The Tax System is Broken. Should You Give Up on Winning with Money?

Tax System is Broken17 Tell us then, what do You think? Is it lawful to give a poll-tax to Caesar, or not?”
18 But Jesus perceived their malice, and said, “Why are you testing Me, you hypocrites?
19 Show Me the coin used for the poll-tax.” And they brought Him a denarius.
20 And He *said to them, “Whose likeness and inscription is this?”
21 They *said to Him, “Caesar’s.” Then He *said to them, “Then render to Caesar the things that are Caesar’s; and to God the things that are God’s.”
Matthew 22:17-21 (NASB)

Well, that’s finally done. I just finished filing my taxes for the past year. This is never an enjoyable experience for me. Every year I get stressed out and angry about having to deal with the U.S. tax code.

But as a Christian, I have no choice but to deal with it every year. The context for the passage at the top of this post is Jesus’s last week before going to the Cross (and I am writing this on Palm Sunday!).

For about 3 years, Jesus had been ministering in Israel and for that length of time the Jewish leaders sought to catch Him in an inconsistency or a blasphemy so they could find cause to eliminate Him.

The passage above brings us one of the last questions they used to challenge Him. They were trying to trap Him either as a traitor to the people (for supporting the tax system and Rome), or as an insurrectionist (seeking to challenge and overthrow the government by refusing to pay taxes.)

As usual, He was way ahead of them. He knew their hearts and evil intent. And He offered a marvelous response leaving all of us with a fundamental principle:

You have to deal with and pay your taxes regardless of what the government is doing with the money.

The Tax System is Broken

I believe the U.S. tax system is broken. For starters, it is way too complicated. There are too many rules and they change every year.

The average person needs a tax professional or specialized software to file their taxes. This is not only costly, but also requires an enormous amount of time and record keeping on everyone’s part.

Second, the system is broken because the government simply wastes most of the income they generate from the tax collection. I would not have such a big problem with paying taxes, if I knew the government was using the money wisely. Sadly, I know better.

Now, let me just say that I don’t have a problem with some amount of tax to go to the government. We do have common needs like infrastructure and defense.

I also don’t have a problem with programs that help those truly in need. There is a place for the government to step in and help.

But a complicated tax code and government waste are not my biggest concerns with the tax system.

My biggest concern with the tax system is that it does not encourage anyone to win with money.

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The Tax System Penalizes Those Who Manage Money Well

The tax system is based on collecting income tax. So the more you win with money, the more you are taxed. The more you earn, the fewer tax deductions you have. Fair you say? Maybe.

But if you are working hard on managing your money well, on getting out of debt, on saving and investing for the future, you have a problem. The tax system penalizes you for doing well with money.

You end up paying more than your fair share of taxes. The system does not encourage you to prosper. It is designed to “help” those that are not doing as well with money.

With the “good intention” of helping out, the system encourages dependence on the government versus independence of living on your own financial strength.

It does not encourage hard work or entrepreneurship. It encourages just getting by and hoping someone catches your slack.

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Should You Then Give Up on Winning with Money?

One temptation is that you just want to throw your hands up and give up. Just do enough so you don’t exceed some income threshold. You know, just don’t make too much money.

Another temptation is that you won’t want to report all of your income. That’s why sometimes many people just want to be paid in cash (i.e., no trace).

I recently spoke with a young entrepreneur who is working hard and doing well. Sometimes she gets tipped in cash and for a moment the temptation is there not to report anything. But she knows better. That would be cheating and stealing.

So yes, the tax system is broken. Should you then give up on winning with money?

No!!! One of the principles I like to emphasize as I write and as I coach people on personal finances is this: you have to be above average.

You have to excel in all that you do!!! So you go do what we know is right and proper:

  • Work hard every day. Excel at what you do and stand out!!!
  • Make your money work for you. Get on a budget, break the chains of debt slavery. Prepare for the future by saving and investing.
  • Take care of your family well. Teach your children how to handle money and how to prosper.
  • File your taxes. Deal with it with honesty and integrity. Make sure you report every penny you make and that you get every deduction you are legally entitled to by the system.
  • Help others. Share what you know. Help those in need. Encourage them to prosper with money

Yes, I know the tax system is broken but that’s not keeping me from doing the right thing.

Jesus did not give me that option. And I must obey Him in all things.

Question: How do you deal with your tax situation?

3 Steps To Survive Tax Madness

My favorite time of the year is here! It is time for the NCAA Men’s Basketball Tournament otherwise known as March Madness!

I am a huge basketball fan and to be honest I much prefer College Basketball to the pro version.

Nothing against the guys that get paid, but there is a different kind of energy in the college game. I have my bracket ready and I am all set for the start of the madness on Thursday (no, I don’t count the “First Four” as part of it.

