One of my favorite questions is, “How can I save on taxes?” To which I always reply, “Send me a big check.” Which is the essence of this post.
This post is in reply to a similar comment we got today. In some cases, there’s some things we can do. In this case there wasn’t. But we covered some things that I generally cover verbally so I reworked my reply and am posting it on this blog.
We generally look down on year-end tax planning as an exercise in meaningless timing differences that end up resulting in higher taxes as often as any other outcome. They very seldom actually cut anyone’s taxes in the long run. Including IRA’s, but that’s another story.
The edited reply is below.
By the way, that’s why we do tax estimates in the first place, to make sure no one is surprised three days before the return is due. That isn’t fun for the taxpayer and throws us into cardiac arrest. Most firms don’t do them. Last year we grew so rapidly we didn’t have the staff to do them as promptly as we would have wished, but we try to do them quarterly.
“Unfortunately there is not much you could do to save on taxes except waste money. The income is already in and it’s solid. The only possibility now is buying deductions, which is where the waste comes in. I’ll explain below.
We did your tax estimate despite not having all your numbers, just because we wanted you to be aware of the bullet you need to bite. We still don’t have your business income/loss and any real estate transactions you were involved in. So the final numbers could go either way. Don’t expect much on the downside because in your case it would take $100,000 loss to save $23,000 in taxes.
Let me put this in perspective for you.
Deductions have to be bought.
With the exception of statutory depletion (which you got by the way) in the good ol’ USofA you get no deductions that don’t cost you hard cold cash.
Just because you spend money doesn’t mean it’s deductible.
In your case, it costs you 100% to save 25%.
So spending money to save on taxes is not a great idea.
The goal is not to cut your taxes, the goal is to make the maximum stick to the walls. You could easily cut your taxes by sending me a $100,000 check. You would save $25,000 in taxes, but you would lose $100,000 in net worth. The happiest day of your life will be the day you pay a million dollars in income tax. Because that will mean there’s more millions sitting in your bank account.
There are ways to delay the tax bite, but your set up won’t work for that, so that’s no option. The only other way you can avoid paying taxes in the USA is an international tax haven. That’s possible, but it won’t fit your income streams. And the setup is expensive. In certain cases it’s legal, but not advisable in your case.
The essence of tax planning is to convert personal non-deductible expenditures into fully deductible legitimate business expenses, and when possible, to change the character of your income from a highly taxed to a lesser taxed income. Both of these have been accomplished with your S corp business. There’s nothing much more we can do. You do your own bookkeeping so we have no opportunity to see what possible expenditures you may be overlooking, but we don’t think there will be enough to cut your taxes meaningfully.
The plunging price of crude oil and gasoline may be the solution to your problem because your royalty checks will be going down along with the cost of crude. That is something you may want to keep in mind. If you put off paying your taxes until next year, you may end up right in the middle of a steadily decreasing income flow.
Although there would be penalties, you don’t have to pay 2014 taxes until October 15, 2015.
Don’t do anything rash to cut your taxes because that’s how people go bankrupt.