[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage podcast.

[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host Dylan Bain, and today I want to tell you about when I first started in public accounting. My wife and my children and I had moved from Flagstaff, Arizona to Phoenix, Arizona, and we are so excited to be in the valley because I’ve graduated from graduate school. My wife is almost done with her PhD, but has gotten her very first professional job. She’s working at the local power utility and I’m working for one of the Big Four accounting firms. And things are looking up in our life and we’re having ourselves a great time. And then when we get to the end of the year, it’s April, and I start sitting down and do our taxes. It’s tax season.

[00:00:53] And this should be simple. We always get a little money back, it’s kinda nice to have that little bonus. We’re talking about what we’re going to do with it, when I look at the TurboTax and it says I owe money. And I’m struggling because first off, I never owed money at the end of the year before. I went and checked my W-4s and my tax withholding at work and it’s all right, and I don’t understand. And what’s worse is that it’s a couple of thousand dollars, and I haven’t budgeted for this. And I’m sitting there at my kitchen table feeling crushed because things had been looking up. We had started paying down debts. We were starting to finally feel like we were getting ahead. And this just felt like a tremendous step backwards.

[00:01:37] Now ladies and gentlemen, I tell that story because we’re doing a section on taxes. And I’ve made my opinion on taxes pretty clear throughout the show, but I want you to be able to understand that if you’re concerned about taxes or your tax situation, you’re not alone. Taxes can be one of these boogeymen that’s hide out in the closet that many people who actually have huge tax issues and liabilities make a much to-do about, and they tend to get on your programs on the television, or be able to suck up time on YouTube or other platforms.

[00:02:09] But the reality for most of us is that we don’t think about it too much until the end of the year. We have to go through the onerous tax filing thing that is uniquely American, and there’s no need for you to have to go through that if you’re a W-2 employee. There are ways to deal with it. There are ways to make the boogeyman a little less scary, or maybe even make the boogeyman afraid of you. But before I get going, there’s two things I got to mention.

[00:02:31] Number one, this is not tax advice. Yes, I’m a CPA. No, I’m not a tax CPA. And so nothing I say should be considered tax advice. Everybody’s situation is completely unique. And while I will say that there are several places, even though you are a unique snowflake, you will fit into the same box that all these other people fit into, and that’s perfectly fine. But the reality here is that I can’t be giving tax advice. So anything that I say or any things that you’re like, “Hey, that sounds like a great idea,” you should be running past a tax professional to make sure it’s a good idea for you.

[00:03:06] And of course, the second thing I want to point out is that we’re getting ready to launch Intuitive Finance with Dylan Bain, which is what this podcast will be changing to. If you’re already subscribed, great. Nothing you need to do. If you’re not subscribed, stop what you’re doing. Hit that subscribe button and share the podcast with a friend. I’d really appreciate it. We’re trying to grow our listenership for all the cool stuff we’ve got coming for the balance of the year.

[00:03:27] Okay, so let’s start our entire conversation around taxes by discussing two concepts. Number one, tax avoidance, and number two, tax evasion. This is a wonderful distinction that you must understand. Tax avoidance is legal, okay? When you’re practicing tax avoidance, what you’re doing is you’re using the tax code to take advantage of different deductions that are within it. It is 100% legal, even though some of these things feel like highway robbery. That’s an absolute true statement. And whenever you hear politicians talking about loopholes, this is what they’re talking about. They’re things that were purpose-built in the tax code so that people could take advantage of it.

[00:04:10] And of course, it’s always going to be more tax advantages to the people who can lobby more because, in the United States everything’s on sale. Trees don’t have economic value until they’re chopped down. And politicians, of course, are the most traded commodity on the market. And up until recently, I would have said that was just for normal politicians, but apparently the Supreme Court’s on that train too, and it doesn’t matter which side of the aisle you’re on. Look at you, Clarence Thomas and Sotomayor. Anyway, tax avoidance is completely legal and that’s what we want to go for.

[00:04:39] Tax evasion, on the other hand, is not legal. And I have clients who come in and say, “I don’t want to be evading taxes.” And it’s, okay let’s talk about what tax evasion is. Tax evasion requires a misrepresentation or concealment of something. So that is to say that misrepresentation, for example, would be to say, “Oh, I have an extra kid,” which we know that people did that for many years until they started requiring social security numbers to be filed on tax returns for the children you have.

