Death and Taxes
Entitlement is one of those words that gets thrown around a lot, especially these days. So and so is entitled to first class accommodations because of some sort of usually silly reason. Parents often try not to spoil their children so that they don’t grow up to be entitled brats. Over time though, it seems that due to innovation and technology, luxuries are far more available, thus causing all of us to be become entitled brats some days. When it comes to life, there are only two guarantees. Death and taxes. Everything else is a gift. The experiences, the relationships, all of that, we are not entitled to.
Tax is another one of those words… A word that everyone knows, yet if asked to write the definition, they would probably all be different. If we were to take the common denominator from all those definitions, I bet the word most consistent with tax would be ‘contribution’. That’s all taxes are, they are our contribution (financial) in exchange for the freedoms we receive as American citizens. A totally fair proposition to me. Now, there are probably other ways for me to say what I’m about to say but I cant think of any so, I’ll just say, there are a lot of loopholes with taxes and because of this, the government gets less money. I’m not a CPA, which is why I won’t get into what the loopholes are but there are loopholes, which is why CPAs exist. *wink wink* Anyway, there are strategies within the tax code that will let you live a tax free life. It’s all legal and its what a lot of ultra rich people are doing including and especially politicians. Again, it is all totally legal. The concern I have is, what if everyone took advantage of these loopholes and no one payed tax? What if everyone used a Solo 401(k) to make all of their investments, business deals, and retirement funds totally legally tax free? How much money would the government get? Very little, if any. That would put our country in quite the predicament, wouldn’t it? I think that the concept of contributing something in order to receive benefits or freedoms is imperative to having a sustainable community or country based on equality. After that, is where it gets crazy. I have a problem with someone who makes $1,000,000 paying less in taxes than someone who makes $75k. The fact that its even possible for that to happen stresses me out to be perfectly honest. There are a ton of superficial issues that get argued about back and fourth politically and nothing gets fixed because at the end of the day, who is benefitting from us contributing tax? The Banks. Think back to “Growing Money on Trees”; why were taxes introduced in the first place? Because the Federal Reserve printed money, forcing the government to create IOUs called bonds in exchange for the newly printed money. Taxes were set up for us to be the ones who pay the IOUs to The Banks.
Death can be a real bummer, no doubt. It’s one of those things we spend our whole lives trying to avoid but someday will be everyone’s day. Here is where I would usually make a joke about my Great Grandma being the only one to never die because her dementia was so bad, she would forget. But at 98, she was able to remember and life honored its second guarantee. Finally free from the hell in which dementia puts a person. She can be with my Great Grandpa again now, I’m sure. The most difficult aspect of death for people to grasp is the business side. There are two sides to death, emotional and business. It’s important to understand the business side and have our shit together because it’s much easier to take advantage of a dead person than someone who’s alive. The most common way people get taken advantage of when they die is taxes. Also, the most common set up for people who are probably more so on deck to die, on account of age, is they have the bulk of their money in retirement accounts. While some is in their house and there may be a few month’s expenses worth of cash or cash equivalents laying around, the majority is in IRAs (Individual Retirement Accounts). Today’s estate tax laws are not even relevant for most people. An estate tax is something you have to pay when you pass down an estate that is greater than X ($11.4 million). The reason I said “X” is, it changes seemingly arbitrarily depending on who’s in office. When Clinton (Bill) was president, X = $600k. When Bush (W) was president, there was a year where they just didn’t do estate tax all together. Estate taxes are just one part of the business side of death. You know how most people’s money is in IRAs? How did that money get there? “Pre Tax” contributions from our paychecks to our “employee sponsored retirement program”. Every dollar contributed to that account is tax deferred; which means no taxes were paid on any of those dollars. Sooner or later, those IRA accounts are going to have to pay the piper and there isn’t anything a trust or will can do about it. Trust and wills are documents that say who gets what, how much, and so on. Trusts can help out with estate taxes but unless you’ve got $11.4 million, it wont do you much good tax wise. Especially when it comes to tax deferred retirement accounts, reason being, the beneficiary of the money pays the taxes at their ordinary income rate. So, let’s say I was 81 years old but I just died. If I had $1,000,000 in IRAs and two kids, they don’t get $500k each. Assuming they’re financially successful, putting them both into the 35% bracket, their net inheritance would be about $325k each. My kids shouldn’t be complaining about getting free money but I worked damn hard for that $1,000,000 and payed taxes all along the way, I should get to pass down what I worked for. Fortunately, there are effective ways of offsetting all these end of life taxes and because I thought of the business side of death, my ducks were in a row when I died, not only did the government get their money, but my heirs got all of what I worked for because they were why I was working to begin with.
There are a lot of things that can happen between now and the end of time. Infinite possibilities indeed but only two things are certain.