Take Control of Your Taxes

As everyone in the U.S. knows, we have just passed one of our most "favorite" times of the year: income tax season. If you are going to create and sustain wealth, it is inevitable that you will have to address your personal tax situation.

By "address," what I really mean is take control. This is true whether you live in the U.S. or just about any other country. Agree or disagree with the "fairness" of taxes, this is a subject that you must obtain some basic understanding if you want to significantly increase your wealth.

Before I start, let me say that I am certainly not a tax expert. And space does not permit going into detailed tax strategy. The purpose of this article is to explain why it is so important for you to take up the study of basic tax law and strategies, and even more important seek out the advice of a true tax expert.

Why is it important to understand taxes?

In most cases, taxes are your largest expense. This is probably the key reason that wealthy people spend so much time, effort, and money doing their best to minimize their tax expense. Depending on your tax bracket, your federal taxes may be as high as 28%-35% of your income! And then there are social security, state income taxes, property taxes, sales taxes, etc., etc. If you are generating all of your income from your wages (earned income), you may be lucky to actually keep 50% of what you really earn.

That is a staggering figure when you think about it. That means that if you have a salary of $50,000, you may be only keeping $25,000 of your earnings for your own purposes.

If you think I am exaggerating, pull out your last paycheck and look at the tax withholdings for taxes that have been taken off the top of your earnings. If you take your net earnings and divide them by the gross earnings, what is that percentage? Don't be shocked if it isn't about 40%. Then take a look at your sales taxes. In California, the sale tax is around 8.25%. So just doing a quick estimate, I'm already at about 48% in tax expense (assuming most of the money is spent on taxable items).

The cost of ignoring your tax expense and not doing everything legally possible to minimize it is huge. Of course, tax law can be exceedingly complex, and the penalties of making a mistake are high. So a large number of people, simply accept this large tax expense as inevitable. They concede defeat without really even trying to take any type of action to minimize the impact.

What are some actions that you can take?

1) Recognize that you can take action to reduce your tax expense. Too many people blindly assume that it is impossible to significantly reduce their tax expense. Either they think it is too complicated, too much trouble, or they are afraid that if they take deductions that are legitimate, that the government will come after them. If you assume there is nothing you can do (learned helplessness), you are right. If you assume you can improve your tax position, you're right. The fact is that while you must pay your legal share of taxes, the government actually wants you to take advantage of tax deductions and credits. That's why the laws were passed to allow for them.

2) Make a commitment to study basic tax law so that you have at least enough knowledge to speak with a tax advisor with a certain degree of intelligence. You can't take deductions that you are not aware of. Because of the potential savings, the study of tax law needs to be a fundamental part of your financial literacy education. Your two highest priorities must be to create wealth in the most efficient manner and protect it. And any protection strategy must include protecting it from over taxation. Don't just limit your study to books. Also seek out college classes, night-school, and seminars. But be careful of seminars as they can be a lot more expensive and not as thorough as a class from a community college.

3) Seek out a CPA and/or Certified Financial Planner to come up with a long range plan to minimize your taxes and increase your wealth. Start with the most experienced person you can afford and plan to pay for even more expert advice as your wealth increases. Ultimately, it will probably be less expensive to pay for outstanding advice than to over pay on your taxes. If you wait until tax time to come up with your plan, you have waited too long.

4) If you haven't already, start keeping detailed financial records. This is a good habit to get into even if you don't yet have a business. If you keep detailed records (using a computer program!) as you go through the year, it makes it much easier to turn over your records to your tax preparer when tax time comes.

5) When you record your income from your paycheck, be certain to record all deductions taken from your check. Don't just record the net. If you actively track your tax expenses deducted from the top of your wages, you will be more motivated to do everything possible to legitimately reduce that expense. If you simply record the net wages, you have probably fallen prey to the tax trap without a fight.

6) If you are an employee, make certain you are taking full advantage of your 401k and medical flex spending plan if available. Money set aside for your 401k (usually matched by your employer) helps reduce your taxable income. You have to pay taxes eventually, but hopefully by the time that happens you will be in a lower tax bracket. Medical flex spending plans help you pay for medical costs (including over-the-counter medicines, dental work, glasses, etc.) using pre-tax dollars. Flex spending plans are also available for child day care.

