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Financial Samurai

Slicing Through Money's Mysteries

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How To Feel Less Guilty About Paying No Federal Income Taxes

Published: 04/18/2022 by Financial Samurai 55 Comments

For the longest time, I’ve been a proponent of paying federal income taxes. Federal income taxes among all other taxes collected are used to pay for Social Security (~23% of budget), defense and security (~16% of budget), major health programs such as Medicaid and Medicare (~25% of budget), and other social safety nets. Somebody has to pay income taxes so it might as well be us!

However, when faced with having to do my taxes, I get bummed out that it takes so long. On average, I spend around four to six hours doing my taxes because I’ve got various assets to report. It’s important that I check and recheck all my entries before filing to avoid as many mistakes as possible.

If only we could spend 30 minutes or less doing our taxes. Think about how much more productive our country would be! After six hours, then having to fork over a six-figure tax bill isn’t the most pleasant experience. It’s like getting kicked in the crotch after you’ve been kicked in the face!

Given everything is rational, I have a desire to take things down a notch by the end of the year. I would rather make less money to have more freedom and experience less stress. Tax rates are going up and social safety nets are increasing.

However, there’s still a weird part of me that feels guilty about paying less federal income taxes! It’s almost as if I have Stockholm Syndrome with the government. Therefore, I decided to interview some millionaires who feel little-to-no guilt about paying any federal income taxes at all. Maybe you are one of them and can share your perspective as well.



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Fighting My Property Taxes And Losing: Key Lessons For Battle

Updated: 04/11/2022 by Financial Samurai 34 Comments

Seeing your property’s value go up feels good, especially if it goes up more than what you made from your day job. However, the biggest downside is your property taxes will likely go up as well.

For as long as I can remember, I’ve always stood up for myself. Whether it was getting bullied at school or getting ripped off by a vendor, you best not try to take advantage of me or else. But after three years of fighting my property taxes, I’ve given up.

This is actually my first time losing a property tax appeal. Yet, I feel it should have been the easiest property tax appeal to win.

Back in 2009, 2010, and 2011, I successfully got the city to lower my property’s assessed value so I could save on property taxes. If I had not appealed, the city would have kept charging me higher and higher property taxes during the global financial crisis.

Let me explain how this whole property tax ordeal started and some lessons learned if you also want to get your property taxes lowered. I want to save you time, money, and stress. I also want to record my experience in order to let go.

In the end, you must do a cost / benefit analysis on the property tax you could potentially save and the value of your time.



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Smart Money-Saving Year-End Tax Moves To Make

Published: 12/09/2021 by Financial Samurai 71 Comments

Taxes are our largest ongoing liability. As a result, it behooves us to optimize our taxes as much as possible. This post will discuss all the smart money-saving tax moves to make by year-end.

Before I had a family, my old goal was to shield as much income from taxes as legally possible. I had a goal of keeping my Adjusted Gross Income to no greater than $200,000 a year. After ~$200,000 per person, the Alternative Minimum Tax kicks in and deductions start aggressively phasing out.

Thanks to lifestyle inflation and the need to support a family of four, I’ve decided to shoot for and limit our household income up to $450,000. President Biden has clarified he won’t raise income taxes on married households making less than $450,000 and singles making less than $400,000.

However, in my opinion, the ideal household income is closer to a MAGI of $340,100 based on 2022 income tax rates. Up to $340,100, a married household’s marginal income tax rate is a reasonable 24%.

After about $200,000 per person or $400,000 for a family of up to four, I’ve noticed there is no incremental increase in happiness. Instead, making more money often creates more misery due to more work and more stress.

The marriage penalty tax has all but disappeared after the Tax Cuts and Jobs Act was passed in 2017. So if you’ve been on the fence about marrying due to a higher tax bill, you really don’t have to worry any more. It’s only married couples making over $500,000 who will likely pay more taxes together than as unmarried individuals.

The majority of actions to reduce your taxes must take place during the calendar year. So if you want to pay less taxes, it’s worth setting aside some time during the holidays and wrestle this beast to the ground.



