Liar’s dice?

Who is the most dangerous blogger on the internet today? This is a serious question. Think about it for a while.

What characteristics would cause a blogger to become dangerous? To start, the blogger would need an audience to be dangerous. A blog with a modest, but fast growing, audience would have an increasing influence in our society.

Another characteristic might entail new ideas masked as truth. Imagine a blogger telling a story with a broad concept that intentionally excludes many of the facts. A grain of knowledge is a powerful tool to expand learning or it can be a recipe for disaster on a colossal scale.

Have you thought of a few bloggers who might be dangerous? Can you narrow it down to one?

I’ll tell you who I think is the most dangerous blogger on the internet right now. You’re reading him.

That needs some explanation.

The Facts

Things have been pretty darn good around these parts lately. The Wealthy Accountant received nominations in two categories for the Plutus Awards and traffic is climbing for a variety of reasons, including the nominations.

Bloggers can masquerade lies as truth. Their advice may sound plausible, but can be extremely harmful. #injury #risk #bloggers #family #badadvice #adviceTraffic is over 80,000 in the last month with October looking to break into six figures. Blog revenues are climbing, too. Certain advertisers have turned me into a project. They want some real estate on this blog. Don’t expect more ads, however. I’ve included enough ad space to break up the page and flesh out the design. I love revenue, but user experience is more important than ads by a mile.

TWA is experiencing more traffic referrals. Other bloggers find my work acceptable periodically so they include a mention on their blog or in social media. It gives me the warm and fuzzy feeling so I always re-tweet and share mentions when I see them.

Interviews are more common now, too. People seem to think I have something important to say because my traffic is climbing. It’s a self-fulfilling feedback loop I have no qualms with. Traffic strokes my fragile ego. There is a satisfying feeling connected to acknowledgement.

Every blog appeals to a certain demographic. TWA has an inordinate number of tax professionals (and government officials) reading on a regular basis. That is why I needed to write this post.

Danger Zone

Periodically, traffic spikes to 100 visitors here at the same time. It makes me nervous. This is still small traffic compared to most popular blogs, but it exposes a risk. What if these people actually believe what I wrote? Worse, what the heck did I write a year and a half ago? The risk prolific writers face is not remembering what they published the day before yesterday. It could be age, but it’s not! The sheer volume requires readers to refresh my memory when they ask about my previous work. Feels funny when I get schooled by my previous efforts.

Now we get to the part that makes me dangerous. What I write here is wrong 100% of the time! Sorry.

I better qualify the last statement before I’m hauled away.

There is a grain of truth in every statement. Dangerous bloggers tell their truth. That's the problem. The worst offender should be no surprise. #dangerous #truth #bloggers #lies #safetyWhen I write on TWA I avoid dry and stale tax explanations. My goal is to write high concept while knowing the details will require working out later.

Take a simple example. If I say donations to a qualified charity are deductible and move on I only told part of the story. On the surface I am right. Pull back the sheets and issues start to crop up.

Charitable donations are deductible if you itemize. Okay, that is still a lie. If your income is high, your itemized deductions might be limited so the deduction is partial.

I’m still a liar! If you retired and have a side gig with no profit and used a Roth IRA to fund your living expenses, you can’t deduct the charitable contribution even if you itemize because you can only deduct 50% of your AGI for cash charitable contributions. The balance is carried over for up to five years where it is lost afterwards.

And I’m still a sniveling liar! What if the alternative minimum tax interferes?

After all the qualifying of my first statement—charitable contributions are deductible—I am still pumping BS. Sitting here writing I can’t think of anything else that might affect my original statement. It doesn’t mean there aren’t any more out there.

As soon as I open my yap on a tax issue I’m a bigger liar than any fisherman who wet a line. And I know it every time I tap the keyboard.

In the tax profession we constantly say “facts and circumstances”. There is no way I can possibly cover every eventuality. I either write dry, staid tax articles where I cover a very, very narrow topic or I write something normal human beings want to read. I choose the later.

Helping the largest number of people requires I write something they want to read.

The Greatest Danger

Tax professionals hound me incessantly. They inform me how wrong I am. I get it.

When fleshing out a concept I intentionally choose what to include. You read that right. I intentionally get it wrong! If I didn’t, I would be bogged down in 30,000 word posts attempting to cover every possible option. Nobody would read it, including your favorite accountant.

Over the next six months I will publish some very complex tax concepts. The first one and a half years of this blog was tame. Now we will start pealing back the tax code in a serious way. Dropping 50 grand into a retirement account is a child’s game from now on. Now we will hyper-charge the wealth building and tax planning process.

The die is cast.

And everything I say will be wrong . . . for you. In each post where I expose a massive tax concept I will be thinking of how it applies to a client or a small number of clients. Your facts and circumstances will be different and so the rules for you will be different.

Another example: A recent consulting session led a client to contact his attorney to set up a NIMCRUT on my advice. He cc’d me in on the email. I wrote back a few questions and upon reply came to the conclusion he would be better served with a donor-advised fund. This is a simpler and cheaper solution to accomplish his needs. Once again, it all hinged on facts and circumstances. And we didn’t even debate all the other pitfalls of charitable donations discussed above!

When I throw out ideas it is a starting point. Complex tax strategies completely fleshed out for every possibility is a book, not a blog post.

Tax professionals should know better, yet sometimes don’t. Shame on you. When I provide a concept you need to dig further. Sometimes I include links when I find web pages that add value to the argument.

Bloggers want to share knowledge they've gleaned from the world around them. Their misconceptions can cost your health, family, safety and wealth. Don't fall for lies bloggers' tell. #health #family #safety #advice #diet #exercise #wealth #moneyYou, kind readers, are my greatest concern. Some of you are very versed in the nuances of the tax code; others, not so much. Okay, I am not lying when I publish here, but I may as well be if I can’t communicate an adequate message. The concepts I outline work. Your facts and circumstances determine the value the concept has for you. Also remember, you can change the facts and circumstances sometimes to your benefit.

I understand the difficulty in finding qualified tax professionals to help you with this stuff. That is why I encourage tax pros to share their contact information in the forum. Readers, check the forum often. Post questions so accountants can help you and even offer their services.

Final Warning

It’s time for me to get back to work on the aforementioned concepts. The decisions are hard. Your favorite accountant is far from perfect. If you think I said something wrong, do NOT hesitate to leave a comment or contact me. I find real errors periodically and fix them as soon as they are discovered.

The tax code is too large and complex for my work to always be perfect. Tax professionals need to test me constantly for this to benefit the largest number of people, including you, my friendly tax pros.

Finally, everything you read here should be taken like a Margarita. With a grain of salt.

There seems to be an inordinate amount of interest in my writing notes. Periodically I will includes my working notes that spur the writing of a post for your entertainment. Sometimes these notes have been around a while before I write the post. The final product can sometimes be radically different than intended. Writing works that way at times. My working notes are unedited; I will not correct errors in working notes to preserve the process as it was originally produced. Enjoy.


