What is the gift tax? Do I have to pay taxes on money transfers? You know that reporting income to the IRS is a must. But it’s equally important to report money transferred into or out of the country Use promo code FINDER to send your first transfer with no fee. Send to 110+ countries for bank-to-bank deposit, cash pickup or mobile top-up. More info.
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• Get weekly updates on the market. • • • Do I have to pay taxes on money transfers? You know that reporting income to the IRS is a must. But it’s equally important to report money transferred into or out of the country. Including gifts or loans among family. By law, banks report all cash transactions — and any transaction of any amount that alerts their suspicions. Money transfer businesses, which often solely send money between countries, sometimes have reporting thresholds as low as $1,000.
With money laundering schemes on the rise, growing concerns about fraud, and funds sent overseas to support foreign terrorists, the IRS isn’t the only government agency that cares where and how you move money. The Department of Justice is just as interested, it turns out. How can the IRS know what I’m transferring? Financial institutions use specific numbering systems to process money transfers that include information on countries and bank accounts on the sending and receiving end. , for instance, not only ensure that your money gets to where it is intended, but they also support the bank’s required reporting.
Supporting the government’s right to know where your money is headed, the allows the IRS and Department of Justice to investigate large transfers of money to identify illegal activity more easily.
For large money transfers, it’s a good idea to ensure that everything is fully above board and complies with the laws of all countries involved. As with any large international money transfer, it’s important to compare your options so you can get the lowest fees and the best exchange rate between currencies: Compare money transfer services for your next large transfer Minimum transfer amount USD 1,000.00 Transfer methods Online, Phone, Bank Account to Bank Account Transfer options Regular payments, One off payments, Market orders, Forward contracts Customer service Phone, Email Available currencies AED, AUD, CAD, CHF, CNY, CZK, DKK, EGP, EUR, FJD, GBP, HKD, HUF, IDR, ILS, INR, JPY, KRW, KWD, LKR, MAD, MGA, MXN, MYR, NOK, NZD, OMR, PEN, PGK, PHP, PKR, PLN, RUB, SAR, SBD, SCR, SEK, SGD, THB, TOP, TRY, TWD, TZS, USD, VEF, VND, VUV, WST, XOF, XPF, ZAR Minimum transfer amount USD 1.00 Transfer methods Online Transfer options Regular payments, One off payments Customer service Phone, Chat, Email Available currencies AED, AUD, BDT, BGN, BRL, CAD, CHF, CLP, CNY, COP, CZK, DKK, EUR, GBP, GEL, HKD, HRK, HUF, IDR, ILS, INR, JPY, KES, KRW, LKR, MAD, MXN, MYR, NGN, NOK, NZD, PEN, PHP, PKR, PLN, RON, RUB, SEK, SGD, THB, TRY, UAH, USD, VND, ZAR Compare What kind of IRS forms will I need?
Depending what and how much is going to where, the IRS requires you to fill out any number of tax forms. Here’s a few you might encounter, but talk to a professional for your specific requirements. Form Number Form Name Form 114 Foreign Bankand Financial Accounts (FBAR).
For anyone who at any time had a foreign account valued at more than $10,000. Form 709 Gift and Generation-Skipping Transfer Tax Return. To report gifts subject to the gift tax. Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
For US residents who directly or indirectly transferred money to a foreign trust. Form 8938 Statement of Specified Foreign Financial Assets. Required if foreign accounts and combined assets are worth at least $50,000. What are the penalties for not filing? Frankly, there is such attention on money leaving the country that whether you fail to report, don’t know you have to report or don’t report correctly — it will likely be discovered.
If you’re found not in compliance, you’re on the hook for some stiff penalties. Those who fail to report can expect fines of up to 5% of the asset value involved or $10,000 a year for up to six years. For those who wait until an investigation is launched, the penalty increases to up to 50 percent or $100,000 — whichever is greater.
That amount can be applied to every year you fail to report for up to six years. You could also face criminal charges and up to 10 years in prison. Whatever your reason for sending money overseas, it is no doubt with the best intentions or for an exciting venture.
For extra peace of mind, work with a professional or reputable transfer company to ensure your compliance in all areas. What is the gift tax? As of 2018, US citizens are allowed to transfer up to $15,000 in US currency overseas or domestically as a gift without having to file a gift tax return.
If you are married, both you and your spouse can give $15,000 to the same person. Further, if your giftee is married, both you and your spouse can each give $15,000 to each person in the married couple. The means that the maximum amount a married couple can gift another couple without filing for the gift tax is actually $60,000. That’s a lot of gifts. Note that your support of dependent children is exempt from the gift tax altogether. Once you go over the $15,000 threshold (or couple limits, considering your circumstances) you are responsible for filing a .
Filing a gift tax return doesn’t necessarily mean that you’ll pay the gift tax. Technically, you can gift up to $5.25 million in your lifetime without owing this tax. Still, you can legally avoid filing for the gift tax in a number of ways. One is to reduce the amount of money sent to any one person.
For instance, if you’re sending money to support a family, divide your total gift among the various members of the family to stay below the $15,000 individual limit. This is helpful when divvying up something like an inheritance, where the money will in fact be shared among family members. Given the complexities of tax laws, it’s wise to seek the help of someone who knows the laws to ensure you’re in compliance.
How can I avoid the gift tax for legitimate support? The amount to which you can help your children with payments toward their tuition, medical expenses and health insurance premiums is seemingly limitless. But you’ll need to pay the school, hospital or insurance companies directly. The IRS will notice — and expect to be notified — of any checks or transfers you send directly to your dependents.
If you’re considering setting up an overseas account, you’ll need to report it to the IRS. Even if the account is to hold money temporarily before a bigger transaction or to share access with a child or family member as a joint account. Besides traditional income tax statements, US citizens with bank accounts offshore must file a by June 30 of each year that an overseas account holds $10,000 or more.
Whether the money is there for a day or a year, it must be reported. Be aware that some countries have limits on bank wire transfers — potentially on incoming and outgoing — so research the rules that apply to any country the money will travel through. Laws and legal documents you need when transferring large sums of money Countries | Frequently asked questions • Kelly Waggoner is a senior editor with finder.com.
She's worked with publishers, magazines and nonprofits throughout New York City, including ghostwriting a how-to on copyediting for the Dummies series. Between projects, she toys with words, flips through style guides and fantasizes about the serial comma's world domination. You are about to post a question on finder.com: • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public • finder.com is a financial comparison and information service, not a bank or product provider • We cannot provide you with personal advice or recommendations • Your answer might already be waiting – check previous questions below to see if yours has already been asked I accept Ask your question Finder.com provides guides and information on a range of products and services.
Because our content is not financial advice, we suggest talking with a professional before you make any decision. By submitting your comment or question, you agree to our and .
Questions and responses on finder.com are not provided, paid for or otherwise endorsed by any bank or brand. These banks and brands are not responsible for ensuring that comments are answered or accurate. Hi Joseph, Thanks for getting in touch with finder.
I hope all is well with you. :) I could not give you a straightforward answer to your question, Joseph. This is because there are just different factors that determine whether a particular amount of money is taxable or not. First, you would need to determine the source of the funds.
If it is an income you earn, then tax would likely incur. You also need to check the tax law of the US and the country where the money will be coming from. Next, since you are sending a large amount of money, you would need to report it to the IRS using the right form.
