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:


The Big Lead

Is Pablo Sandoval Leaving San Francisco Because of Taxes?
The Big Lead
For the sake of discussion, let us assume that Sandoval resides in a tax-free state. When this is the case, a player looking at identical contract offers between teams would need to consider both the team's location and the team's schedule. If Sandoval ...
7.6 Million Reasons Pablo Sandoval Would Choose Boston Over San FranciscoForbes

all 2,319 news articles »

Reuters

China Says 'Company M' Owes It $140 Million Taxes
Wall Street Journal (blog)
A U.S. multinational company will have to pay the Chinese government $140 million in back taxes and interest after authorities found what they called a major tax avoidance case, China's state news agency said. The official Xinhua News Agency said ...
Microsoft to pay China $140 million for 'tax evasion'Reuters
Microsoft reported to be facing $137 million bill for back taxesChinadaily USA
China charges Microsoft $137 million in back taxesThe Seattle Times (blog)
Computerworld -PCWorld
all 125 news articles »

Washington Times

IRS paying millions in bonuses to employees who are tax scofflaws
Washington Times
IRS Commissioner John Koskinen said in an email to employees that bonuses were an appropriate way for taxpayers to reward the agency that polices them. “I believe that rewarding our high-performing employees is a vital investment for our nation's tax ...
IRS staffers with tax debts eligible for bonusesThe Hill
IRS Awards Employees With Performance Bonuses While Some May Still Owe ...Headlines & Global News

all 8 news articles »

Telegraph.co.uk

Scottish MPs 'to vote on English taxes' after devolution deal
Telegraph.co.uk
But Labour sources said it had been agreed income tax on earnings will be devolved, but not on savings or dividends. This is worth almost £11 billion a year and will give MSPs the power to change bands and rates, although the personal allowance will ...
UK Lawmakers Recommend Scotland Gains Power to Levy Income TaxWall Street Journal
Scotland could slash air travel taxes under new UK dealReuters
Scotland set to gain power over air taxesBuying Business Travel

all 361 news articles »

The Nation. (blog)

$1 Billion: That's How Much Walmart Avoids Paying in Taxes Each Year Through ...
The Nation. (blog)
In a recent analysis of Walmart's tax spending, Americans for Tax Fairness (ATF) found that the company “avoids $1 billion a year in taxes” through federal loopholes, and various political shenanigans drive this always-low tax rate: the big-box giant ...


WGMB FOX 44

10 Expired Tax Provisions That Might Affect You In 2014
Forbes
To be clear, these are not tax provisions that will affect you in 2015. They're tax provisions that will – er, would – affect you in 2014. You know, the year that's almost over. Because, of course, who wants to focus on tax planning in advance? It's ...
Taking Note | It's Good to Be Rich: You Get a Lower Tax RateNew York Times (blog)

all 17 news articles »

Boise State Public Radio

Oregon Cities Seek Clarity On Marijuana Taxes
Boise State Public Radio
But if Fairview doesn't actually want revenue from marijuana taxes, plenty of other cities do. The League of Oregon Cities says about 70 cities, including Portland, have approved local taxes on pot. Most are in the 10 percent range. That would be on ...

and more »

Tax office takes action after property tax mistake
KXAN.com
AUSTIN (KXAN) — The Travis County Tax Office has forwarded a case with more than $30,000 in unpaid taxes to the county attorney after KXAN News started investigating. County Tax Assessor-Collector Bruce Elfant says the office noticed the issue after ...

and more »

Danvers tax classification rate hiked to 1.29
Wicked Local Danvers
The owner of an average home in Danvers will pay about $115 more (or about a 2.2 percent increase) in their property taxes in 2015. The owner of the average commercial or industrial property will pay about $702 more (or about a 2.5 percent increase) in ...

and more »

The Detroit News

Wayne Co. extends tax deadline on auction properties
The Detroit News
Detroit — Wayne County officials on Wednesday gave buyers of tax-foreclosed properties more time to get current on taxes. Treasurer Ray Wojtowicz has threatened to seize property from those who bought at tax auctions and then allowed those taxes to go ...
Wayne County Treasurer extends tax deadline for homes bought off auctionsMLive.com

all 2 news articles »
Google News

About Income Taxes; Tidbits

1812The first attempt to impose an income tax on America... Read More

Small Businesses Filing Amended Federal Tax Returns to Recover Money

Small Businesses Filing Amended Federal Tax Returns to... Read More

Need an Offshore Sales Office in a Tax Free Environment?

The 100 year old investment-banking firm of... Read More

Highlights of IRS List of 2005 Tax Scams

Each year, the IRS lists various scams taxpayers get caught... 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

Taxing Overseas Firms for SOX Compliance

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform... Read More

Taxation of Forgiven Debt: The 1099C & You

Often people fall on hard times and stop paying on... Read More

2005 Ford Escape Hybrid Certified For Clean-Fuel Deduction

If you are environmentally conscious and purchase a 2005 Ford... 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

Tax Tips - Which Tax Form Is Right For Me?

IRS Tax forms can be confusing.Am I a 1099 or... Read More

E-commerce Taxation

The means and types of businesses have transformed with advent... Read More

Some Folks Pay A Lot Less Tax Than Others On Very Same Income?Did You Pay Too Much Tax In 2004?

Someone once remarked, "Next to being shot at and missed,... Read More

Euro Tax Haven Threat

Media reporting of a new EU savings tax directive has... Read More

The Internet Tax Man Cometh

Q: I was contacted by the city tax collector to... Read More

The Implications of Income Tax Charge on Estate Planning

OverviewIn the Pre-Budget Report of December 2003 the Chancellor Gordon... Read More

Understanding Marketing Tax Deductions

Marketing is a necessary expense in running practically any business... Read More

10 Tax Tips to Reduce Costs and Increase Income

No one likes paying tax. Everyone understands that tax is... Read More

Tax Trap #4 -- The Quagmire of Depreciation

If you are a Small Business Owner or Self-Employed Person,... Read More

Requirements To Produce Tax Information (Whats Up With That?)

"What we've got here is a failure to communicate." ... Read More

Fiscal Deity: Tax Consultant

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

SFR Substitute for Returns: IRS Action on Non-Filers

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

A Taxing Investment

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

Complaince of Tax Return in Electronic Commerce Taxation

Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More