Tag Archives: taxes

10 Tax Breaks That Only The Rich Enjoy

Ahh, what’s that smell? American Greed?

We 99%ers love to call out the 1%. Some get to the 1% with hard work and luck, but many are placed there due to being born into privilege and likely a sizable inheritance. Others weasel their way into wealth. Few can get there in a way that wouldn’t make some “kooobaya-type god”scream mercy. Regardless of how the 1% made it to the top of the fiscal food chain, they can enjoy a whole host of benefits staying there — private jets, beautiful women, more beautiful women, houses, yachts, and — last but not least — some really tricky tax breaks so they can just keep accumulating more and more wealth!

Here are 10 tax breaks that only the super rich enjoy. Read ’em and weep.

  1. Income Tax, Smincome Tax
    The rich don’t need your stinkin’ income. CEOs can come out and say they’re going to take a $1 salary and the masses think that they’re being just so damn humble and giving. Not so. While us lowly folk have to work and get paid salary to do things like eat and have a roof over our heads and pay for our kids piano lessons, the rich can take their heaping savings and put it into investments that compound over time. Good thing these folks are not actually earning any income because that means they can enjoy 0% tax rates on all of their capital gains. The best us lowly folk can do is attempt to put together an investment plan that eventually provides us with enough dividends and capital gains to also take out our money tax free, even if we never have an army of beautiful girls/men and/or private jets (source)
  2. Taxes Are for Losers (AKA Poor People)
    Some rich folk work in fields like investment banking, private equity management, or real estate partnerships. Not only do they get paid a lot off the bat for these roles in terms of total compensation, their pay is not in the form of that same lowly income you and I see deposited into our bank accounts every few weeks. These modern-day royals get to be paid in a “carried interest” which is – somehow – usually taxed as a capital gain instead of ordinary income. That means these richies are paying 20% taxes to the federal government on all of their earnings. Even Mitt Romney managed to pay 15% taxes for his great service to our country as head of Bain Capital (yea, aren’t you glad he didn’t become our president?) (source)
  3. Home is Where the Cash Is
    The government wants to encourage home ownership because this means the country is more stable, generally speaking. Thus, big brother provides tax incentives for home owners of all wealth levels (as long as you can afford a house.) However, the best writeoffs go to the super rich. The mortgage interest deduction lets taxpayers who itemize deduct the interest they pay on their home mortgages. The way the program is set up, the more expensive the home and the higher the homeowner’s tax bracket, the bigger that subsidy is. (source)”Less than one-third of taxpayers are able to take advantage of the deduction—it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.”  (source)
  4. That Foggy Definition of Charity the Rich Love
    Oh, what wonder, a 1%-er is donating something to charity. That’s great, if genuinely done to help an organization, but often the reason for donation is not exactly out of good will. It’s horrible to say but many charities are corporate scams. Seriously. Let’s take a look at Walmart. The Waltons, owners of Walmart, are using “Jackie O” trusts to both give money to charity AND pass on money to future generations without paying estate taxes. Oh, and did I mention they’re doing this all through their own charity, The Walton Family Foundation? This is perhaps more disturbing than the other tax loopholes because wealth dynasties are why inequality is cemented into American culture. (source)What’s more, “generally, you can deduct the fair market value of property you donate to charity if you’ve owned it for more than one year and the property is used to further the charity’s tax-exempt function. Thus, the appreciation in value is untaxed forever. The tax law limits the annual deduction for gifts of appreciated property to 30 percent of AGI, but that still provides a gaping tax loophole.” (source)
  5. Beam Me Up and Around and Around Scotty
    Geez, private jets are just so damn expensive. But how else are the rich supposed to get from point A to point B? Not with the underlings, by god. There is a special subsidy for corporate jets which cost taxpayers $3 billion a year. Yes, a common tax trick and CEO perk is to pay for private jets under the guise of security (because what if a poor average flight attendant accidentally spilled coffee on their Prada suit during a turbulent flight???) If a benefit is classified as for security purposes the CEO will pay a reduced tax bill or no tax at all on the bene. (source)
  6. Mooooooooooooooooooooooooooooo. Mooo. Mooooney
    I feel like we should just let this tax write off slide for the sheer fact of it being so ridiculous. JK. This will make you want to go tip some cows. In states like New Jersey, Florida, Texas, Iowa, Colorado, Alabama and more, farmers can take a tax deduction for their service feeding our great nation. That is, even farmers that aren’t farmers at all. According to an article in The Nation, that’s what Michael Dell did with his second home—a suburban ranch in Austin. Because he hunted there periodically and maintained a “well-managed deer herd,” he was able to reduce the property’s 2005 market value from $71.4 million to an agricultural value of $290,000. That saved Dell—but cost Texas—$1.2 million. Florida has a well-known “rent a cow” program (I kid you not.) What is this cow business? To qualify for the tax writeoff, Florida requires a couple of cows or a herd of goats, which don’t have to be on the property all the time. So you have wealthy people paying next to nothing on property tax because they own lots of acres and can afford to rent a few cows.  (source)
  7. John Edwards and Newt Gingrich Walked into a Bar (and didn’t pay any tax)
    This one is a doosey and surprise surprise it involves politicians again. Slime of the earth. Payroll taxes are supposed to be paid on income from work, with social security payroll tax paid on the first $113k in earnings (as of 2013) and medicare payroll tax paid on all earnings. Except S corporations, which are made up of a partnership of self-employed type folks, don’t need to qualify all their earnings as payroll, and thus it doesn’t need to be taxed. This one gets a bit complicated to explain, so just check out this writeup to get the full picture of how dishonest richies can get away with legal tax loopholes that only benefit the 1% (source)