[00:05:08] But the other ways that people misrepresent is they overstate their expenses in their business, or they overstate a particular charitable deduction, or things like that. A concealment would be people taking cash on the side so that they don’t have to pay taxes. US tax law on this is fairly clear that if you’re receiving cash for a service, you have to pay taxes on that.

[00:05:27] So in Fiscally Savage, which will eventually become Intuitive Finance, when I bring on clients and I do financial coaching where I sit down and help people get their money, house in order. So they’re going to my website, they’re signing up for an appointment. Or when we do a 30-minute onboarding session, they come in, we decide if we’re a good fit for each other, then we move forward, and they’re going to pay me a fee for service. I collect cash for that, but I have to claim it on my tax returns as income. If I don’t, now I’m practicing tax evasion. And there’s ways that I can practice tax avoidance instead.

[00:06:01] But it’s always important to understand when you’re having the tax conversation, the taxes are only part of your equation. And many people, particularly people who are W-2 employees, will come to me in my practice and say, “Dylan, I got a huge tax problem, you got to save me.”

[00:06:16] And I always say, okay, let’s just breathe for a second and let’s go through and look at this. Do you have a tax problem or do you have an income problem? Is the taxes you’re paying biting you so much because your income is too low and that’s what we really need to focus on, rather than trying to focus on taxes? Because as you’re going to see here in a second, the more money you make, the easier it is to practice tax avoidance. So there’s a lot that goes on in here.

[00:06:42] Okay, let’s go in and start talking about tax avoidance. Now I want to preface this right at the top of the section to say that I’m speaking specifically to W-2 or 1099 employees, okay? If you are a small business owner or you’re getting the bulk of your income through something like an S corp that you own, or a LLC that you own, or you’re practicing your own business, there’ll be a section for you at the end. But this part here is typically targeted towards your salaried or hourly employees who are getting W-2 or 1099.

[00:07:13] Okay, so the first way that you can start practicing tax avoidance is you claim the standard deduction. And you might say Dylan, that sounds easy. It is, and there’s a ton of people who don’t do it.

[00:07:24] This is one of the things where the US tax code should include this as an automatic part but it doesn’t. And it doesn’t because, we have powers that be, say, large corporations that own very quick tax services, whatever you wanna call it. Maybe Turbo. But they lobbied the government to stop them from including these things automatically so you have to purchase their software to have them do your taxes, to remember to file it. If you’re printing out the forms and doing it by hand, and I know people who do that, chances are good you’re leaving a lot of money on the table in taxes, simply because you’re not knowing what boxes to check.

[00:07:59] So taking the standard deduction is the very first thing that you can do to start avoiding taxes. The standard deduction, of course, is about 14K for single people and about 28K for married filing jointly. All numbers in the show are rounded up so they’re not exact, so take them with a grain of salt.

[00:08:17] But the standard deduction, what it does is that it basically says, if you’re a single person, you make $14,000 a year. We take that $14,000 and we have the deduction of $14,000, which brings your taxable income to zero. It’s a $14,000 haircut right off the top of everything that you make. So if you’re making $20,000, you’re only going to own taxes on the $6,000. That’s above the $14,000 of the standard deduction. It’s a starting point.

[00:08:42] The key here though is that if you’re somebody who likes the idea of, I do charitable contributions and I want to be able to include those in my taxes. If your charitable contributions don’t exceed that $14,000 for single people or $28,000 for married filing jointly, chances are good it’s not a great idea for you to actually claim those, because in order to claim those you have to itemize your deductions.

[00:09:06] The standard deduction is the government’s way of saying, we think you on average have a bunch of this stuff that would more or less total to this $14,000, so we’re just going to give it to you so you don’t have to itemize. Which is neat, because I know that when I was not doing nearly as well as I am now, I was not doing $14,000 worth of charitable contributions and other things that were tax deductible. Okay, so moving on.

[00:09:32] The next two require you to be able to save. That is retirement accounts and savings accounts.

[00:09:38] Let’s talk about retirement accounts. When we talk about retirement accounts, we’re talking about 401ks, 403bs, or IRAs. And it doesn’t matter whether it’s a SEP IRA, simple IRA, it just has to be an IRA. When you choose those accounts, they typically come in two flavors. You get your traditional and your Roth — and I did an entire show about these types of retirement accounts, link to that in the show notes. But the traditional versus Roth is — traditional means that every dollar you put in there is a tax deduction.

