Taxes Archives - Page 2 of 17 - Financial Samurai

The Best Way To Travel For Free And Lower Your Taxable Income

Free travel tips

Travel is amazing. Since childhood, I’ve had the travel bug because growing up, that’s all I did. I was born in Manila, Philippines, stayed briefly in Washington, DC and moved to Lusaka, Zambia for a couple years. In Kobe, Japan I started kindergarten. In Taipei, Taiwan I had four years of elementary school. I then went to Kuala Lumpur, Malaysia for middle school where I learned a lot of bad things. Finally, I returned to the States for high school and college. As the son of US foreign service parents, life was interesting.

As an adult, my frequent travel continued because luckily I found jobs in the international equities department of two large financial organizations. Up to four times a year, I’d travel to Asia to attend conferences or bring clients to see companies. Kissing the ring in New York City HQ was also an annual rite of passage. It was a whole lot of fun!

Traveling to new places on business is one of the most rewarding experiences you can have. Not only do you get to explore new worlds and meet amazing people, all your flights, hotels, and meals are free. Since I’m no longer in Corporate, I needed to some how recreate this perk.

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.}

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

Posted by Financial Samurai 100 Comments

If you decided to sell your house to simply life, lock in gains, downsize, or relocate for a job, this article will help you minimize your tax bill.

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 $210,000 in 2018, and the average holding period is nine years.

There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free up to $250,000 / $500,000:

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 in an expensive coastal city where your gains are much greater than $250,000 / $500,000. There’s a good chance you still won’t owe much in capital gains tax if any if you keep proper records.

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Income Types Not Subject To Social Security Tax: Earn More Tax Efficiently!

Posted by Financial Samurai 70 Comments

The government gonna knock you out!

The maximum amount of earnings subject to the 6.2% Social Security payroll tax climbed to a record $132,900 in 2019.

In other words, those lucky enough to have jobs and earn $132,900 or more will have to pay $8,240 a year in Social Security tax. This tax would be fine if Social Security was fully funded, but at the current rate, retired citizens will only get about 70% of the expected payout by 2040.

But of course, you can’t forget about Medicare, which is 1.45% of all income earned. And Medicare doesn’t have an income cap. So the reality is that a $132,900 a year laborer will have to pay $8,240 in Social Security tax plus $1,927 in Medicare tax for a total of $10,167 in 2019. That total taxation number is likely to go up in 2020 and beyond.

If you are “unlucky” enough to be your own boss, you’ve got to pay the 6.2% Social Security tax + 1.45% Medicare tax times two (employer plus employee)! In other words, a self-employed individual making $132,900 will now have to pay over $20,300 a year in Social Security + Medicare tax.

And the great irony is, good luck trying to collect unemployment benefits if your business goes bust.

Out of the estimated 173 million workers who will pay Social Security taxes in 2019, about 12 million (7%) will be paying more. But as I’ve shown you before, anybody who makes between $100,000 – $200,000 and lives in a large city is considered middle class. Therefore, we can conclude the middle class is getting punched in the face even harder.

Don’t forget, there’s also the 0.9% Additional Medicare Tax on employees that went into effect in 2013. If you make more than the below thresholds, you’ve got to pony up 2.35% in Medicare taxes (1.45% standard + 0.9% additional).

The semi good news is if you’re self-employed, the employer Medicare rate stops at 1.45% and is exempt from the additional 0.9% even if you make more than these thresholds. The bad news is these income amounts aren’t being adjusted for inflation, so more and more people are getting subject to the additional 0.9% every year.

$250,000 for married taxpayers who file jointly.
$125,000 for married taxpayers who file separately.
$200,000 for single and all other taxpayers.

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Three Favorite Ways To Earn Money And Pay Less Taxes

Posted by Financial Samurai 44 Comments

John F. Kennedy once said, “Ask not what your country can do for you, ask what you can do for your country.”

I took his message to heart when I came to America as a teenager. As soon as I started my first job out of college, I was proud to pay taxes to help our country thrive.