Things have been going pretty good around here. Traffic is up and TWA has been nominated for a Plutus Award in two categories.

My head should be swelling, but instead I am nervous. When I watch the live traffic on Google Analytic I am nervous when 50 or 100 people are consuming my work all at the same time. WHAT IF THEY ACTUALLY BELIEVE WHAT I WROTE?!?!

Blogging tax advice is dangerous and I know it. I make intentional errors for the sake of fleshing out a concept; I incl ideas few will benefit from but have to incl it. Posts need to stay reasonable in length. 20,000 words of taxspeak is sure to snuff out a few lives of readers. Three, maybe four, tax pros might stick around for the punch line, but I’m not holding my breath.

Tax charitable deductions as an example: to a qualified charity they are deductible. Right? No! First you must itemize, not make too much and phase out, have income because only 50% of cash donations count and AMT might be an issue. One simple remark is technically correct, yet fundamentally wrong and I know it when I write. Facts and circumstances change the answer.

So I tell readers donations to a qualified charities are deductible and hope for the best.

It’s the risk a blogger takes daily.

Considering the risks this blogger takes with the public it is a wonder he hasn’t been committed.

Living your dream vacation is easier than ever with credit card rewards. A litany of cards offer massive miles, hotel rooms or cash for spending a certain amount within a short period of time. And there’s the rub. How can the average person spend $3,000 and more to get bonuses of 50,000 points and up within a few months?

Enter manufactured spending. Reaching a level of required spending either requires owning a business with significant purchases, over spending your budget to get the rewards (why bother, it’s cheaper to buy the darn airline tickets) or manufactured spending. Manufactured spending takes time and requires jumping through hoops. There are also additional fees using many manufactured spending methods. And the time! Oh my god, the time to get it done. There has to be a better way.

Meeting spending requirements always required some fancy footwork. But for you, my friend, those days are over. Today I will show you how to reach nearly any spending goal you need for the vacation of your dreams at virtually no cost to you. In fact, you will probably get paid to engage my way of manufacture spending. The time requirements are nil and the whole process is easily handled from the easy chair in your living room.

If you want free vacations from now on, keep reading. The travel hack/credit card hack I am about to reveal is something I have not seen anywhere else. Even if you don’t care to travel, this strategy can drop $10,000 or more a year in your lap tax free.

Meet My Favorite Uncle, Sam

I know y’all come here expecting to read about taxes and stuff. Instead you find articles on early retirement, financial independence, tips on living the good life, and every so often a tax or investment tip. What’s up with that? Well, no more. Today we are going to talk about taxes (only a little bit) because the IRS wants to give lots of free money and vacations, all for the asking.

I will save the links until the end of this post so we can focus on the process.

It works like this: You can pay your taxes with a credit card on a few sites for a fee of 1.87% to 1.98% Since many credit cards have rewards worth around 1.5% to 2% the fee paid is negligible and even slightly profitable in some instances. The value of the points used for travel can make the transaction very profitable.

Bonus rewards of 50,000 or more points for spending a certain amount within a certain time—say $3,000 in 90 days—is no longer an issue. The IRS will help you accumulate nearly any amount of points needed to travel first class anywhere in world.

You and your significant other can apply for a few new cards a few times a year to supercharge your points portfolio of hotel rooms, airline rewards points, cash and other rewards.

Yes, I hear your groans. You don’t owe the IRS or you already filed your taxes. Never worry. This friendly accountant will now show you how a few tax hacks that will turn virtually any tax situation into a cash cow.

Pump Up the Volume

Owing money when you file your tax return limits the opportunities to capitalize on credit card rewards. You can only pay what you owe. Paying the IRS can take many forms, however. Estimated taxes are also payable via credit card. So are payroll taxes for small business owners.

Small business owners can pay their 940 and 941 deposits via credit card on the sites listed at the end of this post. Business owners with employees now have a reason to rejoice every payday.

For non-business owners there are plenty of additional opportunities. There is no rule requiring you to withhold your taxes from your paycheck. You are more than welcome to pay your federal withholding via an estimated tax payment. By changing your W-4 at work increasing your exemptions—thereby lowering your withholding—you will need to make an estimated tax payment to avoid a large year-end balance due. This will provide plenty of spend to meet the credit card bonus requirements.

The IRS says you can claim exempt on your federal withholding if you expect to owe no taxes on your next return. Well, you’re not going to have a balance due! Every month you will make your estimated payment online to keep the IRS happy and satisfy the spending requirements of your new credit card.

You can pay your state taxes the same way, but paying online by credit card is limited to a few states or the fees are higher. You can check the links at the end of this post to review if your state taxes can also be paid by credit card.

The Ultimate Hack

What I outlined above still limits your spending to your actual tax. If you have a low tax the above strategy still doesn’t solve the problem. No worries.

From now on I want you to file your taxes late. It’s okay. This is all legal.

I want you to give your tax professional all your tax documents like you normally do. When she finishes your return tell her to file an extension instead. Anytime during the year you need a massive amount of extra spend to satisfy multiple new credit card bonus requirements you simply pay the IRS an estimated payment for the 4th quarter of the previous year. Call your accountant and inform them of the additional estimated tax paid. File the return ASAP and have your refund direct deposited. You should have your refund in a week or two, well before the credit card payments are due. There is no limit to the size of this type of manufactured spending. Bit it is limited to once a year. Who ever thought you would be so excited looking forward to preparing your taxes?

Bringing it Together

This is a simple hack merging credit cards and taxes. Let’s bring it together so you can get started.

You can pay virtually any federal tax by credit card. Business owners can turn payroll tax payments into cash or vacations

Anyone can reduce their federal withholding at work and make estimated payments instead via credit card.

Finally, you get a once a year opportunity to gather massive rewards points by making a massive estimated tax payment and then filing your tax return so you have your refund before the credit card payment is due. If you use this strategy, know that if you do this after June 1st of the year the return is due the IRS will pay you interest from June 1st to the day the cut the check or direct deposit the funds.

Here are the three sites where you can pay your taxes via credit card online or by phone:

Pay1040: The fee is 1.87%. It is the lowest I could find and is less than some credit cards pay in cash back.

PayUSATax: This payment method is used by my tax software. The fee is 1.98% as of this writing.

Official Payments: Official Payments allows you to pay a lot of other taxes, tuition, fines, utility bills and more. The fee is higher, too. I only recommend this site for payments that can’t be made on Pay1040.

The above are not affiliate links, therefore I receive no compensation if you use their services.

Your friendly accountant does get hungry now and again so I humbly submit the credit card research link below. If you use the following link and apply for and are approved for a credit card at that time I will receive compensation. My hope is you will take pity on a wayward accountant and grant him the love of a commission check by getting all your credit cards using the link below from now on. Be sure to bookmark this page for later reference.