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2022 Income Tax Brackets And The New Ideal Income For Maximum Happiness

Updated: 03/12/2022 by Financial Samurai 70 Comments

The 2022 income tax brackets and standard deductions are out! Although the actual income tax brackets have not changed, the taxable income range per tax bracket has adjusted upward slightly to account for inflation. That’s nice of the IRS, but at the end of the day, the government still wants our money!.

Here are four charts I created for the 2022 income tax brackets for singles and for married couples. In these charts, I also include the long-term capital gains tax rates. The short-term capital gains tax rate equals the federal income tax rate.



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Historical Gift Tax Exclusion Amounts: Be A Rich Strategic Giver

Updated: 12/09/2021 by Financial Samurai 23 Comments

Despite paying taxes your entire life, even when you die, the government still wants something from you! As a financially savvy individual, it behooves you to understand as much about the tax rules as possible. At the very least, you need to know about the historical gift tax exclusion amount. After all, tax is likely your largest ongoing expense.

The Internal Revenue Code imposes a gift tax on property or cash you give to any one person, but only if the value of the gift exceeds a certain threshold called the annual gift tax exclusion. For 2022, that annual gift tax exclusion amount is $16,000, up from $15,000 in 2021. The historical gift tax exclusion amount tends to increase by $1,000 increments every three to five years.

Historical Gift Tax Exclusion Amounts

That’s right, you’re not allowed to give more than the annual gift tax exclusion without incurring a tax. This is despite having already paid taxes on the $16,000!

For example, let’s say you earn $200,000 a year and pay a 20% effective tax rate. Your take home pay is $160,000 and you save 20% a year, or $32,000 a year.

If you wanted to give 100% of your hard-earned savings to someone, you may have to eventually pay an additional tax on $32,000 – $16,000 = $16,000 if your estate ends up over the estate tax exemption amount.

Thankfully, the estate tax exemption amount is $11,700,000 per person in 2021 and going up to $12,060,000 per person in 2022. But the estate tax exemption amount is at risk of going down under the Biden administration. President Biden wants to raise income taxes, raise capital gains taxes, and do away with the stepped-up basis as well.



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Most Working Americans Don’t Pay Federal Income Taxes – A Problem?

Updated: 04/18/2022 by Financial Samurai 43 Comments

The Tax Policy Center recently calculated most working Americans didn’t pay federal income taxes in 2020. According to the chart below, supposedly 106.8 million out of 176.2 million total income tax filers did not pay federal income taxes. That amounts to 60.6 of Americans don’t pay federal income tax!

Given there are roughly 332 million Americans, what happened to the other 156 million “tax units”? Well, the other 156 million are either children, retired, or too old to work.

Have a look at the data for yourself and tell me if you’re seeing what I’m seeing. The forecast for the percentage of Americans who pay federal income taxes increases in 2022. But we won’t know until 2023.

Percentage of Americans who pay no income taxes in America

The Tax Policy Center also estimates that 57.1% of working Americans in 2021 won’t have to pay federal income taxes either. The reasons for the surge in non-federal income taxes payers are obviously COVID and the many tax credits the government introduced to help rescue our workers.

More than 20 million workers lost their jobs in 2020 with low-income workers hardest hit. When you add on refundable tax credits, such as the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC), and stimulus checks, it’s easier to understand why 40% more working Americans in 2020 paid no federal income taxes.



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Never Sell Assets And Pay Less In Taxes Like Billionaires

Updated: 02/08/2022 by Financial Samurai 36 Comments

ProPublica published an article highlighting how 25 of the wealthiest Americans paid a tiny fraction of their wealth in taxes. This makes sense because the type of tax that is often discussed is levied on income, not wealth. If you pay yourself a low income and never sell assets, then your tax bill won’t be high relative to your wealth.

According to Forbes, 25 of the wealthiest Americans saw their net worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years based on IRS data. However, $13.6 billion only amounts to a “true tax rate” of only 3.4%.

The article goes on to say Warren Buffet is a hypocrite for encouraging the rich to pay more taxes. Yet he only paid a true tax rate of 0.1% of the wealth he garnered over the 4-year period. We all know that actions speak louder than words. Given Warren is an ultra-capitalist, his actions shouldn’t come as a surprise.