Starting around age 26, I began paying more than $100,000 in Federal and State income taxes a year. I distinctly remember coming home after a 14-hour day exhausted and finally analyzing my pay stub.

25 percent of my pay went to Federal taxes. 6 percent went to State taxes. 7.65% went to FICA taxes. After contributing to my 401(k), more than half my gross paycheck was gone.

It’s one thing to pay taxes when you’ve got a pleasant job with relatively comfortable hours. It’s another thing to pay lots of taxes when you’re often miserable at work. The desire to be so patriotic like JFK said declines.

Making W2 income is the most inefficient way to earn money. High taxes is why some CEOs gladly accept a $1 salary in exchange for earning stock grants that are taxed at long-term capital gains tax rates.

Let’s look at my three favorite ways to earn money and pay less taxes.

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Short-Term And Long-Term Capital Gains Tax Rates By Income

Posted by Financial Samurai 37 Comments

If you need more incentive to generate passive income in order to give yourselves more freedom to do what you want, then look no further than the below two charts.

The short-term capital gains tax rate is equivalent to your federal marginal income tax rate. Once you hold your investments for longer than a year, the long-term capital gains tax rate kicks in and goes way down.

Here are the tax rates for 2019 and beyond.

Capital Gains Tax Rates By Income For Singles

If you’re single, the largest tax spread difference between short-term and long-term is if you make $200,001 – $425,800 in capital gains. We’re talking a 20% lower tax rate (35% vs 15%).

To generate $200,001 – $425,800 in capital gains you could earn a 4% rate of return on $5,000,000 – $10,645,000 in capital, earn qualified dividends at the same rate with the same amount of capital, take profits on long-term holdings, or you can do a combination of everything.

For the 2019 tax year, you will not need to pay any taxes on qualified dividends as long as you have $38,600 or less of ordinary income. If you have between $38,600 and $425,800 of ordinary income, then you will pay a tax rate of 15% on qualified dividends. The rate for $425,801 or more is 20%.

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Tax Free Profit Exclusion: Prorate For Long Term Rentals That Turn Into Primary Homes

Posted by Financial Samurai 37 Comments

Unfortunately, sometimes dreams don’t come true. In my quest to simplify life, I was blinded by the belief that the rental property I bought in 2003 would also be eligible for the full $250,000 / $500,000 tax-free profit exclusion if I moved back in tomorrow and lived in it for the next two years before selling.

I believed this to be true because I sold a rental property in 2017 that was eligible for the full $250,000 / $500,000 tax-free profit exclusion given I only rented out the property for 2.5 years after living in it for 10 years prior.

With this new rental property I’m considering selling, I lived in the property for two years (2003, 2004), and then have been renting it out for the past 14 years. Even if my family moved back into the rental for two years, we’d only be able to get a prorated tax-free profit exclusion equal to the length of time we lived in the property divided by the entire length of ownership. That’s normally the case for rental properties bought after January 1, 2009, but a law was passed since I bought the property where all use of the rental prior to January 1, 2009 is deemed as “qualified use.”

In other words, the prorated amount of our tax-free profit exclusion would equal Qualified Use / Years of Ownership. Numerator = 2003, 2004, 2005, 2006, 2007, 2008 + 2018, 2019 (moving back in for two years) = 8. Denominator = 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 = 17. Prorated amount = 8 / 17 = 47%. If my gain is $720,000, then my tax free gain = 47% X $720,000 = $338,400. With a 27% effective tax rate, my tax savings = $91,368.

Earning tax free profits of $338,400 is better than a poke in the eye, but certainly not as enticing as earning $500,000 in tax free profits as a married couple. And to clarify, I’m not limited to 47% of the $250,000 / $500,000 number. I’m limited to 47% of the gain. That gain is then limited to $250,000 / $500,000. In other words, at a 47% prorated amount, I can have a capital gain of $1,063,829 before I run up to the $500,000 limit as a married couple.

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