What is the largest expense you’ll have in your life?
Some will say it’s the purchase of their home or their college education. Others, thinking about it a while, feel transportation expenses lead the list of lifetime expenses. You would be justified in thinking medical costs, including medical insurance, are the biggest expense you will face in life.
Yet none of these expenses are close to what you will pay in taxes over a lifetime.
Taxes will consume over half of what the average American earns over a lifetime. This means no other expense can possibly be larger.
The list of taxes in nearly inexhaustible: federal income taxes, state income taxes, sales taxes, excise taxes, payroll taxes, property taxes and now tariffs are being added to the costs of many goods you buy.
Let’s take a look at the taxes a typical American pays:
- Federal income taxes: 20% (yes, you get deductions and credits, but many pay 20% or more after these tax reductions)
- State income taxes: 5% (some states are higher while some have no income tax)
- Sales taxes: 5% of spending (some items are not subject to sales tax however)
- Property taxes: 5% of income, but is levied against the value of the property so it can be a larger (or smaller) slice of your income
- Payroll taxes: 15.3% (half paid by employee, half by employer)
- Excise taxes: What isn’t taxed? From alcohol to fuel to tobacco to vehicle registration and so on.
- Import taxes: Tariffs are a tax paid by consumers of the country levying the tariff and that is going up in the U.S.
- Other taxes: As a consumer you pay the taxes of businesses in the form of higher prices. Taxes are built into virtually every product and service. Medical expenses are usually exempt from sales taxes, but the taxes on the system are passed on to consumers. If they didn’t they would go broke meaning the survivors do pass on the cost of their taxes.
No one tax seems insidious by itself, but added together they take a massive chunk of your wealth unless you take actions to lower your tax liability.
Some taxes are difficult to reduce. If you buy gasoline you will pay the excise tax, for example.
You can avoid many taxes by refusing to consume. That is easier said than done after a certain point. Frugality can save a lot of money, but go too far and you cross the line into being cheap. And there is still something to be said about quality of life.
Reducing consumption doesn’t avoid all taxes. Less consumption means less sales tax, but your wages still get hit with payroll and incomes taxes.
The good news is you can use the tax code to reduce taxes beyond the mere consumption taxes (sales and excise). The United States has a progressive tax system which means your tax bite increases with your level of income. The first $24,000 of income on a joint return is tax-free because that is the standard deduction. Earn several hundred thousand and your top dollar earned can be taxed at over 30%. And that is just federal taxes. The state you live in wants a chunk too.
Investing in Tax Avoidance
Tax avoidance can be a dirty word in the tax profession since it is often the words we use when illegal activities are involved to avoid taxes. However, tax avoidance can be 100% legal!
There are two type of tax avoidance you need to consider: tax deferred and tax-free.
Tax deferred strategies push the tax into the future when you pay them with deflated dollars and potentially a lower tax bracket. Tax-free strategies avoid income taxes completely.
The Tax Code is massive and changing all the time. At the risk of sounding self-serving, you need a qualified tax professional if you are serious about reducing your tax liability. The Tax Code is too complex to navigate effectively without experienced help.
I could go into several tax reducing strategies today, but this isn’t a post on specific strategies. Besides, your facts and circumstances will probably dictate a slightly to radically different approach to meet your needs.
This is where you might think I would recommend my office for your needs. Except that isn’t going to happen.
I closed my office to new clients six months ago until June 1st (which is fast approaching). Unfortunately, a few factors will not make that a good choice for you after June 1st.
First, my regular clients filled May and June to the hilt so in reality July is the earliest I can get a new client in for a consultation.
Second, I decided (with my team) to focus more on local clients. (I owe my community my services. They breathed lifeblood into my firm and spreading myself too thin is very problematic.)
Third, my health had deteriorated significantly.
Before we continue onto solutions you can use I will take short detour into my health issues.
Learning to Breathe
When I was 18 or 19 years old I entered a silo with silo gas. Like a good worker I toughed it out to finish the work. Unfortunately, silo gas damages the lungs.
I’ve since had short bouts of difficult breathing. These bouts are accompanied with persistent coughing. Cold weather makes it worse.
This past winter started early and lasted long. It isn’t hard to say we had a good six months of winter in the Northwoods of Wisconsin this year.
I started out good this winter, but didn’t travel south for a short respite from the cold this year.
Around mid-February I started losing my voice (some might actually think that is a good thing). The cough soon followed. With tax season in full swing I was never granted a reprieve. The cough got seriously worse.