Tax law can be very complicated. It would be helpful if you directly speak to a tax specialist. I hope this helps. Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hi Juan, Thanks for getting in touch with finder. I hope all is well with you. :) There are a few things you need to know before you buy an apartment in South America.
First is to check the local real estate laws of the country where you are going to buy an apartment. Meet their legal requirements. From there, you can start looking for an apartment. Assess your needs, budget, and preference to simplify the whole buying process.
Finally, seek professional help to obtain personalized expert advice. I hope this helps. Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hi M Abouz, Thanks for getting in touch with finder. I hope all is well with you. :) If you are receiving an income from overseas, you might need to declare that to the IRS. However, there is a maximum amount of money that you can receive without getting taxed.
Speak to a tax professional to get more details about the tax implication of your money transfer. I hope this helps.
Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hi Skip, Thanks for getting in touch with finder. I hope all is well with you. :) Generally, taxes are charged when you made an income from a transaction. In your case, you will be returning money to the company.
For this reason, it might not be considered as an income. However, since you are going to send money that exceeds $15,000, you might be charged with gift tax and you will need to file a gift tax return. (To learn more about gift tax, please go to this .) Of course, there are other factors I’m not aware of that might affect the status of the money. It would be a good idea to check with the tax office or speak to a tax specialist to learn more. I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.
Have a wonderful day! Cheers, Joshua Hi Aristo, Thanks for getting in touch with finder. I hope all is well with you. :) Since you are sending money to your sister, you will most likely need to fill the IRS form 709. It is the form used to report gifts subject to the gift tax. Please note, as our guide mentioned, filing a gift tax return doesn’t necessarily mean that you’ll pay the gift tax.
Technically, you can gift up to $5.25 million in your lifetime without owing this tax. Regarding your second question, it depends on different factors whether you need to pay taxes to the IRS or not. For your third question, yes, you can send 14K to your mom and dad provided that you met all the government requirements. Since tax laws are highly complicated, it would be wise to seek the expert help of someone who is familiar with the laws to ensure you’re in compliance.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hi Dave, Thanks for getting in touch with finder. I hope all is well with you. :) Penalties do happen when you don’t abide by the law. If you are going to transfer a huge amount of money from the US, you still need to report the transfer to the IRS.
You probably need to fill out the necessary IRS forms mentioned above. To learn more about the legal implications of sending a large amount of money, you may directly get in touch with the IRS or talk to a tax specialist. I hope this helps. Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hello Ruru, Thank you for your comment. The donor is generally responsible for paying the gift tax which can be for permanent resident and has an annual exclusion if below $14000.
A tax year is counted from January 1 to December 31, and you are required to file federal income tax returns by April 15. I hope this helps. Regards, Jhezelyn I am not sure if this is the right place to ask but maybe someone can point me in the right direction.
I live in a border town with Mexico and discovered that western union allows you to send currency to Mexico at a significantly favorable rate. Usually 5 to 10 percent more than what the local exchange booths will sell you dollars for. For example, today i wired myself $7500 USD and received $154,275 MXN (exchange rate $20.57 MXN for $1 USD).
Once i returned to the US I exchanged the currency at $19.15 MXN for $1 USD. So, i received $8,056.13 USD. The issue was that at the exchange booth on the US side I was told that these kind of transactions are legal and that they wont be able to exchange currency for me again and that I should research the law on the IRS website.
My questions to you guys are: Is this really illegal ? Are there any websites I should research or laws I should be familiar with if I plan to continue this endeavor? Any information is appreciated guys. Thanks! Hi George, Thanks for getting in touch with finder. I hope all is well for you. :) I understand your concern.
It is important to ask the exchange booth what makes your transaction illegal and if they can point you to the specific place to confirm their claim. Since we are not tax or legal experts, you might want to ask a local tax office where you can get a more personalized answer. I hope this helps.
Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua I’m selling my UK property for £350,000, I live in Florida and want to transfer the money to my US account. Do I need to file any paperwork before I transfer the money or do I just declare it on next years tax form in US?
I should have paid the capital gains in the UK and I can offset this on my US tax’s. Hi Spencer, Thanks for getting in touch with finder. I hope all is well for you. :) If you’re receiving more than $10,000, you’ll need to abide by US laws put in place to both protect your money and protect the interests of the government. In most cases, you would probably need to report the money you received using the Form 3520 — Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
As the recipient of the transfer, you are solely responsible for reporting the amount you received during the current tax year with your annual tax filing. Please note that we are not tax experts and so you still need to seek professional advice.
I hope this helps. Should you have further questions, please don’t hesitate to reach us out again. Have a wonderful day! Cheers, Joshua Hi Lou, Thank you for getting in touch with finder. Since 2013, US citizens have been allowed to transfer up to $14,000 in US currency overseas as a gift without having to file a gift tax return.
If you are married, both you and your spouse can give $14,000 to the same person. Further, if your giftee is married, both you and your spouse can each give $14,000 to each person in the married couple. The means that the maximum amount a married couple can gift another couple without filing for the gift tax is actually $56,000.
Once you go over the $14,000 threshold (or couple limits, considering your circumstances) you are responsible for filing a gift tax return. Filing a gift tax return doesn’t necessarily mean that you’ll pay the gift tax. Technically, you can gift up to $5.25 million in your lifetime without owing this tax.
As a friendly reminder, while we do not represent any company we feature on our pages, we can offer you general advice. Please to read more about gift tax. I hope this helps. Have a great day! Cheers, Jeni Hi Bob, Thank you for getting in touch with finder.
Since you want to send a large sum of money to your wife in the Philippines, please . Please note, if you send more than $14,000 to the Philippines, encourage your recipient to claim your remittance on their annual income tax filing. I hope this helps. Have a great day! Cheers, Jeni We endeavor to ensure that the information on this site is current and accurate but you should confirm any information with the product or service provider and read the information they can provide.
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best dating with no money to pay taxes - 8 Ways to Pay Less in Taxes and Save Money
Ever since I was 25, I paid more than $100,000 a year in taxes. You don’t get a thank you card if you pay over $1 million dollars in taxes in case you’re wondering. Instead, you get the government hooked on your juice with ! I didn’t mind paying my fair share of taxes when I was in my 20s because I was excited to progress in my career.
I felt lucky to just have a job that allowed me to save like crazy and help others financially through charitable donations. As I grew older, my views on income taxes changed. Since the turn of the century, we’ve witnessed a devastating war in Iraqistan that by some estimates has taken over 1 million lives.
We’ve observed Congress do nothing to pass a balanced budget since 2008 while giving themselves pay raises every single year. During the 2009-2010 financial crisis, the government doled out massive bailouts to institutions such as AIG while allowing executives to pay themselves millions of dollars.
AIG even had the audacity to contemplate suing the federal government this year for wrongful terms! What the hell.
I felt sick to my stomach supporting such atrocities by a government who also while displaying no fiscal discipline. Why can’t we all be treated equally? Why is there a marriage penalty tax? How come your Social Security benefits go back to the government if you die without a surviving spouse?
I don’t know. When it takes 18 months for the city to fix a noisy and dangerous manhole cover, perhaps paying tens of thousands of dollars in state taxes is not worth it anymore. How about $5 bucks instead? John F. Kennedy once said, “ Ask not what your country can do for you, ask what you can do for your country.” Unfortunately, those words were spoken on January 20, 1961.