You can start your credit card research here or here (I like the second link as a starting point personally). The link takes you to a page with a few recommended rewards cards. There is also a tool for you to research the perfect credit card for your needs. You can pick up a card or two for yourself and your significant other can do the same. In no time at all you will be traveling the world tax-free, all thanks to the IRS.

Is Uncle Sam is starting to give you the warm and fuzzy? Me neither. I just can’t go that far with the love.

In the past I shared ideas that saved you $10,000 or more per year. I also shared numerous other ways to reduce your tax burden by smaller amounts. And, of course, retirement accounts and the Health Savings Account provide plenty of tax reducing power, too.

That is all small change compared to what I share today. Today the gloves come off. Today you will learn how to peal massive amounts off your tax bill. I am talking about taking six figures and more from the IRS and putting it into your pocket legally. No jail required.

This program applies to investment properties and businesses with a building. All other can safely skip today’s post. Or you can read it and share it with someone who owns rental properties or a commercial building. You will make a lifelong friend if you do.

What is Cost Segregation?

The risk I take is getting too technical. You don’t need to understand all the deep tax terms to use this strategy so I will avoid technical jargon as much as possible.

The first thing you need to know is that cost segregation only works on buildings with an original cost basis (purchase price, plus additions) of $250,000 or more. Residential income properties, commercial properties, additions and build-outs all work. This does not include the value of the land. Example: You but a property for $450,000. Land value usually comes in around 20% of the purchase price. Therefore, $360,000 is for the building. Cost segregation works on the building portion of a property only. Also note, the higher the value of the property, the more tax benefits cost segregation provides.

The IRS says you have to depreciate a residential rental property over 27.5 years and commercial property over 39 years. This means you put a lot of money down upfront without a tax benefit.

The IRS says you can use cost segregation to separate the components of the building for faster depreciation. A typical building under cost segregation may have about half the value reclassified as 5-year property, 20-25% as 7-year property, and the remainder as either 27.5- or 39-year property.

Pictures around this post show some illustrations of tax savings with cost segregation.

Tax Benefits of Cost Segregation

By depreciating a building significantly faster you cut your tax bill by a massive amount. In our example above, a $450,000 property with a building basis of $360,000 could see $180,000 moved from 39-year property to 5-year property. (We will disregard the rest. Review the photos for additional details.) $180,000 depreciated over 39 years allows a $4,615 deduction each year for 39 years. As 5-year property it gets a $36,000 deduction the first year (without considering any bonus depreciation) and the whole $180,000 in depreciated in 6 years. (I know taxes are wacky. It takes 6 years to depreciate a 5-year property.)

The additional $31,385 is a current deduction at your ordinary tax rate. You will see why this is important later. Assuming a 39.6% tax bracket and ignoring state tax benefits, your tax savings are $12,428. And that is only the 5-year portion. There are still more benefits from the 7-year reclassified property.

Here is where it gets really nice. Let’s say you owned a commercial or residential rental property for 5 years and want to sell the property next year. The IRS says you can go all the way back to the beginning when you bought the property and take all the depreciation you did not claim. No amended tax returns required. Just one form.

That means our example above would take the entire 5-year property as a depreciation expense currently; the full $180,000! Why does it matter if you are going to sell the property next year? Simple. Ordinary tax rates are higher than long-term capital gains rates. The top ordinary tax rate for individuals is 39.6%. (You could receive additional tax benefits from a lower Alternative Minimum Tax and avoiding/reducing Affordable Healthcare Act taxes.) The top LTCG rate is 20%. Get it. You deduct depreciation at 39.6% and pay tax later at about half that rate.

Who Should Consider Cost Segregation?

There are a few things to keep in mind with cost segregation. First, you need to have a tax liability for it to work properly. The higher your tax bracket, the better it works.

Rental property losses can be limited. Cost segregation increases depreciation deductions and could limit the value in some cases. The deduction is not lost, only suspended until you have a gain to offset the loss or you dispose of the property.

The best part of cost segregation is you can choose when to do it. All depreciation the cost segregation study reveals is deductible currently. This means you can plan when the deductions take place.

Preparing a Tax Return with Cost Segregation

This is the easy part. When you buy a property you enter the building into the tax software for depreciation as either a 27.5-year or 39-year property, depending if it is commercial or residential rental. With a cost segregation study you do exactly the same thing, except you have three, instead of one, entry. The 27.5-year/39-year property amount is reduced and an entry is needed for the 5-year and 7-year property. The computer does the rest. Simple.

If this is not the first year for the property a Form 3115 (Change of Accounting Method) is filed with the tax return and with the Washington D.C IRS office claiming all the accumulated depreciation you should have taken. Go back into your software where you have your depreciating assets (usually a 4562 screen) and override the computer’s automatic depreciation calculation with the new higher amount. It is a one-year adjustment. Depreciation will pick up where you left off. Remember, you need to separate the 27.5/39-year property into 27.5/39-year, 7-year and 5-year property. You may need a professional tax preparer for one year if you normally do your own tax work.

The entries are simple for most accountants to do. Form 3115 scares many people. Don’t let it. The form has more bark than bite. I have a solution if you want the whole thing done for you for the one year the adjustments are made. A small investment can pay large dividends. Then you can go back to what you always did preparing your tax return.

How Do I Start?

You need to hire a firm that specializes in cost segregation studies. How do you do that? Well, there are a lot of firms taking shortcuts with their cost segregation studies and the IRS has noticed. These companies use estimates that should be reasonably close and then wait for the audit to come in to handle actual adjustments. Life is too short for that BS.

I built a relationship with Equity Solutions for cost segregation studies. No shortcuts! We do it right the first time or we walk. Better still, they will handle the Form 3115 if your accountant is unfamiliar with the form. Many are.

Randy Leppla is your contact at Equity Solutions. Mention The Wealthy Accountant blog and receive a $100 or 5% discount, whichever is greater! Randy’s email is: His phone is: 608-852-6772.

Randy is located in Wisconsin, but they have offices over the entire U.S.

If you want, Randy can send me your information for review. There is no cost for an estimate of tax savings. You will be asked for your depreciation schedule and your tax bracket. If I review your account I will definitely need your tax return. I’m picky that way. My involvement is small if I am not preparing your tax return. I only need to verify you will reap the benefits anticipated.

Cost segregation is a powerful tool to reduce taxes. Contact Randy if own property used for business or as a rental and the building has a cost basis (generally the purchase price) of $250,000 or more. Or comment below. I see comments faster than I see emails at times during tax season.

staunton_chess_setLife in the accounting business can be difficult at times. Clients are as close to friends as you can get without actually being friends. You know all the details of their private lives. I know a divorce is imminent many times before the spouse does. I get details on illnesses in the family. I have to. Part of the tax preparation process is to know your client. When you ask about medical expenses you get the details too. In Wisconsin we have a deduction for certain private school tuition. When I ask about the kids I get the low-down on little Billy. And I don’t mind one bit. I care about my clients so I listen and interact. The line between client and friend is thin indeed.

