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Taxes and Investing

Early Retirement, Estate Planning, Lifestyle, Taxes and Investing

How to Become Wealthy in 2017

Here is an important interview with Warren Buffett everyone needs to listen to as we face significant tax code changes from the new administration. Warren's views are not always mine, but his fundamental understanding of taxes and how they work requires all intelligent people to listen and learn as we grade our representatives on how well they are leading.




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Thinking Like an Accountant

The only serious accountant around here.

Things have been looking up at The Wealthy Accountant. Traffic is increasing and the audience is expanding. Even better, the original demographic attracted to the site has expanded, bringing in more people to benefit from the information provided.

The newfound success also causes problems. People unfamiliar with the FI (financial independence) community are frequently shocked at the way I present information. It’s an easy thing to do. Right up there in the title is the word accountant. The blog ought to be about taxes and similar stuff found in a CPAs office. Then you open the cover and find me standing there. Don’t worry! It would scare me too.

There is a major misunderstanding on what this blog is about. Yes, the word “accountant” is in the title. There are a few reasons for that. First, it’s getting hard to find an unused url in the dot com universe anymore. Second, I don’t want you to be an accountant (unless you want to be), but I want you to THINK like an accountant. There is a difference.

Thinking like an accountant allows you to make better decisions in all areas of your life: working, investments, taxes, even relationships and raising the kiddos. Accountants think in a logical fashion. They plan. They also look before they jump.




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Why Saving Half Your Gross Income is Better and Easier Than Saving Half Your Net Income

People frequently look to their accountant for sound financial advice. Good accountants are up to the task; other, not so much. Finding a good one is easy; they tell you what you don’t want to hear even if you threaten to leave.

Advice sought from accountants runs the gamut. Selling or buying a business requires in-depth analysis and most people trust their accountant’s judgment regarding this matter.

Then the bizarre requests come. Over the years I have been pulled to the side by clients wanting advice on how to raise their children, gambling problems, infidelity, and divorce issues. Some of the requests have a hint of tax built into them. Gambling problems are also tax problems. I’m never comfortable helping anyone decide if they should end their marriage. It’s not my place or at least shouldn’t be. And even if it was I want nothing to do with that kind of conflict.

My favorite requests are about personal finance, intelligent tax reduction and retirement. These are the moments when I can shine. It is also an area of massive risk. My mantra, oft repeated, is simple, yet rarely followed. First the client is in denial (which is a river in Egypt last I checked). Quickly the client moves to tell me my advice is impossible to follow and nobody does it. (Oh, yes they do.) Finally, the client starts to bargain her way into a deeper hole. They think they can change the rules and make it easier. Don’t they know I already thought of every twist and shortcut possible? Clients usually bargain themselves into a deeper hole without even knowing it.




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It Pays to Have a Hobby

The demographic reading this blog does the things necessary to retire early. The same demographic believes in a side hustle to retire even earlier or to fill time once work becomes an elective. These facts make hobby rules an important consideration. The tax law has a massive loophole few use.

Accountants in the room will understand what I say next. A client walks in the door and his hobby finally turned a few dollars of revenue. No worries, the client says, I can lose money in my business for three years before I have to shut it down and start over. The client actually thinks there is a rule saying you must make a profit 2 out of every five years. By this yardstick, Tesla, a publically traded company, would have to shut down. (Tesla has a decade of loses as I write this.)

The rule people think applies to small businesses actually is a hobby rule meant to serve the IRS, not you. If the rule wasn’t there, people like me would have a field day. Self-employment tax would be a thing you only read about.

People want to be a business when they lose money and a hobby (if they knew the rules) when they have a profit. Race car drivers want to write-off $48,721 of expenses because they won $2,100 of prize money racing. Sorry, it doesn’t work that way.

But there is a strategy here you can use to seriously reduce your tax burden.




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Never Miss a Charitable Deduction Again





The Wealthy Accountant is turning into a vibrant community. Readers share their stories helping me do my job of teaching you, kind readers, how to live a joyful life without money problems. Readers also do things your favorite accountant cannot. For example, you would never ask me anything about IT. On my best days I am dangerous when given the access codes to computer files in my office. Karen, my office manager, has a standing order with the IT firm managing all our information to never give me a pass code or access to any secure files. It’s better that way.