    • Newt Gingrich: In 2010, Gingrich Holdings, Inc and Gingrich Productions paid Newt Gingrich$444,327 in wage income while declaring $2.4 million as profits of the S corp. This allowed Speaker Gingrich to avoid $69,000 in Medicare payroll taxes. [Wall Street Journal Market Watch, 1/23/2012]
    • John Edwards: Senator Edwards earned $26.9 million from his work as a trial lawyer in 1995. He paid himself a salary of $360,000 each year for four years and took the rest as distributions from his S corp. This saved Senator Edwards an estimated $600,000 in payroll taxes. [New York Times, 7/10/2004]
  8. Selling a House and Paying Taxes?  Yea, Right.
    Even average American homeowners can take $250,000 of their home price increase tax free ($500,000 for married homeowners) which is a pretty good deal after years of fixing broken air conditioning systems and having termite genocide parties. But the real tax benefit for housing is only available to the super rich (surprise!) A 1031 Exchange, also called a like-kind exchange, enables real estate investors to trade the equity in one property to another property of equal or more value without having to pay taxes (yes, you heard me right.) The taxes will need to be paid eventually, but the investor, in the meantime, gets to reallocate their portfolio and you can still take a depreciation tax write-off on your properties that are being exchanged. There’s no limit to how many times you can do a 1031 exchange. Since the rich are doing this with their real estate investment property (you can’t do this with personal property, sorry 99%), when they do sell it eventually they’ll sell at the capital gains rate. (source)
  9. Tax Breaks (i.e. Itemization) Seriously Favors the Rich
    There are many different tax deductions available to take. But, of course, in order to take a deduction, you must itemize your taxes. While itemizing makes financial sense for high-income Americans, it does not for low ones. This means that deductions are mostly utilized by the rich. Only about one-third of Americans itemize their deductions, and they are mostly the well off. In 2010, only 29.3% of those making between $30,000 and $50,000 itemized, but 96.8% of those making $250,000-plus did. (source)
  10. One Home is Just Not Enough
    Speaking of itemized deductions, owners of two homes get to write the mortgage of their second one off as well, as long as they itemize. It turns out this tax benefit isn’t for folks who own tiny little vacation bungalows by the shore or middle-class lakeside cabins. Nope, the main benefactors are the super wealthy. Just to rub salt in the wound of us reg’ies, rich folk can DEDUCT THE INTEREST PAID ON THEIR LUXURY YACHTS (fyi that clink-clanking you hear is the sound of me kicking all the buckets in the world.) As long as these boats are equipped with sleeping quarters, a kitchen and a toliet they can deduct the mortgage debt on these “homes.” (source)

 

How to Estimate Your Tax Rate in Retirement

As I’ve been running calculations on whether or not it makes sense to do a Roth Conversion, I came back to the question — what will my effective tax rate be in retirement?

