Starving the Tax Beasts

STARVING

Folks, I think its time. Clearly, the government(s) have gone completely bezerk with our money. It’s time to do something about it.

What are our options? Clearly, one is armed revolution. I don’t know about you, but I’m too old and fat to participate. If you wish to go that route, know that you have my best wishes. However, PLEASE don’t go the way of other armed revolutions and institute a more oppressive state than the one you overthrew.

Another option is to move. Again, I’m old and tired. I’m tired of moving. Furthermore, I cannot help but recall Ken Hamblin’s book “Pick a Better Country”. Overall, I just don’t know where to go. True, it may get to the point where other places ARE indeed better, but not quite yet. Furthermore, if we can turn things around here, it could be a lot less trouble than moving—particularly if I can get YOU to do the work.

Voting the bums and thugs out is always a possibility, but there are several things wrong with it. One is it takes too much time; another is that they have managed to Gerrymander the districts so that their re-election is fairly certain. Not only that, but it appears that even if we throw them out as we did in 1994, we just get a new crop of bums and thugs.

The problem seems to be money. Now, we all have (some) money, but Congress’ money problem seems that they have too much, so they have to find a place to spend it.

I once calculated that the average person in this country pays over 2/3 of their pay in taxes. The reasoning went something like this.

Tax freedom day is about April 1 or so. That’s about 25% for federal tax. Add in 15% Social Security and Medicare and you end up with a total of about 40% federal tax. Using the figures of 6% state income tax, 2% sales tax, 5% payroll tax (unemployment, disability, etc.) 6% property tax, and 1% gas tax yields a 20% state tax rate. That’s 60% total combined federal and state tax rate. Then add in marriage license, hunting/fishing/dog licenses, hotel tax, motel tax, phone tax, building permits, driver’s license, car registration, parking meters, traffic tickets, and any and all of the various and sundry other “miscellaneous” taxes and you easily reach 2/3. (Of course, that does not include the costs of complying with the tax laws or the added costs of products since taxes are included in their prices.)

Upon recalling that paper, I have concluded that there IS a way to fight the beasts—starve them. Cut off their money supply.

I suggest that we engage in a REAL “tea party”; a REAL tax rebellion. No, I’m not advocating anything illegal like refusing to file or pay taxes. Nothing as inane as sending tea bags to Congress. I’m not saying commit fraud or up your exemptions. Committing fraud to avoid taxes is like shooting a cop to avoid a traffic ticket.

What I AM advocating is that you take an active interest in your taxes. There are thousands of tax loopholes that you can legally take advantage of and decrease your tax bill. I am not advocating tax evasion; I AM advocating tax avoidance. (The difference between tax avoidance and tax evasion is 5 years.) These tax strategies were placed in the tax code so others could use them. There is no reason why YOU cannot also use them. (Do you know that you can rent your house for two weeks and not claim the income? Sam Nunn, Senator from Georgia, has a home in Athens, Georgia which he rents out for two weeks during the Master’s golf tournament. How “fortunate” for him.)

If you need $100 more each month and you get a part time job, you will have to earn $200 in order to have $100 “left over” for your expenses. On the other hand, if you can find a tax deduction strategy or “loophole” that will allow you to keep $100 of your money, you keep the whole $100.  For most people, since their marginal tax is about 50%, reducing their tax bill 10% will give them a 5% raise. However, since they pay no taxes on that money and get to “keep it all“, it is effectively a 10% raise. That raise is good every year, year after year after year.

I suggest that you go to Barnes and Noble, Amazon, or even Good Will or The Salvation Army and pick up a book (or two) on tax avoidance. There have been many written and I won’t recommend one. Try to pick one that is a “cookbook” in that it describes what can be done in a recipe format. As you read them, you can determine if each one is “right” for YOU. Some will obviously not be relevant. Some will clearly be applicable. You may have to consult a tax professional to determine if you can use some of them.