That is why it bothers me when I can’t communicate a message to a client. Try as I may, some clients could care less about their taxes. They are willing to overpay their taxes to get out of all the reporting. They don’t understand the amount of money left on the table.

A few weeks ago I emailed a client reminding them to verify their retirement contributions and to provide a log for business miles and business overnight stays. To be honest, I didn’t expect a response. They are awesome clients and I love’em to death, but they just don’t engage at the level I would like and it bothers me because it is costing them dearly.

To my delight, the client did respond with a promise to begin building the logs and verified the retirement contributions for the year. I was still skeptical I would see logs. A few days ago I was sent the logs and they are in excellent order. Mrs. Accountant had to bring out the paddles and revive me; I was already walking into the light. The logs provided should save several thousand dollars in taxes. Life is good because I did my job well.

Anyone for a Game?

I come up with some pretty wild ideas to save taxes. Some of the ideas never see the light of day as research kills the poor sucker. But every so often I have a moment of brilliance (if I don’t say so myself) that endures the vetting process.

Many ideas I have outlined throughout this blog. I have a post in the queue on how to collect on the Earned Income Credit even if you make too much to qualify. The research is going really good so far. If the idea survives I will share it shortly.

05I get giddy when ideas hit me. I lose myself as I think the idea through and write it down. The research is an addiction I have to satisfy. Sometimes the idea almost seems too good to be true; sometimes it is. Then there are times when all I need to do is make a few adjustments to put the tax reducing strategy into action. I can’t wait to write a blog post about it and tell affected clients the exciting news.

For me taxes are a game. The rules of this game are incredibly complex. Every so often they change the rules of the game just to keep it interesting and keep me on my toes. Taxes are NOT boring! This is the best, more enjoyable, game ever played. The government wants a percentage of your money. Your job: keep as much as possible within the rules of the game. (Cheating and ending up in jail means the government took their ball and went home—you can’t play anymore.)

The nice thing about the tax game is you can play as much or as little as you want. I like to play more often than average, hence my choice in career. You don’t have to be a tax game fanatic to enjoy a nice game of “pay the government less”. A small investment in time researching and talking with your tax advisor can yield significant rewards.


The rules of the game are long and complex, but anyone can play. In fact, the government insists you play! I have no reason why.

Collecting your information is the first step to playing the tax game. Excel spreadsheets (or Google Docs) are a great way to organize data. A log book is also important if you are in business and spend time on the road. My client above kept a record of his trips so overnights were easy to calculate. He also kept a log of his business trips so mileage was easy. I recommend a simple pocket calendar to record this type of information. You can transfer the data to a spreadsheet at a later time if desired. Many pocket calendars cover two years. Get a new calendar each year anyway. Keep each annual calendar with that year’s tax records.

Form over substance. I say it ad nauseam. If your forms are in order you win. If you don’t keep good records, no matter if you would otherwise qualify for a deduction, you lose. Remember: form over substance. Keep good records. The IRS only believes verifiable documentation. Me, too. There are ways to reconstruct a tax return without records, but it is not a preferred method and it leaves you open to serious IRS scrutiny.

The tax game can be fun at this most basic level too. A simple spreadsheet showing your overnights so I can deduct the per diem and the mileage makes it easy to see how much you have lowered your taxes as you go. Are you starting to see why this is a fun game? Let me point it out. You get paid to play the game! Just think of all the fun you will have keeping track of your finances. It will be easier than ever to reduce and eliminate debt, reach financial independence, achieve goals, and enjoy life. Good records helps you keep more of your money! What is more fun than that? (Put your hand down, John.)

Once you have good records you can get serious about playing this game. Using the data you produced it is easy to calculate your maximum retirement plan contributions. You can plan around the Affordable Care Act, Earned Income Credit, education credits, and the Saver’s Credit. All these credits are based upon income. You can use your records to know what steps to take to minimize your tax liability. Fun!

Give Your Accountant a Coronary

A small percentage of clients have records to die for. One client I have served for a few decades now brings in records so good he has details on every stock he has ever purchased. When the 1099-B is wrong he has records to back it up. It is so easy to fix on the tax return. But he and his wife are the exception. You can count on one hand the number of clients I have who know the basis in the stocks or mutual funds they hold. They just trust 1099-B which is usually correct. Usually.

Frequently people bring in records in a somewhat acceptable form. The problem stems from a lack of understanding of tax law. Things are mixed and jumbled. It has the feel of a weekend cram session gathering all the tax records. Not a good plan if you want to reduce your tax liability.

Recordkeeping is a year-round activity. Put all expenses on a credit card (and get cash-back or travel rewards) or debit card for easy recordkeeping. At least you have a record in one place and it’s convenient. Some receipts are required; others are not. Meals under $75 don’t need a receipt, but need a record (date, cost of meal, and business purpose) in your logbook or QuickBooks. Meals and incidentals for overnights can be handled with the per diem, currently $57 per overnight ($68 for high-cost localities). Hotel expense requires and actual receipt for business owners. Mileage is another great way to reduce the tax bill. Business miles are deducted at $.54 per mile as I write. It adds up fast.

Bringing clean records to the accountant will either bring a tear to her eye or cause heart palpitations, probably both. Clean records are the low hanging fruit in this game. When your tax professional asks for something, give it to her. She asked for a reason. I have said it before and I’ll say it again. It is a good idea to talk with your accountant outside tax season. It is also a good time to review your records year-to-date. A short consultation should save you many times what you pay your accountant. And besides, the accountant needs income in the summer too.

Full Circle

I like to tell a story and then come full circle at the end with something witty. Not today. Taxes don’t have a witty ending. They go on, and on, and on. And on. Periodically we file tax reports, but the process is ongoing. When you die there is a tax mess to still clean up. Consider it job security for Keith. Good thing I love my job.

My goal today was to convince you to keep good records so I can do my job well and to encourage you to turn taxes into a game. Everybody likes a good game. When you reframe your mindset on taxes it makes it easier to maximize the benefits and enjoy the process.

Paying taxes is the unfun part. The only way to reduce the unfun stuff is to turn the whole process into a game and work it to death. Literally. You, know, the estate tax. Work it to death. No. Not a witty enough end? Maybe next time.

20573038010_490c18fa3f_bBefore you fire up your email to insult my mother’s choice to have children (or congratulate my good taste), here me out. This blog is devoid of politics, trust me. What I share in this post is in no way indicative of who I support for POTUS. This blog is about personal finance, financial independence, lifestyle, and TAXES. Check the top of the page; it is clear as day.

The latest news comes from Trump’s 1995 tax return. I could care less that some people think he is a good businessman who lost $916 million in one year. What bothers me is the mental morons calling Trump’s actions “genius”. Wrong! Or Trump calling his actions “brilliant”. Wrong! By the end of this post I will show you how The Donald threw away $300 million in cash. His accountant should be flayed, quartered, and beheaded for his incompetence. If Donald Trump knew how badly he screwed up on his tax return he would be spitting nails.


