The Reason You Pay Too Much In Taxes
I want you to imagine, it is the end of January and you are receiving all of your documents for your income so that you can begin to file your taxes. You either hope you get a refund or that you don’t have to pay as much as you did last year.
You contact your Tax Professional who gathers all of your statements and tells you they will let you know when your taxes are ready to file. Some time passes and you hear from them a few times to clarify a few pieces of information and then they send you your tax return and say 1 of 2 things:
“Here is what you owe”
“You’re going to be getting a refund”
If you owe, your heart sinks a little bit, but thems the rules.
You remember a few ideas you heard about tax reduction strategies and you email your Tax Professional to ask about them and they say:
- That’s not legal
- That’s too complicated
- That will get you audited
Or some other form of “I don’t know” or “I’m not willing”. They do suggest that you can max out your retirement plan before you file. But that’s that. You file and pay your taxes.
If you’re getting a refund, they fail to tell you that is bad thing. They don’t inform you that you are having too much withheld out of your paychecks and offer to adjust your Form W4 for you so that you get a monthly pay raise instead of a refund on an interest free loan you extended to the government all year.
Then you wait until next year and do it all again thinking that this is just the way it is.
Only that’s not the way that it is.
If this is how you’ve been filing your taxes this is why you pay too much and you’ll always pay too much in taxes following this method.
And the reality is they only charge you $200 to do your taxes and they have hundreds of customers and are working 12–18 hour days, 7 days per week from January to April. They don’t have time to do anything more for you and even if they did, they don’t charge enough to do it. It’s like going to a Starbucks during the busiest hours of their morning rush and expecting you are going to get a world class coffee experience. No you’re going to get coffee that is simply cheap enough for you to buy and good enough for consumption, with your name spelled wrong and a bunch of foo-foo creams, syrups, and sugars so you can’t tell how bad the coffee is and you keep coming back for more. And to expect anything more than is to not understand who you’re doing business with.
Remember all of those news stories you hear about how these wealthy business owners and politicians pay little to no taxes?
Well it’s true. It’s legal. And you can do the same thing yourself.
But how? That’s the magic question.
If you’re filing your taxes the way I just described it is because your Tax Professional doesn’t know how (or they do and just don’t want to do any of the extra work). And if you keep using them and doing it this way you’ll never know how either.
So let’s set the stage for how this actually is supposed to work.
First, income taxes exist because of something called the Internal Revenue Code (the tax code). This code is over 6,000 pages in length of actual laws and rules about taxation. About 30 of those pages actually have to do with the paying of taxes (types of taxable income, tax rates, etc.)
Which means the rest (5900 some-odd pages) all have to do with clarifications, exemptions, exclusions, etc. (ways not to pay taxes)
Your Tax Professional only knows the 30 pages about what you owe and maybe a few basic pages out of the rest of the tax code. But they don’t know all of the laws that provide ways for you to not pay taxes.
Secondly, we must understand who wrote the tax code. The short answer? The Top 1% of Wealth did.
The tax code is either written by Politicians (or “Poli-Shittins” as I warmly call them) as ways to control financial behavior through tax incentives. The government wants housing, employment, high production, and other things that are just generally good for a country. So they’ll write incentives into the tax code so that if you help them grow these areas in the private sector, you get tax breaks. Because it is cheaper for them to reduce your taxes for you to do these economically stimulating things than it is for them to do it themselves. But make no mistake about it, the politicians who run the show are in the Top 1% of Wealth and they want to use these rules just as much as anyone to lower their own personal taxes.
The second group that writes the tax code are Lobbyists. Lobbyists work for special interest groups (aka wealthy corporations…aka Top 1% ers). These special interest groups will hire a lobbyist and that lobbyist will have the job of essentially buying a politician by taking him to nice dinners, giving him special gifts, paying him consulting fees, and ultimately offering large campaign donations if that politician will give special attention and/or privileges to the special interest group. This is also completely legal.
Then, the attorneys that work for the special interest group will draft a bil that is in the best interest of their employer (the special interest group) and that allows them special tax breaks. They will give the bill to the lobbyist. The lobbyist will propose that the politician sponsor their bill. The politician will work with them on editing the bill so it can be sponsored and proposed in Congress and then passed as a law and added to the Internal Revenue Code.
So other than about 30 pages, the rest of the code is mainly focused on tax reduction and it is legal and there to be used.
How do we use it?
First it starts with the 30 pages that have to do with paying of taxes. There are certain types of income and certain applicable rates that correspond with each. We call this step Payroll.
