J.C.’s Money Blog

A few weeks ago, I posted Part I my book review of More Wealth without Risk by Charles J. Givens. I hadn’t intended to wait so long to post Part II, but moving to another state, being sick with flu, etc. have slowed me down. Now that I’m feeling healthier again, lets get back to business…

Part II is about Tax-Reducing Strategies. Ugh.While many would revel at any opportunity to find a way to stick it to Uncle Sam, I hate tax reducing strategies, because it seems like tricking your way out of paying your fair share, but tax reducing strategies are probably the most effective way to build wealth. Since taxes make up one of the biggest expenses for nearly everyone, finding ways to reduce these recurring net worth killers is a critical tool in personal finance tool-chest. It’s time for me to start taking my medicine…Chapter 13 basically tries to motivate you to start paying attention to your taxes and realize that it is OK to want to reduce your tax bill as much as possible and puts to rest the fallibility that earning more money can put you into a higher tax bracket causing you to actually earn less after taxes.The reason why this can’t happen is that U.S. income tax works on a graduated scale, where the first x number of dollars is taxes at one rate, then the next y number of dollars is taxed at a higher rate. If you get a raise that puts you into a higher tax bracket, only the additional money will be taxed at the higher rate. It is not possible to earn more money but have a lower net pay because of tax brackets.Givens also makes the case that the money you pay in taxes only fractionally goes to the causes you want them to, such as education, welfare, or whatever issue you believe in supporting. The vast majority of the money you pay in taxes will go to things you couldn’t care less about. If you want to make a difference with your dollars, the best method is to reduce your tax bill and donate directly to the causes you believe in.Since reducing the cost of higher education to students is my highest priority, my best plan is to pocket any tax breaks I can find and donate those to a scholarship fund.Chapter 14 dives into tax return filing strategies. Strategy #116 is one I plan to implement next year: “USE THE LONG FORM - YOU CANNOT PAY MORE IN TAXES, ONLY LESS.”In the past I have always used some free online tax preparation tool, or had a tax professional prepare my taxes because of the complications of my expatriate assignment. Next year I would like to start putting in more effort to learn more about the tax system, so I can start actively and aggressively implementing tax savings strategies.Strategy #124 is interesting, although I am skeptical of its validity: “FILE YOUR RETURN LATER, NOT EARLIER”. Givens claims that the IRS’s software is setup so that a higher percentage of returns are audited in the beginning than at the end of the filing period. Givens claims that the IRS has a quota of how many returns to audit because of limited auditing capacity, and that once this quota is met, your chance of being audited drops dramatically.

The idea makes sense, but I still find it hard to believe. Plus, the IRS has plenty of data to know statistically when people will file, so it would be an easy bug fix in the software, if this is or were at one time true.

Chapter 15 is about what to do in a tax audit. This chapter may be a good reference if you’re ever audited, but there isn’t much advice here on how to prepare in advance or avoid an audit.

Family Ties- Chapter 16 introduces a fascinating idea to me, Strategy #138 “SELL YOUR HOME TO YOUR CHILDREN”. The idea is as follows, as you approach retirement age, you likely have a large portion of your net worth tied up in your home. There are other solutions to this problem, such as a reverse mortgage, where the bank buys your house back from you and pays you a monthly check, so that hopefully you die with no equity left in your house, but having the benefit of living there for free and receiving a monthly check to cover your expenses.

Givens has a different take on the same idea, but instead of the bank buying the house, one of kids buys your house. You unlock all of your equity and pay rent to your kid. Your kid receives a nice investment opportunity, because you pay your kid 80% of market rental value, but you also act as a live-in property manager. Your kid gets a nice tax saving incentive in the depreciation of the property. This seems to be a win-win situation that I had never heard of, and I ran the idea by my parents, but they were not all receptive. Oh well. Maybe once I have some established income to pay the mortgage, we can run the numbers…

The best strategy of the chapter is Strategy #148 “2 DEDUCT THE COST OF MORE WEALTH WITHOUT RISK AND FINANCIAL SELF-DEFENCE“.

Givens argues that his own books are deductible tax preparation aids. Since his books teach you how to save on taxes, you can deduct even more from your taxes by deducting them. That’s funny to me.

Chapter 17 is entitled “Whom do you trust”, and it’s all about setting up your finances and legal documents to minimize taxes when you die. Since I won’t die (I am still young and invincible), I just skimmed through this chapter. You should read this and act on the advice if you are mortal and/or have kin to pass on an estate to. Otherwise Uncle Sam would be grabbing more than his fair share and your surviving family will be burdened by your lack of foresight. But hey, I don’t want to face up to that fact that I won’t be around forever, either.

Chapter 18 is about maximizing the benefits of your employer’s retirement plans. This issue is the number one piece of advice of nearly evey personal finance guru, and Givens follows right in line. Maximize your contributions, and do it now.

Back when I had a job, I had the tax free maximum of $15,500 taken out of my check each year. Sometimes I thought it was too much to be saving now for a  retirement so far away, but when I looked at how much difference it made in my pay check after taxes, it didn’t seem worth reducing. Putting money in your 401k reduces your taxable income, so the highest taxed dollars enter your account tax free. The lowest taxed dollars go into your pocket. I have to echo the advice of everyone else, put every dollar you can possibly afford into your tax-deferred retirement plan and don’t touch the money!