Here it is mid-May and the cough is still running strong; three months of hell and still going. The doctor said there is nothing she can do and recommended extended rest. (Well, that doesn’t work well with me.)
I hurt. A lot. Nothing I do or take seems to work. Summer heat can’t come soon enough.
The cough has sapped my strength to the point I nearly faint when coughing spells hit which is often (like 5-10 times an hour).
To top it off my voice is gone. It has started to come back a bit, but the last days of tax season were so bad I couldn’t talk and breathe at the same time. It was difficult breathing at all! I still find it hard to breathe often. (And I never smoked, in case you’re wondering.)
Finding an Ace Tax Professional
No one person can be the go-to guy of the industry. I might be good, but pushed my body too hard and now the price is being paid.
My openings available this year will be limited so I can produce two courses you will find valuable and to make Camp Accountant a reality. If my health does not improve I will take no additional clients this year.
But that doesn’t mean I’ve been sitting around twiddling my thumbs! I am fully aware of my limitations and have taken steps to provide more qualified choices for you.
Hopefully you have noticed the Finding a Local Tax Pro link at the top of most pages of this blog. The list of tax professionals is still small, but growing.
Not all areas of the U.S. are covered. If you are a tax professional who follows my philosophy, consider adding your name to the list. If you know of a tax professional who does outstanding work, consider nominating them for inclusion on the list. I will contact them before adding them to the list. (They have to want to be a part of this.)
Certified Wealthy Accountant Tax Professionals
And that brings up a good point. What level of quality do the tax pros on the list have?
The question recently arrived via email. A reader wanted to know what I thought of one of the tax pros on the list. In that instance I confessed I did not know the tax pro mentioned and could not vouch for their level of competence.
However, those on the list had to take action to get there. They either read this blog or follow my work as I post it around social media. I would be surprised if they were below average. (Let me know your experience. Too many bad marks and they will be off the list. The good news is I have received no bad comments on any tax pros on the list! Fingers crossed that continues.)
Still, it is not good enough to just put names on a list without vetting them. Over the next year I will take steps to “certify” tax pros on the list as Wealthy Accountant Approved. (They can be still be on the list if not “certified”, but I think people visiting this blog will steer toward the “certified” names.) It might eventually roll out to a national designation showing tax professionals who not only are competent, but can add value to their clients by consulting and providing actionable tax strategies to increase wealth (like maxing out retirement plans, maximizing tax credits, et cetera).
Tax professionals who attend Camp Accountant will be offered the “certified” designation. Tax professionals I have worked with personally and trust their work will also gain the designation.
Rather than simple testing, I plan an in-depth vetting process to include the best of the best tax professionals on this blog’s list with the Wealthy Accountant Approved designation.
This is a valuable resource for you and the tax pro. You know the tax pro meets a high standard and the tax pro can charge more for their exceptional level of professionalism. (Smart people are never afraid to pay more for quality. It is the high price for mediocre quality that irritates.)
Putting a Good Tax Pro to Work
Top-notch tax professionals are always busy. The good news is you don’t have to settle for one tax pro!
As the tax pro list grows you will have more opportunities to find a Wealthy Accountant tax pro locally. Until then you can keep your current accountant while gaining the full benefit of using a Wealthy Accountant tax pro.
Tax season is not the time you save money tax planning. Tax season is triage in ALL tax offices! The options for saving taxes on the return being filed is massively limited (y’all want an IRA deduction with that, is about all we can do).
Reducing your taxes happens now, outside tax season. A few hours of consulting can pay off with a massive return. It is not uncommon for my clients to save 10 times or more than my fee in taxes. This is a 1,000% return! Some clients save even more. In some cases I don’t reduce their taxes but help them understand their tax and financial situation better so they can maximize wealth creation even if taxes are not reduced.
It is rare for a client consultation to end with tax reductions less than my fee. In those cases the value is usually increased wealth from other sources or fixing a tax issue that is sure to bite the client in the future.
I encourage you to use this resource: the Finding a Local Tax Pro list. I do NOT charge anyone to be on this list! This is for you, kind readers. There is no financial benefit to me. You get the value and I get the warm fuzzy feeling more of you are getting the service you deserve and that I can no longer provide. Yes, Camp Accountant has a fee, but that is to cover the costs of the Camp. I want Wealthy Accountant Certified to mean something everyone can trust. I want a day to come when everyone demands their tax professional be Wealthy Accountant Certified whether on this list or not.