I did not see the tax return published in the New York Times. My only information is third party comments in the news. Using such information calls my intelligence into question. But it will provide an awesome example of how we can use the tax code to really save and make money.

This is what looks like happened. Trump started several companies that filed for bankruptcy. He structured these companies as sub chapter S corporations so all the gains and losses flowed to his personal tax return. That is the first problem.

The structure of these businesses are probably why the IRS is auditing him. Deductions exceeded his revenue causes a net operating loss (NOL). This is not unusual. In a simplified way, it means his taxable income dropped below zero due to the business loss on his personal tax return.

NOLs currently are carried back two years and forward twenty. Back in 1995 it was slightly different. (If memory serves, back in 1995, NOLs had to be used in 18 years; three years carried back and 15 forward after the NOL was created. Don’t quote me on that. I’m writing at home without the help of tax guides from 1995.) (I verified the info.) Under current tax law, Trump needed almost a billion dollars in income from 1996 to 2015 or the NOL would expire unused.

The IRS is probably looking at the NOL because the NOL must be reduced by the amount discharged in bankruptcy court. You don’t get to double dip. If Trump tried to ram certain gains through on his tax return prior to the NOL expiring and if he did not reduce the NOL by the amount of debt discharged the IRS has solid footing to audit.

Lost Opportunity

Let’s not belabor the point. We will assume Trump had a real $916 million NOL back in 1995. Because he set the companies up as S corporations, the gains and losses ended up on his personal tax return (pass-through on Schedule K-1 from the company to Page 2 of Schedule E on his personal tax return). This is really bad. On his personal tax return, the NOL must be used by year 18 or it is cancelled and is worthless.

The problem starts with the structure. If Trump organized his businesses as regular corporations, also known as a C corporation, the NOLs would have remained with those corporations. We talked about the tax benefits of S corporations on this blog in the past. My recommendations remain correct for small business owners. For large businesses, like Trump Airlines where I suspect a large part of the NOL originated, the regular corporation is better. There are a lot of reasons why, but we will only focus on the NOL.

C corporations with a NOL have a valuable asset. If another corporation buys the company with a NOL, the acquiring company can use the NOL to offset their taxable income. Since Trump is in New York I will use an estimate of 40% combined federal and state tax rate for C corporations for easy figuring. A $916 million NOL could save an acquiring corporation over $350 million in taxes! If Trump had structured the deal correctly he would have recouped $250 – $300 million from a company willing to buy solely on the value of the NOL, without consideration for any remaining assets, goodwill, or client base.

Time value of money says selling the NOL for cash now beats tax breaks spread over 18 years. The tax breaks will only help if he has income. An acquiring corporation with plenty of profits are sure to benefit sooner than Trump could himself without risk of a partially cancelled NOL. Also, cash in hand is worth more than a possible tax benefit. The risk is shifted to the buyer when the business with the NOL is sold.

Of course, the IRS is fully aware people like the Wealthy Accountant know how this stuff works, even if Trump and his accountants don’t. Section 382 of the Internal Revenue Code (IRC) limits this little trick if 50% or more of a company with a NOL changes ownership. Since the buyer will acquire 100% of Trump’s company with a NOL, the acquiring company will use a formula to determine the amount of NOL they can use each year.

The bottom line is if Trump structured the deal properly he could have cashed in big-time due to the NOL. Big NOLs have value which can increase the amount of money the acquired company’s shareholders get. The best possible outcome would have been $300 million to Trump back in 1995. It is more accurate to say Trump would likely have received closer to $150 million. I guess if you are really rich, $150 million isn’t enough to worry about. It would make a difference for me if anyone cares.

29168164412_de376a7e62_bProblems and Solutions

But WA, you said in the past we should have an S corporation for our business. I did and I am correct. I never thought Trump would read my blog and think he is a small business.

Donald worried if he had a profit as a C corporation he would pay more tax. Wrong! General Electric generates billions in profits annually and frequently pays few to no income taxes in the U.S. Trump is so small compared to GE I could handle his whole tax situation myself with one helper. (No kidding! I’d have to quit everything else I do to get the work done, but it is possible.)

Here are a few things Trump could have done if he did it my way. When he had a profit in his C corporation he could use a tax inversion to funnel U.S. profits to a low tax country for usage of the Trump brand. Another neat trick is using the foreign tax credit with the partially tax-free nature of dividends received by a regular corporation. For example: A U.S. C corporation excludes 70% of dividends received from another corporation if they own less than 20% of the stock, a common occurrence. If the C corporation owns British Petroleum it gets the foreign tax credit and the dividend exclusion, a legal form of double dipping. Several years ago a public company used this strategy to reduce its federal taxes to zero and was taken to Tax Court by the IRS. The IRS lost.

A Lesson in Business

Trump is not a good businessman in my opinion; he threw away a couple hundred million due to stupidity. He inherited a sizable amount of wealth and left the bank holding the bag when things soured on business deals; that is where he got his wealth. Trump is good at protecting himself. When it comes to taxes he screws himself more than the IRS ever will. If he played it fast and lose, the IRS will tear him a new one in audit when it never should have been an issue. If he paid me to advise him he wouldn’t have to worry about the NOL; he would have cashed his check twenty years ago.

And no, Donald, I am not accepting new clients.

img_20160911_111930A few months back I was in a conversation where the topic of sabbaticals arose. A member of the group worked for a company that allowed employees a one-year sabbatical in the past, but ended the practice when employees who took the sabbatical tended to never return. According to my friend it was the best employees who decided a sabbatical would refresh and recharge. What the company hoped would be an opportunity for star employees to get away from the frantic pace of life turned into an early retirement plan. I laughed heartily until I realized I have employees and know how hard it is to find and keep good ones.

Different Strokes for Different Folk

Some jobs do not have a halfway point for people to stand between full employment and retirement. That is too bad. Awesome people at the top of their game have and either/or choice: stay fully engaged or dump out completely. It really sucks. All too often employers take just that approach when it is not necessary.

The best employees are the ones who find balance between work and personal life. An employee’s personal life is why they show up for work even if they really love their work. The employee who works ungodly hours for the company never has time to think clearly about solutions for clients or the company. It is the silence between the words where the meaning exists. Without silence between the words or white space between words on the page it all ends up muddled. Sure, you can still read or hear if you focus hard enough, but the energy required is immense and you are still prone to misunderstand some of what is being communicated.

It is the silence between work, between projects, between fun, between family time where the meaning of life resides. It is the quiet times when all meaning and understanding find a foundation. New ideas start when the chatter of life is silenced and the mind is allowed to flow freely.

Many successful people—probably all successful people—start their day with some form of meditative practice before they open email or answer voice messages allowing the world to come crashing in. Yoga, reading, meditating, or a walk are all good ways to reflect before you start your day.

Readers of this blog tend to save and invest so they reach a point at a young age where they need to make a decision: do they dump-out of their profession or keep plugging along doing what they have always done. If you are lucky you have a third option somewhere in the middle.

