Tax Time! Time to Scale Down!

For those of us in the United States, tax season is winding up to its seasonal peak of anxiety as the April 15th deadline sprints nearer. As a taxpayer that of course includes me and for the third year in a row I am in the group of people that have to pay. The difference this year is that I don’t have any anxiety, I am not terrified out of my wits, and I know how to face the problem easily. Since I am blogging, I want to pass my knowledge on to you so that you might be able to enjoy some peace of mind if in the same situation.

For the previous years, I had multiple jobs which caused me to have too much or too little from one job or another but ultimately ended in my having to pay. Last year, I claimed the wrong amount of exemptions. That mistake is why I have to now pay almost $1000 in state and federal tax liabilities. Does that make me sweat? No, I can’t afford this burden as much as I cant afford to open a new credit card. That fact is I have to pay it now so I simply have to figure out how to make it happen. Develop a plan.

First, I read about options available to me on the irs.gov website, then gathered information from about 4 hours research of other sources. I called my counsel. Basically, there are simply few options.

• Pay in full – Not possible
• Pay 90% immediately and the rest paid a little later – As feasible as the prior.
• Don’t pay and get fees and charges added as well as public lien against your name. – Highly undesirable.
• Visit IRS Online Payment Agreement site and make a payment plan with IRS. – Looks the most promising…
• Get loan from bank to pay for taxes. – Cannot get a loan at this time.
• Bum money from others I know. – Everyone I know is even poorer than I am.

So, this is the same for everyone else in the United States. These are your options. Apparently the IRS will work with you to make a reasonable payment plan but I have no idea how that works for those of you with much more debt obligation than I.

However, lets not focus on that. instead, let us look at this situation as a lesson and what we have learned.

How to avoid having to pay taxes

Because I have had to pay three years in a row, I had to analyze why. The other years were because of multiple jobs and this year is because of the wrong exemptions. To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. How to fix:

• Multiple jobs: If you have two or more jobs, adjust the amount of exemptions between them to balance out your estimated tax liability for the year. If one job is 10k, another 5k, and another 22k, then your estimated tax liability is 37k. Therefore if married with no kids:

1. Gross Income $37,000
2. Standard Deduction $12,200
3. Personal Exemptions $7,800
   Taxable Income = $17,000Federal Tax Liability 10% = $1,700

   Figure your state taxes. For this example, we will use $1,715.
   Total tax liability is then $3,415.

What you will then need to do is talk to the employer of the jobs you need to adjust, and ask to change your W-4. If you are having to pay too much at tax time, you need to lower your exemptions. 0 exemptions take out the maximum taxes at paycheck time and usually result in getting a return when filing your taxes. Claiming 2 exemptions caused me to have a liability of $1000 and my income was less than $30,000. You can also opt to have the employer withhold for taxes any determined amount that you desire each paycheck. Since I always file my taxes and have been pretty poor for like, ever, here is my response:

• Immediately change my W-4 exemptions to 0. Some people don’t like to “give Uncle Sam an interest free loan.” I prefer to ask what i can do for my country by giving it a little extra to use for the purpose of good during the year so I don’t have to experience any personal unpleasantness in April. Good for everyone.
• Immediately take another look at my current financial considerations and find where else I can cut back. My wife and I have decided we have cut back to the point we can no further except by moving to a smaller rental or owning our own home. Both of these are options and are underway. We are looking into the small house movement.
• Immediately re-evaluate our current perceptions on what is necessary in our lives and how to grow with the changes we see coming in the future. Americans are predisposed to lifestyles of big houses, lots of technology, bulging debt obligations, and eating themselves out of house and home. We decided to change that.

By taking measures to re-evaluate your lifestyles, we are helping ourselves more than just readjusting for taxes. The majority of people are either too lazy, uneducated, or just don’t know how to really change a situation they have been in for decades. If you make more money, you experience what is called “bracket creep.” Let us say that you have a job teaching, making $36,500 a year and you want more money to have more of the things in life you desire. Some tangible, some not. You talk your boss into a raise that boosts your income an additional $2,000. Now that your income has increased beyond the 10% tax bracket limit, you are now in the 15% bracket. 10% of $36,500 is $3,650, 15% of $38,850 is $5,775. If you are to get a raise, your break even point is 2,125. That means if you DON’T get 2,126 or more, you didn’t actually get a raise at all. How fair is that?