That’s a question a lot of us considering a Roth Conversion should ask, but it’s not one that is easy to answer. What’s important, though, is that the numbers you plug into your calculations are reasonable. After all, expecting a 40% income tax in retirement each year can greatly skew your calculations if in actuality you’ll see a 20% effective tax rate.

This Forbes article by Erik Carter was really eye-opening: Why Your Taxes in Retirement May Be Less Than You Think

Article Highlights 

  • You are probably overestimating what you will have to pay in taxes at retirement
  • Withdrawls from Roth accounts are tax-free at 59.5
  • Social Security is taxed at ordinary income rates but only part of it is taxable
  • Long-term capital gains are taxed at lower rates than income tax (*at least according to current tax law)
  • Your income will probably be lower and put you in a lower tax bracket (i.e. experts recommend 80% of your pre-retirement income, but you may need less)
  • When you are older than 65, you get different deductions than younger people. For instance, you have a $1550 higher standard deduction than us young folk
  • A lot of 401k contributions withdrawn yearly will be taxed at lower rates, especially if you plan on taking out less than $36k per year (note, that’s no where near 80% of my current salary, but I could live on it in another state if I owned a house free and clear)
  • Tax rates could be higher when you retire but that’s unlikely (*not impossible)
  • Lots of people retire in states that don’t have income tax like Texas, Florida and Nevada. (*check out this handy-dandy state income tax calculator and weep… unless you live in a state with low income tax.)
  • Move where all the old people live and you’ll be fine.

My CPA and I… 2011 Taxes, Almost Done

After years of fairly simple taxes finalized in less than an hour online, this year I went to a CPA hoping that he’d provide me more in value than an H&R Block, given his rates were $220 an hour. Selecting a CPA was a daunting process and admittedly one I ran out of time to do effectively — all I knew is in order to properly submit my 83(b) election form with this years taxes, I needed to paper file, which took Turbotax out of the running.

Going to a CPA, I learned, isn’t a lot different from doing your own taxes online. I sat there with him for a full two hours reviewing my paperwork (which admittedly wasn’t as organized as it could have been) — but what took the most amount of time was him trying to understand my gains and loss statement for my Sharebuilder account, which — I thought for a CPA — should have been easy. He also was confused by my tiny Lending Club and Prosper interest, not knowing where to put it.

I expected to owe taxes this year, and really had no idea if it would be $3,000 or $10k, so I was prepared for the worst. In the end, the relatively good news is, I seem to only owe $3500 or so, plus the $500-$600 to the CPA. I can also sleep at night knowing a CPA filled out my tax forms versus my guessing on a few confusing parts of TurboTax. It’s a little bit of a bummer that I am paying $600 or so to file taxes, versus $100 online, but this also ensures my forms will be mailed in that have to be sent with a paper return.

This week, I also re-discovered the inefficiencies of the IRS and just how behind the times they are when it comes to technology. It’s amazing they let anyone e-file taxes to begin with.

In any case, I’m almost done with this filing. I need to figure out if a stock gain was recorded properly on my taxes last year, or if I need to count it in this year’s taxes. I’m on a life mission to get much more organized around taxes and everything else. It’s only going to get more complicated from hereon out.

Taxes Due, Headed to a CPA

Every year so far I’ve managed my taxes via TurboTax. I’m not sure if my taxes were done right, but they were simple enough where I was pretty confident in my ability to answer questions on a software used by tens of thousands of people.