As much as I want to help the world, I am one man who has pushed his body too far. I have to think smarter if I am to help every one of you kind readers. Just because I can help someone doesn’t mean I should. Too much work can break the horses back. Well, this horse is struggling with health issues as a result.
I’m never one to shy away from work. I love what I do, even when it hurts. But if I go down no one is helped. I owe it to you, every one of you, to act and think smarter. The audience is too large for one small office in the backwoods of Nowhere, Wisconsin to handle.
I need a team and one is being built. I will give all I have because you deserve only the best. When I push too far it is impossible to give the best.
With the expanding team of tax professionals around the nation we can serve you at the highest level possible.
Don’t be afraid to hire a tax pro from the list. Ask the right questions before hiring. I published two posts on this in the past: 7 Questions Rich People Ask Their Accountant and Finding a Good Accountant.
Ask questions to verify the tax pro can serve your needs. Many tax professionals specialize. As long as you’re going to pay for the service you may as well get the best one possible.
In parting, do not worry about your favorite accountant. I thought the end of tax season would give me a breather (pun intended), but so far the cough and breathing issues have not improved. Warmer weather and time off (tax season really doesn’t end until June or so as extensions and questions come in rapid-fire until then) should allow me to heal. I am a bit worried this has lasted so long and so strong.
I’ll survive, no matter how much it hurts. I always do. I am fully aware of your presence and need, kind readers. I will find a way to get every one of you served to the level you deserve and more.
More Wealth Building Resources
Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
On a recent ChooseFI podcast where I was the guest speaker I mentioned the possibility the backdoor Roth and her sister tax strategy, the laddered Roth, could be going away. Many people heard me say it WAS going away. That is false. It is only a proposal at this time.
Because so many potential tax law changes now whispered in the halls of Congress have the potential to cause great damage to those in retirement or working an accelerated program toward financial independence (FI), now is the perfect time to review those with the highest possibility of happening. A word of caution before we begin. These are only ideas floating around Congress. They are NOT current tax law! Not all ideas whispered in the halls of Congress become law, but all laws start as a whisper in the halls of Congress. There is a difference.
Most ideas for tax law changes never see the light of day or are significantly modified before becoming a law. Some ideas become law in a few years, other may take a decade or longer before working through both houses of Congress and signed into law by the President. As we review the ideas now floating around Congress I will give my opinion on the likelihood the change will take place and how soon.
Remember, this is one guy’s opinion. My opinion carries weight because I have decades of experience. I also rely upon sources outside my own viewpoint, such as continuing education courses I’ve attended, The Kiplinger Tax Letter, and calls to several Congressmen. (It should be noted I rarely get to speak with an actual lawmaker. Usually I speak with a staff member. They can still be very helpful with potential tax law changes working through the system.)
What’s All the Hubbub, Bub?
The Republicans control both houses of Congress and the White House. There is a strong desire to cut taxes on businesses massively while not raising taxes on individuals. This is easier said than done. Cutting the top tax bracket for most businesses to 15% – 20%, while leaving individual rates unchanged, would blast a multi-trillion dollar hole in the federal budget. This is a serious problem.
The only way to make it work is to reduce or eliminate deductions and tax strategies. Congress can pass a tax bill without a tax bracket increase and claim they didn’t raise taxes even if what you owe goes up. But if you pay more in taxes it is a tax increase! So you can get a tax increase while the politicians smile big claiming they didn’t raise anyone’s taxes. Taxes make liars out of everyone, especially politicians.
Some changes make sense even if they hurt the demographic reading this blog. I don’t like the idea many powerful tax strategies might go away, but I understand why Congress may plug certain tax loopholes. Always remember I am on your side.
The original premise of this post started from my statement the backdoor Roth and laddered Roth would go away. I love the backdoor Roth, but it is really an end around of what Congress intended. The current law says you can contribute into a Roth IRA until your income reaches a certain level and then the Roth option is phased out until it is completely unavailable to high income taxpayers. The backdoor Roth is just a sneaky way to do an end around regardless of income. The laddered Roth the same.
Since the backdoor Roth raises very little tax revenue it is an easy target. Money not invested in a Roth IRA might be spent, increasing economic growth, leading to modest increases in tax collections by the government. The real advantage is down the road when the tax-free growth is taxed instead.
