Posted on 09/29/2023 5:17:56 AM PDT by Jonty30
I'm just curious for other opinions, who maybe are qualified than myself.
A young man gets his accounting certification as a certified public accountant. He gets a job, paying about $75,000/annum, in the IRS department. On weekends, he keeps books for clients, to which he makes about $30,000/annum. He has started an investment account, to which he will deposit as much as he can because he wants to transition living on the investment income and invest his other incomes into his investments.
I told him that it is probably best to have the government take 100% of his income, just to ensure his taxes are covered. Then, live on the weekend job as much as possible. As he gets money into the investment account, have the investment account pay out in March. As it increases, have the HR department subsequently lower how much he sends to the government each year until the time comes when he doesn't send any money to the government but cuts them a cheque in March to cover the tax owings.
Did I do well or is there something better that he could do?
My advice is cheat on your taxes as much as you can get away with because the government is actively stealing money from us all to give to illegals, Ukraine,trans issues, climate change BS and more.
Most accountants are useless when it comes to business/financial decisions. All they know to do is follow the rules and fill in the forms.
That said, he should max out his 40x contributions into an S&P 500 index fund. Max out IRA into S&P 500, spreading the max annual investment into 12 monthly installments. Then with his side hustle money, make regular level monthly investments into an S&P 500 taxable account, as much as your budget will stand.
When the taxable account grows big enough, look to buy a house for cash.
Always strive for a maximum monthly surplus, as big as your living standard can bear, ie, keep expenses to minimum.
Avoid the temptation to “play the market”.
“Not very ‘creative’ are they?...............”
#######################
Most people do not understand the different skill sets required for accounting vs finance vs investing.
Three VERY different skill sets. There can be overlap, but most often there is not.
Not true. For example, if you analyze the holdings of the QQQ, you will see that there are plenty of dogs that are a drag on its performance. It is easy to assemble your own QQQ by investing in the best components and excluding the dogs.
I have done it for years quite successfully. And before that, I did the same thing with the S&P 500.
That said, as I suggested in my comment earlier, it's best to start conservatively and learn the investment business slowly and carefully.
As an aside, I spent my career in the securities business and majored in it (grad and undergrad).
Jonty30 wrote: “As it increases, have the HR department subsequently lower how much he sends to the government each year until the time comes when he doesn’t send any money to the government but cuts them a cheque in March to cover the tax owings.”
The tax laws require regular withholding. If your withholding at tax time is significantly less than your tax obligation, you will be assessed the taxes owed plus an underwithholding penalty. So, your advice will cost him.
Suggest you consult with a tax expert.
The IRS frowns upon ‘Creative Accounting’...................
“you will see that there are plenty of dogs that are a drag on its performance.”
You will see that there WERE plenty of dogs that WERE a drag on its performance.
Identifying dogs after the fact is easy, before the fact not so much.
Does the IRS even allow you to put money ‘on account’ against future taxes that way?
I think after 3 years any overpayment is lost.
Isn’t he an accountant?! Maybe it depends on what school and all, but he should be able to better understand this than anyone else.
As you say, past performance is not a guarantee of future performance. I didn't say that it was. A company isn't a dog because of its past performance. It is a dog because of its future.
BUT, the fundamental purpose of security analysis is figuring out which investments are going to perform well in the future.
I spent most of my career raising capital for companies and projects that I determined would be successful (including venture capital).
I made my living by being good at it (people who aren't good at it don't last long). But it isn't magic so much as hard work. I recommend people start with the basics. I studied Benjamin Graham's "Security Analysis" in college. It's dated but still a good place to start.
As long as you paid as much in estimates and withholding as was due on the prior year return, there are no penalties no matter how much is paid with the return.
~75% effective withholding is a little extreme for my taste. I would withhold nothing and put it in 4-26 week t-bills at treasury direct. 5.5% is better than a free .gov loan.
Sounds to me he has gotten in on the ground floor of IRS/USGOV growth plan: You will own nothing and owe us everything.
“The IRS frowns upon ‘Creative Accounting’”
###########
The IRS frowns upon tax EVASION.
The is nothing wrong with tax AVOIDANCE.
BIG difference.
But neither is the real subject of this thread.
Where to begin….
He is a CPA AND working for the IRS and can’t figure out how much to have withheld from his pay even taking into consideration his side hustle?