Most of us weren’t alive then since the median age in America is only 35. I’m afraid our society has permanently adopted a one-way take, take, take mentality. I think I’ve paid my dues. Unless you’ve paid as much in taxes, please don’t criticize me for writing an article on how to help you legally pay less taxes. To build wealth, we must minimize our expenses. Taxes are one of the largest expenses we’ll ever incur.
THE BEST WAY TO PAY LITTLE TO NO TAXES Besides earning less money, the best way to pay little to no taxes is to make your income equal your itemized deductions. Single filers get a standard deduction of $6,300 while married couples get roughly $12,600 for 2016.
Therefore, make $6,300 a year or $12,600 a year as a couple and voila! No taxes. The problem is no single person or married couple can live off only $6,300 and $12,600 in income, respectively. Hence, forget about the pitiful standard deduction. Go for the itemized deduction which includes home mortgage interest, property taxes, and charitable givings. Obviously you need a mortgage to be able to pay mortgage interest and property taxes, so already.
The government subsidizes your ownership. As for charity, give as much as you can. It is better to give to causes you are passionate about rather than pay more taxes to the government who ends up wasting your money.
The below are three examples with some notes on how to minimize your tax bill. HOW TO PAY ZERO TAXES ON JOB /PASSIVE INCOME Notes * To generate passive income, you’ve first got to save a lot.
You can replace my passive income examples with normal wage income if you like. The effect is the same. * What is peculiar is that one still has to pay property taxes to the state. At least property and state income taxes are deductible and the money is not going to the federal government. You can choose to move to a different state to lower your tax liability. Changing citizenship on the other hand is much more difficult. * A $30,000 mortgage interest deduction can be calculated as a 3% mortgage interest rate off of a $1 million dollar loan.
If you recall from a previous article, a if you can afford it. Some may poo poo paying interest, but I say paying interest with other people’s money to build wealth is much better than paying taxes to the government. * Starting in January 2013, if you have a modified adjusted gross income (MAGI) of $200,000 as an individual, or $250,000 as a married couple, you’ll also have to pay a 3.8% surcharge tax on all capital gains and dividend income.
This is called the Net Interest Income Tax. The government does not have the guts to cut spending, hence more taxes are inevitable. * You might be wondering how does someone survive if their entire $60,000 in income goes to charity, mortgage interest, and property taxes? The answer lies in living off your savings. 2018 Federal Income Tax Rates * Important to note: The standard deduction for a couple has risen to $12,000 per individual and $24,000 per couple in 2018. In other words, any income you make up to these levels is tax free.
If you are in the 10-12% TAX BRACKET you pay zero percent tax on long term capital gains and qualified dividends up to $77K. HOW TO PAY ZERO TAXES ON RENTAL INCOME Notes * Owning a rental property is like owning a business. All expenses related to running your rental property are deductible from the rental income. Just be careful that after you make more than around $166,000 a year.
* A key part of the expense is depreciation. Depreciation is a non-cash expense to provide a fair way for the normal depreciation of your property. * There’s no escaping property taxes again, but at least it is deductible. It’s important to convince the city your property is worth the least amount possible to pay the least amount of property taxes.
* It’s best to receive no rental income while you are in a higher tax bracket. Once you’ve retired, you’ll probably be in a lower tax bracket and should receive more rental income given your rent will be higher and mortgage interest and amortization will be lower.
HOW TO PAY NO TAXES IN A BUSINESS Notes * Starting your own successful business is harder than just working a day job, but it’s one of the most gratifying things you can do. A lot of your normal living expenses can be considered business expenses. For example, you can have annual board meetings in Rio de Janeiro if you want. The flights, meals, and accommodations are all expensable.
Nobody says your annual board meeting has to be in a place of suffering. Everybody should at least to take advantage of the internet and the 3 billion people online. * As an employer and employee, you get to contribute $18,000 to your Solo 401K + 20% of operating profits. In this case, $18,000 + $13,000 = $31,000 that doesn’t get taxed. You can also contribute $5,000 for yourself and for your spouse in a traditional IRA. Eventually you will have to pay taxes on these pre-tax retirement accounts, but not now.
See: * The business has a net profit after tax of $16,800, however you’ve got so many more tax shields at your disposable which can easily wipe out the tax liability. * Business taxes are one of the most complex taxes to calculate.
The above is just a simple example of how a cupcake owner with $100,000 in revenue might not have to pay any taxes at all. HOW TO PAY LESS TAXES IN A BUSINESS PART II Notes * After Gawker Global filed for bankruptcy, Fortune Magazine wrote an amazing expose regarding how Gawker Global created a Hungarian subsidiary to transfer revenue to in order to pay only a 5% effective tax rate instead of a 34% effective US tax rate.
I’ve put together a sample income statement of the parent company above that reflects a huge tax savings thanks to inter-company dealings.
* To read more detail, check out: RECOMMENDATIONS * Start Your Own Small Business: I encourage everyone to start their own small business.
You get a lot more flexibility with deductions as you can see in the example above. The best way to start a business is create a website like mine by signing up for a hosting company like , which costs less than $4/month.
You get a free domain name for one year too. Once you’ve got your simple website up and running, you help legitimize your business. There’s no need to incorporate as an LLC. Just be a sole proprietor, report your income on your schedule C, deduct all your expenses, and pay taxes on your operating profit. Whenever I spend money on travel, it is largely a business expense because I’m always prospecting for potential clients. I expense a portion of my car lease payment given I drive down to the Peninsula to work at my consulting clients.
Many of my meals are also expensed due to client luncheons and dinners. Finally, I contribute over $50,000 a year pre-tax to a Solo 401k because I run my own business. You can check out my today. Once you’ve got your own website, you’ve helped legitimized your business. * Manage Your Finances In One Place: I recommend signing up for , a free financial management tool online that helps you track your net worth, analyze your investments for excessive fees, and manage your cash flow.
I ran my 401k through their 401k Fee Analyzer and found out I was paying $1,700 a year in fees I had no idea I was paying! They’ve also come out with their incredible that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes. Author Bio: Sam started Financial Samurai in 2009 to help people achieve financial freedom sooner, rather than later. He spent 13 years working in investment banking, earned his MBA from UC Berkeley, and retired at age 34 in San Francisco.
Sam’s favorite free financial tool he’s been using since 2012 to manage his net worth is . Every quarter, Sam runs his investments through their free Retirement Planner and Investment Checkup tool to make sure he stays financially free, forever.
It’s free and easy to use. For investing opportunities in 2019, Sam is most interested in investing in the heartland of America through . Property valuations are much cheaper and net rental yields are much higher.
There is a demographic trend towards moving away from higher cost areas of the country to lower cost areas thanks to technology. Since you zeroed the income for tax purposes, there is no money to pay for the small portion of the payment that is the principal as well as food, clothes, utilities and other living expenses.
All these things are not deductible. The only way you can legally reduce your taxes is to use depreciation as a way to shelter your income. Unfortunately, that runs out too. Your savings will be with post tax dollars…so you’re not really dodging the taxes so to speak. Using deductions whereever possible is absolutely a good idea, but the idea that you can live on an income and deduct all of it isn’t realistic…you can’t deduct expenses you need.
