Tonight on PoliticKING: Grover Norquist on How to END the IRS

Tonight's guest on #PoliticKING is Grover Norquist, an American political advocate who is founder and president of Americans for Tax Reform, an organization that opposes all tax increases and a co-founder of the Islamic Free Market Institute.

Just in time for tax season, an EXCERPT from Grover Norquist's new book End the IRS Before It Ends Us: How to Restore a Low Tax, High Growth, Wealthy America



Getting the IRS off your back and out of your wallet need not wait for the political world to embrace comprehensive tax reform. You don’t even have to wait for baby steps, the small, incremental changes to our tax system that would improve your life. Those changes require an act of Congress. That could take weeks. Several hundred weeks.

The good news is that there are some simple, commonsense ways you can reduce the IRS bite out of your paycheck today. You don’t have to wait for Congress to pass a new law. None of these items solve all the world’s problems. You won’t be quitting your day job anytime soon. But they are smart, lower-tax opportunities that the current tax system allows, and that are likely to survive no matter what changes happen to tax law—good or bad.

You can start now to defund the IRS, from the comfort of your home.

1. Don’t Give the IRS Free Money

One of the simplest ways to avoid paying extra money to the IRS is to not give them extra money. That sounds simple enough, but millions of Americans end up paying more than their tax liability to the IRS because of interest and penalties every year.

The IRS, contrary to popular belief, does not want you to pay them on April 15. By then, it’s already been three and one-half months since you stopped earning money for the year. They want to get paid in something close to real time, as you earn the money.

Ideally, that’s done through payroll and other third-party withholding—ideal for the IRS, that is. But for people who don’t have a withholding option, the IRS has four quarterly payment windows in April, June, September, and the following January.

What happens if you don’t pay the IRS enough money, quickly enough? You may be liable for an underpayment penalty and interest (which is charged at a rate higher than what you can get at the bank). If you don’t file your tax return on time, you have to pay a “failure to file” penalty. If you don’t pay all your taxes by April 15, you have to pay a “failure to pay” penalty (on top of the regular penalties and interest).

All of this can really add up. If the clock keeps ticking long enough on these penalties and interest, a tax liability could easily double in size. That’s all free money to the IRS, and you don’t get to deduct it anywhere.

They are going to get the cash anyway, so pay what you owe, on time, and you’ve automatically kept money in your pocket and not given it to the IRS.

2. Don’t Give the IRS an Interest-Free Loan

You can give the IRS too much money by paying too little or too late. You can also give the IRS an interest-free loan if you pay too much too early. The IRS reports that about three in four tax returns—more than 100 million taxpayers—are due a refund every filing season. The average refund is now approaching almost $3,000. About $300 billion is effectively loaned to the IRS every year (mostly paycheck by paycheck), only to be returned to taxpayers as a lump sum every springtime.

If you’re reading this, there’s a good chance that you are one of those taxpayers. When you get a refund, you might think of it as found money, or a windfall. It’s not. It’s simply your money that you paid too much of to the IRS over the course of the year. You could have had that money to earn interest at the bank, pay down debt, fund a retirement plan, save for your kids’ college education, or even take a nice vacation with your family. Instead, you gave it—for free—to the IRS for a whole year or more.

Try to pay what you owe to the IRS. They don’t deserve more than that, and you are not the IRS’s bank.

3. Know Your Rights as a Taxpayer

Believe it or not, there’s a list of taxpayer rights maintained by the IRS. Most taxpayers don’t know about them, but they might come in handy in the event of an audit or other IRS action against you or your family. It’s contained in IRS Publication 1.1

The list of rights is as follows:

The right to be informed about tax law, IRS publications, and IRS decisions

The right to quality service. I’ll leave the jokes to you, the reader.

The right to pay no more than the correct amount of tax.

The right to challenge the IRS’s position and be heard.

The right to appeal an IRS decision in an independent forum.

The right to finality in all audits and other IRS investigations.

The right to privacy. Presumably, this even applies to Tea Party leaders.

The right to confidentiality. Someone needs to tell Lois Lerner about this one.

The right to retain representation in any IRS audit or procedure.

The right to a fair and just tax system.

