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Financial Samurai

Slicing Through Money's Mysteries

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

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This post will provide a detailed look into property taxes by state. The differences in property taxes by state from the highest (Illinois at 2.32%) to the lowest (Hawaii 0.28%) is astounding.

Therefore, just because a state has cheaper home prices doesn’t mean you’re getting a better deal long term. States rely on property tax collection to pay for public utility works, schools, and more.

During the pandemic, a lot of people relocated to Texas from California to pay no state income taxes and buy cheaper homes. However, the property tax rate in Texas is 80% higher than the property tax rate in California.

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. However, if you are to buy a property in a different state, you must take into consideration the property tax rate given it is forever.

The City Loves Your Property Taxes

I used to despise my property taxes because San Francisco would raise them even when property prices were declining 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 over $500,000 in property taxes since 2003, I’ve finally accepted the reality it’s up to those of us who saved like crazy and took the risk of owning property to pay. It is our responsibility 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. After all, renters also want better and are willing to pay for it through higher rents. If they didn’t, they wouldn’t be fair since we all benefit by services from the government.



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The Average Percent Of Income Donated To Charity Can Improve

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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.

However, once households earn a top 1% income of $1,000,000 or more, the average percent of income donated to charities increases. Finally, with such a high income, households feel more comfortable donating more.

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.

Generate More Income Through Real Estate

Real estate is my favorite way to build more wealth and income because it is a tangible asset that is less volatile, provides utility, and generates income. If you’re interested in increasing your passive income and donate more to charity, real estate is an attractive asset class.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. With interest rates down, the value of cash flow is up. Further, the pandemic has made working from home more common.

Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

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

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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.



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Five Lessons From Doing My Taxes For Over 10 Years

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I don’t enjoy doing my taxes, but I do them anyway. My main reason is to learn as much about the latest tax codes so I can reduce my tax liability. This post discusses five lessons from doing my taxes for over 10 years.

Why I Started Doing My Own Taxes

In 2000, I paid a CPA $500 to file my incredibly simple tax return because I had no idea what I was doing. Granted, I had a lot of trades in 1999 to calculate since it was the dotcom mania back then.

After realizing $500 was expensive, I paid $250 for an H&R Block CPA to do my taxes and show me the ropes for a couple years. After getting comfortable with all the forms and jargon, I started doing my taxes myself using H&R Block’s tax software. They started with a CD-ROM that I had to buy at an electronics retailer, but now everything is online, thank goodness.

I’m probably never going to pay a CPA to do my taxes again because H&R Block’s tax preparation software is so easy to use from home. It will ask you questions about your situation before getting started so it has the right forms for you to fill out. Further, the tax software is always up to date with the latest tax rules.

For those of you who want to have a H&R Block tax professional do your taxes remotely (because who wants to go to an office), they’ve come up with the H&R Block Tax Pro Go program.

I tried them for one year because I had questions regarding a couple K-1 filings from my private investments. It was very helpful to talk to a tax professional who inputted the information for me when I was stuck.



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Investing Your Tax Refund For A 1,000% Return

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Investing you tax refund instead of spending it is recommended. If you want to achieve financial freedom, it’s not enough to aggressively save most of your income. You must also wisely invest as well.

In the article, “How To Get Over Your Fear Of Investing” I mention how your risk tolerance decreases the more capital you accumulate.

When you were rocking a $100,000 net worth as a 30-year-old, you had no problems investing 30% of your net worth in your employer’s promising stock. But now that you’re 50 and less enthusiastic about working for decades more, investing 30% of your $1 million nest egg doesn’t seem like a good idea.

The ideal financial scenario once you reach financial independence is low volatility, steady returns! One you’ve won the game, you shouldn’t play as aggressively.



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

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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. The 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.



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Mortgage Interest Deduction Limit and Income Phaseout

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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!



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Why Not Work Overseas, Make More And Pay Less Taxes!

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Why Not Work Overseas, Make More And Pay Less Taxes!

Did you know that you can make a lot more by working overseas and save a significant amount in taxes at the same time? Now that you know, why not work overseas?

The US tax system is not the most lenient by any means. American tax payers shell out effectively almost 50% of their incomes to the Government year after year.

When a US Citizen goes to work abroad, the first ~$90k of income is shielded from income tax by the IRS. Married couples get twice the exclusion at approximately $180,000.

And since a couple can live relatively well-off on just one US salary in most countries, many couples and families find themselves not paying US income taxes at all when working abroad.

Why Would Foreign Companies Hire Americans?



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

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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.

As an SUV owner and a small business owner, this article will highlight the latest automobile tax deduction rules for 2021 and beyond. .

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. Here are the tax deduction rules for SUVs and trucks.



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Exploit Online Data To Lower Your Property Taxes

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Victorian Mansion In San Francisco

If you are a homeowner, your mission should be to try and lower your property taxes whenever there is a downturn. You should also try and fight any egregious property tax increases as well. The city counts on homeowners to rollover and not put up a fight.

Ever since 2008 I’ve been fighting to lower my property taxes every year. If I didn’t fight, the SF Property Assessor’s office would undoubtedly keep raising my assessed value all throughout the financial crisis because they need to extract as much money from homeowners as possible.

Renters certainly aren’t going to volunteer to pitch in if they can simply vote to raise property taxes. Too bad everything just comes around in the form of higher rents. In other words, together we must stand united against the government.

Your main mission as a homeowner is to convince the assessor’s office your property is worth as close to $0 as possible. Anybody who is proud their assessed home value is higher is being silly because the government will take advantage of you. The same goes for people who make a lot of money telling everybody exactly how much they make. Practice the mantra of Stealth Wealth and believe your primary home is a dump in order to build your net worth further.



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