When it comes to taxes, the story is different. I immerse myself in taxes the way a college guy plays video games. Most tax questions are front brain answers to me and minor research for most of the rest. (Every now and again someone throws me a curve requiring serious research, but we will not talk about those times to protect the ego of the innocent accountant in the room.) Then a reader sends me a link for a website that blows my mind. John Haldi did just that.Continue reading

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Applying Cost Segregation on a Tax Return

A few weeks ago I wrote about the massive tax benefits to investment property owners and business owners who also own commercial real estate using a cost segregation study. Some of you took me up on the offer and now are up for a significant tax reduction. Then the problems started. I didn’t anticipate the large number of tax professionals who didn’t know how to handle cost segregation studies on a tax return.

Before you call your tax preparer bad names, know most tax professionals rarely, if ever, see a cost segregation study in their office. When the rules changed a few years back I doubt 1 in 100 accountants handled their client tax returns correctly as it pertained to the repair regs and tangible property rules. The good news is the changes only required certain actions in the first year of accounting method changes. The bad news is that most tax professionals don’t know how to handle a cost segregation study on the actual tax return when a client comes in with one. Not to worry. Your favorite accountant will spill the beans on how to get it done right.  No picking on your accountant either. This is advanced tax planning and tax law can be miles from tax application at times.

Tax professionals will find this helpful; taxpayers should find value, too. Knowing of a tax advantage is only worth something if you can apply it. There are two major issues surrounding cost segregation studies: tracking the components/elements listed by the study and taking full advantage of the additional depreciation allowed.

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Stop Paying Your Quarterly Estimated Taxes!

 

When life is good the revenuers have a way of raining on the parade. A large year-end bonus, mutual fund distribution, or large year-end sale at your business can crimp your tax situation in more than one way. A quick call to your accountant gives you the answer: Make an estimated tax payment.

But making an estimated tax payment can hurt you! A quick payment at the end of the year to eliminate a tax liability still subjects you to an interest penalty in many cases. What you need is a quick and dirty guide on estimated tax payments to avoid nasty surprises, and even better, a way to game the system. (Who doesn’t like gaming the tax system? It’s this accountant’s favorite pastime.)

Our goal today is to pay as little as possible for as long as possible. There are two reasons for this: 1.) The longer you keep your money the longer it keeps working for you earning interest, and 2.) When you know you owe money you start thinking of ways to reduce the liability you have to eventually pay. I understand interest rates are very low as I write this. Still, keeping you money invested longer in your account is better than paying the government. If you are in the “digging out of debt” phase of your wealth building, keeping your money longer means less debt for longer. Since debt interest is significant, the later you pay the better for you.Continue reading

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Why Trade Wars Never Work

An old nemesis has returned to the United States and other nations around the planet: protectionism. These leaders, and the voters who bought their snake oil, falsely believe protecting their borders by building walls, taxing imports, claiming currency manipulation and threatening to dissolve trade agreements will bring jobs back home. They’re wrong.

What these well-intentioned people forget are the lessons of history. They forget about The Tariff Act of 1930, also known as the Smoot-Hawley Tariff, the one piece of legislation that hastened, accelerated and prolonged The Great Depression. People forget about the jobs created that did not exist before due to current trade agreements and the lower prices consumers paid for goods and services.

The misguided perception that jobs will be created for nations with trade deficits by preventing trade does not work. And we are dangerously close to poking the sleeping giant again. Once a trade war begins it is hard to stop the cascading effects. The damage is swift and painful with few options available less painful. Best to leave the sleeping beast where she is. But politicians sometimes have an agenda we all pay the price for.

But why do trade barriers cause job loss? If the U.S. has a massive trade imbalance, curtailing imports should bring the jobs home to create those products, right? It’s not that simple. Today we will explore why curtailing trade destroys jobs in all countries involved. Open trade is beneficial to everyone.




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