What does it mean to retain more of what you earn?
For a lot of people, retaining more means: focusing more on the actual net, fewer expenses, fewer taxes, or getting to keep what you make. When we talk about retaining more, it's retaining more after basic expenses so that YOU can spend it however you are.
It's not about putting together big savings in your savings account. It is retaining more after the core basic expenses. If you don't have a plan you're never going to be able to do it.
W2 and Schedule C
When someone works on a W2, they have payroll, federal and state taxes, and then they get the net amount. Everyone's aware of this from the day they start working. However, it doesn't always have to be this way, and the difference between net and retain is big.
If you're on Schedule C you pay both sides of the taxes. Most of the people on Schedule C are small business owners so they have to pay their self-employment taxes. When they're done they're only getting 53 cents on a dollar that they're netting, on the same dollar that they made.
Basically, the W2 person retained 25 cents after 35 cents in expenses. The basic dollar doesn't have any deductions, they don't have any pieces to go through. In net, they're only retaining 25 cents to spend how they want to spend. The 35 cents will be spent on insurance, debt, and other things.
At Schedule C, they get to deduct some funds. It's not quite a tax credit and you'll see how that works. With a schedule C, even though they paid more in payroll taxes, they're actually retaining more dollars because they are allowed to deduct some of those expenses. They are able to retain even though they made the same dollar.
The Power of Refundable Tax Credits
If you look at a person with a Schedule C, they have someone out there planning for them and helping them. They obtain the tax credits and the federal tax payment is zero. They are letting the tax credits make those payments on their behalf. They are still paying their 30 cents in deductions, they still have five cents that is non-deductible in those expenses, they still paid the government, but the deductions reduced their total tax and their net has jumped up to 49 cents.
The beauty of it all, the really powerful thing that everyone has seen - these are actually refundable tax credits. These rebates that people got, the payments from the government were actually refundable tax credits.
How that works? Again, you get your tax credits but you get to take those credits up to the maximum of what was spent, or what was allowed. Not only are they not paying a dime in federal taxes but the government's actually paying them back. They're sitting on 61 cents on a dollar and this is what Relax Tax does day in and day out for everyone that they work with. They help them to learn how to retain more of what they earn. What you do with that 61 cents is up to you.
Scarily, less than fifty percent of Americans even pay a dime in federal income tax. Most of them are receiving refundable tax credits and are getting money - not paying a dime in actual taxes. If you are one of those people paying taxes, and if you have a big business, the burden that you've had before this whole disaster has been astronomical. It's only going to get worse and it's going to get a lot worse if you don't have a plan as to how to do it.
If you have a W2, and at the end of the month you don't have any money, you're not alone because you didn't have a plan. It doesn't work without a plan. It's because you don't get the understanding that what your net is basically what you're retaining. You can be as creative as you want with that net but it's still only a quarter. When people hear “retain more of what you earn” it's not just about skipping and saving and how you spend that quarter. It's about making that quarter to 61 cents.
Q&A with Dennis
Q: Can you define basic expenses? How deep does that go?
A: It depends on what everyone has and it depends on your exact situation. But a lot of times some of your basic expenses are auto, cars. When we're talking about basics, we're talking about the cost of food, shelter, Maslow's hierarchy. Some of those basic pieces of food, shelter, and in the modern world, debt and insurance, cable bills, utilities, certain things we're right at that core level. We're not talking about Maseratis or anything fancy. We're talking just getting-by expenses
As a business owner, some of those are needed to do your business, some of those become deductible, some of them aren't. There are distinct rules around it but this is not something that entering numbers in TurboTax is going to do for you. Having an accountant that works with you when you bring in the numbers after you've already spent the money isn't going to do it for you. You need to have a plan and address it in advance and that's how you get it there.
Q: When I normally think or hear about tax credits I’m thinking “oh in order to get that credit i still need to spend a lot of extra money” so the thing that comes to mind is solar roofing, sure I can get a tax credit on it, but I'm still spending a whole lot of extra money.
A: Exactly and that's one of the things that drives me insane is when I hear people “but it's deductible so I bought something”, “I bought this hummer because it's deductible”. But you didn't need it, and you spent it and you did save money and that's where again the plan comes in.
There is a list of credits, but no one can qualify for all of them. But you may qualify for some of them and a lot of these credits are designed to grow small businesses. So when you use it and leverage it at the right time it will work.
As far as going through, liquidity is what matters. Then you have your physical assets, your home, all those things that you have to buy. Next, have your tax, insurance, and debt which help go in through that. Then you get into your retirement savings, and then you get into your growth money.
The key with liquidity is making sure that you have that quarter do more things than just one thing. If you have a plan and if you use it properly and if you use insurance and debt properly, you can make that quarter into 61 cents.
You can do more things with it and that's where the term leverage comes in. That's how using those taxes and insurance together versus having them fight each other. They become a source plan and you are using the same dollars over and over again which allows you to go further and further.
ABOUT DENNIS HARABIN
I am a CPA obsessed with helping people to retain more of what they earn so that they can pursue their passions. Relax Tax takes a holistic approach to tax planning that makes us more of a Financial Architect than just a Tax Preparer.
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