The first book you use will probably yield about 10 courses of action that will reduce your tax liability. The second will probably yield about 5 more, in addition to repeating some from the first. The third book will probably yield one or two.

Here are some of the courses of action you may consider to reduce your liability.

Do you like to go to garage sales? Try buying all the clothes left over on Sunday afternoon. Value them according to fair market value (there are books to help you do this) and give them to Good Will. Take a deduction at FAIR MARKET VALUE. You will find that for $10, you have purchased $300-$400 of charitable tax deduction. Don’t forget to deduct the mileage to obtain the clothes (going to the garage sales). Make it a family outing. Have some fun and starve the bums.

Do you have a business? If not, you should. Try AMWAY or a similar organization. Use your garage to store the products, and take off a percentage of your electricity, rent, insurance, phone, repairs, mileage, etc. on your home as “business expenses”. Since you must make a profit 3 out of 5 years, fold the business after 2 years, and open up a different one (e.g. Mary Kay Cosmetics, Shaklee). By the time IRS gets around to audit you in three years, all physical records are gone with no hope of reconstruction. YOUR paper records will be the only source of information. Not only do you starve the bums, but who knows, you may be the next Bill Gates.

Do you have kids? Do you want them to go to college? Have the government subsidize their expenses. Have them advertise on the radio for your business. Pay them $2,000 or so. Normally that income would be considered family income and be taxed as part of your tax. However, since they have “earned income”, they qualify for an IRA. You get to deduct the “advertising expense” and they get a college fund that compounds tax deferred. At withdrawal time (college), they will have little income and they will pay little taxes. Since they are using the money for education, there is no penalty. This should be a traditional, not Roth, IRA. (Note #1: If you have no business, you can still pay the kids to do chores, and get the IRA. It just won’t be deductible. In such a case, use a Roth. Note #2: Since these are “retirement funds“, they do not count when determining “need“ in terms of student aid. Note #3: $2,000/yr for 16 years at ten percent is over $70,000.)

Speaking of college, one of the saddest stories I’ve heard (many times) is the story of the parents who carefully “put away” for their kid’s college fund by investing in a mutual fund. When college time came, they sold part of the fund and gave the money to the kid. Someone should have told these folks that they should have given the STOCK to the kid as a gift. The way THEY did it, they paid taxes on that money. Had they given the stock to the kid instead of the money and had the kid sell the stock, no taxes would have been due.

IRS says you cannot deduct commuting costs. However, if you have a business, you may deduct the costs of obtaining materials and supplies for that business. As such, each day, do not drive directly to work. Drive to a nearby store and pick up something for your business (e.g. a pencil). Do the same on the way home. As such, the costs of travel from the store to your home/business are not deductible, but the costs from your home/business to the store are. If there is a post office nearby, renting a post office box to get “business mail” will also work.

Going on vacation? While you’re there, apply for a few jobs. In doing so, your vacation becomes tax deductible as “searching for employment”.

Going on a cruise? Find one that gives “investment classes” and deduct the cruise as “investment expense”. In like manner, if you wish to take a trip to a certain city, buy stock in a company that has stockholder meetings in that city—then deduct as investment expenses going to the meetings. Traveling to find investment property has possibilities. Want to travel? Write a book and travel to research material—business expense.

Forming a church has certain benefits, though it is somewhat complicated and takes a bit of work. Tax laws pertaining to “farming” and “commercial fishing“ are “interesting“. Ronald Reagan paid little taxes due to his “ranch” in California.

There are MANY such “loopholes”. It’s your money—until you send it off to the various governments. I know you are concerned—IRS has deliberately cultivated such an attitude on your part. You need not be. One should consider the procedure for (e.g. income) taxes. If there is any doubt about whether or not to take a deduction, you should take it. What can happen??

1. The computer could simply pass it through—no problem

2. It could be kicked out for human review

a. the human could say, “This is acceptable”—no problem

b. the human could say, “I need an explanation”, and write for one

3. You write the explanation and tell them what you did

4. The human gets the explanation

a. the human says, “This is O.K.”—no problem

b. the human says, “This is NOT O.K. Pay up.”