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How To Pay No Capital Gains Tax After Selling Your House For Big Profits

Updated: 01/31/2022 by Financial Samurai 123 Comments

If you decide to sell your house to simplify life, lock in gains, downsize, or relocate for a job, this article will help you minimize your capital gains tax bill. You may even be able to pay no capital gains tax after selling your house for big bucks.

According to the IRS, most home sellers do not incur capital gains due to the $250,000 and $500,000 exclusion for single and married couples. This makes sense since the median home price is roughly $350,000 in 2021.

If you make more than $250,000 – $500,000 on a median-priced home, it is extremely rare. However, as the housing market continues to go up, more people may potentially face a capital gains tax bill.

Conditions To Sell A Home Using The Tax-Free Exclusion

To be eligible for tax-free profits up to $250,000 / $500,000 for singles / married couples, there are three conditions that need to be met.

  • Ownership. You must have owned the home for at least two years during the five years prior to the date of your sale. It doesn’t have to be continuous, nor does it have to be the two years immediately preceding the sale.
  • Use. You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
  • Timing. You have not excluded the gain on the sale of another home within two years prior to this sale.

But let’s say you plan to sell a property where your gains are much greater than $250,000 / $500,000. Fear not! There’s still a good chance you still won’t owe much in capital gains tax if any. Let’s go through how with an example.



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Why The Stepped-Up Basis Must Be Preserved For Our Children

Updated: 09/11/2021 by Financial Samurai 90 Comments

The stepped-up basis for our children is under attack. The Biden administration wants to either abolish the stepped-up basis altogether or alter it to generate more tax dollars. If heirs are then forced to pay a capital gains tax upon inheriting an asset, despite not selling, this could have negative consequences for families and the economy.

The stepped-up basis is a way of adjusting the tax rate paid on capital gains, which may be hiked for those who make over $1 million in combined income and capital gains. Although paying a capital gains tax rate of 39.6% + 3.8% NIIT tax may sound like a lot, eliminating the stepped-up basis would be far worse. The stepped-up basis applies to investment assets passed on after death.

When someone inherits capital assets such as real estate, stocks, bonds, or a small business, the IRS “steps up” the cost basis of these properties to the current “fair market value.” Fair market value is easier to determine for publicly traded assets. However, deciding the fair market value for real estate, private equity, or a small family business is much more subjective.

Under current tax law, when an inherited asset is sold, the inheritor only pays tax on any profits calculated from the day they inherited it. Therefore, if the asset value is stepped up to its current market value and immediately sold, the heir doesn’t have to pay any capital gains tax.

Let’s first go through an example of a stepped-up basis and then the risks of relying on the stepped-up basis to pass down assets. Then I’ll share some examples demonstrating why we need to preserve the stepped-up basis for our children. If you are an estate planner or tax lawyer, please chime in!



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A Capital Gains Tax Hike Should Alter Your Income And Selling Strategy

Updated: 02/16/2022 by Financial Samurai 88 Comments

President Biden’s proposal to increase the capital gains tax from 20% to 39.6% for people making over $1 million a year sounds aggressive. Add on the Net Investment Income Tax of 3.8%, and we’re talking a total long-term capital gains tax rate of 43.4%.  

If this new long-term capital gains tax gets approved to pay for the American Families Plan, qualifying residents in California would pay a 56.7% combined state & Federal tax rate. New Jersey residents would pay 54.1%. New York residents would pay 58.2%. At the margin, people in these states with such means will relocate or find other ways to avoid taxes. 

No matter how much you make or where you stand politically, I think most people agree we should keep the majority of our income and wealth (50.1%+) given we worked for it. Do you really think it’s fair if the government gets to keep more of your money than you do? I don’t. Maybe if the government managed our money better. But the government is inefficient and sometimes corrupt.

Given only about 0.3% of Americans make more than $1 million a year, this potential capital gains tax hike won’t affect the vast majority of us directly. However, it could cause rampant selling of assets by those who are affected, which would ultimately end up hurting most investor’s portfolios.



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