What Would Bill Do?

Bill Gates started Micro-Soft in 1975 with Paul Allen. Bill left his day job at Microsoft in 2008, but he never completely walked away. His role diminished with each passing year as younger and more ambitious people working for the company would take Microsoft to the next level. I would argue Bill retired long ago when his net worth was sufficient to cover all his living expenses for life. But he never stopped working!

In 2000 Bill and Melinda Gates started their foundation officially. It was at the same time he took the first steps at Microsoft to step back from the company. Eight years later it was no longer a day job.

Bill changed the world with his work. Few of us ever get the opportunity to make such a significant contribution to the human condition. We don’t have to. If we all engage, a few of us will make radical positive changes while the rest of us are a hell of a support group.  Everybody can go along for the ride.

Still, I bet Bill Gates will leave a far larger lasting impression on this planet with his charitable work. Make no mistake; it is work. He puts in long hours working on solutions to problems the greatest minds on Earth have had a hard time solving. His advantage is he no longer works daily at Microsoft; he only consults and sits on the board. He is granted adequate free time to sit quietly, reflect, and think.

Most technology we think of as new is far from it. Many technologies we use today were already understood by a select few in the 19th Century or early 20th Century. It takes the right set of circumstances to put the technology together in a way that works. Many times the new discovery requires addition discoveries before it can be implemented. All too often the old becomes the new with a fresh coat of paint.

Think of the concept of the space elevator. The idea was first floated by Konstantin Tsiolkovsky in 1895. We know how to do it and even have materials today to make it happen. Now we need to figure out how to make a lot of the materials commercially. My guess is some guy (or gal) in a back room with plenty of quiet time to think will find the missing pieces to the puzzle.

img_20160911_112130What Did Pete Do?

Friday night cards is the highlight of my week. I get to sit with family and neighbors and play a friendly game of sheepshead. Pete is a neighbor who retired from Kimberly-Clark when he was 50. He worked in the IT department and as I see so often, IT guys tend to burn out young.

Pete found a way to live life right. He recently turned 65 so he went almost all the way to full retirement. When he left K-C he took odds and ends jobs to fill his days. He worked a few summers in Menasha as the bridge guy who pushed a button to lift the bridge when a boat came along. Most of the time he could read a good book. Some days only a handful of boats showed up. It was kind of a long day so he decided to do something else.

He has one rental to add excitement to his life and he works at the town shed during elections. He also decided to milk cows for a local farmer a few days per week. The last one blows my mind. He retired to farm! For real? That is hard work, man. Oh, wait. I did the same damn thing, only I have my own far. Forget what I said.

Now Pete works a few hours on election days and still has his solo rental. He is happy. My dad is 70 and still plays salesman in his business; my brother runs the company. Pete sometimes goes along for a ride when dad has a long sales run. Last Monday Pete rode along to Illinois. Sounds like the neighborhood is living the good life to me.

What about You? What about Me!

Sometimes I think if I took a full year sabbatical I would never return. One tax season away and I’d be done. I’m not sure that is true. The first twenty years of my business I worked seasonally without any problem rolling up my sleeves as tax season approached. I actually get squirrelly as tax season approaches. It is only September and I am starting to feel the pull of the upcoming tax season. Preparations need to be made; plans set in place.  I am all assholes and elbows.

My unofficial summer sabbatical next year already has me nervous. I will be gone for a long time, for me. My team will run the company just fine. In fact, the office will probably run better than it ever has with the deadwood removed.

Will I lose my love for tax work if I take a step back? I doubt it. I never lost the feel before. The difference this time is I have this blog which I really like writing. (Writing is in my blood.) We started this discussion asking if a sabbatical would end a promising career. Not in my case. I will always come home to mama, my baby, my business. Even a full year away would not destroy my desire to do what I enjoy most, working taxes.

What about you? Want to join me on a galavant around this rock floating in space for a year? Think you can stand a year in close proximity to me? Think again. All I know is this. Sometimes the greatest people do their best work after they finish work. Bill Gates is more influential in retirement than when he changed the world working. He is actually paying money to do his retirement work. Ya gotta love it when you do that!

If you were away for a year would you go back to what you once did? Me neither. We would be changed irrevocably. We would be better than before. We would then be more valuable advising in our field of study. Worldly wise we would become more valuable than ever before. Join me on this awesome adventure. And don’t leave the lights on for me. I doubt I’ll ever be coming home.

Americans who read the news even poorly know large corporations use tax inversions to avoid massive amounts of taxes due the U.S. government legally. What most Americans don’t know is they can use the same strategies on a smaller scale to never pay state income tax again. My guess is fewer than ten accounting firms in the U.S. utilize these strategies to protect their clients from state taxes. Today I will show you how to use the tax inversion without the help of an accountant.

A tax inversion happens when a major corporation buys a smaller company in a low or lower tax country or municipality. The acquiring company then moves its headquarters to the acquired company’s country. We will not get into the minutia of corporate tax law as it is not the focus of this post. We will use techniques of large corporations where they are applicable to small businesses, landlords, and retired taxpayers living or working entirely within the U.S.

Individuals living and working in a single state will not find value in this discussion. Each state has its own set of tax laws to reduce income taxes a lot, but what we are interested in today is driving the state income tax to zero for business owners and landlords with a few simple moves. Your circumstances will determine how you structure your finances to avoid state income tax.

Small Business

High tax states like California, New York and Wisconsin place a massive burden on business owners of those states. Competing against rivals in low-tax or no-tax states is difficult to impossible.

To facilitate these strategies you will require a corporation (regular or S) or a LLC treated any way you want for tax purposes. Corporations and LLCs are entities and considered persons in the eyes of the law. This sets up some unusual opportunities.

In tax inversions by large public corporation the inversion is handled between divisions within the same company. For small business owners it would work better to have separate entities.

The best way to explain this is with an illustration. We will use my accounting practice, called TPAS here, as an example. Wisconsin is a high tax state and it is darn cold in the winter. We will use a simple example of a company with $1 million in profit for easy figuring.

Your friendly accountant is paying the dirty bastards, ah, I mean the state government, ~$75,000 per year in state taxes on his $1 million in profits. TPAS is located in Wisconsin. All clients are either in Wisconsin or send their stuff to Wisconsin for processing. Therefore, all work is being performed in Wisconsin, subjecting all profits to Wisconsin income tax. The goal: move those profits to a no income tax state.

The owner of TPAS prefers living in Texas. It is warmer and he gets to keep more of his income. The owner of TPAS-WI can’t move his business to Texas without losing most of his clients. As his advisor I tell him he should move to Texas (make Texas your domicile), but keep TPAS right where it is. His company’s profits will flow through to him personally, but because the business is in Wisconsin, Wisconsin income tax is still due.