For myself, I have a long way to go before hitting the bracket limits, but my locality finds it just to keep a low upper wage limit for what they are willing to pay employees. I have found here that highly educated, skilled workers top out around the 40,000 a year mark, while using generalized government wage scales for comparison 40k represents near the entry level. I need to either get more education (can’t afford it), find a better job here (nope), move to another town with better opportunities (cant afford that either), create a business (have ideas and plans but require money and credit), or do something else I haven’t thought of yet…

Considerably Scale Down Our Lives.

We took a look at how we were living. We really don’t have that much stuff. When we moved here, we donated 70% of our belongings to Goodwill and people we knew could use our stuff. 95% of what we currently own was either given to us, purchased from Goodwill, or hand made with the sweat of our own brows. The combined total of what we have in our house of everything we own is less than $2000. Some would call that sad. We looked at our living space and saw – too much space. It is our nature to want to fill out spaces with furniture and house-things. In a materialistic society such as we are now, there is far too much emphasis on having the matching living room furniture, wide-open spaces, vaulted ceilings, etc. Our rent went up to $700 for our 2br/2ba 920 sq ft rental so it is really causing us to feel the burn.

Pain is the Motivator of Change.

The way I figure it, we have a 256 sq ft room that we mostly live out of, but only use perhaps 100 sq ft of it. We use our bedroom for only the bed and closet space which is really 54sq ft of required space. The dog sleeps on the living room couch and we use the living room to pass through to the bedrooms and kitchen. Therefore it is completely dead space to us. The kitchen is about 50 sq ft, which we use in its entirety. However, much better use of space can be had by removing cabinetry altogether and limiting the amount of dishes. We decided the bathroom could be whittled down to 45 sq ft. Adding up all these totals, we have a very conservative figure of 249 sq ft for our total living needs. For extra comfort and added storage space, we could add 48 sq ft. for a grand total of 298 sq ft.

With that information, we have now sought to figure out just how we are going to plan and implement getting ourselves into a 300 sq ft house. We have inventoried the things all houses need such as water heater, plumbing, electrical fixtures, shower/tub, toilet, sinks, and furniture, so that we may know how much to spend on acquiring these items. We have started researching how to build small houses and companies that build them. We have started researching how to source previously used materials like old lumber from demolition projects and old barns.

Banging My Head Against the Wall

What we have found is that in order to live a comfortable life doing the things we love, we only consume a quarter to half of the power of a normal household. We use less than a quarter of the amount of water a normal household does. Same goes for the gas. When you itemize your life in a quantifiable fashion, the things you need to change become glaringly obvious. For instance, why are we heating and cooling a huge living room in my house that we are never in? Because we don’t really have a choice based on construction. So create construction where everything is conservative. While it is harder to modulate the temperature in a small house, it costs precipitously less to make the needed changes to environment than in a larger house. Everything is cheaper.

We want to use all wood construction with the best thermal insulation available. In the future we will have the outside stuccoed but for now plain treated wood will do. We are going for the cheapest, most sustainable construction possible. The water heater, shower, sinks, and toilet will be high efficiency. Space will be maximized with sleeping areas upstairs which effectively increases square footage for “living” space. Water will be stored in subterranean 500 gallon reservoir and pumped to a higher-level tank. Electrical power will be solar photovoltaic and battery bank with grid tie-in. Sewage and waste water will be treated and septic system installed. Oh yeah, at least 1 acre of land, too. The total amount for all of this has been estimated so far at about $32,000.

Is That Really Possible?

Of course, with bad credit, no money, and low income jobs, how could we possibly make it happen? Well, faith. Things don’t happen overnight, especially big things in our lives. However, $32,000 represents the same financial obligation as an Acura ILX with the Tech Package, except we would be getting a house to live in instead of a car to tool around in. So here are some figures:

• $32,000 at an outrageous 20% for 7 years is $711/mo in payments, $27,690 in interest over the life of the loan.
• $32,000 at 15% – $617/mo, $19,870 interest
• $32,000 at 10% – $531/mo, $12,624 interest
• $32,000 at 7% – $483/mo, $8,569 interest
• $32,000 at 5% – $452/mo, $5,992 interest

These represent monthly payments for the loan for ownership of land and a small, manageable house on 1 acre of land.  Representing owning this house at an outrageous rate of 20% interest we would still be a proud owner of a house in 7 years, and owners of nothing if we lived in our current rental. Not only that, but rent is expected to increase 2-3 times over the next 7 years. Losers.