Yes you can have your deductions offset your income but then you’re living off of savings…which if your savings is insanely large, good for you…but as you built that savings, you paid taxes on it… Unfortunately, it’s death and taxes… You should discuss the concept of positive leverage, which is when you borrow money at 4% interest on a real estate investment that produces a 6% return.
The more you borrow and the better leverage you get, the more it amplifies your return. Example below: $300,000 down, $700,000 loan at 4% on a $1,000,000 real estate investment offering a 6% annual return or $60,000. $60,000 less $28,000 ($700k @ 4%) equals $32,000 $32,000 divided by your $300k down payment equals a 10.67% ROI That beats an all cash 6% return on a $1M down payment with no loan. It’s all about return on your dollars invested. Banks do the same thing.
They pay you nothing in interest on your savings and lend it out to real estate investors like me at 4%, which I turn around and invest at 6%. That’s why it makes sense to borrow money, if you are earning more than you are paying.
Otherwise, you don’t borrow. I think anyway to reduce the amount spent to a runaway government is a good thing.
I think that our government needs to start reducing the spending, and programs, and everything else that we have got and perhaps focus on the following: trade and war. Anyway, I think you’ve covered a good post here to find ways to reduce taxes overall. No, this article is for anyone who makes less than $10,000 a year or who can reduce their higher income to zero.
Did you know that people who make less than $10,000 a year from what is considered ordinary income are not required to file an income tax return ? If you go the IRS [dot] gov website and browse to Individual Taxpayer webpage there is a tool (webpage) that you can use to verify what I am saying is actually “TRUE”.
People who make less than $10,000 are not required to file an income tax return. How can this be possible ? Well, if a person has ordinary income from one or more jobs, the employer takes out all necessary taxes and if done correctly where enough taxes (Social Security, Medicare, Income taxes) and a person makes less than $10,000 that person will not owe any income taxes after all deductions are made if they were to file an income tax return.
Resulting in “no taxes due” on their income and no requirement to file an income tax return. Normally, this would only apply to people with ordinary income but, there is a way for people who are self employed to have the benefit of not having to file an income tax return. I say benefit because and as you will see, this opens a door for those who do not want to be part of ObamaCare or Medicaid. Yep, this is also true. Under the Affordable Care Act those who are NOT required to file a income tax return are not required to maintain health insurance.
Its that simple ! Forgot to mention the best part of all: You can file “EXEMPT” on your W4 and not pay income taxes all year just to get it back at the end of the year !!!!! Do your own research and you will see that you can also not file an income tax return providing you make less than $10,000 of ordinary income, however, there is a way for people who are self-employed to repeat the benefits of non-income tax filing. Its too late to effect your 2014 year income but, you can start on your 2015 self-employment tax quarterly payments.
That’s Right ? Do you see where this is going ? As a self-employed person who makes less than $10,000 a year can file quarterly Self-employment tax payments and if you do it right ! You will not be required to file a Federal Income Tax filing at the end of the year. Now, this will not help those who have children and need to deduct losses and carry those losses to future years but, if you are like me ?
Good-bye to filing Federal Income Tax forms and Good Riddance to OBAMACARE ! Forgot to mention the best part of all: You can file “EXEMPT” on your W4 and not pay income taxes all year just to get it back at the end of the year !!!!!
Great article Sam. Definitely makes me interested in owning my own business in the future. Quick note, I think in example 2, you meant to say depreciation instead of amortization. Amortization refers to spreading the cost of an asset over a period of time; where depreciation is a non-cash expense that you prorates the cost of an asset (like you describe with the rental property). I love this site. A tip as I just started a consulting business and recently discovered that section 129 and depreciation is your friend.
Especially if you have other sources of income besides your startup business. Bonus depreciation is an interesting subject that people with a small business should know about. Carrying a huge mortgage in order to cut down on your tax bill is one of the worst pieces of financial advice I have ever heard.
You are basically spending a dollar to save 35 cents (after you exceed the standard deduction), while the rest of your interest payment goes to the bank. Sure, you can make the argument that everyone needs a place to live, but that is no reason to buy more house than you need in order to get a bigger tax write off. I have to agree, too much debt is what causes empires to fall.
I could easily qualify and take $1M mortage on my home at some ridiculously low rate. Yes the math says do it, common sense says “are you freaking crazy, you have a paid for home”. The way to build REAL wealth is to be debt free, then build your alternative revenue streams.
The goal with a home should be a roof over your head that gives you the lifestyle you want, a home is an expense, not an investment. Yes, there is a high probality that over time it will appreciate in value DO NOT COUNT ON THIS!
Buy what you can afford & pay it off, once you do you’ll be shocked how fast your wealth accumulates! I love the general idea of being creative to pay less taxes, it is something I’m definitely spending time on. Exactly. The housing stock for ownership is so superior here in SF that I did not want to rent.
Folks shouldn’t be afraid of a mortgage if they have the cash. It’s just accounting. I’d rather have $1 million to invest at over a 2.6% rate of return and be liquid and have the tax benefits than tie it up in a house. Of course, if you can’t afford a mortgage, don’t get it. Imagine living in your house and waking up 20 years later to find out you not only didn’t have to pay rent, your house actually made you money.
Sam’s strategy is extremely effective when the real estate property is appreciating, and the difference between the mortgage APR (i.e. 2.6%, wow! My first mortgage was 10.5%, and I thought it could never go lower after 5%) and the invested difference (stocks returned 7.5%/yr over 2011/12, for a net of 4.9%/yr) is positive. For the past two years, Sam would have benefitted at $78,400, plus whatever capital appreciation to his home would have been ($250,000 cap gains tax free for single filers, after 2 years occupancy of primary residence).
Smart! However, when the real estate market declines 15%/yr, the equity investments also decline 10%/yr, and one realizes they are paying (in my case 5%/yr) for the privilege of losing money while paying for a home eventually sold for 30% less than one paid, Um, I mean, one can feel pretty stupid! For the risk-averse, one might consider the investment directly into paying off the outstanding mortgage, an equivalent 2.6%/yr return, while freeing up cashflow and eliminating risk to that portion of one’s net worth.
It’s like adjusting one’s sunglasses, once you get started there is no end to it!:-) But your house declines in value in a down market whether you pay the entire mortgage off or not! I’d much rather have $1 million liquid and NOT tied up in a house than the other way around. Also, the topic of this post is tax minimization not real estate investing. Up or down market, a mortgage will shield income from taxes.
Absolutely. The $800K paying off the mortgage no longer produces passive income, but an implied return equivalent to the mortgage APR; tax minimization from the other side, no longer having to be offset by deductions. I wasn’t criticizing your decision, it makes excellent sense and you are doing just fine with your strategy.
My real-life example is not for most, just the risk-averse. At some point I hope to reduce my taxes through legal means similarly to this, but at some point its money vs time (and you Sam have some money) so unless you find tax sheltering yourself inherently ‘fun’ it may be easier to skip some of the accounting and mortgage refis and just pay up.
Not saying you should… I’m doing a refi though and its dreadfully boring. I have to remind myself about all the money were saving to do paperwork. But then in real life I make games so maybe my ‘fun’ bar is high. Or weird. It really is mind boggling how complex our tax rules are. Understanding basics like the difference between standard and itemized deductions goes a long way.