[00:10:07] So let’s say for a moment that you put in $6,000 into an IRA. That was a traditional setup IRA, and now you’re at tax season. Now you get the standard deduction of $14,000 and you get an extra six, which means your total deduction is $20,000. So the first $20,000 you earn is not taxed at all. It’s reduced, it’s deducted from your taxable income. And then you start paying taxes and every dollar after that. If you have a 401k or a 403b, your maximum contribution is going to be over $20,000.

[00:10:38] So that means that you could actually set this up so that you put $20,000 into your 401k, six grand into your Roth IRA. So that’s $26,000, and then you take the standard deduction and that’s going to bring you to $40,000 worth of tax deductions, which is a pretty sweet deal if you can afford to save $40,000, which of course is the downside to this. Remember at the top of the show I said, the more money you make, the easier it is to avoid taxes. This is why.

[00:11:07] Because if you’re able to save, that’s money that you can then invest in the market in a tax sheltered account that’s going to be a benefit to you. This is how you save for retirement. But you get to benefit on the taxes right now if you’re on a traditional version of these programs.

[00:11:21] Another way that you can avoid taxes is the savings accounts. Again, there are two different flavors. An HSA or health savings account, or an FSA or flexible spending account. Okay, so an HSA is something that you have as an adjunct to a health insurance plan. So if you are not getting health insurance through your work or paying for it by yourself, you’re probably not eligible for an HSA.

[00:11:46] In order to be eligible for an HSA, you have to have a health insurance plan that’s considered a high deductible plan. The idea here is that you’re going to be paying less in health insurance premiums, but you’re going to be putting money into this HSA to cover medical expenses. And you can put in — they tap out at $3,800 for singles and $7,800 for families. It’s important to note, ladies and gentlemen, that if you and your spouse are both working, you both have high deductible plans through your business, you can’t double dip on us. It’s one family, one HSA.

[00:12:19] For example, my wife gets her own health insurance through her work, but our kids are on my health insurance, and I have the HSA, so I’m maxing out to that $7,800 a year. She could not do the same, and if she does, I’ve moved from tax avoidance to tax evasion because I’m misrepresenting how much money I can put away into these accounts. It would be a really dumb way to get audited if you tried to do that, and people try to do it all the time. But a health savings account can be used for medical bills or medical needs.

[00:12:47] One of the neat things about it, though, is that the things that you can use it for, or you consider it to be a benefit for reimbursement for, is a hugely expansive list. So for example, over-the-counter drugs. When you go to the store, you’re like, hey, I need some NyQuil. Well, your insurance isn’t going to cover that, but you can get it reimbursed for it out of your HSA. And that’s just one example. The IRS has an entire publication on what is considered, and it’s worth it to go and read it. But here’s the deal: those reimbursements are forever.

[00:13:18] So here’s how this can work. If you have an HSA and you’re maxing that out, so you’re getting an extra $7,000 in tax benefit that gets removed from your taxable income on top of this. So remember that if you maxed out your 401k IRA and took the standard deduction, that was 40 grand. Now you can tack on almost another eight grand on top of that.

[00:13:39] Okay, that’s great, but chances are good that I have the cash flow to pay for my medical needs. When I have to buy medication, or I have to go to the doctor, or I go to the chiropractor, or whatever, I keep the receipt in a folder, and I can get a reimbursement for that for any time in the future. So long as I have that to prove that, yes, I have the expense, I can get the money out tax-free.

[00:14:02] But I can also let it sit in the HSA, invested in the market. And growing tax free because nature say it comes with a triple tax benefit. You get a tax deduction on the front side, the money inside of it gets to grow tax-free, and so long as it’s for a medical expense, you can withdraw it tax-free. That’s a hell of a benefit. And so these are amazingly efficient programs.

[00:14:24] The second type of savings account that you’ll run into is something called a flexible spending account or FSA. They come in two flavors. You can have a health FSA. So if we say, for example, maybe you are on a heart medication. That’s something you know you could save into the FSA, receive a tax deduction for contributing to the FSA, and then pay for that medication out of the FSA. And therefore, you’re going to be able to take that money tax-free out of this vehicle, you have the tax section on the front side, and it’s great. Except if you have an HSA, you can’t use the health version of this, so you can’t double dip on it.