If that is the case, I wouldn’t want him keeping my books 😉 Just saying.
He is also going to want to check to see if his outside work/business is approved as the IRS takes a dim view of outside employment that could be considered a conflict of interest, which could result in termination.
And whether approved or not, I’m pretty sure that not reporting his self-employment income would get him into even more trouble with the IRS whether an IRS employee or not but if an IRS employee, not reporting would likely result in termination, but if he is a CPA, I would expect him to know this. And FWIW, this could also result in him losing his CPA.
Next – the ONLY mechanism for communicating to an employer how much federal tax you want withheld each pay is via a Form W4.
And there is nothing on the W4 that allows for a flat percentage of tax to be withheld, so you can’t just “ask HR” to withhold 100% or any other flat % of pay.
There is a spot under Step 4 - (a) Other income (not from jobs) where you can enter an amount with would result in a higher amount deducted each pay but the instructions state: “You shouldn’t include income from any jobs or self-employment” and a spot (c) Extra withholding to have an additional flat $ amount withheld but that is not the proper way to pay tax on self-employment income as self-employment income also requires one to pay SS and Medicare tax.
He would need to submit a new W4 each time he wants to change his withholding, and an employee can make a change to their W4 as many times and throughout the year as they deem necessary, but the employer has the 1st pay after the 30th day from the date you turned it in to update.
https://www.irs.gov/pub/irs-pdf/fw4.pdf
“I can understand that, but my thought is to keep things simple. In a few years, if all goes well, he could cut the government out each pay period and just cut them a cheque come tax time because the investment covers that.”
That is not how it works. You can’t have zero federal tax deducted from your paycheck and just cut a check to the IRS for taxes owed on employment income each pay. You can make quarterly estimated payments on self-employment income but not on employment income.
While it is possible to fenagle a W4 to have zero federal tax withheld from pay or claim “Exempt”, there are significant penalties for submitting a fraudulent W4 and there are very specific instances where someone can legitimately claim Exempt on their W4, none of which would apply here.
And if an employee ends up owing a significant amount of tax and is found to have fraudulently claimed Exempt from withholding or claimed other amounts resulting in no or little federal tax withheld from pay, the IRS can and will send the employer a “Lock In Letter” which overrides whatever W4 the employee has submitted and typically a higher withholding and does not allow any change to a W4 until the lock in is released.
Assuming he is not in a conflict of interest with his IRS job, he would need to pay estimated quarterly tax on his self-employment income, and file an annual Schedule C with an accompanying Schedule SE (Form 1040 or 1040-SR ) - Self-Employment Tax to calculate the additional the amount of Social Security and Medicare taxes he should have paid during the year.
Investment income is a whole other ball of wax and I’m not as well versed on the intricacies and reporting for that, but I do know that federal tax laws require brokerage firms, mutual funds, and other entities to report on Form 1099 all investment income, usually interest or dividends, they have paid to investors during the previous tax year and that is reported on the annual 1040 return and sometimes payments brokerage firms allow these payments to have federal and or state tax withheld.
There would also be potential capital gains or losses or carry over losses to report on the sale of any investments.
JSM_Liberty - “He should put as much as he can into the TSP (federal equivalent of a 401k). This will reduce the amount of tax that he needs to pay now and the index fund options in the TSP are very good.”
Good advice.
“Did I do well or is there something better that he could do?”
Please stop giving anyone tax advice and if he is taking tax advice from you, he should really consider another line of work. I hear W-Mart is hiring. :)
Did you forget the sarcasm tag?
The idea of paying taxes when you are older is a fallacy. This guy makes 100,000 now pay the tax because he will need more than 100,000 a year when he retires. So 401Ks and such just avoid the inevitable. Better to pay tax now on the seed than on the harvest when you retie.
Investment grade indexed insurance is after-tax investing over 5 years, no tax on the gain, no tax when you withdraw. Not attachable in a court case. Can withdraw without penalties in emergencies. And a death benefit to your beneficeries. Start as young as you can and retire young.
When the sentate passed this law decades ago, many senators put money in these. AAA insurance companies don’t default on policies.
I agree with that assessment.
What kind of CPA would need to get advice on this kind of stuff.
Is it a Affirmative Action CPA?
Don’t forget he needs to register as a democrat to cover himself, if he does that.
Great point thanks.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.