Now, some of those might have elicited a well-deserved harrumph or guffaw from you, especially if you’ve ever been through an audit. But what’s important is that these are rights you have as articulated by the IRS itself. If you feel that your rights are being violated, this is the first resource to consult.

4. Participate in Your 401(k) Plan at Work

The biggest tax benefit in the entire tax code is one that you probably have access to, or if not you, a spouse or a child. It’s nothing that you have to get a law school degree to understand, either.

Would you believe it’s the simple act of signing up for your workplace retirement plan, which is often a 401(k)?

Most 401(k) plans are structured with a match on contributions. Under the most common form of these, you need to defer 5 percent of your wages in order for your employer to contribute the equivalent of 4 percent of your wages toward your 401(k) account.

Right off the bat, you’re getting a fantastic rate of return there. In fact, it’s the equivalent of getting an 80 percent rate of return before taking any other action (4 percent on top of 5 percent). Where else can you get a tax-free 80 percent rate of return on anything?

The money your employer contributes to your 40l(k) is not taxable to you. It will grow and build in your 401(k) (or an IRA, if you roll it over someday) until retirement. Only then will you pay tax on your nest egg. So not only is the original employer contribution tax-free—it is free of taxes for decades and decades of growth.

What about the 5 percent you yourself have to put in to get this free money? It also has a tax advantage. Most employers now offer an option between a traditional pretax elective deferral (where your taxes are cut merely by contributing, but you pay taxes in retirement) and a “Roth-style” after-tax deferral (where you don’t get any tax benefit for contributing but the money grows tax-free forever, into your retirement and beyond).

Whichever method you use to contribute, getting that free money from your employer is an absolute no-brainer. It’s also the best tax advantage out there that is available to almost anyone in the working world.

5. Open a Roth IRA

The good news is that most Americans are already eligible to save in an account very much resembling the Retirement Savings Account mentioned earlier. A “Roth IRA” is an account where you get no immediate tax advantage for making contributions. However, the money grows and builds over time tax-free, and withdrawals after retirement are tax-free. Contributions can be withdrawn on a tax-free basis, usually at any time.

The contribution limit to a Roth IRA is $5,500 in 2014, and those over age fifty are allowed to make a $1,000 “catch-up” contribution. You have to have earned income (wages and salary and self-employment income) at least equal to your contribution amount.

Roth IRA eligibility is limited by income, but those limits are very high. The limit is over $100,000 for single taxpayers, and nearly $200,000 for married couples. That means that Roth IRAs are available to over 90 percent of workers today. There are also no income limits on converting a traditional IRA to a Roth IRA.

Can’t wait for Congress to reform tax-free savings accounts or create a yield-exempt savings system? Make your own—use a Roth IRA.

6. Save for College Tax-Free

Just as a Roth IRA is a pretty good rough substitute for a Retirement Savings Account, there are ways to construct something like a Lifetime Savings Account for yourself, too. One of the main reasons you might choose to use an LSA in a reformed system is to save for college. You might also want to save for precollege education expenses, such as for parochial school or homeschooling costs.

The “529 plan” (named after its section in the tax code) is a tax-free account for college savings. As with a Roth IRA, you get no tax benefit for making contributions. However, the money grows completely tax-free, and distributions are tax-free if they are used to pay for college costs. Unlike a Roth IRA, there is no income limit on contributions—anyone can give. Also unlike a Roth IRA, the contribution limits are very high—most states merely have an account accumulation limit, and the only contribution limits you need to worry about involve potential interactions with the federal gift tax.

Do you need to save for both college and precollege expenses? Then you should look at a Coverdell Education Savings Account, or Coverdell ESA. These work like Roth IRAs (after-tax contributions, etc.) The contribution cap is $2,000 per year, and there are very high income limits. Coverdell ESAs certainly can be used for college savings, but they can also be used for precollege costs such as tuition and homeschooling expenses.

7. Open a Health Savings Account (HSA)

The other way to use your LSA is to save for future health care needs. There is an existing tax benefit that can do this. It’s known as a “Health Savings Account,” or HSA.

An HSA is a tax-free savings account on “both ends.” That is, contributions to HSAs are tax-deductible (or they are tax-free if received from your employer). Money invested inside an HSA grows tax-free. Withdrawals from HSAs for health expenses are also tax-free.

