6 tax lessons for millenials

Darla Mercado for Crain's writes: I spent a good part of 2013 and early 2014 writing about higher taxes that were just around the corner for their clients due to the American Taxpayer Relief Act of 2012.

But I never anticipated I'd be writing Uncle Sam a four-figure check. Ouch.

The exact amount my husband and I owed for federal taxes was $4,175. That's decent-vacation-in-Europe money. Or new-pair-of-fancy-roadbikes money. The best alternative? We could've just left that money where it was originally: sitting in our emergency fund savings account.

Here's a quick recap on the new laws: Single filers with taxable income over $400,000 and married-filing-jointly filers with taxable income over $450,000 will be subject to a top marginal income tax rate of 39.6 percent, plus a top marginal tax rate of 20 percent on long-term capital gains.

Starting at the $250,000 (single) and $300,000 (married, filing jointly) levels, there's also a phaseout of personal exemptions and itemized deductions. Don't forget the 3.8 percent surtax on net investment income, plus the 0.9 percent Medicare tax on wages, which apply at $200,000 income level for single filers and $250,000 for married filing jointly.

My husband and I do “well enough.” We're far enough from the $250,000 income threshold that we don't have to worry just yet about the additional levies on wages. We do earn enough, however, that we're close to the higher end of the 25 percent tax bracket.

But we did undergo a couple of major changes from the 2012 tax year to the 2013 tax year. The biggest one being that my husband was between jobs in 2012 and doing some independent contractor work on the side, then he became a W-2 employee for the full year of 2013. The end result? A huge bump in combined income for the two of us, raising us from five figures to the low six figures.

There are valuable life lessons to be learned here, for my husband and myself, as well as for moderately successful Gen X and Gen Y or Millennial clients who will one day hit those higher income levels.

1. Double-check W-4 forms. This is particularly important for households with two wage earners. Sometimes it's better to pay a little more in extra income taxes throughout the year, rather than having to write out one big check come April 15. A big mistake for some taxpayers is filling out the W-4 form — the form in which an employee calculates how much taxes an employer should withhold — in such a manner that the employee receives only the standard deduction and taxes are withheld in the 10% bracket. Sure enough, my husband and I have this on our to-do list, as we both withheld our taxes in the 10% bracket, underpaying on taxes through 2013. Updating a W-4 is a relatively simple fix that can save a bundle.

“What I recommend as a good fix in maybe 80% to 90% of situations is that one spouse should claim zero and married, while the other claims zero and single,” said Jerry Love, a certified public accountant and personal financial specialist.

When your combined family income hits the $100,000 threshold, it's time to have a talk about Form W-4, updating it to ensure that they're withholding enough money in payroll taxes, Mr. Love said. “Once you get over $100,000, you can end up in the 25% bracket very quickly,” he added. [snip].  The article continues @ Crain's, Click Here.

The Tax Strategy They Aren’t Telling You About

Anthony Robbins writes: Imagine that you’re a farmer, and your tax collector gives you two options: (a) get taxed by the seed or  (b) get taxed by the crop.

Which option do you choose?

Most people will choose (b), by the crop—and they’re wrong. In fact, you should choose to get taxed on the seed. So many people are conditioned to defer their taxes until the future—even though the tax rate in the future is a complete unknown. But if you pay tax on the seed, your harvest will be yours to keep. Consider taking the same approach when you’re deciding how your retirement fund will be taxed.

Most of us have been taught to invest in a tax-deferred retirement account. Tax-deferred means you invest your money without being taxed, but then when you withdraw this money when you retire the amount you take out will be taxed as income. But do you think taxes will be higher or lower when it comes time to take it out—10, 20, 30 years from now? (You should count on the tax rate being higher.) Plus, as we all get older, many of our deductions go away. For example, when you pay off your house (or downgrade to a smaller house), you lose your mortgage deduction. When your kids graduate and move out, you lose these deductions, too.

Instead of using a tax-deferred retirement account, if you pay a little tax now, you’ll likely be able to keep more of what’s compounded later on. Look at it this way: If you want to double a dollar every year, the first year it doubles from $1 to $2. The following year it doubles to $4. After eight years, that amount has gone up to $256.

After 20 years, what will be your balance after that single-dollar investment?

You will have amassed $1,048,000.

If you’re not paying taxes on your investments along the way, you are choosing to give the IRS the spoils later on. So why not pay a little tax now—and keep all the compounded growth for yourself? You could do that with a Roth IRA or a 401K Roth IRA. Also, if you own a business, you can now have a 401K Roth IRA inside your company.  You can put aside a maximum of $17,500 a year, and if you’re at least 50 years old, the amount goes up to $23,000.

If you are going to be truly financially free, you have to not only spend less than you earn and invest the difference, but you have to be able to protect what you have, and capture the growth for yourself.

This article is for educational and informational purposes only.  Neither Robbins Research International, Inc., Anthony Robbins, nor their affiliates (collectively “RRI”) are accountants, tax consultants, licensed professionals or certified financial planners, and you should not rely on any statements made in this article to determine the correct strategies for you.  RRI does not guarantee any results or returns based on the strategies outlined in this article, and you agree to hold harmless RRI, its employees, officers, agents or affiliates from any of your activities or strategies which may result from information obtained from this article.  You should choose a competent tax consultant or financial advisor to determine the strategies that are right for you and your particular situation.