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

Updated: 04/22/2022 by Financial Samurai 40 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. 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 $147,000 for 2022, up from $142,800 in 2021. This income limit goes up by around 2% – 3% 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 $147,000 X 15.3% = $22,491. As a result, self-employed business owners are wondering how little in income they can pay themselves to pay less Social Security tax.

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

Updated: 06/27/2022 by Financial Samurai 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!



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

Updated: 08/31/2021 by Financial Samurai 96 Comments

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

Updated: 08/18/2022 by Financial Samurai 173 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. But you can also deduct the cost of your SUV or truck as well.

As an SUV owner and a small business owner, this article will highlight the latest automobile tax deduction rules for 2022 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

Updated: 10/02/2021 by Financial Samurai 41 Comments

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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Maximum Taxable Income Amount For Social Security (FICA)

Updated: 08/13/2021 by Financial Samurai 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. 



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Important Year End Tax Moves To Make

Updated: 02/18/2021 by Financial Samurai 35 Comments

Year End Tax Moves Sunset

The end of the year can get hectic. There’s the holidays, family stuff, and work deadlines. But most importantly, there are important year end tax moves to make.

The good thing about having multiple income streams is the financial security it provides. But, the bad thing about having multiple sources of income is a much more complicated tax structure. With 70,000+ pages to the tax code, things can get confusing.

My income sources come from investment income, rental income, W2 income, deferred income, K1s, and 1099 income. My goal is to shield as much income from taxes as legally possible.

I want to keep my Adjusted Gross Income to no greater than $250,000 a year due to AMT and deduction phaseouts that completely go away after this level. It’s also very important to accurately predict your passive income.

Use Business Expenses To Save On Taxes

But as my online business grows, it gets harder to shield income. For example, one can only contribute so much to a 401K and SEP IRA. Meanwhile, I can’t eat $300 business steak dinners every night with clients.

Nor am I willing to buy a luxury car to write off as a business expense. And I don’t want to pay 4X the price for first class flights, let alone fly private. Maximizing ROI and minimizing waste is the way I like to run my business and my personal finances.

The majority of actions to reduce your taxes must take place during the calendar year unless you’re filing as a business entity on a fiscal year. Thus, reviewing your business expenses is one of the important year end tax moves for business owners.

If you want to pay less taxes, it’s worth setting aside some time during the holidays to wrestle this beast to the ground.



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To Save Money On Property Tax Don’t Update Your City Property Records

Updated: 03/24/2022 by Financial Samurai 45 Comments

If you want to save money on property tax, please don’t call the assessors office to update your city property records. Instead, let the inefficient, bureaucratic machine take its sweet time!

The property assessor’s goal is to try and extract as much money from homeowners as possible. Your goal as a homeowner is to save as much money on property taxes as possible.

One of the main reasons why many homeowners do not remodel with a permit is to avoid detection by the property assessors office. If they know you remodeled a kitchen or increased livable space, they will raise the assessed value of your home, and hence your property taxes.

Save Money And Don’t Contact The Property Assessors Office

As part of any standard mortgage refinance, the lender requires a home appraisal. The lender wants to ensure the homeowner has enough equity to make a new loan. The amount of equity a homeowner is required to have for a refinance is usually 20% or more.

The cost for the home appraisal is generally between $500 – 800 to cover the appraiser’s time inspecting the house, taking pictures, drawing a layout, measuring the square footage, and doing a valuation analysis based on comparables and rebuild costs.

My appraiser spent about 40 minutes getting all the information he needed before telling me he’d get back to me in about a week with the results. While he gathered the information, I asked him questions about the health of the real estate market, how busy he was, and what the city records reflected as my home’s official square footage.

He said he was really busy and the market seems to be doing well. Then, he told me something I was surprised to hear. He said the city has my home recorded at only 1,720 square feet on the 3R report (Report Of Residential Building Record), or at least 200 square feet smaller than its actual square footage.



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Three Favorite Ways To Earn Money And Pay Less Taxes

Updated: 10/04/2019 by Financial Samurai 44 Comments

Three favorite ways to earn money and pay less taxes

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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The Main Reasons To File A Tax Extension Beyond Late K-1s

Updated: 04/14/2019 by Financial Samurai 18 Comments

The main reasons to file a tax extensionFor the past several years I’ve filed a tax extension. A tax extension allows taxpayers to file for a six-month extension if they need more time to prepare their tax returns.

The neat thing is that you can obtain an extension for any reason, so long as you submit Form 4868 electronically or on paper by the April filing deadline.

By filing a tax extension, you’ll also avoid failure-to-file penalties, which can add up to 25% of the tax due. That said, you must still pay your estimated taxes if you owe anything by the April deadline, despite getting an extension.

So why the heck would anybody file an extension? Here are the main reasons.

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