Tax Savings Ideas

In Mark 12:17, we hear the story about the Pharisees trying to trick Jesus   by asking him the question, “Is it right to pay the imperial tax or not?”  If Jesus said “No” then he would be considered an enemy of Rome and if he said “Yes” his reputation with the people would be undermined. As in all Bible stories, Jesus answers the question, but in an unexpected way. He asked for a Roman coin, looked at the image of Caesar on the coin and replied “Repay to Caesar what belongs to Caesar and to God what belongs to God.”

Just like the individuals in the Bible, we are also required to pay to the government what is due to them in the form of taxes. And although filing your income taxes is a once a year event, taking advantage of every legal means available to reduce your taxes is a year round event.

If you pat yourself on the back each year when your tax refund is received, you should rethink your strategy. A big refund means that you’re having too much tax taken out of your paycheck every payday. A refund of $2,400 (which is about average) means you are loaning the government $200 each month – and they are not paying you interest for the privilege of using your hard earned money.

Go to the IRS website to calculate the various tax exemptions available to you, so you can determine if you should file a new W-4 form with your employer. You’ll need some information, such as your pay stubs and most recent tax return in order to calculate it properly.

The purpose of changing your W-4 to accurately calculate the number of deductions you should take allows you to remain tax neutral. You won’t have to pay much but you won’t get much back either. And being tax neutral will put more money in your pocket every month.

One of the best ways to lower your tax bill is to reduce your taxable income by contributing to an employer sponsored retirement fund. You can contribute to up to $18,000 to your 401(k) or similar retirement savings plan in 2017. If you will be 50, or older, by the end of the year you can contribute an additional $6,000 as a catch up allowance. Money contributed to a 401(k) is taxed when you withdraw it so it is not included in your taxable income in the year you earn it.

The other types of retirement savings that are widely available are a Traditional IRA and Roth IRA. You can contribute a maximum of $5,500 for 2017, or an additional $1,000 if you are over 50 for a catch up allowance. While the contribution limits are significantly lower than those of 401(k)s, IRAs can be a good addition to your retirement strategy as you can choose the type of investment you prefer—stock, bond, or mutual fund.

Both types of IRA accounts allow your investments to grow and compound on a tax-deferred basis, meaning you won’t have to worry about paying taxes on capital gains and dividends each year. But there is a difference.

Traditional IRAs work like most 401(k) plans. Contributions may be tax-deductible depending on your income, but your eventual withdrawals will be treated as taxable income and there is a minimum distribution required when you reach a certain age. Roth IRA contributions are made on an after-tax basis. You won’t get a current-year tax deduction, but qualified withdrawals will be 100% tax-free.

Take advantage if your employer offers a health care flex plan (medical reimbursement account). This type of plan allows you to direct some of your salary into an account earmarked to pay medical bills. You’ll avoid both income and Social Security tax on the money and those medical bills won’t be such a drain on the monthly budget.

Any improvements to your home or vehicle made for medical reasons may also be deductible as medical expenses.  Keep detailed records of any changes such as adding hand controls to a vehicle, or putting a wheelchair ramp in your home.

If you are job hunting, keep track of your expenses. As long as you are searching for a new job in the same line of work, you can deduct job-hunting costs (travel, lodging and transportation) if your job search takes you away from home overnight. Such costs are miscellaneous expenses, and can be deductible if they exceed 2% of your adjusted gross income.

Once you get that new job, keep track of your moving expenses. You can deduct the cost of the move if your new job is at least 50 miles further from your old home than your old job was.

A child born to you or adopted is a blessing to both you and your family as well as your tax return. An added dependency exemption will reduce your taxable income, and you may be able to qualify for the $1,000 child credit, based on your income and other factors as defined by the IRS.

A tax credit is available for child and dependent care. This tax credit allows you to save one-third or more of the cost, since you avoid both income and Social Security taxes. If you have dependent care expenses and your employer offers such a plan, take advantage of it.

Save for college costs and avoid taxes at the same time by using a state sponsored 529 plan. With a prepaid tuition plan, you can pay tuition in advance, many years before the student actually enrolls. Prepaid plans allow you to pay for tomorrow’s education at today’s prices. There may be residency requirement as well as limits on what the plan will cover so buy carefully.

Be sure to talk to your tax preparer and check out the IRS rules if any of these scenarios apply to you. As with all things related to taxes, there are more level of details than can be listed here.  Take time to validate the applicable deductions and the amounts for which you are eligible.