[00:14:55] But, never fear, there’s also the child care expenses part of the FSA. So for example, my kids go to before and after care at their school. Okay cool, well that cost me extra money. Even though they’re going to a public charter, I still have to pay for the before and after care. So what I’m doing is I’m contributing into my flexible spending account for their child care, and I’m getting a tax benefit on that, and then I pay the child care out of the FSA, which is great.

[00:15:21] The downside to the FSAs is that you can’t invest the money that’s in there. So even if I wanted to, I can’t just YOLO it into the stock market and hope for the best like I could with an HSA. Even more, at the end of the year, you either use it or you lose it. And so this requires some planning and foresight that goes on here. In my case, the before and after care is greater than the maximum contribution so I don’t sweat it. I just contribute the maximum amount and get reimbursed on the backside when I make the payments. Okay, so far so good.

[00:15:52] But you’ll notice, ladies and gentlemen, that we’ve gone over three different things: standard deduction, retirement accounts, and savings accounts. And of those three, two of them require you to have enough money left over at the end of the month to actually be able to save. It’s not really that great of a benefit, but again, do you have a tax problem or do you have an income problem?

[00:16:10] Because if you have a tax problem, here are some solutions for you. But if you have an income problem, then these aren’t going to be able to help you, and we need to focus on income. It is extremely important in any tax conversation that we talk about the right problem. But, and there’s a caveat on this, there are some actual things that you can do.

[00:16:31] For example, if you are sending a kid to daycare or you have before and after school care, some summer camps qualify for this, you can get the child care tax credit. It’s huge and it’s amazing. If you’re an hourly employer or W-2 employee and you’re earning below a certain amount, you can get the Earned Income Tax Credit. This is a form of welfare that’s through the tax code that kind of almost creates a universal basic income. There isn’t penalties for you earning more, you just end up getting less than the tax credit and you can get it spread out throughout the year.

[00:17:02] It’s a really great program. It’s way more efficient than all the different means tested welfare programs we have in the United States. So if you are sitting there and you’re like, I can’t contribute to my 401k, I don’t make enough money or, it’s great, Dylan, it’s wonderful to save in an HSA, but I just can’t put the money away. Chances are good you qualify for the Earned Income Tax Credit. And you need to file for it.

[00:17:25] Another thing is education tax credits. If you’re listening to this show, chances are good you’re all about self-development. You realize that at the end of the day, no one’s coming for you, so we should all expect a self-rescue here. And education is a great way, even though some educational systems are unbelievable rackets that should be shut down and made illegal, we still can benefit from it on taxes.

[00:17:48] That is to say, if you have, for example, if you’ve just moved from Taiwan and your wife is going to graduate school to get her PhD, and you’re a full-time teacher trying to make ends meet with your multiple jobs and you’re still on welfare — you’re not going to have a tax issue because everything she’s paying in her tuition is a tax benefit in tax credit form to you, which was my issue at the story at the top of the show.

[00:18:11] When we moved from Flagstaff to Phoenix and we had started our professional jobs, I was no longer in graduate school, and even though she was still technically in graduate school, it wasn’t enough to trigger these tax credits. So what had actually happened to me is that because I didn’t do tax planning at the time, I lost some of my biggest deductions. And that’s why we owed money.

[00:18:35] And so this should be a wake up call to all of you that are listening of saying, “Hey, there’s a lot of things I don’t know, and maybe these automated software platforms aren’t the best.”

[00:18:44] Which brings me to the last bullet point on tax avoidance for W-2 employees: tax strategy. There’s lots of tax strategies out there. The US tax code is infinitely complex and has a ton of iterations, which is where a tax professional can come in. I am a CPA, and like I said at the top of the show, I’m not a tax CPA. I do business analytics.

[00:19:04] But I have my own CPA who’s a tax specialist who helps me out with my taxes. I go in and we can talk shop, and yes, I can have a more nuanced conversation because of my understanding of the financial and tax markets, but that guy’s like a wizard. That’s what I pay him to do. And honestly, a good tax professional — you don’t pay for a good tax professional. They pay for themselves and you end up with a benefit. That’s how it works.