I love how we have software like H&R to help fill out all those confusing forms, and that we can use those programs as learning tools to see how various changes impact how much one could owe or get refunded. Each year I feel like I learn something new about taxes and even though it doesn’t make paying taxes less painful, it makes me feel more aware and smarter about how I use my money.
My biggest annoyance is that the gov’t keeps CHANGING the tax code every single year, so that means there are more booby traps the gov’t can lay to penalize us. The IRS are really nice folks though. They know the tax code is ridiculous, but they won’t stop to charge sky high interest rate penalties and wait 3 years before they ask to maximize their returns!
Germany might be the least ugly of those by fiscal and economical data. But still broke, like the others. Some day someone is going to have to eat the losses. Actually sorry…the savers of the world are already paying the bill. Btw, if you believe in freedom and individualism the “happiness of a people” doesn’t make much sense, right? Who made this happiness statistics? Someone campaigning for office, planning new handouts? I can tell you that at least once a month as an employee you shed some tears when about 50%-60% of your salary end up in political coffers.
I think what the goverment doesn’t get is that the people who are smart enough to be the top earners in our society will either figure out how to circumvent a the system, or just generally be disenfanchised and quit working so hard to earn more.
Why be responsible and work hard to give to a goverment that proves they cannot grasp fiscal responsibility? I used to be happy paying my fair share, but when I hear our Pres. explaining how he wants to expand our goverment and entitlements it makes me sick to my stomach. My tax bill will go down guaranteed, my income will not.
I read a study that a flat tax of 15% above a certain income level is the best tax rate to generate the most revenue because it is low enough for tax cheats to stop cheating, low enough for people to stay motivated, and high enough to maximize returns. Makes sense to me. Take out all deductions, tax at 15% and watch revenue surge. Just look at Hong Kong and Singapore with their 15-20% flat tax rate.
Budget surpluses and their economies are booming. Unfortunately, we aren’t as small and nimble as them. So let’s look at RUSSIA! Huge country and also a flat tax of under 15%. Sam, you had mentioned that rate before, and I have read it elsewhere. Not asking for info you are uncomfortable discussing, but your conversation with the Undersecretary of the Treasury sounds very compelling. If you ever had thoughts on implementing that rate, and reconciling it with expenditures, I would love to read your analysis.
So many variables outside of the ‘lab’, though, including population growth/decline, existing debt, and mainly the ability to enforce payment.
Jane, is 25% your top marginal tax rate? What’s your total effective tax rate? I’ve always heard Canada is higher, around 40%. If you’re only paying 25% in total income tax, that is GREAT! Exect a migration from Americans up north for free health care.
Romeny makes money through long term capital gains. That is what we all need to move towards. Working for money is for fools, according to the gov’t. Just remember – for each $ spent on interst – your taxes decrease by your top maringal tax rate. Thus, if you spend $10,000 a year in interest, your taxes decrease by only $2,500 (assuming your top rate is 25%). Addtionally, the “savings” only relates to $ above the standard deduction.
If the standard deduction is $8,000 and your itimized deductions are $10,000 – your savings is only $500 (25% of $2,000). What I’m trying to say is – paying interest on a mortgage is not all its cracked up to be. Pay as little mortgage interst as you possibly can!!!!!
It depends on income. Which is why around a $200,000 AGI is the best balance imo to take advantage of the deductions, stay under the populace and gov’t radar, and live a merry life.
If you have to live somewhere, you might as well live in a nice place and take advantage of government gifts. The mortgage interest deduction is a secondary or tertiary benefit.
The biggest benefit is living in a place you love where nobody can kick you out or tell you what to do. What’s your homeownerhsip situation again David? I own a condo that I bought 5 years ago with a 15 year mortgage. I have been paying extra on my mortgage and thus have paid off more than half of the principle in 5 years. I refinanced to a 10 year mortgage 3 years go. I was just trying to make the point that the mortgage interest deduction is not the panacea that some people think it is.
I hope they come w/ a fruit basket and find some unclaimed expenses and refunds they owe me! One of the government’s biggest worries is people waking up to see the truth. It’s kind of like the Matrix.
The government needs to keep the people in a zombie-like stake in order to maintain control. The smartest thing the gov’t did was allow for into paying more taxes up front during the financial crisis.
Genius by them. Silly rabbits for those who fell for their trick. It seems the only way to do this is to own property. But I also imagine that owning property is more expensive than renting. Even though you’re saving on the tax deductions, you’re still saving on “interest” that is money you are losing to the bank.
The business concept makes more sense, albeit requiring a lot of time. I make about $110k a year right now, s/o makes $0, so I don’t know if this would be a valuable exercise for me. I’m considering buying a condo right now and don’t fully understand the cost benefits versus renting, so need to do my research. Everyone says that the tax benefit of owning is so great but I try to do the math and it just doesn’t add up.
A quick note on German taxes, it’s based generally on family income, so my wife earning 6 figures takes home approx 64%, of I worked I would lose over half of it.
A single person usually loses around 50% to tax. Secondly while Germany is hurting due to an ageing population (mostly on healthcare), overall it’s doing very well, everyone and their brother from Spain is moving here. Very odd but Germans are a nation of renters, not unusual to meet people who’ve rented the same place their whole life. The AMT is a tough one, but doesn’t really start hitting until after making $150,000 or thereabouts.
With $150k you can bring your AGI down to around $100k or less and AMT will be minimal if nothing. It’s case by case. $200k is my ideal income for Max happiness. Much more and the government starts getting you and deductions start getting phased out. Great post, I’ve been thinking along the exact same lines recently. After the standard deductions I have been thinking to donate increasingly large amounts to charities that fit my purpose, rather than allow the Govt to waste more of my tax dollars.
I believe that you can donate up to 50% of your AGI which will wipe out taxes from all but the highest income earners. Interesting post Sam. I’m just not sure how capital efficient it would be to save up $100-$200k to sit around in a saving account earning no interest which you draw down to live on.
I assume you aren’t suggesting selling capital assets like your shares that are producing dividend income, which you’d incur capital gains on, nor other capital assets that you would incur tax on from a sale. The potential “lost income” from that $100k sitting there possibly something like $5-10k /yr? But perhaps, based on the example illustrated, you have $60k passive income coming in anyway that this isn’t such an issue :) I just stumbled upon this forum.
If I am planning to make dividends & capital gains my sole income (disabled, very low expenses, house paid off, not near retirement age), should I do it through a corporation (& which type, S-corp, LLC., etc?) or just as an individual? Which way would be most beneficial tax-wise? Any thoughts? Confused. i am an 80 year old retired businessman.
I am selling my business to my son under a formula that is good for both of us. this morning I received information on the business from my cpa and i am, paying on 250k. I was astounded at the amount. I do not want to go to work again on a startup company. I am an S corp. Hi Sam, thanks for the piece. I just wanted to add that a Solo 401k, while great, may not be applicable as most small-business owners who employ full-time employees will have to make equal contributions to all employee accounts.
Of course, there are certain ways to circumvent this by hiring only employees who are non-resident alien, or union, or under 21, etc. but attempting to do so often ends up being more hassle than its worth. However, I would definitely recommend a solo 401k for anyone who’s an independent real estate agent, accountant, lawyer, tax professional or in any business only with their spouse and/or children as employees.
