Remember When Federal Budget Deficits Mattered?

It’s so interesting watching the latest talk from Washington come through.  It’s all about potential tax cuts and what they mean.  President Trump is touting a plan that would lower taxes for many businesses and people.  He claims it will help the middle class.  Pundits argue it mostly helps the rich.  Either way, it’s interesting that very little attention is given to the budget deficits and the impact that the plan would have.

Budget Deficits

For as long as I can remember, the federal government has run a budget deficit.  There were a couple of years under President Clinton when there was a surplus.  However, that seems to have been a blip on the radar, and very much an anomaly.

The government spends more than it brings in.  They’re the only level of government that is authorized to do so.  States, cities, townships and the like must all balance the budget.  The federal government does not have to do so.

And they don’t.

When a deficit is created, the government essentially issues bonds or bills and repay them down the road.  For decades, it seemed, people would worry about this.  They figured too many would devalue the dollar.  People worried that it could spark inflation.  Some worried what would happen if the market got saturated and there was no demand.

With all that, it was always thought that limiting or eliminiting deficits was the right idea.

I remember that budget deficits were a big point of most presidential elections as I was growing up.

Why No More Concern?

But it seems that the impact of budget deficits has waned.  Our deficit has exploded over the past fifteen years.  Yet, when the latest tax plan was introduced, the potential impact was nowhere near the top talking points.

So why is that? Why don’t budget deficits matter anymore?

Well, first, is that inflation seems to have really lowered the cost.  With inflation at historic low numbers, the government has to pay very little interest.  So, they can borrow practically for free.

Next, the demands for the US Dollar seems limitless.  Where many once feared too much debt could destabilize the dollar, that hasn’t happened.  At all.  It seems that as long as we issue debt, there are foreign countries willing to buy it.

Finally, I think it’s seen as an investment.  Cutting deficits would mean cutting programs and jobs. This would have a negative effect on the economy.  Some might argue that deficit spending has partially helped the economy chug along for the last ten years.  An argument could be made that cutting or reducing the deficit would be worse in the long run.

What’s Next?

I don’t have any idea how this plays out.  One could argue that there has to be a limit. However, you could also say that twenty years ago, the current deficits would have been unimaginable.  If George H.W. Bush or Bill Clinton had suggested the deficits we have today, they’d have been run out of office in a hurry.

So, really, as far as what happens next, who knows?  It’ll be interesting to watch, though.

Readers, what do you think about the current federal budget deficits?  Do you think the current deficit spending is sustainable?  What about adding even more with the proposed tax cuts?  

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Going All In On Itemized Deductions

Since being married, my wife and I have always been able to itemize our deductions.  Between mortgage interest, property taxes, and state taxes, our itemized deductions have always exceeded the standard deduction amount.  This has been great come tax time.  But, it looks like the ability for us to itemize is coming to an end.

As such we’re going all in this year.

Why Itemized Deductions May Not Happen After This Year

Over the past couple of years, I’ve noticed that the gap between our itemized deductions and the standard deduction has gotten smaller. The main culprit is our mortgage interest.  We are just over five years into our fifteen year mortgage.  Each month a bigger chunk goes toward principal and less toward interest.  In the grand scheme of mb-201403stacksthings, this is fantastic, but it definitely changes strategy when it comes to itemizing.

I’ve calculated that if nothing were to change, we’d end up claiming the standard deduction beginning with our 2016 taxes.  I’ve seen this day coming, so we’ll be doing a couple of things to not only keep the ability to itemize, but maximize the amount.

How We’re Maximizing Our Itemized Deduction

First, we’ll pay our winter property tax in 2016.  The tax bill comes in November and is due in February.  Typically, we pay right around the due date, so that we keep our money in our pockets for the longest possible amount.  This year, we’ll make our payment before the end of the year.  Since we paid last year’s winter bill as well as the summer bill in 2016, we’ll have made three payments this year.  Since the deduction is based on the year you make the payment, this will work in our favor.

Second, we’ll make our January mortgage payment in December.  This means that we’ll make 13 payments this year.  Again, since the amount is based on the date you actually make the payment, we’ll get the extra amount in interest on this year’s taxes itemization list.

That’s cool!

Moving Forward

Looking ahead, we certainly won’t be able to itemize next year.  Which is fine.  I’m hearing that if Trump gets his way with some of his tax plan changes, the standard deduction amount would be going up.  This means that we likely wouldn’t have been able to itemize anyway.

So, the timing couldn’t have been more perfect, as least on how things are looking today.  You never know how things will change, of course.  Still, for now it looks like we’ll end up with a few hundred extra dollars in our favor when it comes time to calculate our 2016 taxes.

Readers, what tax strategies are you employing for the end of the year?  Are you doing anything special because of Trump’s tax plan or are these things you might do otherwise?  Let me know in the comments below.

 

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Tax Basics For Your Small Business

Tax law is very complicated, especially for small businesses. Employers are required to collect income withholdings from their employees, and there’s a self-employment tax for individuals who work for themselves. It doesn’t matter what type of business you’re operating (with employees or without, and even freelancing), the IRS demands that you pay. If you don’t pay you’ll face penalties and, in some cases, criminal charges.

The following lists the different types of taxes your business may have to deal with. Keep in mind, tax credits can help you lower your effective tax rate. The ADP SmartCompliance tax credits module has a database of more than 3,000 incentives and can help you claim and keep all the credits available to you. Achieving the lowest possible tax rate is complicated (less so when you outsource the effort), but the savings are worth it. At tax time, your business has two goals: be 100 percent compliant in order to avoid financial penalties/fraud charges and save money.