To me it’s basketball welfare and a grab for more TV money by the NCAA).

Unfortunately in March, there is another kind of madness. It is time to start working on filing your taxes. I have not met a single person who  enjoys preparing taxes or paying taxes.

However, it is something we have to do and as a teacher told me a long time ago: the best way to get started on a task is to accept that it has to be done. So let’s get on with it. Here are my 3 Steps to Survive the Tax Madness:

I. Get Organized

You need to gather all your paper work for preparing your taxes.  Most of the documents needed fall into these categories:

  • Income: W2 Statements, Dividend Statements (i.e., 1099 forms, etc.)
  • Deductions: Mortgage interest statements, receipts for charitable contributions, etc. Make sure you take into account tax deductions like having a home office. If you either sold or bought a home in 2011 make sure you have the closing statements readily available.
  • Miscellaneous: Medical expenses receipts, business expenses, etc. If you moved in 2011 due to a job relocation, you might be able to deduct some of those expenses.

II. Plan Your Time

This year the deadline for filing your taxes is April 17. Ensure that you set time aside to prepare your taxes. Usually what I do is spend one Saturday in March devoted to this process. That gives me plenty of time to do the work and to resolve any questions that might come up.

If you feel fairly confident of the process there is excellent tax preparation software available that can guide you through every step. Alternatively, you can also seek the help of a tax professional. Finally take advantage of electronic filing and avoid last minute, long lines at the Post Office.

III. Prepare for Next Year

With the filing process completed, start preparing for next year. Ideally you want to be at the point of breaking even in terms getting a refund vs. having to pay the IRS.

If you are receiving a large refund, don’t mistake it for a large bonus from the government. All this means is that they are deducting too much money out of your pay check every time. In essence, you provided Uncle Sam with an interest free loan. Don’t do that, they already mismanage too much of your money.

Instead, work with your Human Resources department and update your withholding information (using the W4 form). That extra cash flow can help you achieve some other financial goals like finishing your starter emergency fund, accelerating your debt snowball, starting on your fully funded emergency fund, or saving more for retirement and college.

If you had to pay a large amount of money, here are a couple of options to improve your position:

  • Increase your charitable donations to qualified non-profit organizations.
  • Increase your retirement contributions to qualified plans (401K, 403B), IRAs, etc.

20 And He said to them, “Whose likeness and inscription is this?”
21 They said to Him, “Caesar’s.” Then He said to them, “Then render to Caesar the things that are Caesar’s; and to God the things that are God’s.”
Matthew 22:20-21 (NASB)

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The Tax Man Cometh: Are You Ready?

Spring is coming and along with the warmer weather there are many traditions that go with this time of the year. You might be getting ready to do some spring cleaning or maybe you are getting ready to work on your yard and flower bed.

Something else that comes with Spring of course is Tax Season. Now if you are like me, this is not one of your favorite times of the year and probably you would not rather deal with this issue.

However, it is inevitable so we might as well be prepared. Here are some tips that I trust will make the process a little more endurable.

I. Get Organized

You will need to gather all your paper work for preparing your taxes.  Most of the documents needed fall into these categories:

  • Income: W2 Statements, Dividend Statements (i.e., 1099 forms, etc.)
  • Deductions: Mortgage Interest Statements, Charitable Contributions, etc.
  • Miscellaneous: Medical expenses receipts, business expenses, etc.

II. Plan Your Time

This year the deadline for filing your taxes is April 18. Ensure you set time aside to prepare your taxes. Usually what I do is spend one Saturday in March devoted to this process. That gives me plenty of time to do the work and to resolve any questions that might come up.

If you feel fairly confident of the process there is excellent software available that can guide you through every step. Alternatively, you can also seek the help of a tax professional. Finally take advantage of electronic filing and avoid last minute, long lines at the Post Office.

III. Prepare for Next Year

With the process completed, start preparing for next year. Ideally you should be at the point of breaking even in terms getting a refund or having to pay the IRS.

If you are receiving a large refund, don’t mistake it for a large bonus from the government. All this means is that they are deducting too much money out of your pay check every time and that you are providing the government with an interest free loan.

Work with your Human Resources department and update your withholding information (using the W4 form). That extra cash flow can help you achieve some other financial goals like finishing your starter emergency fund, accelerating your debt snowball, starting on your fully funded emergency fund, or investing more.

If you had to pay a large amount, here are a couple of options to improve your position:

  • Increase your charitable donations to qualified non-profit organizations.
  • Increase your retirement contributions to qualified plans, IRAs, etc.

6 For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing.
7  Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.

Romans 13:6-7 (ESV)