As a retailer, I just don’t think the cupcake shop is the most fitting example here as its difficult to adhere to all the eligibility rules of a solo 401k in a restaurant business. Interesting article. If there was a way to have a decent income and not pay taxes, the government would shut that down in a hurry. I used to prepare taxes for individuals and businesses, and I have yet to see anything that really eliminates taxes beyond the obvious stuff like 401K contributions and charitable deductions.
There was one return that I worked on where someone purchased some hideous looking yard sculptures, let them sit around for several years, had them appraised at pretty high values and then donated them to some organization. The taxpayer got the benefit of the appreciated value of 25K for each piece of “art”, which was probably BS and paid a lot less in taxes.
I think the key to making this whole thing work is buying something from a semi-legitimate artist and then finding an appraiser who knows how to justify the high value of your unique art. Plus you really have to let the things sit around for a while to justify the appreciation in value. Other than that, the best way to avoid taxes is to have a small business and cheat.
Buy a new car and say it is 100% business while keeping a junker that you claim is a daily driver. Cheating on your taxes is like speeding on the interstate, a little over the limit isn’t going to get you into much trouble, but too much will land you in jail. By the way, I will never admit to writing this article. Well one option that’s rarely mentioned is to simply make less money.
We made the decision to go part time last year, couldn’t be happier. We did the math and between federal, state, local, medicare, and SS taxes 40% of our income came off the top. Add transportation costs, over half our income is gone. Going part time put us in lower federal and state brackets, now we’re taxed about 25% of our incom3. Time is money, I’m not interested in being taxed out of 50% of my life. Sad but true Nick, high tax rates take away the incentive to work.
Take a manager job that pays 25% more than a worker job for example, the manager pays more taxes, has more responsibility, probably has to work more hours and probably has to pick up the phone during off hours.
Is it worth it? For many the answer is no. Thank you progressive tax system. I have a few questions on paying little taxes. Let’s assume you have a well paying job and are able to put away 20k per year in a 401k (pre-tax). You also end up buying two rental properties. The rental properties produce about 30k but you have 15k in operating expenses as well as mortgage interest etc.
You can then also deduct about 12k for property depreciation. So you would only have to pay taxes on about 3k (30k-15k-12k=3k). So now you decide to quit your job and roll over your 401k into a pre-tax IRA. You are able to frugally live from rental income and do not get a job again. In this situation: 1) Is it possible to roll over a few thousand dollars from the IRA to the Roth IRA every year, just enough to stay in the 10% federal tax bracket?
(e.g. 10k minus rental income) 2) Would you be able to get free Obamacare Health insurance because your AGI is under 12k per year? (full subsidy amount for single filers making under 12k) Despite the fact that your income is obviously higher but your deducting most of it with operating expenses etc? 3) To top it off, could you get a very low paying job for about 2k per year (think working for a few weeks in a summer camp or something like that) and contribute those 2k to a ROTH IRA, therefore qualifying for a $1,000 tax credit?
(50% tax credit on up to $2k for single filers making under $18k) –> still insuring that the overall tax AGI stays around $10k/year to stay in the 10% tax bracket.
Are there any flaws with my line of thinking? “I don’t mind paying my fair share of taxes”. This is a mindset we need to change. Just what our “fair share” is have we become, like cattle, so used to? The 1776 American Revolution was started over a ONE PERCENT tea tax. There was NO personal income tax until 1913.
When the Income Tax was first enacted, it was done so to pay for the costs of World War I. It was promised that once that war was over, the Income Tax would be repealed. It was not. Liars. When the Income Tax was first enforced, one had to make at least $40,000 to be taxed AT ALL…and was only taxed at ONE PERCENT. If you made $40,000 in 1913, you could live like a king! Yet today, the sheeple who struggle to make ends meet are content to be robbed, at what amounts to gunpoint, of a THIRD of their income by the government.
Add state and local taxes and “fees” (disguised taxes) and we are raped and robbed of HALF our annual income. Abolish the current Income Tax system, which is now more oppressive than RUSSIA’s, and replace it with a low, flat income tax, with no loopholes. I understand bringing income to zero.
But if you do that and you need a loan or a credit card with a greater credit line for your business–how do you do that? They ask for tax returns…tax returns that show zero income don’t float well with banks, credit card companies or mortgage companies.
No financial institution seems to care about the amount of money flowing through your accounts. Just curious. Thanks I like your examples Sam, but why not just live very low key? That 61,000 in passive income won’t have you paying more than $10000 in taxes (even living in California). I believe that we all should try to live by the old Spartan adage of never showing wealth.
That Lamborgini over there? That’s for suckers… only making the Italians richer. So an extra $40000 a year is way better in my book–something a good investor could turn into over a billion dollars.
And that’s power, and freedom to start great businesses for the sake of humanity. I believe almost everyone is capable of the following: Step one: get rid of all debt. Any debt over 4% get rid of it. Let’s face it, if you are not a spectacular investor, it is most likely not worth the risk. Without it, you’ll probably have a much clearer head anyway.
Step two: Decide why and where you want to live. Step three: Locate suitable piece of land, water etc… Decide on a travel trailer, fifth wheel, boat, tiny house, stone house… As a slightly worse alternative, consider owner financing that land, renting it, or buying a fixer upper. But remember a house is not an investment!
Thousands of dollars (I mean millions) in property taxes and maintenance are being discarded which could otherwise be put to use in the market or a hedge against inflation (Private gold/metals).
All for quality of life or take a gamble on the corporate ladder? No thanks. I’d rather keep all my money than give 85% of it back to interest, taxes, healthcare, and living expenses. A personal business is a much safer bet, or an educated gamble with infinity times the reward.
You must know that since you started this blog, right? Please help! I just turned 33. Have been working as a business owner in a hectic, high risk, exhausting industry for 13 years hoping for the right opportunity to come along and just as I was about to throw in the towel and take a new direction in life….
BAM! $800k in profit over the past year. Most of my business expenses related to this profit were incurred before the end of 2014 and I collected most of the receivables this year without many expenses to offset the income. I file cash basis as an S-Corp. This is pretty much a one shot business lick.
I haven’t made any decent new money in 2015 and I may never make decent money again in this industry. I’ve maxed out retirement accounts (SEP IRA) and spent money on everything that I can justify for the business that has some amount of benefit to me professionally. After all this my CPA is telling me that I’m in the highest tax bracket and where I sit currently for 2015 I’ll owe approximately $185k in taxes!!!
I just can’t stomach that amount. I feel like there has to be ways to not give the government that kind of money to squander. I risked every dime I had to invest into this high risk endeavor, slept on a blowup mattress for 10 months 1500 miles away from home and worked 12-14 hrs a day 7 days a week to make it happen. I stuck it out in a crazy business that has robbed me of any normal social life (constantly moving around the country), worked my tail off and risked it all and was fortunate enough to be in a good place at the right time and take advantage of an opportunity with every bit of energy I could muster.
Bottom line is I don’t have faith in the wasteful, runaway train monster governments and don’t want to give them my hard earned money that I want to use to stabilize my family, finally. I know there’s lots of details someone that might be interested in helping me or providing insight would need to know to do so that I’d be happy to provide.