How are you receiving your income? Is it organized? Is it optimal? Is it legal? Is it being reported correctly? The #1 thing that will get you audited and in trouble with the IRS is unreported or misreported income, not the “loopholes” of the tax code.
Second we look at your Bookkeeping & Accounting. Whether you are a business owner or investor, you spend money and if those expenses are accurate, organized, and documented then some of them are deductible per the Internal Revenue Code. But, if they are messy, not being tracked, not being categorized correctly, or checked for accuracy then that is the #2 thing that can get you audited. An audit is the IRS simply looking at your tax return and saying “prove it”. If you can’t because you have poor or no bookkeeping or accounting then you are going to be in trouble with the IRS. Again, this has nothing to do with “loopholes” in the tax code. This is simply being neat and accurate with your income and expenses. This also sets the baseline for us to be able to use Tax Planning and take advantage of those “loopholes”. We can’t use any of these if you we don’t know what you make, what you spend, what your taxable income will be, and what you owe.
Third, is Tax Planning. This is where an experienced Tax Planner reviews your Payroll, Bookkeeping & Accounting, and your prior year tax returns to understand your situation and then pick out the areas in the Internal Revenue Code that we can apply to your situation to give you the largest tax reduction possible. Here is the kicker. There is no professional designation or license for a Tax Planner. It’s not a thing. A CPA isn’t a tax planner. An Enrolled Agent isn’t a tax planner. A Tax Attorney isn’t a tax planner. So you have to find someone who is either CPA, Enrolled Agent, Tax Attorney, or Financial Advisor who also specializes in tax planning and knows how to apply the tax code legally. This is by design. The IRS doesn’t want everyone to know they can essentially pay no taxes because then there wouldn’t be enough money for them to waste the way they want to. So the code does exist, but it’s long and complex and very few people know how to understand and apply it. Those that do are often the ones who had a hand in writing it and it is usually reserved only for the wealthiest families or those who can somehow figure it out themselves.
Fourth is Tax Filing. This happens last. After we optimize your payroll. After we handle your bookkeeping & accounting. After we’ve completed your tax planning. Then and only then do we file your taxes.
The last thing I want to address is timelines. We all hear about “Tax Season”, but really that’s not a thing.
Payroll, Bookkeeping, & Accounting need to be done from beginning of year to end of year. The season for them is ALWAYS.
Tax Planning season is September 15th — December 15th. Which means if it’s after December 15th and you’re just now trying to reduce your taxes (this includes next April when you’re filing) IT IS TOO LATE. Your only option is going to be to max out the trusty old retirement account like your Tax Professional always suggests. But if you’re serious about reducing your taxes you need to start in September and be working on having a plan complete and implemented by December 15th.
This also means if you plan on engaging in Tax Planning in September, you probably should start in April as soon as you file your prior year return just in case corrections need to be made to your payroll and accounting. Otherwise you risk signing up for Tax Planning, but then finding out your Payroll and Bookkeeping are inaccurate and require correction (which could take weeks or months) and then missing out on Tax Planning because of that.
And then Tax Filing season is January — April (unless you file an extension then it is September — November).
So look, if you read this and you’re tired of the same old same old where you file just to overpay or get refunds from the Starbucks version of a Tax Professional, then my Tax & Accounting Firm can help.
We have a full time Payroll Team, a Bookkeeping Team, Tax Planning Team, and CPA team on call and on demand to help you achieve the lowest possible tax bill.
It’s going to be different than what you’re used to.
It’s going to require more from involvement from you as a client than you’re used to.
It’s also going to cost more than you’re used to.
But you’ll likely also pay a lot less than you’re used to and keep more of your hard earned money than you’re used to.
To get started, click here and fill out this questionnaire and a member of my team will be in contact with you.
To Purpose, Wealth, and Freedom.
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Yahoo Finance, Fox, Chicago Weekly News, New York Finance, interviewed on over 45 podcasts with world renowned experts, earning endorsements and affiliations throughout his career with names like Grant Cardone, Dave Ramsey, and Pamela Yellen.
Jerry’s mission in life is to help create millions of financially educated and solvent families achieving greater financial freedom and sharing the truth about money with those around them.
Learn more at www.WealthDynamX.com
(DISCLAIMER: The information in this content should not be considered tax, financial, investment, or any kind of professional advice. Only a professional diagnosis of your specific situation can determine which strategies are appropriate for your needs. Wealth DynamX can and does not provide advice unless/until engaged by you.)