7) As soon as possible, replace your income from wages with income from your own business and unearned income from investments. Of course, this is easier said than done, but the benefits are huge. If your income comes from a business that you own, it's much easier to pay for expenses with pre-tax dollars. Obviously, you have to have a real business (not just a hobby) and the expenses must be legitimate business expenses, but this allows you to have a lot more flexibility in your tax planning. Realize that you can (I would say must) still start a business even if you have a full-time job. If you want to create great wealth (and minimize your tax expense), don't let fear, unbelief, or lack of knowledge prevent you from starting your own business. You must take action to overcome those obstacles.

Eventually, you need to target making the ultimate shift to getting your income from unearned income rather than wages. Unearned income is taxed at a lower rate than earned income. That's one of the ironies of our tax law: the more income that is "unearned" the lower your tax expense.

Some Power Affirmations Related to Helping you Take Control of Your Tax Expense

1) I am now in confident control of my tax expenses.

2) I have a clear understanding of basic tax law and strategies.

3) I regularly seek out sound tax advice from seasoned professionals.

4) My unearned income from investments is increasing everyday.

5) I record all financial transactions regularly and take advantage of every legitimate tax deduction.

6) I now take maximum advantage of my employee benefits including my 401k and flexible spending accounts.

7) I pay as many expenses as possible with pre-tax dollars.

8) I enjoy studying basic tax law, because I enjoy the savings my knowledge brings.

9) I am absolutely committed to increasing my financial intelligence everyday.

10) I now take full advantage of every legal tax deduction available to me.

11) I track my tax expenses and take every action possible to minimize that expense.

12) By studying books, taking college-level classes, and attending seminars, my financial intelligence is increasing everyday.

Copyright (c) 2005 Bill Marshall - All rights reserved. Feel free to republish this article provided you include the copyright information and the weblinks where possible.

For practical self-improvement tips, visit http://www.poweraffirmations.com. Get my new free e-book, "Power Affirmations: Power Positive Conditioning for Your Subconscious Mind"

In The News:


CNBC

Americans Must Work Jan. 1 Through April 24 Just to Pay Taxes
CNSNews.com
“Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its federal, state, and local tax bill for the year,” explained the Tax Foundation. “Tax Freedom Day takes all federal, state, and local taxes and divides them by the ...
Ax the income taxCNBC
Is Consumption Tax Talk Making a Comeback?Forbes
You're Still Working for the Tax Man - But Relief Is SoonDailyFinance
MarketWatch -Fox Business
all 29 news articles »

AL.com

Baldwin County voters turn down proposed new taxes, as well as some renewals
AL.com
Baldwin County school officials are determined to stay positive in the wake of a resounding defeat Tuesday night after voters denied the school system new property taxes, and failed to renew some of those already dedicated to it. The ballot contained a ...

and more »

Chicago Tribune

Rauner ally tries to tie Preckwinkle's hands on property taxes
Chicago Tribune
Republican Commissioner Timothy Schneider of Streamwood intends to ask colleagues at Wednesday's board meeting to record their opposition to a property tax increase. The symbolic measure would not have the force of law but could tie Preckwinkle's ...
Editorial: Be wary of a premature county property tax freezeChicago Sun-Times

all 6 news articles »

Sales taxes hit 10 percent in Hayward, San Leandro, Union City, Albany and El ...
Contra Costa Times
The taxes have been overwhelmingly approved in the Bay Area. Last year, voters in Hayward, Concord, Richmond, San Leandro, Union City, El Cerrito, San Pablo and Pinole all approved sales tax hikes or extensions. Alameda County voters approved two ...

and more »

NPR

Mass Tax Foreclosure Threatens Detroit Homeowners
NPR
In Detroit, tens of thousands of people are facing a deadline Tuesday that could cost some of them their homes. That's when homeowners have to make arrangements to either pay delinquent property taxes — or risk losing their home at a county auction.
Thousands of Detroit homeowners could lose homes for unpaid taxesWWMT-TV

all 101 news articles »

The Tennessean

Dell owes Metro property taxes after workforce falls
The Tennessean
Dell Inc. owes Metro property taxes for the first time since arriving here after the company fell short of the required employment level under an incentive package. That roughly $2,600 the computer maker owes for tax year 2013 is expected to grow.