Small House, Small Obligations

With a small house, after our loan is paid off, we could always install additions to increase the size of our house with all the extra money we would have. Obviously it is key to get a lower interest rate so one of the things we have to do is pay off outstanding debt obligations. Our goal is to get my loan rate as close to 7 as possible so we can overpay and thus pay back our loan quicker. The expected utility costs would be around $70 a month total, so our entire monthly living expenses should remain under $650. One person working an $8/hr job at 36 hours a week can expect to make $250 a week after taxes. That’s $1000 a month right there, so we would have a remaining $280 for the month for food, fuel, and extras. Sure that’s not great, but that’s only one person in the household working!

Give Yourself a Raise!

It goes to say that the best financial raise we could give ourselves is to lower our expectations to first meet what we can afford and what we really need rather than try to afford what we want. If we scale back to the bare necessities, we will eventually find ourselves with loads more money to use for our own desires. So yeah, it is unfortunate that we would have to pay taxes this year. The good news is next year we will be getting money back from the IRS. We are confident that next year the only debt we will have is school loans, unless we can get a loan for this plan. We may or may not have better jobs, but we will be in a better financial situation. We may not have a big house and a lot of land, but we will have a house and some land.

Taxes, credit, financial obligations… All these are finite if you are smart enough to not compound your own problems. If you have bad credit, pay it off and move forward. It really doesn’t take that long to build any type of credit. The debt collectors will hound you to the end of time. If you use your cards to buy things that don’t make money for you, stop. No one cares about your jewelry. Less people want to hear your whining about not being able to pay bills to pay for that jewelry. Stop buying things you don’t need. When you stop that, you start thinking about what else you don’t need. When you stop spending money on those things, you end up with a lot of money left over for things that do matter to you.

Live Like Your Finances are Water in a Bucket full of Holes.

When you have a bucket of water with holes in it, leaking out all over the place, you need to find a way to tape up that bucket. If you put the tape on the bottom, there is likely a bunch of water spilling out making the surface wet. the tape wont stick. You get frustrated. The water is still leaking everywhere.

Take a step back. Allow more time between action and reaction. Think about how to solve the problem in a different way. A way that is different from everyone else. Start the tape at the top where it is dry, and simply wind the tape down the bucket, overlapping itself to create a tight, waterproof surface. As you go downward, you seal holes and allow more dry surface for the rest of the tape to adhere to, finally reaching the bottom. Now that all the holes are covered, we can go back upward to redouble our efforts and ward out any extra leaks that may continue.

Let this be the same way with your finances. Start by standing back and taking a look at your entire situation. Think about unorthodox ways to solve your predicament. Attack the little things first, things that would remove completely at first. A parking ticket. A book fee. The remainder of the $200 balance on a charge card. Pay back friends or give back books or CDs. Get all the little, easier-to-tackle line items. Then focus on the easiest of the larger items. Then, squash off the remainder. When you are debt free, only take on new debt when it will make you more money.

“Your house is an investment” – No it isn’t. Your home is an asset that has liabilities: mortgage, taxes, HOA fees, etc. Your asset is the home’s value that you own (your equity) minus the mortgage and other fees. That is, unless you have rented out that house for more than you pay in expenses to meet the liability. It is only an investment when your house puts money IN your pocket.

“Your car is an investment” – Whoever said this is misinformed. Any car is a depreciating asset. The value of the car goes down every minute, every mile, every day.  You have to act as a taxi service or something to make your car an investment.

What IS an investment? Individual Retirement Accounts, Interest Bearing Accounts, Rental Property, Capital Investments, Stocks, Bonds, Physical Assets such as Gold/Silver/Platinum/Palladium/Diamonds. Things that when you store them or otherwise not use them, that create money for you when you are sleeping, working, while on vacation, while in the hospital…

Rethink your life. Restructure it if necessary. Restore your ability to live harmoniously in this world. It is changing and we need to adapt to it or we will inevitably fail and live in constant desperation. We all need to draw back, scale down, and work harder to make the future brighter. Sometimes the pain it takes to motivate you to get there comes in the form of paying more taxes, paying more for healthcare you can’t afford, rising food costs… Pain is the motivator of change.