware that if you can afford such a mortgage, you might want to think of this crucial loss of deduction before you get married. With rates averaging 5%-6%,  you could literally lose out on tens of thousands in interest deductions!


The Government Passes A Renters Tax!

In good old fashion political jockeying, the House finally agreed to a budget and unknown to many, they also passed a Renters Tax!  The idea is for all Americans to participate in our simple tax system and shore up our huge deficit.  The new law states that starting October 1, 2011 all renters shall pay a Renters Tax equal to half the value of their rented home as determined by the government every year.  Landlords equally pay the other half.

Example: A nice 3 bedroom, 2.5 bath property is assessed at $500,000.  A taxation of 1.2% = $6,000 must be paid once a year.  Since the renter benefits from living in the home as well as the public parks, roads, libraries, and schools, the renter writes a check for $3,000 to the local state county tax board.  Meanwhile, even though the landlord does not enjoy any of the benefits of living in the home, s/he receives rental income, potential long term asset appreciation, and the option to move back in at his or her choosing.  As a result, the owner pays for half the annual property tax by sending in a check as well.  Perfect equality.  Both renter and owner have “skin in the game” and look to better their surrounding community.


Blowing My Tax Refund On Life

For the first time in my income earning life, I plan on spending my tax refund on something fun in 2015.  Every time I did get a tax refund I would just put it away in savings or pay down debt.  That’s pretty boring, especially since I’m already a saving fiend, spending only 30% of my gross income and banking the rest.

My federal tax refund isn’t large at around $500 bucks.  I’m happy with this amount as it’s a good balance between not giving the government more than they should get and being large enough that I can do something fun with it.  My California tax refund is much larger because California is broke and screwed us in 2010 by withholding more than they should have to pay their debts.

Despite California taking more than they should, I’m still happy to get my money back.  Just a year ago, California issued IOUs!  We learned from a previous article that the average tax refund is $3,000.  I also highlighted some practical things to do with your tax refund such as get more education and invest in a business.  Unfortunately, I’m sick of being financially savvy at the moment and there’s no way I’m going to pursue my PhD!


How Much Money Do The Top Income Earners Make?

President Obama

Welcome top income earners!

Americans are rich by world standards. With an average per capita income of ~$48,000, America ranks in the Top 10 in the world. The other nine include Qatar ($88,300), Luxembourg ($80,000), Singapore ($57,230), Norway ($52,230), Brunei ($47,500), Hong Kong ($45,000), Switzerland ($41,800), Netherlands ($40,800), Australia ($39,632), and Austria ($39,100). The data comes from the IMF (2015), and the World Bank and CIA World Factbook collect and corroborate similar data.

If at birth, you had the mental capacity to choose where you’d like to live for most of your life, one of these 10 countries should probably be on your list thanks to proper infrastructure which allows for opportunity. Even if you end up being the most mediocre producer, you are still miles ahead of much of the world. Too bad many of us can’t pick where we want to grow up and earn a living. As such, it’s nice to understand how we compare against the rest of the world to give us some perspective.

If everybody earns $1 million a year, being a millionaire isn’t very special anymore. At the same time, if everybody earns under $20,000 a year, the income level for poverty must be redefined. Everything is relative. Let’s learn about each others’ incomes shall we?

WHAT THE TOP 1%, 5%, 10%, 25% and 50% MAKE IN AMERICA

The Average Percent Of Income Donated To Charity Can Improve

Mumbai BeachDonating money is a very personal decision. There is no right or wrong amount. Anything more than 0% is good in my eyes. According to several of the largest charitable foundations, the average percentage a person donates of his or her adjusted gross income is 3 to 5%. Studies also discuss how Republicans donate more on an absolute basis, and the poor donate more on a percentage basis as well.

Doing your own taxes helps you think more about such topics as giving. You start wondering whether you’ve given enough or too much. You look for answers to figure out what is the norm and proceed to adjust within the band. Furthermore, you input different charitable scenarios to see how your tax bill changes. It’s all very educational and thought provoking.


Government Leaders: Vice President Joe Biden donated $4,820 to charity, or 1.44% of his $333,182 salary in 2009. Meanwhile, Obama donated about $329,000 to 40 different charities, or roughly 6% of his $5.5 million 2009 income (largely from books and royalties). Obama also donated $1.4 million of his Nobel Peace Prize proceeds to 10 different charities as a straight pass through. In other words, Obama donated $1.723 million out of a potential $6.9 million in income, or roughly 25%.

Religion: The Bible refers to Jacob promising to give a 10th of what he receives back to God. “And this stone, which I have set for a pillar, shall be God’s house: and of all that thou shalt give me I will surely give the a tenth unto thee.”  Buddhism discusses alms giving to monks and nuns as a way to spiritually connect, show humility, and support the community.

The Super Rich: Warren Buffet pledged 85% of his entire US$45+ billion fortune to the Bill & Melinda Gates Foundation.  His rational is to give it away to people who will live longer than him, and who know how to give better.  In Warren’s case, he is giving away almost his entire net worth, which still leaves billions more to be passed down to others in his immediate circle.

The Poor: Perhaps they don’t pay much in taxes, but the poor do contribute a healthy amount to charity.  The 2000 Social Capital Community Benchmark Survey shows that households with incomes below $20,000 gave 4.6% to charity, higher than any other income group.  Households earning between $50,000 and $100,000 donated 2.5 percent or less.  Only above income levels of $100,000 does the percentage rise again.


Do Your Own Taxes Or Hire An Accountant?

Despite what many have advised, I’ve been doing my own taxes for the past 8 years.  Along the way, I’ve cocked things up, such as one time when I forgot to report the cost basis to over $1 million dollars worth of stock proceeds!  For some reason, I just passed over the stock section of the software.  You can imagine my surprise when I got a tax bill from the IRS for over $300,000!  By not putting the cost basis down, the IRS thought I had another $1 million worth of income that I hadn’t paid taxes on.  Instead, I only had about $10,000 worth of extra income since my cost basis was around ~$990,000 (trading is tough and not worth it!).

After scrambling to gather all my stock purchase prices, I submitted everything to the IRS and prayed it was all just a silly mistake.  I gave the IRS folks a ring in Utah to explain what I had sent in, and they were so nice.  The man on the other end said, “Not to worry, we see these types of mistakes all the time.”  Two months later, I got a letter from the IRS saying I owed them minimal interest, and taxes on only my profits of ~$10,000, or about $3,000.  Phew!  Thank goodness.

Lesson learned.  Always report your cost basis and save all records of transactions.  You know I’ll never mess up that section again.  I just told you a story as to why you might not want to do your taxes yourself.  That said, I cherish every learning experience and would do it over again.