That’s quite a benefit. In fact, it’s unlike any other benefit in the tax code, with the possible exception of the tax breaks given to employer-provided health insurance. What do you have to do to qualify for it?

There’s the catch. Not just anyone can fund an HSA. You have to have a consumer-directed health insurance plan that is HSA-eligible. In order for one of these plans to be HSA-eligible, it must have (among other things) a deductible of (in 2014) $1,250 for singles and $2,500 for adults. These amounts are indexed for inflation.

A deductible, just as with car or home insurance, is the cost you must pay before insurance coverage “kicks in.” As you save money in the years you do not spend your entire HSA contribution, it builds and is available to cover costs in a year when you have higher-than-expected health costs. That allows you to have a larger deductible, and that reduces your overall HSA insurance cost.

Plans with people paying for their own routine medical expenses result in health insurance policies that are less expensive than traditional, first-dollar coverage. According to AHIP, the trade association for health insurance plans, the cost savings from moving from a traditional plan to an HSA-qualified consumer-directed plan is about 33 percent.2

The typical family plan today is over $15,000, also according to the Kaiser Family Foundation.3 So a 33 percent savings from there is an annual savings of $5,000. This number will only grow larger over time. Someone with an HSA could deposit these savings each and every year into their account. It would not take too long before a high deductible is not only not scary but not relevant. The maximum amount that can be annually saved in an HSA is nearly $7,000 for families, and nearly $3,500 for singles, so the opportunity to accumulate more is certainly there.

What happens to money you save in the account but did not need to use for medical expenses? Unlike other health accounts, such as Flexible Spending Accounts you might have had at work, HSAs have no “use it or lose it” rule. Whatever you don’t use simply rolls over to the next year. Over time, HSA balances can become quite large, even into the five- and six-figure range. Most people with HSAs will find that they have more than enough money to pay for routine medical expenses, and they always have the health insurance plan as a backstop in the case of a very high-cost year (remember that you never owe more than your deductible and any coinsurance costs).

HSA dollars that are carried into retirement can be used to offset Medicare premiums and pay for any other expenses that Medicare does not cover. Even better, starting at age sixty-five, HSA owners can take withdrawals for nonmedical purposes while avoiding any early-withdrawal penalties (they simply must pay income tax on what they withdraw).

HSAs also help keep the cost of health care down for all Americans. If more people were paying their routine medical expenses with their own money (leaving insurance for the unusual year when they have unusual health challenges or have a baby), they would care what things cost at the doctor’s office and at the pharmacy. When consumers pay directly, they shop around. One notes that LASIK surgery and plastic surgery declined in cost when not covered by insurance. Ideally, the major government health expenditure programs (Obamacare, Medicare, Medicaid, S-CHIP, and Veterans) would be encouraged to become consumer focused. (Not as the Veterans Affairs system sadly turned out to be: bureaucracy centered.)

Senator Orrin Hatch (R-Utah) has legislation he introduces every Congress to expand HSAs, the “Family and Health Retirement Investment Act.” These and other efforts to grow HSAs are an important part of incremental tax reform.

8. Start a Small Business

There’s an old adage that “no man ever got rich working for someone else.” It’s true that most wealthy Americans didn’t inherit their money—they built it by starting businesses. The tax code has all sorts of things that small business owners can do to prevent as much of that start-up money as possible from going to the IRS.

Business owners get to deduct all “ordinary and necessary” expenses of running their firm. This includes things like travel, rent, supplies, home offices, etc. In addition, they can expense in the first year up to $250,000 of business-asset purchases (as opposed to subjecting them to slow depreciation tables). Health insurance expenses can be deducted.

If you’re an employee, you probably can’t deduct those things, even if they are business related. The IRS makes that very difficult. But if you’re self-employed, the deductions tend to be much more straightforward. Think about becoming your own boss and your own employee.

There are special retirement savings accounts for small businesses. The most popular is the SEP-IRA, in which 20 percent of business profits can be deposited—tax deductible—for retirement. That’s one of the most powerful tax benefits in the entire tax code.

As with everything in taxes, there’s a catch. Self-employed people are subject to the income tax, and they are also subject to both the employer and employee halves of the Social Security and Medicare payroll tax. The combined FICA rate is 15.3 percent. That means that small business owners face some of the highest marginal income tax rates of anyone in our tax system.