Jesus said to pay to Caesar what belongs to Caesar, but if Caesar creates rules that allow you to pay less . . . then take advantage of those opportunities! If you are carefully keeping track of your income and expenses there are many ways to save on your taxes all year long and avoid a big tax bill on April 15th.

Do I Have to Pay Taxes?

Let’s face it, nobody likes to pay taxes and complaining about them seems to be a national pastime, especially at this time of year. The annual process of gathering information then completing what seems to be a mountain of paperwork can leave us feeling frustrated and irritated. And if you are like 99% of Americans you want to pay as little as possible and maximize any refund you may be entitled to.

With so many reports of corporate tax loopholes and large companies paying lower federal tax rates than some low and middle-income families, it easy to think, “If they can cheat, why can’t I?”

That is all very understandable. However, gaining that refund through lying and cheating is not the way to do it. As children of God, we are called to be honest in all situations even if we don’t like the situation.

The IRS Oversight Board published its taxpayer attitude survey in December. While some people indicated it was “OK to cheat on your taxes a little” the vast majority of those surveyed did not agree with cheating on taxes and most of them thought it was proper for the cheaters to be held accountable.

The survey also indicated that the top reason for not cheating was personal integrity. Integrity is sometimes loosely defined as “doing the right thing, even when no one is looking.” A variety of systems and situations in society rely on our integrity and honesty.

For instance, on Halloween children know they are supposed to take only one piece of candy from those delicious-looking bowls full of treats. As we grow into adults, we’re trusted to act with integrity in many situations. Some people do so because they are afraid of the consequences associated with getting caught. Others do so simply because it’s the right thing to do. And others do so because it is God’s call for us to be honest and act justly in all situations.

People may tell you to avoid paying taxes at any cost. After all, they will reason, look how much the government wastes and squanders. But the Bible tells us to pay our taxes. “Everyone must obey state authorities, because no authority exists without God’s permission, and the existing authorities have been put there by God…That is also why you pay taxes, because the authorities are working for God when they fulfill their duties. Pay, then, what you owe them….” (Romans 13:1, 6-7) It’s certainly permissible to reduce taxes by using legal tax deductions, but we should be careful not to make unwise decisions and manipulate the truth simply to avoid paying taxes.

This means when it comes to tax time we must report all income from every source, even if a large portion of our income is in cash. It also means being totally honest with the deductions we take. Things such as the costs for commuting to and from work, unqualified business expenses, legal fees, and medical expenditures for pets are not allowable.

While it may be tempting to cheat on your taxes to save money or get a large refund, it definitely is not worth the risk. If you do decide to cheat, you may have your return audited by the IRS. We’ve been audited by the IRS and it is not a fun experience and I highly recommend avoiding it. And the bottom line is that cheating is both dishonest and a sin.

When people make a decision on whether or not to be honest, the first filter they use is trying to figure out if they’ll get caught or if they can get away with lying. But if we are living from a Scriptural basis, then our decisions are based on what will please God, and we don’t base decisions on what we can get away with.

When we cheat on our taxes, we may rationalize that it’s the government suffering the loss. Yet, if we look at the bottom line, it is our fellow taxpayers from whom we are stealing. Dishonesty always harms an individual. Any time we are dishonest, we are harming one of God’s children.

So as you calculate your tax bill this year, keep the following Bible passages in mind.

The first verse is from Mark 12:14-17, “‘Is it lawful to pay the census tax to Caesar or not? Should we pay or should we not pay?’ Knowing their hypocrisy he said to them, ‘Why are you testing me? Bring me a denarius to look at.’ They brought one to him and he said to them, ‘Whose image and inscription is this?’ They replied to him, ‘Caesar’s.’ So Jesus said to them, ‘Repay to Caesar what belongs to Caesar and to God what belongs to God.’”

The second verse is from Judges 17:6 “Every man did what was right in his own eyes.”

Even though we may not realize it, each of us makes many small decisions every day about being honest. Deciding whether or not to fudge the numbers on a tax return to get more money back is one of those decisions.

Too many times in our society, honesty is a relative thing. People say things like “I don’t quite remember” or “As I recall …” which indicate they may be manipulating the truth.

Society thinks that honesty is relative – you can exploit the truth to get what you want. But the Bible says we must be honest with everything at all times. The eighth commandment is “You shall not lie.” There are no exceptions to that statement.

