Did you know that October is tax season? Yes, taxes are normally due on April 15, but tax planning should be done in advance. Remember the Golden Rule of taxes; tax evasion is illegal, but tax avoidance is encouraged.
When our resources are limited, it is vital that we maximize the value of those resources. Part of that strategy involves paying as little taxes as legally possible.
One of the easiest things we can do is to file our taxes on time.
Even if you don’t have the funds needed to pay your taxes, you should still file the forms. Ironically, the failure to file penalty is usually higher than the failure to pay penalty. Nobody likes paying taxes, but being on time with the paperwork can save you as much as 25%. That really adds up!
You can also file a request for a 6-month extension. Politicians are experts at “kicking the can down the road,” so of course,
they allow extensions. As I continue to learn about taxes, I’m starting to notice little exceptions that benefit lawmakers. They don’t like paying taxes either, so don’t hesitate to do some research.
Businesses and individuals believe October is the start of tax season because it is the start of the fourth quarter of the year.
Some may think this strategy only helps the wealthy, but they’re wrong. These tips can help many of us. Most of the households in this area have two income earners.
Being self-employed is not limited to farmers and building contractors. I’ve noticed that, in many families, typically one person is self-employed, while the other works a full-time job with benefits. Usually that job is with the government or a large corporation that can afford to pay benefits, such as health insurance, to employees.
Although I work with Brookstone Capital Management in order to provide investment advisory services, technically I am self-employed. Most of the people who provide a service, such as real estate agents, insurance agents, etc., are self-employed.
Self-employment taxes can be real jerks, so many of us use the year’s final quarter to lower our taxable income.
While there is nothing wrong with this practice, we should be careful regarding our motivation. There is a big difference in investing in your future by growing your business and spending money just so the government won’t get it.
I’m reminded of the “use it or lose it” technique often employed by grant recipients. When I worked with Wayne County 4- H, part of my job was managing the funds we received from grants. Some grants were for a 5-year period, and the amount changed each year based on the program’s needs.
That meant if we didn’t use all of the money during the year, then we wouldn’t receive as much in the following year. Apparently, this is standard operating procedure for government-supported organizations.
As a saver, this policy frustrated me to no end. I didn’t like the busy work of having to submit a plan over and over just so the already approved funds could be released. Adjusting the programs strategy is great, but the rest just slowed our progress.
I also hated the spending spree at the end of the fiscal year. Once my desk was covered with ink cartridges just to use all of the money. I wish we could have saved the leftover money for opportunities that could come up in the next year.
Does that sound familiar? I’ve noticed that we, the self-employed population, do the same.
My dad worked in agriculture research. After being a victim of corporate downsizing, he started doing contract work. He often worked with the company that fired him and their rivals. Paying contractors is much cheaper than paying full-time salaries with benefits.
When Dad was laid off, he received a severance package. That is usually the case with downsizing. Unfortunately, the lump sum payment normally increases the former employees tax burden.
After paying that high tax bill, Dad believed he had given the government enough over his life. He did everything he could to avoid paying taxes in the following years.
Overall, my parents did an amazing job managing our household finances. Honestly, my parents were part of my inspiration to pursue a career in financial planning. If I have one criticism it would be Dad using the end of the year spending tax avoidance strategy.
No, his use of the strategy itself wasn’t wrong, but his motivation was. If we had that time back, I would have encouraged him to contribute to a retirement account in order to lower their current year’s tax burden. Instead, he bought farm equipment, some of which was needed. However, most of it was purchased in order to lower taxable income.
I share these examples because I want you to know that there may be more suitable options for your situation.
Of course, I prefer retirement accounts because that is my job, but your needs are where we will focus. Perhaps you have an opportunity to grow your business and need to spend money to make that happen. By all means, growing your business to better provide for your family is the right type of motivation. Of course, it would be wise to do some risk analysis before making such a purchase.
Unfortunately, most self-employed people do not realize there are retirement options available to them. I have written on them before, so feel free to check that out here. Email me, so we can see which type of account is right for you.
Also, it should be noted that you can usually borrow from your retirement account or even take early distributions. There would be tax consequences and maybe a penalty, but it could be a source of funds if needed. That may be a better option for you instead of a business loan. Of course, you would have to open a retirement account first.
Fear is a natural part of our life, but it becomes detrimental when fear controls our life.
Sure, sometimes fear is helpful. Fear of being burned keeps us from putting our hand in a fire. Fear keeps us safe, but it can also hold us back.
Most Americans know there are government benefits available for people with disabilities. I think society finds comfort in knowing that help is being provided to people who really need it. Unfortunately, those benefits are also a source of fear for people with disabilities.
For example, because one of my medications costs $26,000 a month, I cannot risk losing Medicare and Medicaid. My family would lose everything in their effort to keep me alive. Under the current rules, my pursuit of financial independence would cause me to lose the benefits long before I could safely get off of the system.
The fear of losing benefits can be just as crippling as our disability. When I was playing wheelchair hockey, I heard a teenager say he wouldn’t go to college because he wouldn’t ever be able to do better than receiving government benefits. As a teenager, he had already lost his motivation. Nobody can achieve their American Dream without motivation.
Sadly, I see similar behavior regarding our income taxes.
I have seen workers turn down overtime work because the taxes would be too high. Later in the week they couldn’t afford to take their family to a movie.
Life is expensive and we all face struggles. There is no shame in not being able to afford luxuries when you’re doing the best you can. However, it’s virtually impossible to chase your dreams and achieve financial independence if your decisions are based only on tax brackets.
I challenge you to find any “rags to riches” story in American History that starts with, “No matter what, I have to stay in the
lowest tax bracket.” That story usually ends in generational poverty. Remember, our children learn from us.
It’s easy to vilify the wealthy, especially while we struggle, but we should look at their stories. I promise when they began their pursuit of wealth, their tax bill was the least of their concern. Now, they are in the highest tax bracket and pay people to find as many tax breaks as possible.
Doesn’t that sound better than trying to stay eligible for all of the low-income tax credits? It does to me. Financial independence is my dream because that hope is so much better than hoping a divided government will help me.
If we chase our dreams, we may fail, but we also may succeed. Even if we do fail, then we can just end up back where we are now. Email me!
