April is the dreaded income tax filing date for all of us. Last year I received the largest tax refund of my life, which is not necessarily a good thing as I essentially gave the government a tax free loan for most of the year. This year we get a few extra days to file due to April 15 falling on a Sunday, and the 16th being a federal holiday. I could use the extra days. This is one year that it does not pay for me to file early as I am faced with a huge tax bill. How huge?
- This year’s tax bill is 50% more than the annual salary of my first job out of college in 1989.
- It is almost 50% of my annual salary at my last job in 2006.
It is due mostly due to some major capital gains in a few properties I sold. Not only do I have a major tax bill, April is the month I have to pay my property taxes, corporate taxes, estimated taxes, and accounting fees. Combined with a family vacation to Hawaii, a lot of money is going out this month. On the positive side, I did receive some income from a consulting job I did last month, and I should receive the balance of the money from that job in May. I also anticipate a good payday from a private lending deal that should close by the end of the month.
After getting over the shock of such a large tax bill when my accountant gave me the news, I realize there is worst things than paying income taxes on a good earning year. When I see that I will pay more in taxes this year than I made in my first job, it means that I have been fairly successful in the past 17 years. I have been blessed financially, and paying taxes is just comes with the territory. As my accountant told me “Well, you did make that money”. Yes, I did, and that is much better than not making it, even with having to pay taxes. I’ve seen many investors who are obsessed with minimizing their taxes to the point of making poor investment decisions. An example is the use of the 1031 exchange. A 1031 exchange is a great way to defer taxes, and real estate investors should use it whenever possible to minimize their tax liability and grow their long term wealth. However, because of the time constraints of the 1031 exchange, many investors rush to place their money into another investment which turns to be a bad investment. The reason is that the investor is so focused on the tax aspect that they ignore the fundamentals of the investment, and make a poor decision. Sometimes, the best thing to do is pay the taxes rather than rush and make a poor investment decision which may cost you much more than the tax savings. Last year I saw that housing prices were starting to fall, and inventory start to rise. I was having trouble finding properties that fit my investment criteria, so rather than enter into a 1031 exchange, and possibly make a poor investment decision, I decided to pay the taxes on my gains. So, on April 17, 2007, I will be paying a large tax bill on those gains. However, with my proceeds, I am seeing a lot more attractive investment opportunities this year, and I am starting to put those funds to work. I think it was the best decision to wait, rather than let the tax consequences dictate my actions.
No one likes to pay more in taxes than they have to. In the coming year, I will be working with my accountant to minimize my taxes for the year, but it will not be the overriding factor in my investment decisions. In the bible, Jesus says:
“Give to Cesars’s what is Cesar’s, and to God what is God’s”
Matthew 22:21
Try to minimize your taxes as much as possible, but there are a lot worse things than having pay taxes on your gains.
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