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In this show, we leave the fluffy stuff behind and dig deeper into real financial education. We’re going to talk about taxes!
Why should you care?
Tax planning is vital! A significant portion of our income goes toward taxes in all forms.
“Politicians tax the middle class for the same reason some people rob banks. That’s where the money is.” -FORBES Magazine, May 11, 1992
The Tax Foundation, which is a Washington, D.C.-based think tank that collects data and publishes research studies on tax policies estimates the national tax freedom day for 2013 to be April 18. In Florida, it’s April 15. On average, Americans now spend more time working to pay their taxes than they spend working to provide food and shelter combined.
This is, in many ways, misleading. Because this is a national per capita number and taxes are not paid that way. Rather, they are born disproportionately by different sectors of society. Income taxes are paid primarily by the rich, but payroll taxes are paid by all who earn wages. According to the Heritage Foundation, the top 10% of Earners paid 71% of Federal Income Taxes in 2014. That doesn’t mean that the wealthiest 10% paid 71% of federal income taxes…it means that the top earners paid the taxes. (We can adjust how much we earn.)
Tax planning will affect many decisions you make:
- First, you’ll make more money because smart planning can allow you to increase your income and investment returns by up to one third.
- Interested in buying property? Tax deductions for home mortgage interest and real estate taxes will affect your costs and your buy vs. rent calculations.
- Interested in retirement? Tax advantaged retirement accounts will help make a huge difference over time!
- What about choosing which job offer to accept?
- How to save for college?
- How to give money to friends/family or support your favorite charity?
- How to ensure your heirs receive more of your money when you die?
- What about your business? What organizational form should you use? The simple decision of deciding how to be taxed in your business will make a huge difference.
- Where should the business be located?
- How should business acquisitions be structured?
- How should employee compensation be structured?
- How should the business raise capital–debt (bonds) or equity?
- Should the business rent or own its equipment and property? Should there be different business structures? (example of a gift leaseback technique)
- How should the business distribute profits?
There are many types of taxes and you have to create an avoidance scheme for each one. There are various lists floating around the internet of the taxes that Americans pay. Some of the lists make sense and some don’t. The only way to know what you pay is to actually track it.
In general, here are my major categories of taxes:
- Income Tax – 50% of all tax revenues in the US
- Employment Taxes –
- Unemployment Taxes
- Excise Taxes
- Transfer Taxes
State and Local Taxes
- Income Taxes
- Sales and Use Taxes
- Property Taxes
- Excise Taxes
Implicit Taxes (example municipal bonds)
Almost all taxes are optional. You can avoid almost all of them. If you’re willing to take the necessary actions.
Good tax avoidance planning can do a world of good. But it’s intensely personal.
We need a solid foundation of knowledge to know how to ethically avoid taxes.
Is it ethical to avoid taxes?
“As a citizen, you have an obligation to the country’s tax system, but you also have an obligation to yourself to know your rights under the law and possible tax deductions. And to claim every one of them.” – Donald Alexander, former commissioner of the Internal Revenue Service under three presidents
“As to the astuteness of taxpayers in ordering their affairs so as to minimize taxes, it has been said that the very meaning of a line in the law is that you intentionally may go as close to it as you can if you do not pass it.” – Superior Oil Co v. Mississippi, 280 U.S. 390, 395-96
“This is because nobody owes any public duty to pay more than the law demands; taxes are enforced exactions, not voluntary contributions.” – “J. Frankfurter, Atlantic Coast Line v. Phillis, 322 U.S. 168, 172-173 (1947)
“When met get in the habit of helping themselves to the property of others, they cannot easily be cured of it.”…”The history of our tax code, in economic terms, mirrors the course of most addictions: advancing dependence, diminished returns, and deteriorating health of the afflicted.” – A 1909 Editorial opposing the very first income tax.
There are no tax loopholes for the rich. If anything, all of the tax loopholes are for the poor.
Why do tax loopholes exist?
Need to understand how to calculate taxes: Tax = Tax Base x Tax Rate
Different Ways to Measure Tax Rates:
- Marginal Tax Rate
- Average Tax Rate
- Effective Tax Rate
Tax Rate Structures
- Proportional Tax Rate Structure
- Progressive Tax Rate Structure
- Regressive Tax Rate Structure
All tax planning strategies come down to:
- Timing (deferring or accelerating taxable income and tax deductions)
- Income shifting (shifting income from high to low tax rate taxpayers)
- Conversion (converting income from high to low tax rate activities)
I hope you like the show!
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