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Archive for Taxes

Apr
04

Tax Time – Do you understand your tax return?

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Whoa – I was amazed to see that my husband and I were getting a giant tax refund this year.  Good as it feels to get that nice check from the government, mathematically it doesn’t make a lot of sense to try to get a lot of money back.  You’ve just loaned that money, interest free to the government for a year.

This year, though, that rate of return definitely beats out the performance of my portfolio in the stock market… wonder if I should think of it as diversification?

Part of the reason our refund was so big is that we had a baby this year and my husband didn’t adjust his withholding at work.  Also, we have a number of real estate investments in our portfolio, and we have the ability to write off the “depreciation” on these because I am a full time real estate professional.  That’s a special tax status that lets you have unlimited depreciation loss, rather than capping the loss at $25,000 each year.

The more involved in real estate and business you get, the more opportunities you have to save money on your taxes.  However, you’ll also be getting more and more complicated tax returns to fill out.

I discovered a few years ago that I could not efficiently and accurately complete my own tax returns and I started using a CPA which was a great decision for me.  They do it much faster and cheaper than I could do it myself.  That’s another form of leverage, freeing up my time to focus on revenue generating activities.

If you’ve started using a tax preparation software or other tax professional to prepare your taxes, it’s still important to review your return.  It would have been easy for me to skip to the bottom line, see I wasn’t going to have to write a check for my taxes, and sign and mail my returns after my accountant sent them back to me.

 

Instead, I decided to sit down and review them and I found several items I had questions about.  Whether you find errors and inaccuracies, or just notice items that show you’re saving money or have the opportunity to pay less tax, it’s important to know what you’re doing with your finances, and your annual tax filing is a good time to sit down and review things when the numbers are all in one place.

Look at how much you’re spending on taxes, medical insurance, interest on your home mortgage, and your retirement savings.  These are some of our biggest expenses and it’s good to know where the money’s going.

Financial reviews more often are even better, but at tax time, they are a must!

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Dec
12

An Allegory of the US Tax System

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Did you ever feel like the farther ahead you got, the more Uncle Sam became an anchor around your leg, slowing down your upward momentum?

Well, you’re not the only one.  My cousin, Bill Davis, sent me this humorous, but cynical story about tax cuts and how they affect the poor, middle class, and the rich.

It was attributed to David R. Kamerschen, Ph.D., although according to his website, he is not the author.

Thus – we don’t know who wrote it or where correct attribution should go.

However, it is still a humorous piece that will get you thinking.  Which tax bracket are you in?

 

Emily

 

Our Tax System Explained: Bar Stool Economics
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beer by $20.’ Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.
But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should p ay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
‘I only got a dollar out of the $20,’declared the sixth man. He pointed to the tenth man,’ but he got $10!’

‘Yeah, that’s right,” exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I got’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got
only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Categories : Just For Fun, Taxes
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About Emily Cressey

Emily Cressey is a real estate investor and licensed real estate agent living in Seattle, Washington. After graduating Phi Beta Kappa with an Economics degree from UNC-Chapel Hill (Go Tarheels!) her focus has been on building business for cash flow and investing in real estate for wealth. If you have questions about real estate investing, personal finance, or would like some flat-rate, affordable advice on one of these topics. Please fill in the Contact form.