Chapter 5 - Taxes

By Richard Valentine Reily, author of Gregory's Hero.

Interest expenses are such a large part of most people’s spending that it merits a section of its own. There’s lots of other hidden spending which also must be identified before it can be controlled.

Another large part of most people’s spending is taxes. Taxes withheld from your paycheck are fixed spending. They are not in your control past limiting the amount that you earn or sheltering portions of your income which we will talk about later.

You pay taxes all day long every time you spend. You pay sales taxes, use taxes, value added taxes, shipping taxes, resale taxes, payroll taxes, social security taxes, Medicare taxes, state and federal unemployment taxes, income taxes, intangible taxes, property taxes, utility taxes, telephone taxes, registration fees, license fees and on and on.

Most takes are discretionary. No, you don’t get a choice to pay them or not; well there is the jail thing, but I’ll still consider that a bad alternative to simply paying your taxes. The discretion comes when you decide to spend or not.

Most taxes other than payroll taxes are tied to consumption. If you do not consume, you do not pay the tax. When you spend, you pay an additional amount on most transactions for taxes many of which are cleverly hidden within the price of the good or service you are buying. Take a look at a telephone or electric bill and try to understand the litany of fees listed there. Don’t bother, they are all taxes in disguise. When you spend less you pay less tax. Those taxes are discretionary.

A note about big taxes, like property taxes; these taxes usually are payable on a schedule with a due date some months later. If you pay the tax on time it is the actual rate. If you pay it late there is usually a late penalty that will cause you to spend additional money on tax that was unnecessary.

Conversely if you pay in advance, as usually scheduled on your tax bill you can often reduce the amount you pay in tax sometimes up to 10%. This is almost always a good bargain for the tax payer. Use it and keep the balance of the tax bill in your own pocket. Many states offer exemptions from all or portions of property taxes and limitations on the rate of increase of your property taxes. The opportunities for exemptions are too numerous for our purposes here and you are best served to check with your county for exemptions available to you. I have yet to see a taxing entity that will readily and willingly refund you money you paid in error and that you are unaware of!

Did you know that in many areas the property tax rate on new homes is set based on the closing price? That’s right. All those exorbitant amounts that developers charge for wider driveways, screen porches, upgraded kitchens, tile floors, sound systems, crown moulding and so on set you up for a life time of higher property tax rates.

You can avoid many dollars in property taxes over the life of your ownership by allowing the developer to do less and then having those upgrades done after you take possession. I hope you will also consider having those improvements done with money from your cash flow, not borrowing, when you finally get around to doing them. Your property taxes will be lower for the life of your ownership and you mortgage will also be lower costing you less interest.

Telephone companies are notorious for myriad of taxes and unintelligible fees that take half a page to list. These taxes and fees and all associated with services you ordered. Do you still use them? Did you ever use them? Go down that phone bill and question each line. As you do this analysis remember that technology is rapidly changing and services that used to come from only one supplier may now be available through other or multiple suppliers who you might find to be in competition for your spending. When you reduce your overall purchases you also reduce you tax and fee expense proportionally.

I was very excited when the local telephone company brought DSL service to my community. After years of dial up I was ready for always on fast access. The telephone company figured out that they could make a package of lots of useless services for just a little bit more than DSL and basic phone service and net the difference.

Then cable high speed came to my community. The cable company delivered high speed and every cable channel for two thirds of the cost of my telephone bill. Even with basic phone service added in, I now have all the premium cable channels in addition to basic phone service and high speed access for less one third less than the telephone company charged for its service package. Simply because it was appropriate when installed does not mean it remains the best value for your hard earned spending money.

Utilities operate in much the same way as telephone companies. What is a network transfer static recovery fee anyhow? It may have to be paid, but if it is a percent of some usage volume you can pay less when you use less. And using less fits into the overall effort to reduce spending through changing habits.

Do you really need to stand in the running shower for thirty minutes? Perhaps a twenty minute stretching session and a five minute shower would accomplish the same warming and relaxing. Does the washer really need hot water when warm or cold will do? Can those towels air dry while you are at work and allow you to leave the dryer off? Can those few dishes be hand washed and put away leaving the dishwasher to simply look nice under the counter without incurring additional operating expense?

It is known that any give household can easily reduce its energy consumption by 20% without noticeable changes in energy usage habits. Think about what is in the refrigerator before opening the door; get what you want and immediately close it. Turn the water heater down a few degrees. Turn off electrical products when not in use. Along with paying for less power, you also pay for less taxes and fees.

Do you know how much tax is in a gallon of gasoline? Upwards of 50 cents per gallon, and climbing. Want to spend less on gas tax? Buy less gas. It’s easy too. Grab the sneakers and take a stroll to the store for that one or two things you decided you can’t live without. Not only do you save the gas tax, you save the cost of gas, you get some exercise and might even run into a neighbor you had never met. But don’t forget what you went to get after ten minutes chatting up the gossip with your new friend.

Income taxes, disguised as payroll taxes for most, can be one of your highest taxes, though for many people FICA (Social Security) taxes can outstrip your Federal Income Tax rates and there is no refund of FICA taxes. Another significant hidden spending is in the exemption level you setup with your employer when you completed or changed you last W-2 form.

Determining if your withholding level is right is frighteningly simple. Answer this question: Did you get an income tax refund last year? If you answered yes, you are having too much withheld from your paycheck. Divide the amount of your refund by the number to times you get paid each year, weekly 52, biweekly 26, twice monthly 24, monthly 12, and you will see the amount you could have added to your savings each paycheck.

Are you willing to give me an interest free loan for a year or longer? No. Well why not? If you get an income tax refund you have lent the government your money free of charge until such time as the Internal Revenue Service is kind enough to refund it to you.

There are rare cases of anyone lending you interest free money – I term interest one of most people’s largest spending items – so use your own money and pay down those debts that cost you interest instead of allowing the government to have your money interest free. It’s very easy; just contact your payroll department at work and request a new W4 form; complete it with a higher exemption level than previously, and return it to them for processing. You will immediately see more take home pay in your paycheck.

A word of caution here: use the new money to pay down debt, not for more spending. Spending begets more spending and it is a vicious cycle. If you are still caught in the spending cycle I recommend that you not increase your exemptions until you have demonstrated to yourself that you can control spending. Better an interest free loan to the government than more to spend and more in debt. When you own debt, more spending creates more debt. Stop spending!