Financial Samurai

Slicing Through Money's Mysteries

Your Beater Car Can Make You A Lot Of Money In Tax Savings Or Reimbursements!

Published: | Updated: by 71 Comments

Beater Car Making You Money

Driving a beater car can make you a lot of money. As a car fanatic who has owned beater cars and luxury cars, let me explain.

After writing, Never Buy A New Car In Its First Year Of Redesign, a reader commented that he netted about $17,500 in reimbursements from driving his 2002 economy car roughly 35,000 miles. At first, I thought there was no way he could receive reimbursements more than the value of his car. Gotta be a loophole!

So like any good Financial Samurai, I decided to get to the bottom of this strange situation with some tax analysis and research. If you have a car, a business, a job that requires travel, or simply love to drive, this post is for you.



Read More…

Property Taxes By State: Why We Should All Embrace Higher Property Taxes

Published: | Updated: by 123 Comments

This post will provide a detailed look into property taxes by state. The differences in property taxes by state is astounding. Therefore, just because a state has cheaper home prices doesn’t mean you’re getting a better deal long term.

Where you live in America can really help or hurt your finances. In a time when working from home is more feasible, many more people are trying to geoarbitrage to make their income go farther.

I used to despise property taxes because the city would raise them even when property prices were collapsing during the financial crisis. It was/and still is up to property owners to fill out a complicated form, find comparable homes that have dropped in price within a certain radius, make sure the comparable sales fit within a certain timeframe, and pay a $60 fee to do so with no guarantee you’ll win!

If you didn’t spend time contesting your property taxes, the city would gleefully raise them despite the obvious declines. The city counts on meek or ignorant people to fill their coffers and pay themselves handsome salaries.

It’s just like how members of Congress continued to get paid even when they shut down the government or close businesses during a global pandemic. Can you imagine losing your job in the recession and having to pay higher property taxes while knowing your neighbor sold his house for 20% less than the city’s assessment?

Fight Your Property Taxes

I fought my property taxes in 2009, 2010, 2011, and 2012 and won for a particular property I bought in the beginning of 2005. I had to fight since the value of my stock and real estate holdings were getting hit and I no longer had a job in 2012.

Since 2013, I’ve let the city tax me back to my normal purchase price plus a ~2% a year catch up increase because the economy has thankfully recovered. I don’t mind paying my fair share so long as it’s just.

After paying ~$450,000 in property taxes since 2003, I’ve finally accepted the reality that it’s up to those of us who saved like crazy and took the risk of owning property to pay for our community’s infrastructure, education, public transportation, service men and women, and other public works. We must pay for those who cannot or will not.

What I’ve also realized is that after much debate, my fellow renters absolutely believe they are paying their fair share of property taxes, even if they aren’t cutting a separate check to the city twice a year.

With this thought in mind, I now believe it’s logical behavior for renters to keep on voting for increased government spending because they all want better and are willing to pay for it through higher rents.



Read More…

The Average Percent Of Income Donated To Charity Can Improve

Published: | Updated: by 71 Comments

Mumbai Beach - The Average Percent Of Income Donated To Charity Can Improve

The average percent of income donated to charity by levels of income is sadly very low across the board. According to several of the largest charitable foundations, the average income donated to charity ranges from just 3% to 5% of annual gross income.

Not surprisingly, the average percent donated to charity is the highest for lower income households. But the absolute dollar amount donated to charity is highest for the highest income households.

Donating money is a very personal decision. There is no right or wrong amount. Anything more than 0% is good in my eyes.

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.

The Average Percent Of Income Donated To Charity By Income

Below is a chart from the National Center for Charitable Statistics. It shows that people making between $45K-$50K donate the second highest amount to charity at 4%.

Households making $100,000 – $1,000,000 donate the least amount of their income to charity at between 2.4% – 2.6%.

Households making $10 million or more donate the highest amount of their income to charity at 5.9%. This is great to see as one would think once your adjusted gross income is over $10 million, you have plenty of disposable income to spare!

The households earning $200K – $1,000,000 are likely crunched the most because of taxes. Therefore, it makes sense these households would donate the least to charity.