Our friendly business owner has family back in Wisconsin and he is more than welcome to visit as often as he likes. But I recommend he start another business in Texas, an LLC: TPAS-TX. TPAS-WI will no longer e-file tax returns. Instead, they will farm out the e-filing to TPAS-TX for a fee. This is a high margin product that will in effect transfer a large amount of profit to TPAS-TX. For argument, we will assume TPAS-WI prepares 15,000 tax returns a year and pays TPAS-TX $50 each to e-file and process the acknowledgements from the IRS. TPAS-WI now has $750,000 less profit and TPAS-TX has the same amount of additional profit.

Now a process call “earnings stripping” is applied. TPAS-TX will loan TPAS-WI $3,125,000 for working capital at an 8% interest rate. The interest is $250,000 per annum and deductible by TPAS-WI and reported as income by TPAS-TX.

We have now successfully stripped 100% of the Wisconsin profit and applied it to TPAS-TX. I assume we have two LLCs treated as S-corporations here. The profits from both LLCs will flow to the federal tax return exactly as in the past; the tax will remain the same. However, there is no profit to report to Wisconsin, only Texas, therefore there is no tax owed Wisconsin. Since Texas has no income tax, state income taxes were eliminated.

Art by Tabatha Davis

Art by Tabatha Davis

It is a bit more complicated in real life, but you should now understand the basic mechanics of the structure. The biggest issue is the domicile of the owner/s. The state where the owner lives will be the state that is paid income tax on ALL profits; a credit is given for state taxes paid to other states.

My artistic talent is less than hoped for so I had Tabatha Davis draw the illustrations for me; she is an accountant in my office. There can be more moving parts (and probably will be) in a real life situation. Large companies already do this, but the little guy really needs to as well. The illustrations help visualize the process of getting money from a high-tax state to a low-tax state.


I have several clients who would benefit from this so I hope they are reading. In this scenario we will assume the taxpayer lived in New York City once upon a time and now lives in a state with a lower tax rate. While living in NYC she purchased investment property.

You will only need one LLC for the income properties this time. The LLC can be and should be a disregarded entity. This means you will report your rent income and expenses on your personal tax return for the property as you always have. (You never put real estate inside an S-corporation or an LLC treated as an S-corporation for tax purposes.)

The process is simple. The LLC does NOT have a mortgage with the bank and you as guarantor as most people structure investment properties. Instead, you get the loan, secured by the property, and you lend the money to the LLC. The interest rate charged the LLC can be higher than the bank mortgage rate to you as long as a reasonable rate is used.

Here is what happens. We will assume you have a $1.5 million property with a $1 million mortgage. The interest rate from the bank is say 5%. You charge the LLC 8% on your loan to it. This is called a wrap-around mortgage and common in the real estate industry.


Art by Tabatha Davis

Because real estate has unique tax laws to start with, your property has only $30,000 in profit after depreciation and other expenses. This is still enough profit for property held in NYC by someone living elsewhere to pay a hefty tax. Because the additional mortgage interest is $30,000, the LLC has no profit to report to NYC or NY. You still need to file a return, but that is the end of it.

The $30,000 additional interest to you over the bank mortgage interest is taxed at the tax rate where you live. You can keep the LLC perpetually in debt to you to maximize the ongoing deduction. The federal tax return will report interest income where there were rental profits before; the tax is the same for most taxpayers.

There is a tendency for people to want to charge a bookkeeping fee or management fee to the LLC with income properties. It is a bad idea since this turns rental profits into earned income subject to self-employment or payroll taxes. There is no need to get fancy with income properties. Mortgage interest should easily handle the shifting of income to your low-tax domicile taxing authority without any further need to reduce the tax at the property location.

Retired People

Ten or so years ago a retired wealthy client walked into my office who wanted to reduce his state income tax. He had a home in Wisconsin and was moving here from Illinois. I encouraged him to get a home in Texas and make Texas his domicile. He bought a small home in Texas as his primary residence, owned a second home in Wisconsin and Florida. By avoiding Wisconsin income taxes the Texas home was paid for with one year of tax savings.

Moral of the story: It is okay to visit or even own a home in a high tax state, but never make it your domicile.


Note: I added several additional options under the Share button, including Reddit. It will not hurt my feelings if you share. 

20131025_125301In the United States, and I suspect in most countries around the world, people are taxed for spending and rewarded for saving. Almost all the tax revenue raised by the federal government comes from spending. This idea taxes are too high or the rich get a better deal is false because the middle class has the best deal going for it than at any time in history.

The reason taxes are so high for many people is they spend too fucking much money! In America, for example, the taxes levied against spending are massive while savers and investors are rewarded with low or even negative tax rates. This constant complaint of taxes being too high is annoying at best. Taxes are not too high when the people complaining about them volunteer to keep paying them. Here are a few of the extra taxes you pay when you spend: sales and use tax, property tax, excise tax, and corporate tax. Yes, corporate tax! Do you think businesses don’t pass all their expenses on to the buyers of their goods and services? Of course they do. And you pony up with a million dollar smile (when you are broke) and pay all those extra taxes and complain about how high taxes are.

The income tax return is also built around people dumb enough to spend like drunken sailors (no offense to sailors who drink responsibly). You do realize there is a Saver’s Credit on the tax return? And don’t get me started on the benefits of retirement accounts. You even get to choose between a tax deduction now or tax-free income later. People with a Health Savings Account get both a tax deduction and tax-free growth.

I don’t want to whine all day on this (okay, I could whine all day on this) so I will only focus on the more generally topics in this field worth whining about. The small amount of information in this short post can easily cut your income taxes in half and more than half in other taxes. Anyone with an income under $100,000 can structure their finances to pay no income taxes in the U.S. Okay, you might have some income tax; it should add up to about 1% to 3% of your income. But if you are serious you can get a negative tax rate too.

Non-Income Taxes

I’m fired up so sit back and enjoy the rant. People endlessly hound me over how high their taxes are. NO THEY ARE NOT! Your taxes are high due to YOUR behavior, not the tax bracket. Warren Buffet says the tax code is broken because his secretary pays a higher tax rate than he does when he is one of the richest people alive. Bullshit! Warren Buffett has a smaller tax rate than his secretary because he spent less of his income and invested it, where the tax rate is really low and in most cases not taxed at all.

Smokers pay a massive tax rate because the excise tax on cigarettes is tremendously high. Driving a gas guzzler which also costs a lot more than a fuel efficient vehicle has a federal and state excise tax attached to each fill-up. Groceries, medical, and housing is generally exempt from sales taxes, but is applied to purchases of stupid shit. Personal property is taxed in some states and real estate taxes are in every state. Even renters pay property taxes when they pay their landlord. If the landlord did not pass the expense to the tenant she would soon be bankrupt and the new owner would certainly know enough to raise the rent to cover all expenses. The smaller your home, the smaller the tax.