This year, however, I’ve decided last minute to have a CPA do my taxes. There are a few items I’m nervous about and want to make sure to get right. That said, I’m also extremely nervous about selecting a CPA — because they could easily be wrong too. Most CPAs that are good are booked solid until after the 15th right now, which leaves me a little concerned over the CPA I found that seemed to have a few (or maybe more) available appointments. However, in my neck of the woods where everyone is rich, I’ve found the minimums to do one’s taxes are $1500 or $850 (two real quotes I got), so the one person who quoted me $220 an hour with assistants costing $90 an hour, minimum 2 hours, seemed reasonable. Still a lot more expensive than TurboTax — which I’ll probably fill out anyway just to keep my records electronic (I wonder if I can save it without submitting) — and I doubt it will “save” me any money in the actual tax return, but at least I’ll feel like it’s done right.

I’m concerned about 5 particular items:

  • 83b filing. You have to file that along with your taxes the year you make the election, and there’s no way on TurboTax to attach documents. I could fill out the paper form myself, but that would be putting a lot of confidence in my math abilities that i don’t have. I am also starting to be paranoid about the IRS never receiving my original “within 30 days” election (even though I sent it within 30 days) and want to make sure I get this right, just in case anything should happen later which would result in my being majorly screwed. I sent it certified mail with a return receipt but given I never mail anything anymore, I apparently did that incorrectly and never got the receipt, so I’m extremely concerned.
  • Stock losses. I took a sizable amount of losses this year on a few big losses that were not going anywhere, so I could reinvest the funds left in them into more profitable companies such as Apple, as well as diversify internationally. I “lost” (not paper loss) more than $3000 this year (probably more like $6000), and I want to make sure this is filled out correctly and that any additional losses over the $3k are noted to be carried over to next year.
  • IRA conversion. Last year I opened a traditional IRA with post-tax money because I thought I would end up making too much to qualify for a Roth IRA. I think that may be true. Regardless, if you make more than something like $6k you cannot use pre-tax money for an IRA. Which is stupid because if you don’t have a 401k then you have no way to set aside pre-tax money (unless you’re a real sole proprietor, in which case you can set up a solo 401k.) In any case, I want to make sure the IRS understands that this was post-tax money, so when I later do a Roth Conversion (ideally on a year I stay home to be a mother and have very low income taxes) I’ll be able to only pay tax on the interest on the account with a $5k basis.
  • $20k of freelance income I forgot about — is there anything I can do to reduce the amount of taxes I have to pay on this? Probably not, but worth asking.
  • General investment taxes — my taxable account dividends, P2P lending accounts, etc. It would just be nice to hear someone who does this for a living discuss if I’m doing anything wrong here.

Otherwise, my tax returns are simple enough to do via TurboTax. Other than the carried over stock losses, I assume next year they will be even more simple as I’m back in a full time job (hopefully for the remainder of this year) and not earning freelance income because I’m so busy with this FT job.

Have you ever used a CPA for your taxes? Do you feel it was worth it? How much did you end up paying?

Startup Stock Options: Taxes and Risk

One of the supposed benefits of working at a startup is the equity you’re offered as part of your compensation package. Given that more often than not this equity is in place of a 401k and a portion of your salary, in theory it may offer great reward in the long run.

However, what I didn’t realize about stock options (ISOs and NSOs) years ago is that in order to actually receive the stock, you still have to pay for it. Options just mean that you are able to buy the stock at a strike price, which is “low” but may very well still be higher than what the stock ends up being worth. Continue reading

Tax Freedom Day: You are Now Free to Earn Income

Congrats! You have now paid the government your taxes for the year, and are now able to earn income.

What??? Didn’t you spend the last three months earning income this year?

Well, yes and no. Today is National Tax Freedom Day. On average, it takes us 102 days to pay for the taxes we owe the government, and it’s coming three years later this year than last.

For some states, actual tax freedom day comes much later. In Connecticut, their Tax Freedom Day falls on May 2 – nearly halfway into the year! California, where I live, won’t reach Tax Freedom Day until April 16 this year. Those in Mississippi get to celebrate Tax Freedom Day the earliest – March 26, followed by Tennessee, South Carolina, Louisiana and South Dakota.