9. Take Classes to Increase Your Marketable Skills, and Talk to Your Employer about Paying for It

If you take classes in order to acquire a new skill or to become self-employed, that’s obviously going to be a good thing for your long-term wealth accumulation prospects. But it’s also a pretty good way to prevent money from going to the IRS.

There are three separate tax preferences for taking higher education classes—the Tuition and Fees Deduction, the Lifetime Learning Credit, and the American Opportunity Credit. They all have different rules, levels, phase-out rates, etc. But they are available to you if you know how to use them.

You can also receive a limited amount of tuition benefits ($5,250 per year) as a tax-free fringe benefit from your employer. This money is deductible to them and tax-free to you, so it’s a great way to shield even more money from the IRS. In fact, there are a whole host of tax-advantaged benefits you can get from your employer. Talking to your employer about what’s in your benefits package is a good idea in any event. Common things it can include (and should if it doesn’t) are:

  • A 401(k) or other retirement plan
  • Pretax employee contributions to health insurance premiums or HSAs
  • A Flexible Spending Account (FSA)
  • A special type of FSA for dependent care
  • Employee parking or public transportation benefits
  • 10. Don’t die

    Sadly, the death tax, while pruned back during the Bush years, still exists.

    The federal death tax now stands at 40 percent above $10 million for a couple. But watch out because fourteen states have lower exemption levels from their own death taxes. If you cannot follow my sound advice to avoid dying, you might wish to move to one of the thirty-three states with no death tax.4

    Death Tax States with Top Rates

    In order to avoid paying the death tax, there are some commonsense things you can do. For this, you should consult a financial planner and perhaps an attorney.

    Another thing to avoid is tripping up against the “gift tax,” which is intended to prevent estate transfers before death. Yes, the government limits how much you can give your kids and grandkids as a gift each year.

    If you’re smart about it, you can prevent your family from having to face both the undertaker and the IRS on the same day.

    11. Move to a Low-Tax State

    Between 1995 and 2010, 2,461,687 Americans moved from the ten highest-income-tax states, while the ten lowest-income-tax states have gained 3,838,694 Americans.5

    12. Keep Taxes in Mind When Investing

    If you’re investing in a taxable brokerage account (say, using mutual funds or just buying stocks), it’s easy just to focus on the headline rate of return on the investment in the past. But it’s important to remember that this investing is not happening in the context of a tax-advantaged account, such as an IRA. Any taxable income thrown off will be taxable to you in the here and now.

    For stocks and mutual funds, there are two taxes to watch for. First, dividends, the payments companies make to shareholders when they distribute profits. Shareholders must pay taxes on these profits, at a rate that can go as high as 23.8 percent. The average dividend yield (that is, the dividend payment divided by the share price) in the stock market is about 2 percent per year. If you are buying a stock or mutual fund that returns cash to you in excess of this amount, know that you’re going to pay taxes on it. Some companies, such as utilities and financial services firms, pay a very high dividend by design.

    The other principal tax is capital gains. Capital gains taxes take two forms in this context: First, you have the capital gain that is a result of the share price of your investment rising. You buy a stock for $1 per share, and it grows in price to $10 per share. You have a $9 capital gain. This is not due to the IRS until you sell the shares (capital gains face the same taxation as dividends).

    The other type of capital gains is those that are realized inside of a mutual fund you might own shares in. A mutual fund is just a bucket that itself contains stocks. You own a piece of the bucket. Any stock sales that happen within that bucket are passed along to you, the mutual fund shareholder. Some mutual funds have a lot of “churn,” meaning there’s lots of buying and selling going on within the fund. Generally, these types of mutual funds will throw off a large annual tax bill, even if you haven’t sold any mutual fund shares.

    It’s important to be conscious of taxes, fees, and the total return on an investment before deciding to hold it outside of a tax-advantaged account.

    Excerpted from End the IRS Before It Ends Us: How to Restore a Low Tax, High Growth, Wealthy America by Grover Norquist. Used with permission from Center Street, a division of Hachette Book Group, Inc.

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    The views and opinions expressed herein are those of the author's alone and do not necessarily reflect the views of Ora Media, LLC, its affiliates, or its employees.

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