Average percentage of income donated to charity by income level

Deciding How Much To Give To Charity

We now know the average percent of income donated to charity is between 2.4% to 5.9%. If you’re looking to be more charitable, let’s use other people or institutions as a guide.

Government Leaders

Back when Joe Biden was Vice President, he 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%.

Now that Joe Biden is President again, let’s see how much he will donate, especially now that he’s a deca-millionaire.

Religion Donation Recommendation

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. Although in Buddhism, there is no exact percentage figure suggested to donate to charity.

How Much The Super Rich Donate

Warren Buffet pledged 85% of his entire US$50+ 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.

Do you really want to donate your money to an inefficient government? Heck no! Which is why if you’ve been fortunate enough to accumulate more than the estate tax threshold per person, I highly suggest spending and giving more aggressively while alive. Paying 40% of you estate to the government is such a waste.

How Much The Poor Donate

Perhaps the poor doesn’t pay a large absolute amount 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.

Stuck In The Middle

It would be great if all of us amassed billions of dollars like Warren Buffet. Then we could give away billions and still be rich.

Unfortunately, many households are stuck in the middle. Middle-income and upper-middle income households can often pay a hefty amount in income and other taxes. Such households may have mortgages, car payments, and student loans. Then there is the expense of children.

If you’re making $200,000 – $250,000 and already paying a 32% marginal federal income tax, a 8% marginal state income tax, and a 7.65% FICA tax on your first $137,700 of income, the propensity to donate income to charity likely declines.

Capital gains tax rates

The Give Nothing To Charity Ideology

Then, when you find out that roughly 44% of Americans pay no income taxes (too old, too young, or too poor), then your desire to donate to charity might decline even further.

Given tax revenue is used to build social programs, one could logically assume that paying taxes is a form of charity. The charity is just not being redistributed as efficiently as most would like.

The percentage of Americans that pay no incom tax

As America heads towards a bigger government, the omnipotent government should be responsible for supporting charitable organizations and eradicating poverty.

It’s pretty clear that when given a choice, most Americans would want more Social Security benefits, more subsidized healthcare, more unemployment benefits, student loan forgiveness and more.

If you go visit Singapore, for example, you won’t see poverty on the streets. That’s because their benign dictator system has ensured that all people live a reasonably comfortable life.

The government provides subsidized housing, has a central provident fund (social security), solid infrastructure, and a flat tax system. The government is doing its job in ensuring that everyone has at least a certain standard of living.

If we are relying on the government to fix our problems, we should also lean on the government to eradicate poverty and more.

Joe Biden announced another $1.9 trillion stimulus package in 2021 to help middle-class and lower-income households. The new stimulus package calls for providing $2,000 in stimulus checks, $600 a week in enhanced unemployment benefits, and more. Further, Joe Biden wants to cancel student loan debt of $10,000 for everyone.

Who is going to pay for all this stimulus? Taxpayers.

A Solution To The Redistribution Of Redistributed Wealth

To help alleviate poverty and help society, may I suggest one final simple solution.

Those who pay no income taxes at all donate more to charity. Perhaps a minimum donation percentage is 5%, half of what the Bible suggests.

To suggestion helps prevent people from not paying taxes and not donating to charity. By increasing the breadth of charitable contributions, more people benefit. Further, it feels great to give instead of only receive.

Perhaps a simple donation formula for everyone is: 20% (Avg. effective tax rate) – An Individual’s Effective Tax Rate = How Much To Donate. Of course, if your existing effective tax rate is already higher than 20%, you should feel good that the government is utilizing your income for the greater good.

Recommendation To Build More Wealth

If you want to donate more of your income to charity, then you should track your income and wealth more carefully. Do so by signing up with Personal Capital. It is a free online platform which aggregates all your financial accounts in one place. The better you can track your wealth, the more you can optimize it.

Personal Capital’s best feature is its Retirement Planner. It uses your real expenses and income to calculate what your future retirement cash flow will look like. There is no rewind button in life. Plan accordingly!