Want to know when Tax Freedom Day is where you live? Check out the official map below…

Worried About My Tax Return

Just as a special report on the news warned that the IRS is going to be closely watching – and possibly auditing – anyone who files their returns online I was… filing my return on line. While I don’t think I’m going to end up in jail, I am very nervous about potential costs if my understanding of the rules isn’t quite accurate.

2008 was my first (and possibly last) year as a self-employed individual. The most confusing part of the return has to do with the mileage expenses. I worked a bunch of different jobs last year, and over the year the main one grew into one that required, in my contract, for me to be at the office 4 days per week. So – I assume it’s ok to take that as a mileage deduction. I also deducted – guesstimated – my mileage to and from a few other clients who are further away from my office.

Then I read the fine print – you aren’t allowed to take a deduction on transit to your office if it’s away from home. But – my office was my home, I just didn’t take a home office deduction because I lived in a studio and worked from my bed. But I could do all of my work from my bed (as a freelance writer) and did not need to travel to accomplish this work 4 days per week. I went into the office for meetings, and just because my contract said I had to be there. I’m not sure anyone has a record of how often I was actually in the office, but I do have proof that for at least 1/2 of 2008 I was required to commute 4 days per week.

But then that’s what confuses me about the fine print – it says if your office is away from your home, you cannot deduct mileage to drive to this office. So am I not allowed to deduct these expenses? Or does this mean only if you pay for your office away from home and deduct that separately? Ugh.

I really hope I don’t get audited but I have a bad feeling about this year. I reported all of my income and interest, it’s just the deductions that could possibly screw me over.

In related “potentially screw me over” news — I transferred the funds to cover my $14k tax payment from ING to Bank of America on Friday, but it hasn’t arrive in my BoA account yet. Here’s to hoping it will show up by April 15, when TurboTax will be removing the funds from my account. (ING said it takes 2 business days so it should be there tomorrow, fingers crossed.)

Happier news – it looks like I managed to save about $15k last year beyond taxes. Which may end up going to a lawyer and tax accountant to deal with an audit, if they want to fight me on my mileage deduction. I’m scurred.

2008 Taxes, Part 1: Did my 50% of income strategy work?

In 2008, I tried a financial strategy meant to keep me both “in-the-know” and “out-of-the-know” at the same time. This simple strategy was to save 50% of my income for taxes in a high-interest savings account. As a self-employed person this was legal, as long as I paid 90% of my previous years’ tax along the way. Being as in 2007 I made less than $30k and my income shot up to $58k in 2008, this made a whole lot of sense.

The outcome of my 2008 plan seemed to have worked decently. I just tallied up my tax figures for the year, not counting any deductions I or Turbo Tax may take, and my total tax owed for 2008 is $22876. This includes my 25% tax bracket federally, $15.3% self employment tax, and $9.3% tax bracket in California (why is California one of the highest tax states to live in yet we’re also the deepest in debt???)

I saved $26,000 for taxes after paying $4315 in estimated taxes over the year (I still owe my Jan 15 estimated tax for federal, need to send that out, but I hear it’s not late as long as you get your return in by Feb 2.)

So, number crunching that means sans deductions, I still owe $18,562, leaving me with $7438.17. I’m sure with deductions it will be a little less then that and then with my various interest income from different accounts it will be a little more. I’m guessing I’ll end up with at least $7200 to save.

So the good news is I start 2009 off with $7,200, or thereabout, to spread about in my various accounts as a “cushion” for the year. Sweet. Still deciding on whether to get a tax accountant for my 2008 returns, though I figure even if I don’t take any deductions I’ll get

In 2009, my tax situation is an entirely different story. My income may go up a bit, but I’m now a full-time employee, so I can’t shelter as much money from taxes over the year… nor do I really want the headache. In my next post, I’ll describe how I’m planning to take a more active approach to budgeting in 2009.