[00:19:31] This is the difference when I was in public accounting between things like audit and tax. Nobody liked it when the auditors showed up, but everybody loved the tax guys because they were like these wizards who came over and made you money out of thin air.

[00:19:44] And when people come in and they say, I have a tax problem, that’s what they’re really wanting these tax professionals to do. To be able to leverage the tax code to give them extra income because they don’t have a tax problem, they have an income problem. Because their income is too low, they can’t do that. So it’s worth considering, again, which problem do you actually have?

[00:20:03] But let’s talk about perhaps one of the biggest and most overlooked tax deductions you could possibly do to try to avoid taxes: start a business. This seems counterintuitive, if you’re a W-2 employee especially. You might say, but I don’t have a business. Honestly, in the land of opportunity, we should all try our hand at some point to try to YOLO into a business.

[00:20:25] And it takes a lot of work, there’s no doubt about it. And it might not be for you. And this is absolutely not me saying, “Hey, go burn the boats and just quit your job and go open a business, and then you’ll be in the land of milk and honey in no time.” There are some guys who go out there and say that and that they’re full of shit, okay? I’m not going to lie to you. If you do this and you start working on this, keep your day job. Slowly work on it. It will take a long time for you to learn.

[00:20:50] But if you have an LLC or you have a corporation that is, for tax purposes, considered an S corp, okay? They are flow-through entities. What does that mean? What it means is that the profits or losses of the company, of the business, flow through to your personal taxes.

[00:21:12] For example, if you are working in a business and you’re looking at it and you say I need to buy a laptop. Okay, do I use my laptop for my business? Absolutely. Okay, how often? About 50%. Okay, cool, so 50% of that expense is personal. That’s not tax deductible. But 50% of the expense absolutely is used for the business, so it gets counted as an expense to the business. If revenue is less than expenses, you have a loss, which means you have a tax deduction.

[00:21:40] And this is one of these things. If you read a book that talks about fathers of various economic means, one of the pieces of advice that book gives you is go start a business and have the corporation pay for everything.

[00:21:53] That’s a really great way to get audited, and I would say that book gives a lot of spurious advice from time to time. But it is 100% correct that when you do that and you’re working with a tax professional, you will be shocked at how many different things you can have the business pay for and then be a tax deduction. Where people get in trouble is that they suddenly think that it’s magic and they want to tell everybody and their brother like, oh, I’m going to pick up lunch here, and that’s a tax deduction, ha ha ha! Well, you still are paying more than that tax deduction is worth.

[00:22:26] So this is why you want to be working with a tax professional, to sit there and go, hey Doug, stop that. It doesn’t work like that. And just because you’re going to have a great tax benefit does not mean it’s free. Your tax benefit at most is going to be 30 cents on the dollar. And so when you stop and think about that, you’re still paying 70 cents to save 30 cents.

[00:22:49] This is part of the advanced class. And if you decide to start a business, yes, you’re going to have a lot of tax considerations. And whatever business you start, you’re not getting the business to do your books and your taxes. And in the advanced class, you absolutely need a tax professional to make sure you do it right and to keep yourself out of trouble.

[00:23:08] And ladies and gentlemen, I know what it’s like when you have to sit down and look at something as complicated as the US tax code with all of its complexities and loopholes and weirdness, with the big bad threat of the IRS looming right over your shoulder.

[00:23:21] So when my wife and I were sitting there at our kitchen table realizing we owed money, it was really uncomfortable. And I looked over at my wife and I said, “We are never going to be in this situation again.” And so after we paid our tax bill, we worked together to figure out how we could avoid our taxes.

[00:23:39] We increased our contributions into our 401ks. We changed our health insurance plan from a low deductible plan to a high deductible plan and started saving into an HSA. We also took advantage of FSAs for our children. And ladies and gentlemen, I’m proud to report, we have not owed at the end of the year since. And that feels really good.

[00:24:04] Outro: Thanks for listening. If you like what we do here, please hit that subscribe button. Leave us a rating and review, and share the content with somebody who would benefit from the message. You can follow us on Instagram, Facebook, and Twitter, all @FiscallySavage, and head over to FiscallySavage.com to get our free tools, suggested reading, and everything else you need to take control of your financial life and live free.