Society tells us to only deal with the facts that can be seen. Yet the Bible tells us to act in a way that displays our faith in the living unseen God. In John 14:6, Jesus tells us, “I am the truth” We need to follow him and also be truthful.

Our actions speak louder than our words. We can not be good Catholics, and be dishonest at the same time.

So you may not like your current local, state or national government officials, and you may think taxes are too high, and you may not agree with how the government is spending your money, but you still have to pay your taxes.

Tax Cheats

calculator-1044172_640Last week we blogged about getting organized so tax time is less stressful and more automated. This week’s blog is about another aspect of tax time – cheating!

Most of us don’t enjoy paying taxes and many of us object to the way our tax money is being used. Some people even go so far as to insist that taxes are unconstitutional. For example, some people argue that income taxes violate the First Amendment rights to freedom of speech and freedom of religion. (Not sure I see how that relates to paying taxes.)

Others say income taxes violate the Fifth Amendment statement that no person shall be “deprived of life, liberty, or property, without due process of law.” I can see where some people may be able to make a case that taxes deprive us of our “property” (i.e. money) if they totally ignore what we get in return for our tax dollars.

Still other tax protesters have argued that income taxes impose involuntary servitude in violation of the Thirteenth Amendment or that the Sixteenth Amendment (Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration) was never ratified.

All these arguments have been rejected by the courts and according to the government, we are obligated to pay our taxes. The Bible even reiterates that we are obligated to pay taxes. Romans 13:6-7 says: “This is why you also pay taxes, for the authorities are ministers of God, devoting themselves to this very thing. Pay to all their dues, taxes to whom taxes are due, toll to whom toll is due, respect to whom respect is due, honor to whom honor is due.”

It may be difficult to see that the authorities in our government are “ministers of God.” And we may disagree with any and all decisions of our local, state or federal government, but we are still obligated to pay taxes.

Because so many people disagree with the government, we often get asked if it’s OK to cheat on our taxes if the government is acting in a way (in that person’s opinion) that is not very Christ oriented. The answer is NO! It’s not okay to cheat on your taxes, even if you disagree with the government.

The IRS released a Taxpayer Attitude Survey from 2014 which indicated that a majority of the responders found in unacceptable to cheat on their taxes. I wonder if people were saying they were honest because they were speaking face to face with a person, or if there are really so many people who are actually honest. Only 11 percent were tolerant of cheating “a little here and there” or “as much as possible.”

The cheaters lie in various ways – they write off items which are not considered valid tax deductions or they under report their income, and this is especially true of people who receive a large portion of their income in cash (restaurant servers) as well as the individuals who specifically deal in cash transactions in their business to hide income.

People who cheat may think they are in some way “getting even” with the government, but they are really hurting the other taxpayers. The victim in any dishonest situation is always a person – a child of God. Our faith calls us to be honest in all situations. Job 31:6 tells us: “Let me be weighed in a just balance, and let God know my integrity!

Integrity is defined as the quality of being honest and fair. People of integrity are honest and do not lie on their tax form. Integrity is also defined as the quality of being complete or undivided. People of integrity incorporate their faith into all aspects of their life – even when it comes to being honest on their 1040 form. Sometimes integrity is defined as “doing the right thing, even when no one is looking.” People of integrity always do the right thing – whether anyone is looking or not.

A variety of systems and situations in society rely on our honesty and integrity. For instance, on Halloween children know they are supposed to take only one piece of candy from the bowl full of treats. As we grow into adults, we’re trusted to act with integrity in many situations, and some people do so because they are afraid of the consequences associated with getting caught, while others do so because they are following the Word of God.

This isn’t to say that you can’t maximize any and all legal deductions to which you are entitled. With the average refund being more than $2,902 (as of the 2014 tax year), there is a lot of financial gain to be had. But maximizing legal deductions and cheating on your taxes are two entirely different things and cheating is never acceptable.

Mark 12:14-17 reads: “They came and said to him, ‘Teacher, we know that you are a truthful man and that you are not concerned with anyone’s opinion. You do not regard a person’s status but teach the way of God in accordance with the truth. Is it lawful to pay the census tax to Caesar or not? Should we pay or should we not pay?’ Knowing their hypocrisy he said to them, ‘Why are you testing me? Bring me a denarius to look at.’ They brought one to him and he said to them, ‘Whose image and inscription is this?’ They replied to him, ‘Caesar’s.’ So Jesus said to them, ‘Repay to Caesar what belongs to Caesar and to God what belongs to God.’