I don’t have any mentors with the right experience to turn to so I’m looking for input out here on the web. Any guidance would be much appreciated. Thanks! Randall Randall, I agree with your CPA, maybe because I am a CPA, but mostly because I know there is no legal way out of it. I’ve seen many people in similar situations, they make a bunch of money one year and come in thinking there is some kind of magic dust that takes away tax obligations. That’s what good CPA’s do right?
Unfortunately you have to get creative and do things like not receive the money in a certain year and even that strategy is dangerous because the wording of the law say’s something like “receive or could have received” payment for goods/services rendered.
I will caution you to not go in for scams that promise to eliminate your tax bill because chances are if you fall for one of these, you will wish to God you had just paid your taxes when faced with actual jail time, penalties and attorney fees. I cannot agree with you more on multiple points, great article, great way of thinking, thank you for sharing.
You will see my email ID with this comment, you mention that for the past several years you have been doing your own taxes so that you can understand the nuances and create pro forma scenarios such as AMT etc, do you have those in Excel that I can see? I have been trying hard to create an Excel that replicates the 1040 but it’s proving to be next to impossible.
I filled for bankruptcy chapter 7, 6 months ago, and got a letter 2 moths ago that i was granted and my case was closed. Couple days ago i received a letter from Arizona Department of Revenue saying i owe taxes from period ending in 12/31/2004., 12 years ago, and that i have 15 days to pay.
According to them i owed 240.07 but they are now charging me 466.64 Is this right. I feel like this is buishit. They are calling it Bankruptcy Discharge. Should fight against this. Can they charge me for tax that i never knew, and never received anything from them in 12 years. Can someone help me on how to deal with this. I don’t hear pay for it.
I think is an absurd. thank you. Send them a copy of your bankruptcy discharge. It is also helpful if you can get in touch with an individual revenue agent and get them to look at your case. Do not pay anything no matter what they tell you, a single payment could be construed as affirmation of your debt and will only spur them on to collect the rest of it and possibly other taxes you might not know about either.
I guess I’m WAY out of your league for this to help me. I raised 3 kids who are all out on their own now. I work as a school nurse and another part-time job on the weekends for a total of $35K. Because my kids are grown and because I am within 10 months of paying off my home, I am paying Federal AND State taxes this year. They want another $1,000 of my money so that what I tried to save for an emergency will now be depleted.
How can these principals work in my situation?? Just so you know, I file single and I have an excellent credit score of 825. I have credit card debt of about $2500. I’m afraid allowing more to be taken out of my paycheck will result in my not being able to pay household expenses. Any thoughts??? WHY WORK?? ugh.. it’s tax season again and I’ve been dreading it.. I just got my taxes back and I have to write a check to Feds for an additional $19k for a total 2016 tax bill of $88k AND to the great state of CA, I have to write a check for an additional $8k for a total CA tax of $28069..
Thanks to $6k on AMT and another $3k for O’bamacare tax. I’m 58 and have been asking myself, why should I bother to keep working when i’m paying 37% for taxes (37% when you add Fed, State, SS, Medicare tax.
Thankfully I have enough to retire on, so I think this may be the year!! It makes me sick paying this to the gov for worthless wars and welfare for those that choose not to work or take advantage of the system.. Yes, I’ve become very cynical in my old age… I can stop working..
pull out $72k annually from my investments, and save $20k per year by getting subsidized health care from O’bummer.. and sit on the beach drinking mai-tai’s! if most of your income is from w2, having your own side business no matter how big or small and claiming a net loss is the way to reduce your taxes. I have a friend that has a wine blog where he makes about 10k a year off ads and consulting.
He deducts almost 100k in actual wine as business expenses (he needs to drink wine in order to blog about it no?) and claims a 90k loss that he writes against his w2 income. Party will probably end for him soon but so far it’s been good (he has claimed net profit some years). I am confused. If I make only 23k a year now and want to stay in this tax bracket, what is my best way to lower my taxed income?
Ira or 401k? also this is a little different but in my state I we get greatly subsidized health care is you make under 23k, if my income rises about to lets say 25k, is there a way I can put money away in such a way that my over all income stays below 23? Thanks! Hi, This article doesn’t make sense. My gross income is around 150k-160k filing jointly. There is no way I can pay no taxes. Do you have any suggestion in my case. Also buying mortgage worth 1million you atleast need 200k as down payment and if you do not take home any money.
You will never be able to buy any mortgage. Hi, I just graduated from college and got a new job this month in SF Bay Area. The income tax is very high, a total of 35% taken off from my salary.
How should I avoid paying this much? Should I create an LLC or an s-corp and report losses to that side business? become a contractor? What is the best way for a young single professional who is struggling to make ends meet due to high rent, deal with lowering taxes?
Some interesting ideas. An HSA is like an IRA for all practical purposes if you have a high deductible health plan. This can shelter an additional 6700-7700 per year. The paying interest is a sucker bet. If I have the option of paying 30,000 in interest or 30% of that 30,000 in taxes, I’m paying the tax…unless I am leveraging that money to make more.
IF it’s interest on my own house, forget it. Also consider utilizing savings strategies that grow tax deferred and the money can grow with uninterrupted compound interest over long periods of time. This is called The Infinite Banking Concept. If done correctly, paying taxes only once on the seed and compounding over mulitple generations then you too can be like the Rockefellers and other wealthy Dynasties.
Hence the reason I called my business Dynasty Banking! I am 60 yo, have 5 rental homes as a business. Another Business, Horse lessons. Wife is a contract computer person. Your examples are really geared toward 1 million dollar properties or more.
my typical rental house is worth $200,000, interest $5000, HOA $400, tax = $2500, repairs $2000, income for one $16,000. Now, my plan has been to build an income, so I can retire and also leave my Son a money machine. 4 of the 5 homes will be paid off soon. I do realize, that locations change character and am planning on selling then buying in a different area utilizing the 1031 tax exchange.
Have done before. But your example numbers are sort of like a hotel in New York. A bit scary. And yes, you have little money to live on. It all works if you have 5 million in the bank then do your examples. And I deduct everything I can and year end taxes just kill me. lets say your bought a building for $1 million. with the mortgage, you are paying close to $2 million.
the mortgage interest deduction from the rental income is so tiny, is it really worth not buying the building with cash? at the end of the day is it worth paying more on the mortgage that what you will save on the taxes? Financial Samurai, I need help.
I make 150k a year and have to save $1,500 each month to pay taxes at years end. I have a lot of bills, mainly 3 mortgages on 2 homes totaling 9k, 450$ credit card payment, utilities, tuition and some life Insurance.
I was thinking of getting a second job to pay for sons college but that would put me to save even more for taxes. I made a huge mistake investing heloc cash that was stolen in the great recession and suffering for it.
Deductions for state taxes or mortgage interest are UNFAIR. I have worked since 1970 and had several mortgages but have never had enought deductions to file long form. Why should I pay all my taxes when you rich people with your overpriced mansions get all these writeoffs? GET RID OF ALL WRITEOFFS AND CREDITS! FLAT TAX! Better yet, replace federal income tax with a federal SALES tax! PRIVACY: We will never disclose or sell your email address or any of your data from this site.
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Nine years ago, I started living a more bountiful life by working less, earning less, and spending less. I started by going to my employer’s human resources department to ask if I might take a significant pay cut.
