Taxes

Core Principles

1. Cash Management (Budgets & Expenses)

2. Debt & Credit Management

3. Saving & Investing

4. Goal Setting & Planning

5. Risk Management

6. Taxes

Welcome to the last planned article for the core principles of personal finance. I know the last few have been one-off articles, and this one will be no different. That is because the further down that list you get, the core takeaways are much simpler.

1. Set Goals but do not kill yourself over it.

2. Risk Management can be boiled down to a few equations.

3. Taxes - everyone thinks about way too much!

Bit of a spoiler there, but you will see what I mean in a few short moments.

Everyday People and Taxes

The most important takeaway for most people today is that they think way too much about tax strategies for avoiding tax. Instead, think of ways to make more income to make up for the tax you will pay.

Major Tip Here!

Stop giving the government a free 4-16 month loan! In case you did not know, every time you get taxes taken out of your paycheck, you determine that amount. Wild, I know, but when you sign onto your job, they give you a W-4. On this form, you tell them how much money to take out. For some reason, it is super popular to give them more than you will actually owe, so that you get a refund April next year.

The new W-4 is more accurate than the pre-2020 version, so if you have been at your job awhile pre-2020 and have not updated your W-4, you should look into that!

It is way better to owe than get a refund. If you are getting a refund, it is just the money you gave them. Then because they are the government, they just buy bonds with it and make 5% on the money you gave them. Instead, you could keep that extra money, get those 5% bonds or even easier, a high yield savings account. Put the money in that account that you would normally get taken out for taxes. In April of the following year, you might owe money to the government, but you will have made money on what you owe them, so you will make more income!

Holy shit, what a concept!

Example:

In Step 4 below, there is an extra withholding section. If you were thinking about putting any number here but 0, then you should take that money out of your paycheck and send it directly to a high-yield saving account instead.

W-4 Form:

The goal is to have what you owe the government be as close to zero as possible. So you should fill out the form as accurately as you can. If you have to lean a direction, then you should underestimate your taxes and grow the cash with interest.

So if you take nothing away from my writing in the last year but just read this, I have made you more money than you would have before. Turns out I’m just a nice guy!

Beyond this, if you are not an investor, this is the extent of tax knowledge you really need to have yourself. Outside of that, you should just talk to a tax professional, probably the person who will fill out your taxes, about any small nuanced things you could be doing. The key is keeping as much money in your pocket throughout the year so you can make interest on it instead of letting the government make interest on your money!

Investors and Taxes

For the people who are in Real Estate or Business Owners, there are a few more things you should probably look into.

Yeah, actually, that is probably the best advice I can give you with regards to taxes. The money savings for doing them yourself does not outweigh the time freedom and tax savings of paying someone who knows their shit to do it. Especially if you own a service business, do one more job and you will more than pay for the cost in less than a day of work.

Three Topics to look into:

1. Depreciation 

2. 1031 Exchange

3. Section 179

These are bigger, everyday tax strategies that you can read about a bit, especially if you have assets like buildings (houses), vehicles, or heavy equipment needed to run your operations. Even with this little bit of knowledge, you should still talk to the pros. It will just prep you for those conversations a little bit more.

Short and sweet this week. Stop thinking about taxes and start enjoying life some more.