What would Dave say? (tax question)

**gmarie** · 08-24-2011, 08:23 PM

We are looking at owing this year mostly due to my business income. We can not itemize our personal expenses. I am playing around with some numbers, and we can shave $1500 off our tax bill by investing 5k each into an IRA, bringing the amount owed way, way down. (We can also play around w/ these numbers, for example 4k each would save $1200)

a few facts:

1. See signature line.
2. We could save the 8-10k in 3-4 months.
2. Neither DH or I have a 401k available.
3. We are in our early 30s and have no money in retirement.
4. Our goal after BS3 is 20% down for a house

What would Dave say?
Should we do it?

Thanks!

**khaski** · 08-24-2011, 10:36 PM

Is there a reason you are not paying your business taxes quarterly (or are you, but still owe?)? Not sure what Dave would say about your current situation, I would agree it's probably best to invest and cut down that tax bill, so long as it does not leave you strapped for cash to pay the rest of what you owe- the last people you want to owe $ to is the IRS!. I imagine Dave would encourage you to refigure and balance things so next year you come as close to '0' on those taxes (neither owing nor getting a refund) as you can. If you find yourself owing a significant amount, something is off somewhere.

My husband owns a small part-time machine shop, we file taxes quarterly, and while we usually end up with a refund, it's because some things can't be deducted til the end of the year due to the nature of the equipment used in the business.

**Greebo** · 08-25-2011, 05:10 AM

I'm not sure what Dave would say but I *think* what he would say is - pay the taxes and focus on getting out of debt. I really really think you should call his show, though, to find out.

But here's why I think he'll say it - If you put 10k in an IRA yes you lower your tax bill but you've taken 10k out of circulation - locked it away to where you really don't want to touch it or you'll pay taxes AND penalties - meanwhile you'll only reduce your tax bill by your tax rate * the 10k, and you'll STILL owe all that money from BS2.

If for instance, your taxes are going to be oh, $5,000 -

So - use 10k, save 3k, spend 2k in taxes net lost liquidity = 12k.

OTOH if you just pay the taxes, you only lose 5k, leaving you 7k to pay off debts with.

Sure, option A DOES put money into an IRA for your future - but you KNOW what DR says about that.

You *SOLD* your future with the debt - you need to buy it back first by getting out of debt before you start investing in it.

**gmarie** · 08-28-2011, 08:37 PM

Greebo, I agree with you that I sold my future for the debt... but it just hurts to give the money to the IRS when we could be investing in our retirement!

Your answer it what I would expect to hear from Dave!

I don't think I have the guts to call into Dave's show! Not even sure I will do it when we are debt free. I would be so nervous and would probably sound like an idiot!

Thanks!

**BobbyDee** · 08-29-2011, 02:35 PM

I'm sorry I kind of missed that part of the whole Dave Ramsey steps; what's step #2?

**Greebo** · 08-30-2011, 08:41 AM

Originally Posted by BobbyDee

I'm sorry I kind of missed that part of the whole Dave Ramsey steps; what's step #2?

Expanded Baby Steps - Stolen from MYTMMO.com

**mek42** · 08-30-2011, 10:11 AM

I think you are confusing two things and, frankly, have fallen into a pernicious line of thinking.

First the confusion. Taxes and retirement should always be thought of as two entirely separate things. If you are going to invest for retirement (and maybe that should be deferred until your debts are lower) than look into the best way to do so, independent of today's tax bill. For me as a private individual and not a business owner, that answer is with a Roth after contributing to a defined benefits plan. Then, after deciding what the best way to invest for retirement is might you look into tax advantages, but today's taxes should play no a priori role in selecting a retirement vehicle (tomorrow's taxes are fair game though, which is why I use a Roth).

Next, the pernicious line of thinking. Why do so many people view taxes as the worst use of their money? Are you willing to hire twenty men with machine guns to protect your assets? If not, be thankful for our stable, orderly way of life that comes from tax dollars. Or, if you really, really don't want to pay taxes I believe there are still some tax-free convoy driving jobs available in Afghanistan.

Businesses are treated very favorably by our tax code. When I hear people bemoaning their taxes due to business income I wonder if they made a poor choice of business entity structure or have a poor understanding of our tax code. Either of these two possibilities, to me, says that they are a poor business person, being unwilling to put in the hard work needed in all of the required areas of business.

I think that for this year you should just put aside the money needed for your taxes and know that you are supporting our troops and preventing hordes of have-nots rising in armed insurrection.

However, you also have a duty to learn the tax code better and plan better to prevent this issue from occurring next year. Knowing the tax code and choosing an appropriate business entity are equally important to taking care of your customers.