I’ve used Personal Capital’s free financial tools since 2012 and have seen my net worth skyrocketed since then.

Photo: Mumbai Beach at base of Queen’s Necklace, SD.

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

Published: | Updated: by 38 Comments

Tax-free profit exclusion for long term rentals need to be prorated

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. I only rented out the property for 2.5 years after living in it for 10 years prior.



Read More…

What’s The Right Ratio Between Salary And Distribution To Save On Taxes And Avoid An Audit?

Published: | Updated: by 38 Comments

Salary Versus Distribution

Every year, as a small business owner, I like to ask my tax accountant: What’s the least amount I can pay myself in salary and bonus before the IRS comes knocking? Every year, he comes up with a slightly different answer. Th IRS is smart and is always changing the rules, usually to its benefit.

You might ask yourself, why I would want to be paid the least amount possible by my business? The answer lies in the self-employment tax (FICA + Medicare). 

As a S-Corp business owner, I’ve got to pay the employee’s and employer’s portion of the self-employment tax on salary. This equates to a 15.3% tax (12.4% for Social Security tax + 2.9% for Medicare tax = 15.3%). If you’re an employee, you only pay 6.2% Social Security tax and 1.45% tax for Medicare. Spend some time looking at your pay stub next time and marvel!

Social Security taxes are applied to income up to $142,800 for 2021. This income limit goes up by around 2% a year on average.

There is no income limit to the Medicare tax, and there’s actually an extra 0.9% Medicare tax if you make over $200,000. The maximum Social Security tax for a self-employed individual is therefore $23,378.4 for 2021.

Meanwhile, any money left over after operating expenses, retirement contribution, and salary may be paid out in the form of a distribution. Distribution pays 0% self-employment tax.

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.



Read More…

Mortgage Interest Deduction Limit and Income Phaseout

Published: | Updated: by 39 Comments

The mortgage interest deduction limit has decreased since the new Tax Cut & Jobs Act was passed in 2018. In the past, you could deduct mortgage interested on up to $1 million in mortgage indebtedness.

Today, according to the IRS, the maximum mortgage amount you can claim interest on is $750,000 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 $750,000 even though both people could have $750,000 mortgages. It’s beyond me why the government thinks two people who want to marry with $750,000 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 3.25% in 2020,  you could literally lose out on tens of thousands in interest deductions!



Read More…

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

Published: | Updated: by 37 Comments

If you need more incentive to generate passive income in order to give yourselves more freedom, then look no further than the below two charts. It shows the capital gains tax rates by income.

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. The rate is much lower.

Here are the capital gains tax rates for 2020 and beyond.

Capital Gains Tax Rates By Income For Singles

Long-term capital gains tax rates by income for single filers

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. Or, you could earn qualified dividends at the same rate with the same amount of capital. Or you can take profits on long-term holdings. There are many ways to make a 4% rate of return.

For the 2020 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%.



Read More…

Tax Rules For Buying A SUV Or Truck To Deduct As A Business Expense

Published: | Updated: by 172 Comments

If you own a business, you should know the tax rules for buying a SUV or a truck. You can and should deduct the operating expense of your vehicle if you use it for your business. This article will highlight the latest automobile tax deduction rules for the new decade.

As you may have read from my Net Worth Rule For Car Buying post, I’m looking into buying the latest Range Rover Sport HSE to replace Moose, a 15 year old Land Rover Discovery II. The 2020 Range Rover Sport can be had for roughly $75,000 MSRP, an exorbitant amount of money for a vehicle.

SUVs are an anathema to eco friendly San Francisco. But I’ve long argued that if you don’t completely destroy your car before buying a new car, you are still ADDING pollution to the world.

I like SUVs because they ride high so I can see what’s going on in traffic. They can go through snowstorms with ease, a necessity for when I go up to Tahoe in winter. Furthermore, I’d rather be in a larger vehicle vs. a smaller vehicle during accidents. As a parent now, safety is paramount.

SUVs have become more fuel efficient thankfully. The new Range Rover Sport V6 engine produces 345 hp at 17 city / 23 highway. Just 10 years ago such an SUV would be a V8 and run around 12 city / 17 highway mpg with only 185 hp. But this is not a post to defend purchasing a large vehicle.