“How significant?” they asked. I said, “I’m not sure yet; maybe 75 percent?” As you can imagine, this was not the sort of request they were used to, but they gave it their best shot. How did I come to make such a strange request?
A little over nine years ago, the war on Iraq began. Along with many other people, I was horrified at the magnitude of the suffering the U.S. would inflict with its “shock and awe” campaign, and also at the increasingly blind, ignorant, and bloodthirsty war fever that dominated our country.
But I also knew that as a taxpayer I was a small but vital part of the monster we were unleashing, and that no matter how much I protested, as long as I continued to pay taxes, I was — in a practical, bottom-line sense — a war supporter. I had a hard time getting to sleep at night and looking myself in the mirror in the morning. I knew I had to stop supporting the war, if only for my own peace of mind.
But how? My major financial contribution to the war was from the federal income tax which was automatically withheld from each paycheck before I even saw it. If I were to stop this withholding by filing a new W-4 form with more allowances, this would just delay the inevitable.
Come April, the IRS would realize they’d been underfed and would come after me or my employer to seize the rest. I decided instead to get “under the tax line,” reasoning that the best way not to pay income tax is not to owe any to begin with. So that’s why I visited my H.R. department. But they said they couldn’t help me — such a radical pay cut might look suspicious to auditors and cause problems of some sort for the company. So I quit my job where I’d been earning roughly $100k, and now I’m self-employed doing contract work and writing books.
When I started, I didn’t know where the “tax line” was. I assumed it was somewhere in the vicinity of the “poverty line” (which didn’t sound encouraging). I found some stories about war tax resisters who use the “under the tax line” method (one among many methods of war tax resistance) and these seemed to suggest that the “tax line” was somewhere around $3,000 to $8,000 a year. So I started thinking “hmmm... I could buy bulk rice and pick dandelions for vitamins” . . . “you can do a lot with top ramen!” .
. . “maybe I could work as a fire-spotter to avoid paying rent” . . . that sort of thing. I started to resign myself to a path of deprivation, sacrifice, and renunciation in the service of my values. There are things to be said for sacrifice in the service of values, but my path took another turn entirely.
I researched tax regulations to find out more precisely where the “tax line” is and just how much of a budget I had to work with. What I found was a great relief. Today in the United States, about 40 percent of households that file tax returns are already under the federal income tax line — that is to say, two in five of these American households pay no federal income tax. So I didn’t have to live in a cave and eat grubs and berries, all I had to do was join the income-tax-free 40 percent.
There really is no single “tax line.” The threshold is different for everyone. It's based on things like your family structure, your age, how you make your income, and what you do with your money. For me, the tax line is about $36,000 this year. By using deductions for tax-deferred retirement accounts, and for health savings accounts and health insurance — entirely legally and by-the-book — I’m able to owe no federal income tax. To do this, I have to put about $14,000 into these retirement and health savings accounts (almost 40 percent of my income).
Subtracting Social Security taxes, that leaves me about $20,000 to live on during the year. That seems like very little to many people, especially in the expensive San Francisco Bay Area where I live, but it’s more than enough for me.
For one thing, it’s a real $20,000, not a $20k salary that then gets whittled down by income tax. My yearly expenses — rent, food, transportation, health insurance, and the like — come to less than $18,000.
What’s left over is a rainy-day, emergency, or vacation fund. I often use it for a south-of-the-border backpack-and-hostels style adventure. And note that I’m also saving a healthy $14,000 a year for retirement and for health expenses.
Here are some of the techniques I’ve adopted to lower my expenses: • I cook my meals from scratch rather than eating out or eating expensive packaged food. • I brew my own beer, because I like the good stuff (and because I want to avoid the federal excise tax on alcoholic beverages).
• I've traded English tutoring for Spanish tutoring, and web programming for training in DIY skills like meat curing and urban foraging, rather than paying for classes.
• I use the public library for research and recreational reading rather than buying books. • I don’t own a car, but instead use public transit, bicycling, Greyhound, Amtrak, and such.
• I try to find used stuff on freecycle or craigslist rather than buying new — for instance: a pot rack, a Foreman grill, a vacuum cleaner, a back door that I could cut a cat door in without risking our security deposit, a bread machine, speakers, a living room couch, some lectures on video, a food processor and blender, and a carboy I use for brewing. • I gravitate toward social events that highlight generosity and participation rather than commerce and spectatorship.
How has my life changed now that I’ve gone from a $100k urban playboy lifestyle to living on $20k? When Money Magazine profiled me a few years ago for an article they put out on how to avoid taxes, they wrote that their readers wouldn’t enjoy the “ascetic lifestyle” that comes along with my technique.
Well, if this is “asceticism,”asceticism is very underrated. The life I’m leading now is fuller and more enjoyable than ever. I have less anxiety and feel more integrity, and I’m genuinely living a bountiful life.
By being willing to take in less income, I can work fewer hours. Those now-free hours are much more valuable to me than the money I’d been trading them for. It seems that many things people give up to pursue their careers are more valuable than the money they gain in the trade. And many are not for sale at any price: health, youth, and the time we need to pursue our dreams, learn new skills, volunteer for good causes, strengthen relationships with our family and friends and communities, or just to read those books we’ve been meaning to get around to.
Money is at best a means to various ends. It is these ends, and not the money itself, that define abundance. While money is a useful means to some ends, it is hopeless for others and inefficient for many. For example: I love good food. When I was making the big bucks I used to go out to eat all the time since there are so many great restaurants in the Bay Area. But for the cost of one restaurant meal I could eat fantastic food all week — if only I had the time to look up the recipes, shop for the ingredients, prepare the food, and clean up the kitchen afterwards.
Now I have that time, and so I eat great food just about every day for a fraction of what I used to spend. And along the way I've learned a thing or two about the art of cooking, which helps me share good food with others. One measure of abundance is this: What percentage of your time and energy can you devote to your passions, and what percentage are you forced to spend on priorities that contradict and oppose them?
By “your passions” I don’t just mean “your selfish whims” but your values, the things you think are worthwhile and important. If a percentage of your paycheck is being sucked up by Uncle Sam, you’re spending that percent of every working day — spending your energy and time, your life — to promote the Pentagon’s priorities and political pork projects, war and empire, bank bailouts and mass imprisonment.
You can serve your values and your community much better by redirecting that time and energy in more positive directions. What worked for me won’t work for everyone: Some people, for good reasons, have higher expenses than I do (for instance children, though they are good tax deductions, can be an expensive hobby – I don’t have kids). Not everyone has job skills that translate well to a part-time, freelance, work-from-home style job. Many people have to work full-time jobs, year-round to earn as much as I earn.
Many still earn less. I don't have a one-size-fits-all strategy, but there are some lessons I learned along the way that many of us can use to make our lives more bountiful, whatever our situation. Take stock of your own vision of a rewarding, generous life, and look closely at which components of it are best served by earning money and which components are best served in more direct ways.
Look also for ways in which your career may interfere with such a life. And look at how the government, by means of the tax system, is forcing you to expend your time and energy on priorities that contradict your values. Consider the possibility that the most bountiful and generous life you could be living may be one in which you are earning and spending less but living and sharing more. If you like this article, read , also by David Gross.
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