Don’t Live Life for the Taxman

by Marie on November 4, 2013 · 2 comments

Taxes can really take a bite if you do well and have high income. It may be tempting to live life by the IRS’s rules to lessen the bite. Here is how you could get to that point, a few ideas on living life to avoid the bite and why you shouldn’t always live that way.

Improvements to your home.

Every year the county appraiser will take a look at the accessed value of the real estate that you own and make a determination as to it’s value. Once set, the value is multiplied by the tax rate the county collector uses to determine what your yearly real estate taxes will be. If you are still paying a mortgage, you may not notice too much when the taxes go up, but once you are paying the taxes yourself, you definitely will!

Anything you do to improve your house, especially if it is visible from the street, may subject you to potential increases in your appraised value. Add a shed? You might be adding value. Pave your drive? You might be adding value. Add a deck or patio, you might be adding value.

So, if you are thinking of making those improvements, don’t forget to calculate the increased and ongoing cost of rising taxes on them, in addition to the cost of labor, materials and time to make the improvements.

If you are appraised higher, and think the new appraisal is not reflecting reality, you can appeal the increase with your county.

Many times, the joy and convenience you get from the improvements you make will offset the incremental increases to your real estate taxes. Sometimes you might even get part of the materials and labor cost back when you sell.

The problem at our house is that to me, the joy and convenience of the improvements would offset the increase in taxes, but to my spouse, it would not!

Taking profits in the stock market.

You know you should buy low and sell high. You also know that usually creates a taxable capital gain when you do. Selling at a profit is a two edged sword, one good, one bad. Tax planning involves not only record keeping and knowing the impact of new tax regulations, but also consideration of the pros and cons of buying and selling – whether at a profit or a loss.

Sometimes you can combine the two, sell your high performing stock, but also take an equivalent loss on a stock you have been wanting to get rid of. Another strategy is to try to sell in a year when you have lower income elsewhere, to minimize the effect of the gain.

We are doing that now. I retired 3 years ago, planning to have 4 years of lower tax years before starting to draw either social security or retirement funds. We are using that time to re-balance our portfolio, shedding shares in my old company’s stock because we were over invested in it compared to our other assets.

Although you may be tempted to hang onto a high performer if the tax bill will hurt, don’t let that govern your decision on whether to sell or not. Instead look for other ways to offset the gain.

Selling a real estate property.

I’m currently visiting our vacation condo at the lake, getting it ready to lease. I just met a new set of owners today. They indicated that they bought, not only because they like the area and loved the unit, but also because they had just sold another property and needed to do a 1031 exchange.

A 1031 exchange (in my limited and non professional opinion) lets you sell one property and buy another without paying the capital gains tax on the first one (assuming the second property costs more). This is an example of taking your profits and rolling them into another investment while postponing the payment to Uncle Sam.

Also in my opinion, you should never buy or sell real estate just to avoid paying the capital gains. However, if your allocation calls for real estate and you can do a 1031 or some other method of postponing or minimizing the taxes, then go for it!

Success at work.

If you have a paycheck, you will have taxes deducted, no getting around that. Success at work can translate into a larger salary, a bonus, extra (taxable) perks and more.

Most of us are very glad when we are recognized for our hard work and smarts in our chosen career. I know of at least one person, however, who refused an advancement due to increased taxes. This person had just seen, in the prior year, his entire gross income go back to the government in income taxes – due to his wife’s success at producing income. He thought, why should I accept this higher level (and more stressful) position when the government will just take the increase in pay back with my income taxes. Atlas Shrugged flashbacks anyone?

Getting that new car.

Sales taxes can also take a bite out of your financial hide. If you have bought a new car lately, you may still be patching the wound from the sales tax hit.

So how can you possibly minimize this one?

  • Be careful where you buy. Check out the sales tax rates in various areas around you and if you can get the same deal at a dealer in an area with a lower tax, it might be well worth the drive.
  • Buy used. The tax is based on the price of the car. If you buy a used car (even one just a year old), the price and hence the tax will be lower.
  • As with a house, the longer you keep and use your car, the lower your overall tax bill will be.

There have been times in my life when I have done or not done things based on the taxes I would incur. Although it is financially smart to consider the tax consequences of your actions and do tax planning with your accountant, it is not (in my opinion) smart to base your life choices on what the tax codes will cause for your actions. You miss out on too much by doing so! Live your life, smartly, but live it so you are in charge, not the taxman!

{ 2 comments… read them below or add one }

1 This Life On Purpose November 4, 2013 at 10:56 am

Those are definitely big considerations. I used to hear about nurses that hate working a double shift, even though they would get paid double time for their second shift. Why? Because the extra income would mostly just go to income tax, and so it wasn’t worth burning themselves out.

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2 Crystal @ Prairie Ecothrifter November 7, 2013 at 5:37 pm

Great points! It’s good to know how the home improvements and new cars may affect you with taxes, but I wouldn’t avoid making my overall quality of life better just to avoid taxes.

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