With the tax reform act passed at the end of 2017, buying a truck or an SUV that is over 6000 pounds has become more favorable for 2018 and beyond.



Read More…

Maximum Taxable Income Amount For Social Security (FICA)

Published: | Updated: by 48 Comments

Uncle Sam The Tax Man

FICA stands for Federal Insurance Contributions Act and consists of a Social Security tax and a Medicare tax. This tax is very important for everyone to understand because so often we only think about federal tax rates and state income tax rates. The FICA tax is a big percentage of your total tax bill, especially for those making under six figures a year.

When I was making big bucks in finance, the tax bill was equally big bucks. The only saving grace was seeing my after tax paycheck increase after the maximum taxable income threshold for Social Security was breached each year. The tax amounts were jolting based on how inefficient the government was and still is with regards to spending our money.

Maximum Taxable Income Amount For Social Security Tax

In 2021, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $142,800 (up from $137,700 in 2020). Any earnings above that amount are not subject to FICA tax. The FICA maximum income level tends to increase roughly 2% a year due to inflation.

In other words, if you make $142,800 in 2021, your maximum FICA tax will be $8,853.60. But don’t forget. You also have to pay a Medicare tax rate of 1.45%. Therefore, your total FICA tax rate is 7.65%. 7.65% X $142,800 = $10,924.20. If you are an employer, you have to pay double.

The flip side of this is that as the taxable maximum increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits.

Maximum Social Security Benefit Amount

The maximum monthly Social Security benefit that an individual can receive per month in 2021 is $3,790 for someone who files at age 70. For someone at full retirement age, the maximum amount is $3,011, and for someone aged 62, the maximum amount is $2,265.

Given we have a progressive tax system in America with Alternative Minimum Tax (AMT) and deduction phaseouts, I’ve calculated that the optimal Adjusted Gross Income is roughly $250,000, +/- $50,000. At $250,000, $112,300 of the earnings is free from the 6.2% FICA tax.

Meanwhile, you still get most of your mortgage interest deduction, and only have to pay a slight amount of AMT, depending on the person. A $250,000 income is also high enough to live relatively comfortably in any part of the world.

Some might argue that the Social Security tax is regressive because it caps out. Why shouldn’t rich people pay more? Here’s the thing people might not understand. Social Security benefits cap out based on the maximum amount of Social Security tax contribution as well.

It’s not like someone who is making $500,000 gets FICA-taxed on all of his earnings and then gets capped on Social Security benefits. He’s just getting the maximum Social Security payout amount when it comes time.

The $500,000 income earner is already paying the highest marginal federal tax rate of 37% plus state taxes, if applicable. 



Read More…

Income Limit For Maximum Social Security Tax 2020

Published: | Updated: by 58 Comments

Income Limit For Maximum Social Security Tax 2020

I’ve got some good news and I’ve got some bad news.

For those of you who believe the government is efficient and benevolent, the good news is that the income limit for maximum Social Security tax rises to $137,700 in 2020.

Raising the income limit for Social Security tax from $132,900 in 2019 to $137,700 in 2020 brings in more funds, thereby increasing the viability of our national pension system.

It is estimated that Social Security’s long-term unfunded liability is now $43 trillion, up from $34 trillion last year. The fiscal gap equates to an estimated 33 percent underfunding. In its current form, citizens eligible for Social Security will only be able to collect ~70% of what is promised on their statements.

For those of you who believe you can manage your money better than the government, the bad news about raising the income limit for Social Security tax is that we might be throwing good money after bad. Raising the income limit by $4,800 or 3.5% should be concerning.  

Just compare the 3.5% income limit increase to the 1.6% Cost of Living increase (benefits received) for Social Security recipients. The spread helps the solvency of Social Security, but it is clear we’re all at risk when it’s time for us to collect.

The best way to view Social Security is to never expect it to ever payout. The new three-legged stool for retirement dictates you must only depend on you (pre-tax savings), you (taxable investments), and you (extra work).



Read More…