If we are living our faith, Scripture clearly tells us that we are required to pay taxes and it is not acceptable to cheat on our taxes (or anything else for that matter!)

It’s Tax time!

bookkeeping-615384_640For many people getting ready for tax time is full of stress, tension and anxiety. Most people have receipts, statements, stubs and other tax information scattered all over the house. I remember one year when we lived in a very small apartment, our tax statements arrived in the mail on the same day we were trying to clean up the guest bedroom in preparation for visitors. I hastily put the mail (including our tax statements) in a box of crafts and stuffed the box on the top shelf of the closet to keep the guest bedroom clean. Needless to say, it took many hours of searching and much frustration to locate the tax statements after our guests had departed.

Thank heaven we have gotten a lot more organized since then. The first thing that helped us was when we started to use a spending plan and budgeting software to manage it. This helps us keep track of where every penny is going while at the same time gathering information throughout the year for tax preparation. So when tax time arrives, we have everything we need in one place.

A spending plan means getting a receipt (or your version of a receipt) for every transaction. When we purchase at a store using cash, debit card or credit card, we always ask for a receipt. If we purchase online, we keep the receipt until the credit card bill or bank statement arrives. If we buy something with cash where there is no receipt (think girl scouts selling cookies in front of the grocery store) we write down what we spent on a notecard we carry or we snap a picture of the item with our phone.

We have one room upstairs which is our home office so we put the receipts on one of the steps and whoever goes upstairs next takes the receipts upstairs, where they are put into the “receipt basket.” The paper in the receipt basket sits there for a week or 10 days then gets recorded in our budgeting software as we have time (we use Quicken.)

Any good budgeting software will allow you to arrange expenditures into categories so you can track your spending in a way that is meaningful to you. There are also many credit card companies, financial advosors and banks that provide budgeting software to their clients. The important thing is to be sure the software you use will allow you to track ALL your spending. If you are using the bank software but you can only track spending from the accounts at your bank, you may be missing spending from other bank accounts, credit cards or cash.

A lot of people ask us for the appropriate categories to use when they track their spending. The answer is that the categories need to be broad enough so it is not a major nuisance to record spending while also being narrow enough to allow you to analyze where you spend. For example, if you have a pet you may want a category devoted to costs associated with your pet (food, supplies, grooming, veterinarians, boarding or pet sitting.) If you have children you may want to lump like things together (sports, school tuition, supplies, etc.) Or you may want a category for each child. The important thing is to make sure your categories work for you. A sample list of spending plan categories can be found on the Compass Catholic Website: Spending Plan Categories

If you are using an electronic budgeting program it’s pretty easy to mark a category that would be considered tax deductible. This way every receipt that is put into that category is marked as a tax deduction and the amount of the deductions for that category is automatically totaled. Our “Giving” category has subcategories for each charity we support: our parish, the diocese, plus each non-profit to which we contribute. As appropriate, you can set up categories for child care, medical expenses, sales tax, property tax, investment expenses, union dues, etc.

The key is finding a system and process that meets your needs then using it all the time. Our process works for us – it may not work for you. We know that receipts always go on the step, then into the basket, then into the software. It’s routine and we trust it. Similarly, since we trust the items we’ve set aside for the purpose of tax deductions, we also trust those receipts when we pull them out at tax time.

Trust in your process is absolutely vital for any kind of organizational system. It may take a few false starts to define a process that works for you. Just start now, and commit to making the system one that you can trust. Even if you missed the first two months of the 2016 tax year, you still have 10 months of expenses and deductions to go. If you put value in having your deduction information in order as well as in tracking your expenses, define a process that works for you and start now! It will be well worth the effort.

We may not like paying taxes, but we are directed by the Bible to do it:
Matthew 22:17-21 says, “Tell us, then, what is your opinion: Is it lawful to pay the census tax to Caesar or not?” Knowing their malice, Jesus said, ‘Why are you testing me, you hypocrites? Show me the coin that pays the census tax.’ Then they handed him the Roman coin. He said to them, ‘Whose image is this and whose inscription?’ They replied, ‘Caesar’s’. At that he said to them, ‘Then repay to Caesar what belongs to Caesar and to God what belongs to God.’”