Investors: As If The Markets Haven’t Screwed You Enough…

So your stocks are down, what, 35%, and all you want to do is cling to the precious dollars you have left? Not so fast. Any money your stock funds made earlier in the year (when times were closer to peachy) is going to have to be taxed. Yea, I know you know that, but CNN wants to remind us that we can’t avoid paying taxes on stocks that have already lost the money they gained, and then some.

Unless your stocks are in a tax deferred account, like a 401(k) or IRA, you’ll probably have to pay taxes on them. “Fund managers had to sell appreciated shares to raise cash for redemptions, which triggered capital-gains distributions,” Tom Roseen, senior research analyst at Lipper told CNN. “So you have insult on top of injury.”

CNN suggests checking if your funds have declared their taxable distributions yet. If they haven’t, sell them and capture the loss. You can deduct up to $3,000 in capital losses from ordinary income. Losses beyond that amount can be carried forward indefinitely to offset future gains. The article provides other tips for investing wisely in the years ahead so taxes aren’t such a pain in the ass.

Should I Hire an Accountant To Do My Tax Returns?

Read the Her Every Cent Counts Taxes Series

Since tax season is right around the corner, I’m trying to figure out if I should hire an accountant to prepare my tax returns, which one to hire, and how much it should cost me. I’ve pretty much decided I need to hire someone to handle my taxes for me this year, as I’m going to be taxed heavily as an independent contractor and need help finding all the deductions I can take.

Then again, it looks like hiring a tax accountant will cost me $350 – $450. Ouch. That’s a lot of money. I’m sure the work they do is worth that, but it feels like I should be able to do all the work myself. An online tax software would cost me $100, so even if I missed out on $300 in deductions I’d still end up breaking even. And how much money in deductions am I really going to get? I can’t take a housing deduction, I’ve never lived in a space big enough to qualify for that. My “business” expenses are minimal – maybe I could deduct hosting costs for my promotional website, and mileage for the route to and from the office. Other than that, I don’t know what I can deduct.

The complicated parts of my return are going to be from my various investment incomes. God, that’s going to be a nightmare. I’m not sure how to handle Prosper (luckily I only have 10 investments out… but it sounds like the earnings on each one will have to be taxed), and then there’s Sharebuilder and those pesky dividends that count as income even though they’re long gone now, and my Vanguard dividends (most are in my Roth but I also have a small regular brokerage account through them, which is supposed to be my grad school or house money), and then there’s my CD from bank of america and various other places I’ve earned income throughout the year. Yea, that’s where it gets complicated.

But I worry that because it does get complicated a tax accountant will have to take longer than his minimum 2 hours to complete my returns. They’ll end up costing more like $500 or something, which is a pretty big chunk of my income considering so much of it’s going to taxes (15% self employment tax on top of everything else, yuck.)

I’ve reached out to 3 local CPAs, and found that their rates range from about $300 for a return (the cheapest) to $400/$500. I wonder if the more expensive ones will save me more money, or if it ultimately doesn’t matter because any extra money they’d save would be eaten up in their fees.

Here are my 3 options thus far:

  • CPA #1 My fees for income tax preparation fees are at $175 per hour. Most returns I prepare are in the $400 to $600 range. The tax preparation fee is all inclusive as it includes meetings and follow up questions and other assistance you may need. Also, I don’t charge any additional fees for questions during the year. Of course, if you need assistance that involves significant time, it will involve additional fees, and I will let you know this in advance.

  • CPA #2 I charge $160 per hour plus out-of-pocket costs and there is a two hour minimum for tax preparation. 2-hours covers a basic return for an itemizer typical family. I can get you an appointment. (I followed up and inquired what out-of-pocket costs would be…) Tax software license access fee, copies & supplies, postage & misc. runs around $65 per individual tax return.

  • CPA #3 I’d be happy to help you with your 2008 taxes. It would cost around 300 for a schedule C. That includes preparation & the initial meeting. We should meet before the year end to maximize deductions.

If any of you are 1099 out there, or have been in the past, do you use an accountant to do your taxes? How much income merits hiring a tax accountant to deal with your returns?