I’m not saying all non-income taxes can be avoided. I tip a glass now and again and understand there are excise taxes on alcohol. I make more of my own hooch than I buy however, eliminating most of the excise taxes paid. If you smoke, stop! Not only will you live longer, you will have money to enjoy that longer life. You also know they have one of these fancy devices called a—ah, what is that called again?—oh yes, a bicycle. They have been around a while. They worked out all the bugs found in the beta version. I will be the last guy to tell you to never drive, but gawd people, trips less than five miles are made for walking and biking. And with every step and with every turn of the peddle you are telling the government to go fly a kite!

Sales tax is the ultimate kick to the crotch. The more you spend on stuff you don’t need the more you pay. Isn’t that nice? The government can spot a sucker from across the continent and has no problem unloading a fool’s wallet. “More stuff” is the battle cry of the oppressed, sorry, obsessive spender crying taxes are killing them. Do you have any idea how much those tax dollars would accumulate to if they were invested instead of paying taxes? And since you chose to pay that extra tax just so you can have more shit to store, insure, and protect, it is an easy tax to avoid.

Income Taxes

Now we get to my favorite game: reducing income taxes. The goal: zero. Yes, your favorite accountant loves finding ways to reduce the income tax bite. It is easier than you think. I sometimes give presentations showing how I can take a $100,000 income based solely on wages and drop the income tax to zero. It’s a fun game. The best part is that in year two you not only have a $100,000 wage, you also get a tax-free $5,000 bonus (unrealized market gains or retirement plan profits from prior year investments).

Let’s run down some of the goodies available on the income tax return. Most people get personal exemptions and a standard deduction. Sure, you can itemize, but that is for losers (unless you itemize due to charitable giving). Itemizers think they are getting a tax break because they deducted the $22,000 in mortgage interest they sent to the bank and the $12,000 in property taxes they paid to the local municipality. Stupid! If you want to give $36,000 away so you can get a quarter of it back on your income tax return I have a better idea. Build a structured charity plan. Better yet, deduct contributions to charity with a full deduction and don’t report it on Schedule A. Yes, I have a post in the queue on how to deduct donations to charity without itemizing. I call it structured giving.

Low income taxpayers qualify for a Saver’s Credit if they just friggin save! Can you imagine? The government slipping a quick thousand in cold hard cash to use any way you want just for tucking a bit of your income away instead of spending it? It’s true, I swear.

If your income is too high there is still a coterie of retirement plans available to drive your taxes to ground level. The facts and circumstances will determine which plans you need to implement for maximum results. Know this, a married couple in the right circumstances can tuck up to $106,000 into retirement accounts and deduct it from income.

IMAG0320Health Savings Accounts are the best of all worlds. You get a deduction for an expense that has not happened yet, but is required spending at certain times in life. The gains are all tax-free if used for qualified medical expenses. Healthy people can watch the account grow and grow only to use it to cover Medicare premiums when they reach 65. (HSAs cannot be used to pay health insurance premiums, except Medicare premiums.)

Rich people also know there are several forms of income that never get reported. Gains inside a retirement account either grow tax-free or tax deferred. Capital gains on investments are only taxed when realized. Investment property owners can defer the gain on the sale of a property with a 1031 exchange (like-kind exchange or sometimes called a Starker exchange). Dividends are taxed preferentially, too. Investment gains, dividends, interest income, and investment property profits all avoid the payroll tax.

As a departing gift to my friends I present one last nugget of knowledge sure to place a smile on your face.

The United States Internal Revenue Code has so many moving parts it is easy to manipulate to your advantage. The wealthy do it all day long. It pays better than working a job. The latest wrench tossed into the works is the Affordable Care Act. This has created more opportunity than any other piece of tax legislation.

Understand how the IRS handles credits or deductions. Most credits are on page two of Form 1040 and are non-refundable. This means you first have to owe a tax before the credit reduces it; credits greater than the tax liability are wasted. There are some refundable and partially refundable credits too.

We are familiar with itemizing where we can deduct state and local taxes, mortgage interest, and charitable contributions. Itemizing is the least valuable deduction because it can be phased out by income and most credits are calculated on income before itemized deductions (AGI).

The next higher level of deduction is between total income and adjusted gross income. Your AGI is figured by subtracting some expenses like student loan interest and retirement plan contributions from total income. Getting your AGI lower helps with some additional tax credits on your return.

But the Affordable Care Act premium tax credit is calculated using Modified AGI (see update below). This makes it hard to game the system. Total income is all the stuff on the top of page one of Form 1040. Wages, interest, dividends, capital gains, business income, and Social Security are all up there. If you get insurance from the exchange ( you can get a credit to use against your health insurance premiums if your income is less than 4 times the poverty rate. For a family of four your income approaches $100,000 before you no longer qualify for any credit at all.

The ACA premium tax credit is calculated using total income. Therefore, it is imperative to reduce your total income to maximize the credit. This means taking a retirement plan deduction at work is more valuable than taking it outside of work. The 401(k) deduction comes off your total income while a traditional IRA deduction comes off your adjusted gross income.

If you have a HSA qualified medical plan you also want to contribute to the Health Savings Account through a payroll deduction. Most people contribute to their HSA savings account on their own and get an adjustment to income. When the deduction is run through payroll it avoids all taxes and reduces your total income, meaning you will get a bigger premium tax credit.

Let me close with an example of how important it is to think outside the box on a tax return. The first year of the ACA I had a client who applied and took the maximum credit. He owed $12,000 on his tax return to repay the premium tax credit he was not due. The husband had retired, was on Social Security, but not yet 65. His wife still worked a job and received a W-2. To reduce the damage I recommended the following: contribute the maximum to a traditional IRA for the husband and wife. The husband was allowed a spousal IRA and the wife had adequate earned income to max out both IRAs.

Here is where it gets fun. The IRA deductions reduced AGI. The taxable portion of Social Security benefits is determined based on AGI, but the taxable portion of Social Security is part of total income. Follow carefully. The IRA deductions reduced AGI which lowered the taxable portion of Social Security which affects total income and increased the amount of premium tax credit qualified for. By understanding how the IRA deductions flowed through the tax return my client reduced their $12,000 balance due to $200. You read that right. A $12,000 contribution to traditional IRAs (the husband’s IRA max contribution was $6,500, the wife’s $5,500) reduced their taxes by $11,800! The funny part was they could take the money back out five minutes later and pay income tax on the withdrawal, but never would have to repay the premium tax credit.

It pays to understand how income, deductions, and credits flow through a tax return and the unexpected consequences of such actions. My client above had over a 98% tax rate on $12,000 of income all removed with a simple IRA contribution. Like I said, we tax spenders and reward savers. From now on you will save/invest half your gross income. I don’t want any excuses. You don’t get taxed on your net worth or even your income; your get taxed on spending.

Update: Thanks to an email from Charles C for pointing out the Premium Tax Credit is based upon Modified AGI. I always run the risk when I am thinking of a specific account and how it worked through the tax return. I got it wrong. The Premium Tax Credit uses Modified AGI which is AGI for most people, just not my client in this case. I made a slight change to the text above, but retained most of the wording and added this note.