Once again, now is not the time to panic. This is NOT tax law yet. It may never happen. It could be effective January 1st of 2018, which is the earliest I think it could happen. A more likely outcome is a January 1st, 2019 effective date. Time will tell.
What all this talk of reducing the advantages of retirement plans you need to kick it in the tail and max out those retirement accounts now while you have the full advantage available. If ever there was a motivation to supercharge your FI goals, now is the time. The backdoor Roth and the following ideas to change the tax code makes waiting to up your savings rate a dangerous, expensive and wealth endangering exercise.
The Bad News Bears
Many of the ideas being toyed with by Congressmen are vague. What is coming out of Congress in whispers are not complete tax code changes. Some of what is reaching my ears requires some background tax knowledge to understand what is probably being proposed. Some of these ideas are so vague I am only making an educated guess as to how the change would be accomplished. Regardless, you need a basic understanding of what lawmakers are anticipating changing in the tax code. It is essential in your tax planning process.
Many of these proposals come from a 2014 tax reform plan that never got traction. As mentioned above, these things frequently take time before they start moving forward. Variations of some of these proposals are likely to be enacted.
Now it’s time to scare the bejesus out of you.
Have a seat, kind readers, there are lawmakers serious about a proposal to reduce the amount of pretax contributions to your 401(k) by up to half! The current annual contribution limit is $18,000 with an additional $6,000 allowed for those 50 and older. This means you could only deduct up to $9,000 per year or $12,000 for older taxpayers if this proposal is enacted. The key word here is pretax. The contribution level would still be $18,000, but any amount over $9,000 would automatically go into a Roth 401(k). On its surface this may not seem like a serious issue. However, it takes away a massive planning tool. Many credits are calculated off total income or adjusted gross income. Your mix of retirement investments between traditional and Roth plans can be modified each year to maximize your tax savings. If this controversial proposal becomes law it will seriously curtail your ability to reduce your tax burden by adjusting your retirement investment mix.
The above proposal also means if you are in a higher tax bracket while you are working—a common occurrence—you will be limited in your deduction at today’s higher tax rate and will be unable to take advantage of your lower tax rate in retirement.
Another idea floating around is to eliminate all traditional (deductible) IRA contributions, limiting IRA contributions to Roth IRAs only. As much as I love the Roth IRA, this accountant is horrified over the loss of flexibility from the loss of deductible retirement contributions. People do not save enough already in the U.S. These proposals will take away a massive incentive to get people to start or continue to save and invest.
Short-sighted goals to raise tax revenues for the government will end badly. The low savings rate of the U.S. would be forced lower to raise a small amount of revenue to offset massive tax cuts for businesses. The small added gain to economic growth would be temporary. With fewer savings, hence a smaller personal safety net, would exacerbate future recessions and strain the system more as people age; forget about early retirement.
Another bone-headed idea is to eliminate the Simple 401(k) and SEP plans. Existing plans would be grandfathered. This idea has been bounced around for several years now. If you are able to open a Simple 401(k) or SEP, now might be the time to preserve the option. (Note: Simple 401(k) plans look and act a lot like SIMPLE IRA plans.)
If all this isn’t damage enough, there are some lawmakers who favor cutting the cap on retirement contribution by employers and employees or freezing the contribution limits so they are not inflation adjusted. The Republican proposals are built on a foundation of discouraging savings and investments. Your favorite accountant does not favor short-term solutions to solve long-term federal budget problems. It seems to me if more Americans had a higher liquid net worth it would be better for the country, not worse.
According to Kiplinger (not an affiliate link), the White House claims retirement plan incentives are safe. Considering the current environment, I take no comfort, nor do I trust, what comes out of Congress or the White House. This could be a fight for the ages. Stay tuned.
Some (Modest) Good News
There are several proposals to improve S corporations. The most notable is allowing IRAs to be eligible shareholders. This could open powerful possibilities if it becomes law. There are additional S corporation changes proposed, but they will affect a much smaller group. Due to their complexities and time I will leave that discussion for another day when it appears the changes are imminent.
The one piece of good news seems unlikely to become law unless it is part of a larger tax reform bill.
Sorry for the downer this morning. It was too important to leave unsaid. You, kind readers, need this information to plan accordingly. Now more than ever it is imperative you increase your savings rate now. Eliminate debt, save and invest. A solid plan can reduce the damage the government inflicts. Those who wait will take the full blunt force of the assault.
As readers of this blog there is no need for you to be the victim.