Good luck and I hope I didn't come off as too cranky - negative attitudes toward taxation is one of my pet peeves.

**gmarie** · 08-30-2011, 07:09 PM

I'm not trying to reduce my tax bill to zero, I am just looking for honest ways to reduce my overall tax expense. There is nothing wrong with that. You should be more concerned with the countless number of people who have refundable credits and get back more than they pay in and the countless others who lie on their taxes and take deductions they should not take. (like the home office deduction). As a bookkeeper, I have met plenty of these people and I want no part of it.

I do not have many legitimate expenses associated with my business income, and my husband and I can not itemize due to no kids or mortgage.

Regardless, I was really only asking advice on what Dave would think if I did xyz. I was not asking for advice on my taxes.

Thanks.

**Greebo** · 08-31-2011, 08:56 AM

Originally Posted by mek42

I think you are confusing two things and, frankly, have fallen into a pernicious line of thinking.

First the confusion. Taxes and retirement should always be thought of as two entirely separate things. If you are going to invest for retirement (and maybe that should be deferred until your debts are lower) than look into the best way to do so, independent of today's tax bill. For me as a private individual and not a business owner, that answer is with a Roth after contributing to a defined benefits plan. Then, after deciding what the best way to invest for retirement is might you look into tax advantages, but today's taxes should play no a priori role in selecting a retirement vehicle (tomorrow's taxes are fair game though, which is why I use a Roth).

Next, the pernicious line of thinking. Why do so many people view taxes as the worst use of their money? Are you willing to hire twenty men with machine guns to protect your assets? If not, be thankful for our stable, orderly way of life that comes from tax dollars. Or, if you really, really don't want to pay taxes I believe there are still some tax-free convoy driving jobs available in Afghanistan.

Businesses are treated very favorably by our tax code. When I hear people bemoaning their taxes due to business income I wonder if they made a poor choice of business entity structure or have a poor understanding of our tax code. Either of these two possibilities, to me, says that they are a poor business person, being unwilling to put in the hard work needed in all of the required areas of business.

I think that for this year you should just put aside the money needed for your taxes and know that you are supporting our troops and preventing hordes of have-nots rising in armed insurrection.

However, you also have a duty to learn the tax code better and plan better to prevent this issue from occurring next year. Knowing the tax code and choosing an appropriate business entity are equally important to taking care of your customers.

Good luck and I hope I didn't come off as too cranky - negative attitudes toward taxation is one of my pet peeves.

Your anger is misdirected.

You shouldn't be mad at the people who take the fullest advantage of the system.

You should be mad at the people who made the system so unbalanced.

**BSW** · 09-02-2011, 08:53 PM

I suspect Dave would not agree with me, but I would put the money in retirement. My husband and I were in a similar situation - we do not own a business, but when doing our taxes he found we could save $1500 or so by putting 5K in my Roth (I am a SAHM). To us, it seemed like a no-brainer to do it as that large an immediate return on investment was a lot more than the interest rate on our student loans. We have more student loans than you, and do want to pay them off, so it hurt a bit to not use the 5K on them. But we do save for retirement while paying off debt, so we're not really Dave followers. I also think it is always a good idea to contribute to a 401K at least up to the limit for employer match for the same reason (50% return? I'll take it!)

**esb3357** · 09-05-2011, 10:10 PM

Personally I would put the money into retirement to reduce your debt. If you have a large change from one year to another the IRS will sometimes reduce the penalties to nothing.

**mek42** · 09-05-2011, 10:25 PM

Originally Posted by Greebo

Your anger is misdirected.

You shouldn't be mad at the people who take the fullest advantage of the system.

You should be mad at the people who made the system so unbalanced.

I'm not angry at people who do whatever they can to get ahead legally. I am irritated that so many people see taxes as bad and negative. It seems like people spend way more time finangling their taxes than it is worth.

**Greebo** · 09-05-2011, 10:37 PM

Originally Posted by mek42

I'm not angry at people who do whatever they can to get ahead legally. I am irritated that so many people see taxes as bad and negative. It seems like people spend way more time finangling their taxes than it is worth.

When two wolves and a sheep vote on what to have for lunch, the sheep loses.

That's Democracy in action when it comes to taxes, and as a higher income producer (relatively speaking) I'm pretty fed up with beeing the sacrificial sheep to the mob of wolves out there.

You go ahead and be angry at me if you like, but I don't care if its 2 people bossing around the 3rd or 200 million bossing around the 3rd 100 million - in my book forced taxation is wrong simply because its FORCED. End of story.