One funny quote from the book, “You are no longer required to stick your money in a low-paying, fixed interest, 7% or 8% guaranteed-return investment. If you were your money, you wouldn’t even consider working that cheaply!”

Anyone with a programming background knows not to hard-code numbers… these things change and need to be updated over time… I would kill for a guaranteed return of 7% right now!

This book was first published back in 1988, when interest rates and inflation were much higher, so the numerical examples must be looked at carefully, as they don’t necessarily apply to current laws and market conditions.

Chapter 19 explores some ways to make travel tax deductible. Right off the bat, Strategy #181 is eye-catching: “USE JOB INTERVIEWS TO MAKE VACATIONS DEDUCTIBLE”. Givens says if you spend two hours a day on your vacation looking for a job, you can deduct the expense of the vacation. Another idea is to travel to a foreign country with an empty suitcase and return with items to sell to your friends. You can deduct the travel expenses as you are now an import company.

Chapter 20 is about interest that is tax deductible. Everyone knows that mortgage interest is tax deductible, but what other ideas does Givens have:

Strategy #188 “BORROW MONEY FOR YOUR IRA”. I need to do some more research on this one, but that could be a very smart way to do things. Givens gives a complicated example, so I’ll make up my own.

Let’s say I want to fund my Roth IRA for 2007 with $4,000. Since the market is down, now is a great time to invest, and I am confident that I will be able to make a 15% return on my money for the year. Also, my credit score is good, so I can go to Prosper.com and take out a personal loan for 8%. According to the loan schedule, I would pay $275 in interest the first year, but this interest is tax deductible, so it would really only cost about $200, assuming I am in the 25% tax bracket. My $4,000, however, earns $600 over the year.

Since stocks tend to go up over time at a rate of 11% per year, using this strategy of borrowing the money at any rate under 11% will statistically work in your favor. Add to that the tax advantage, and that’s a great strategy! Thanks Mr. Givens. I hope this tax deduction checks out.

Chapter 21 is called “Give yourself a tax-free raise”, and its full of boring advice such as how to adjust your W-4 withholding to make sure you don’t prepay too much in taxes, or get stuck in April with too much to pay.

Chapter 22 is “Working for tax deductions”, and it lists ways to deduct expenses related to your job. Also boring, but here are some ideas. Strategy #208 is something I hadn’t thought about before: “DEDUCT EVERY DOLLAR YOU SPEND THAT IS RELATED TO YOUR JOB”. Givens claims that if you spend money for job-related items that aren’t reimbursed by your employer, you can deduct these expenses. I’ve certainly spent my own money in the past on work related things that I wasn’t reimbursed for, but never thought to keep records of the these to deduct. Also expenses related to finding a job, or relocating for a job can be deducted as well.

Maybe a stretch, but Givens suggests paying your family to help you with work and deducting the expense in Strategy #210 “PAY YOUR SPOUSE OR KIDS TO ASSIST YOU WITH YOUR JOB”. Is this a way to get a tax break on your kids’ allowance?

Strategy #216 is probably even more relevant today than it was in the 1980’s: “DEDUCT A HOME-BASED OFFICE WHEN USED FOR YOUR EMPLOYER”. If you can convince your employer to let you work from home, not only could you save time and money by not commuting, but you could also lower your tax bill.

Chapter 23 is entitled “Turn your home into a tax haven” and is just a few pages long. Givens explains that you can deduct home improvements, but not home repairs, unless they are made within 90 days of selling the house.

Chapter 24 is about how to make your boat, plane or RV tax deductible. You guessed, use them in your business to make them tax deductible. Also, a boat or RV can be declared as a second home, so that you can deduct interest paid.

“Getting Down to Business” - Chapter 25 is all about turning a small business into a tax shelter. Strategy #232 “BEGIN YOUR BUSINESS AS A SOLE PROPRIETORSHIP INSTEAD OF A CORPORATION.” Givens argues that the benefits of forming a corporation are not worth the hassle of the paperwork initially. The main benefit of a corporation is the protection of your personal assets, but Givens argues that a business liability insurance policy is an adequate alternative. As a sole proprietor, you are your business, so you can deduct all losses from your day job and investment income.

Of course to perpetually claim your deductions, you must be a legitimate business, and you must show a profit three out of five years.

The rest of the chapter is filled with the same concepts repackaged in several different embodiments, but Strategy #268 “USE ONLY A SELF-DIRECTED SMALL BUSINESS RETIREMENT PLAN” is very exciting to me. As an employee I had very little control over my main investment account, my 401k. As a small business, I will have the chance to decide exactly which investments are available to me in my tax-advantaged accounts.

Phew, the pain of reading about taxes is finally over. Now I have some ideas for saving on my biggest expense in life. Next year I will take Givens’ advice and do the long form of taxes and see what I can learn about keeping as much of my money as possible (so I can give it away later, of course!).