CNN

Harry Reid doesn't regret accusing Mitt Romney of not paying taxes
CNN
New York (CNN) Retiring Senate Minority Leader Harry Reid sat down with CNN's Dana Bash for a candid interview, where his body language, expressions, and willingness to address critics fit the expectations of just about anyone readying for retirement.
Harry Reid: No Regrets for 'McCarthyite' Lie About Mitt Romney's TaxesBreitbart News
Harry Reid defends false claims on Mitt Romney taxes in exit interviewWashington Times
Harry Reid's appalling defense of his attack on Mitt Romney's tax recordWashington Post (blog)
NewsBusters (blog) -Daily Caller -The Hill (blog)
all 70 news articles »

Forbes

Taxes From A To Z (2015): S Is For Scams
Forbes
“We are doing everything we can to help taxpayers avoid scams as the tax season continues,” said IRS Commissioner John Koskinen earlier this season. “Whether it's a phone scam or scheme to steal a taxpayer's identity, there are simple steps to take to ...

and more »

Omaha World-Herald

Bill to raise Nebraska gas taxes asks conservative lawmakers to do the ...
Omaha World-Herald
LINCOLN — The debate over hiking Nebraska's fuel taxes by 6 cents a gallon began Tuesday with conservative state senators clearly split on doing, for them, the unthinkable: raising taxes. Whether or not the idea has enough votes to advance and ...
Gas tax hike, more state power in livestock decisions debatedNET Website

all 15 news articles »

USA TODAY

Retirement: Minimize taxes to maximize savings
USA TODAY
Retirement planning is hard enough for most Americans. But when you layer in a convoluted web of U.S. tax laws, the task can seem truly overwhelming. Some complexity is unavoidable. After all, how much you make, when you choose to retire and how ...

and more »
Google News

Tax Trap #3 -- IRS Penalties, Interest and Love Letters

As a small business owner or self-employed person, one of... Read More

Tax Secrets - How Drew Miles Helped Me

How about a Tax Tip?As we all know Taxes are... Read More

Furnishing Evidence in E-Tax Compliance

Self-assessment relies on taxpayers voluntarily meeting their tax obligations. This... Read More

Marriage or Divorce ? Check Your Social Security Number

Newlyweds and the recently divorced should make sure that names... Read More

Back To School ? Educators Deduct School Expenses

As teachers and students head back to school following a... Read More

SFR Substitute for Returns: IRS Action on Non-Filers

In the latest Star Wars episode, the evil empire executes... Read More

How to Reduce the Estate Tax Using the A-B Revocable Living Trust

In a past article I relayed the plight of the... Read More

Six Urban Myths About Taxation

Six Urban Myths ? Taxation"I am proud to be paying... Read More

Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from... Read More

IRS Reports Tax Gap of $300 Billion

The Internal Revenue Service is reporting that the difference between... Read More

Deducting Points On Home Refinances

Deduction of Refinance PointsAny points that you pay in the... Read More

How To Claim CHILD TAX CREDIT The Right Way And Add An Extra $2,000 To Your Refund

The U.S. Department of Agriculture estimates that it costs nearly... Read More

Truly Bizarre Taxes: The Tax on Illegal Drugs

One can never underestimate the enthusiasm that politicians have for... Read More

Small Businesses: Company Car Vs. Personal Mileage Reimbursement In Hurricane Katrinas Wake

With gas prices at an all time high before Hurricane... Read More

Surprising Truths About Tax Preparers

Choosing the right tax preparer for your business is a... Read More

Need a Copy of Your Tax Return Information?

Taxpayers have two easy and convenient options for getting copies... Read More

Corporations Failing To Claim AMT Exemption Overpay Taxes By $11,000

Does your incorporated business pay alternative minimum tax ["AMT]? If... Read More

Get Uncle Sam To Pay $36,000 For Your Childs Education!

Let's assume that you would like to begin saving for... Read More

A Taxing Investment

April 15 - The most dreaded day of the year... Read More

Fiscal Deity: Tax Consultant

Strategic planning throughout the year results in a minimal tax... Read More

Donating Cars To Charity - New Tax Rules

On June 3, 2005, the IRS released guidance on charitable... Read More

What Is Tax Law?

The federal tax code is complex. This complexity generally arises... Read More

Slash Tax when Buying a Business

When buying a business, how the "purchase price" is made... Read More

How to Donate Your Car to Charity and Get Tax Deduction

Donating your used car to charity is a win-win situation;... Read More

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their... Read More