Payroll Taxes aka Employment Taxes

If you have employees, you absolutely must collect withholding tax. The IRS calls these tax responsibilities Employment Taxes. Every check is subject to withholdings, regardless when an employee is paid (weekly, bi-weekly, etc.). This money is deposited in a withholding tax fund until tax time, which is when it’s paid to the IRS.

The following taxes must be collected from every employee and yourself. Use the IRS’s withholding tables to determine how much to hold back for each fund.

  • Federal income tax
  • Social security and Medicare

Here’s a warning, you shouldn’t ignore: do not borrow against your withholding tax fund. If this money can’t be paid back, the IRS will consider you a criminal. In the eyes of the government, employers who borrow from saved employment taxes are stealing from their employees. You will be prosecuted.

Annual Income Tax Return

Excluding partnerships, all businesses must file a tax return. Partnerships should file an information return and individual returns but, otherwise, businesses should file a tax return. Your employee’s taxes are paid through the withholding fund, but business taxes are paid out of pocket. You must pay your income tax as-you-go, just like your employees. Sometimes, you can opt to pay an estimated tax and this doesn’t require as-you-go payments.

FYI: It’s on this form that you will include your tax credits.

Self-Employment Taxes

If you don’t have employees but you’re operating a business, you’re obligated to pay self-employment taxes at the end of every year. You can opt to pay as you go, or you can pay at the end of the year when you file. Your tax payments are important because they contribute to your financial future, such as your ability to collect social security.

You may be able to write off some of your business expenses, especially if you paid sales tax on certain items.

In general, self-employment taxes must be paid on any received payments that weren’t already subject to payroll taxes. This includes:

  • Home-based business income
  • Freelance work income
  • Independent contractor work
  • Untaxed earned income
  • Business income, unless taxes are already paid

Excise Taxes

Not all businesses have to pay excise taxes. If you meet the requirements, you’ll be asked to file a specific form and pay the resulting tax. The IRS lists the following as examples of excise tax:

  • Environmental taxes
  • Communications and air transportation taxes
  • Fuel taxes
  • Tax on retail sale of heavy trucks, trailers, and tractors
  • Manufactures taxes on sale or use of a variety of different articles

There you have it: the taxes you may or may not be subject to. This is a very basic look at business taxes. You absolutely must dig deeper to ensure you’re not subject to penalties because you made a mistake. The best way to ensure safety during tax time is to educate yourself and follow the advice of your tax accountant.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

If You’re Paying More In Taxes, You Might Get Little Sympathy

I read a post on another one of my favorite blogs recently that rubbed me the wrong way a little bit.  I’m not going to point it out because I don’t think the post was written with the intent to get anybody upset.  Plus, it actually dovetailed into some other advice that was practical and useful for many.   But it still gave me enough pause that I wanted to vent a bit.  The post started with the author complaining that he’s paying more in taxes than most.

Professional Blogger

Some background first.  The is a professional blogger who writes a lot about his profession.  I can tell that he’s very knowledgeable, and I would wager that he is very good and very successful at what he does.

As such, I think he probably earns quite a good living.  Which, just to make very clear, I am 100% fine with.  People that do good work and are compensated well for it, I really have no problem at all with.

However, where it went a little off course was that he just jumped right into the fact that he was paying a lot of taxes, and glossed right over what I consider the even more important part of it.  What’s that?  It’s simple.

He’s  paying a lot more in taxes because he’s making a lot more money.

Mo’ Money, Mo’ Taxes

See, when you shift the focus of the sentence, you could easily look at the “making more money” aspect, in which case, who would complain about that?  Nobody.  Nobody at all would complain about making more money, right?

mb-2015-06-chartBut, if you’re paying more in taxes, aren’t you, in essence, complaining about making more money?

Now, I know that tax law is complicated and there are tons of factors that go into what people pay, so I know that people can make the same money and pay wildly different amounts in taxes, and vice versa, but I think it’s a safe bet to say that someone who pays $5,000 in taxes is likely making a lot less than someone who pays $25,000 in taxes.

See, it’s all about perspective.  You’d probably never hear the person that pays $5,000 in taxes say “Oh, wow, I wish I was paying $25,000 a year in taxes.”  That would sound almost silly, right?

Would You Sacrifice Income For Taxes?

But, what if, for the sake of argument, the two were making $50,000 and $250,000 respectively.  Would you think it crazy if the person making $50,000 thought “I wish I was making $250,000 a year.”  Of course not, who wouldn’t want that?

However, aren’t they really saying the same thing?

Let’s face it, everybody would like to pay less taxes, sure, I get that, but in the roughly 20 years I’ve been filing returns, it’s a pretty safe bet that if I’ve paid more taxes versus the prior year that I’ve started off by making more money.  I mean, you can’t really have it both ways, so which way would you rather have it, paying more and making more or paying the same but foregoing your growing income?  That could very well be the easiest question ever asked on this blog.

So, the point is that people can complain about paying taxes, but in many cases, aren’t you potentially complaining about making more money?   Have you ever heard of someone making such a complaint?  Well, if you’ve heard someone complaining that they’re paying tens of thousands of dollars in taxes, you may in fact have.

The post could have been nullified a bit.  Perhaps  starting things off with “Our income was good last year, but even so, it still sucks paying $<amount> in taxes.”  Acknowledging the other side might have earned a tad bit more empathy from me, anyway.

Readers, what do you think?  Do you see complaining about paying more taxes almost as complaining about making too much money?

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.