Have you ever wondered why you just can’t ever seem to make enough? No matter what you do, finding a job that pays enough or even provides livable raises, is as elusive as Big Foot or Loch Ness?
The real reason is more complicated than it seems; Taxes. And no, not just filling out the 1040 long form.
Before I give you some tips to KEEP more of your money, let’s look at why the difference between “Gross” and “Net”, really is gross. As an employee, it’s a common misconception that your salary or wages is all that the employer is paying for your services. It’s not. You’ve seen on your own pay stubs, that what you earn, isn’t all that you get to keep. More specifically, your Gross and Net. That difference is of course, taxes.
But here’s what’s going on behind the scene. Your employer matches those taxes, dollar for dollar to the government, in addition to Unemployment and other requirements, as mandated by state and federal law, to boot. So while you might be thinking, I only make $40,000 a year, your employer is really thinking you’re costing them $50,000.
It’s no wonder your pay raises are so small! The last thing any business wants is more red ink. But that’s not the worst of it. You and I take what’s left, spend our money on all the things in our “expenses” column in the budget, on taxable goods and services! So we take after-tax dollars, to buy things that have further taxes on them, ie sales tax.
In a recent study “Does it Pay, at the Margin, to Work and Save?” by Laurence J. Kotlikoff and David Rapson. These two economists from Boston University pegged our marginal tax rate at a whopping 40%, give or take a few percentage points. So on average, for every dollar that you earn, that means only $.60 cents of that can you use to buy all your “stuff”. Now, I don’t want to argue the tax system, I like and use many of the benefits that my $.40 cents buys every day. From road construction to national security, I think pennies on the dollar is pretty cheap, for what it would cost me to provide those things, if I did it myself.
But how do you KEEP more of what you make.
First, go 1099. Obviously, this doesn’t mean quit what you’re doing, but start looking for ways to own your own side business. Just the tax savings alone justifies a few hours of your time to be involved in a legitimate, income earning business that allows you to take extra deductions on your taxes. From work at home to freelance writing, you could literally save yourself thousands depending on what you do and how it’s set-up.
I personally operate a business in the financial industry and my first year in business, shaved an additional $2600 off my tax liability. And the best part, is that it’s following the IRS’ own rules! There’s plenty of opportunities to choose from, just remember one thing; the goal is to SAVE money, not shell out a lot. Many of the things you spend money on, can be channeled for your business, thus creating a deduction! For example, maybe a portion of your internet connection!
Second, look at your payroll deductions. If you get a tax refund each year, that’s usually bad. Sure, it feels good to get a big fat $3,000 check from the government, but there’s a reason it’s called a REFUND. Meaning = OVERPAYMENT. Would you ever, willingly overpay for your car? Your house? No way! Well, when you see that manila envelope from the US Treasury in your mailbox, you just did. And what’s worse, the government got all that money from you interest free! Why not let your money make some money for you? You can change your W-4 deductions at anytime through your HR Department, so try lowering the number you originally claimed when you started (talk to a professional to best decide what number is best for you) and put the difference in an account that PAYS YOU interest. What’s the worst that could happen? As long as you’ve been disciplined about saving the difference, you can always use that money to pay any shortfall come tax time. But guess what? You get to keep all the interest!
Third, use the system! The IRS has created a number of “Savings Programs” that the average consumer can use, yet it’s surprising how few people do. From Flexible spending accounts to Energy Efficient Vehicles to IRA’s, there’s a wealth of opportunities, where you can have money working for you, BEFORE the tax man comes to collect. As a rule of thumb, anything pre-tax is good. And I encourage you, even if all you do is, instead of buying a $5 lottery ticket each week you “buy” into your tax-differed retirement account, you’re much closer to wealth, then the week before.
Fourth, find a tax professional. While I think independence is wonderful, a qualified tax professional is worth their weight in gold. They know not only where to find the best deductions, but also how to file them! I can’t think of any time when I paid a professional to handle my taxes, that I didn’t make or save more than if I’d tried to swim in those waters alone.
Fifth, micro-manage your money. I teach people, that a good habit to get into is “tell your money where to go, not ask where it’s been”. Look at your bank statement daily. Look at your receipts when you buy goods or services. Scrutinize EVERYTHING. The first step to curbing overspending, is to see how you spend. It’s also a simple way to catch unwarranted fees and charges.
This article is for illustration purposes only. Consult a tax and investment professional for your personal situation and tax consequences.