5. You say, “O.K. here’s your money.” BUT you’re in no worse a position as if you didn’t take the deduction in the first place.

The worst that can happen is that you end up paying a few bucks in interest. Penalties are seldom assessed unless there is fraud or unreported income.

As an example of the attitude IRS has cultivated in the population, let me ask this question. “What happens if you are a month late filing your income tax?” Many folks stay up to all hours on April 15 in order to get their tax form in. No one has ever said what will happen if you don’t, but the whole country has been terrorized into thinking something horrendous will happen to them.

In actuality, it IS stated what will happen. You have to pay interest on any money owed. First of all, when you consider the deluge of mail coming into IRS on April 15th, do you REALLY think they have someone there checking the post marks? If you’re a week or two late, trust me, no one will notice. Second, if you owe no money (i.e. more was withheld than your tax liability), there is NO penalty. Third, assume you’re a month late and owe $1,000. At 6% (presently set at 5%) penalty, if you are a month late, the penalty is one half percent of $1,000 or five bucks!! Hardly worth staying up all night for.

If you own your home, you should protest your property taxes. It takes very little effort, and generally your assessed valuation will be reduced up to 10% with little or no conflict. The reason is that it is not worth their time to go through the formal hearing procedure for such a “little amount” of money. If you fail, you have lost nothing. If you do not fail, you can easily save as much a $1,000/yr. With the present situation in real estate, property valuations are being routinely lowered.

State governments generally get their money from their citizens (not corporations) in three ways—income tax, sales tax, and property tax. If you show me a state where there is no income tax, I’ll show you a state where the property taxes and/or sales taxes are quite high. Given a choice, the “trick” is to move to a state where the high taxes do not “hurt” you as much as you benefit from the other lower rates.

For example, Oregon has no sales tax. If you are a senior citizen that has purchased all the major items you intend to purchase, this is not as big a benefit as it would be for younger folk. Property taxes and income taxes in Oregon are high. If you want a “nice” house, you will pay dearly in property taxes.

Texas has no income tax. If you are working for minimum wage, this is of little benefit to you, but the high 8.25% sales tax is particularly onerous.

New Hampshire has no sales tax and no income tax; however, the property tax is quite high. New Hampshire would be tax heaven if you don’t mind living in a single wide trailer or a camper.

If it is possible, you should live on the border between two states with different tax exemptions and play one off against the other. For example, you could live in Vancouver, Washington (no income tax) and shop over the Columbia River in Oregon (no sales tax).

If you have an IRA, you should realize that when that money “comes out”, it will be taxed as ordinary income. It is MY recommendation that people should have traditional IRAs as long as their tax bracket is above 15%. Use a Roth IRA if your tax bracket is 15% or below.

During the years before exhausting the traditional IRA, quickly estimate your tax liability/rate before December 31. You will have some “lean” years—medical expenses, capital losses, lay off, etc. If your tax bracket is 15% or less, transfer as much as you can from your traditional IRA to your Roth without raising your tax bracket. Hence, you are putting money into your IRA and saving 30% tax, then transferring it to your Roth and paying 15% tax. In particularly lean years, you may well pay NO tax on the transfer.

If your IRA is “sizeable”, you may consider moving to a state where there is no state income tax. Such a move may effectively “increase” your IRA by the amount of the state tax you would pay—as much as 10%. You may consider moving to a state with no income tax for one year, converting any remaining money in your traditional IRA to a Roth, then moving back to your “home” state. A year’s “vacation” in Nevada might be worth pursuing in and of itself, in addition to saving enough money to pay for it. (While there, look for a job.)

So folks, it’s up to you. It may take a bit of work, some study, but the rewards are there. Not only do you starve the beast, but you can use the money to feed yourself a bit better. Remember, once done, the results are good until they change the tax laws. You continue to save with no added effort year after year after year.

Regards,
Tony De Maio

December 22, 2009