Welcome to the first episode of Tax Sherpa Stories, where I share with you stories from the front lines of the tax world, current events that affect tax, finance, and markets, and a whole lot more.
In this episode, I share my personal story with taxes and how I owed the IRS over $1,000,000 and then went on to pay none of it. Despite the stress that all caused, it led me to where I am today.
In the live Q&A portion, we went over some of Biden's proposed tax policy changes and how that might affect things. Nothing is set in stone and he's not even in office until tomorrow, but these are things we all need to stay aware of.
I still need to get some artwork for the show and maybe a theme song, but overall I think it went well. We had some technical issues, but those should all be sorted out for next week.
Links and images from chat
Transcript
Hey everybody.
This is the first episode of the texture. The stories I was about to say the monster Maverick show, which is my other show on discord. That's a weekly streaming live Q and A kind of thing, but this is Tax Sherpa Stories. On this first show, I want to go over a couple of things, what the show is about, the whole structure of it, and we'll get into the actual meat of the episode.
There are going to be stories from the front lines of the tax world. Things I've learned from doing, 50,000 tax returns or so over the past decade and current events, things going on in the financial and tax world, ways to run your business better, I'm a profit first professional. That's a big part of what I do to help clients and other topical things in the world of tax, finance markets, and all those kinds of things.
That's kind of what the show is going to be about. And if that's your bag, if you're an entrepreneur, if you are into, keeping your money, not paying it to the government or, operating your business more profitably and just lowering your overall financial stress, then this is your place.
So, that's kind of what it's about now.
Who am I? why should you listen to anything I have to say? An important question. And I, well, my name's Neal. I am the principal over at Tax Sherpa at taxsherpa. co and I've been in the tax world for, like about a decade. And I got into it, the old fashioned way I married into it. And that'll, that's a big part of my story about how I came into the tax world.
I was trained as an engineer, went to Georgia Tech. I was a bachelor of Electrical Engineering with an emphasis in bioengineering. This was before BME, Biomedical Engineering was it's own separate major. I did do my undergrad there. I did some graduate work and ended up not finishing there. Then, I went out into the world and I found out fairly quickly that the corporate world was not for me. I have a whole separate story about the instant. I realized that I did not wear to work in the corporate world, especially as an engineer.
I was doing other things, I've been in the investment markets, for about 20 years. Since I was an intern in college and that's going to play a part in my story today about how I owed the IRS over a million dollars at one point and how I paid none of it and, and legally, but I don't want to spoil the surprise there.
I ended up going through a very old school kind of apprenticeship under a tax attorney. Spent many years there and kind of learned the ins and outs of all the tax code and how it applies to your average kind of small business owner. If there is such a thing as an average.
The thing that turned out to be interesting is that my background, training as an engineer allowed me to come to the tax world from, a very different perspective, compared to most accountants. Most accounts, major in accounting and they have this kind of very basic fluency in numbers and a little bit of understanding of the law and what I came in as an engineer though engineering is all about systems-level analysis.
By looking at things in that way, it has allowed me to see very readily what kinds of things are applicable, and how one-piece affects another very quickly. It's kind of a unique perspective. I think I bring the whole thing. On top of that, at one point I had my series 65 investment advisor. So, I ended up not doing that, which is again, a whole other story unto itself. I do at least formerly had those credentials, which I may not place any weight on, my take on the markets and things on top of that, I am what's called profit first professionals which means that I help businesses structure their cash flows. The goal is to end entrepreneurial poverty.
Entrepreneurial poverty is kind of a weird term because the typical, I guess, pop-culture idea of an entrepreneur is somebody who's rich and who wants to grow a business. The dirty little secret is that the average entrepreneur is flat broke because of the way that businesses are run for the most part. Is that, money comes in revenue, and hopefully, there's some revenue kind of there. A lot of businesses fail that step, but then right after revenue comes expenses and leftover is profit. That's the typical accounting formula, profit minus our revenue minus expenses an equal profit.
The way probably first looks at that is not a sufficient way to run your business because what ends up happening and I've experienced this myself, is that money comes in, money goes out, and then there's nothing left. There are so many entrepreneurs out there who have their small businesses, whether it's just them or it's whether they have a team or any situation. It doesn't matter because they put themselves last. Then they get nothing. Either they barely get by, or they end up going into debt to support the business. What profit first does is it turns that all around.
I'm sure that you've heard the old expression that, you pay yourself first. The richest man in Babylon was written, I don't know, a hundred years ago, 120 years ago. Something like that. It says, pays yourself first. And they say, let it not be less than a 10th of all you make.
So, profit first just pays yourself and there's, there's a whole structure to how you do it, but that's the basic idea. So, you know, when it comes in, you pay yourself and you run your business on whatever's left. And so that allows you to live and it allows the business to continue.
Certain decisions need to be made along with that, along that journey, but that will get you at least a step one, which is kind of the most important part. That's a little bit about who I am. So I've been in, in the world of money and finance and markets for roughly 20 years, a tax world specifically for 10 years done, as it turned out, the mentorship I went through was a very high volume kind of place.
The 50,000 tax returns I've done are way far above the norm. I'd go to these conferences, with the IRS. We talked to other taxpayers who were there to continue the education kind of series that the IRS puts on every year and say, What's your business-like? And they would say, it's like, Oh, you have 200 clients and your clients are 65 clients or whatever. It's like, Oh, we do 8,000, you know? So it's kind of a different scale of things. So that has just through, just through the sheer volume has built up my experience. In that way.
So, the way that this show is going to work is that there are going to be two basic segments. Segment number one is going to be Storytime. We have two stories on tap for today. Story number one is going to be the time I owed the IRS a million dollars. Then, how I didn't pay any of it. And story segment, number two is the Q and A, this is a live show we're on discord here. People could be watching on, MSP waves.com or they can be watching on VIN. I think we're still on SEDA. I'm not sure about that. But the Q and a portion are here in discord. People can type in the chat and say whatever they want on the live stream, which you can't see right now, you will see in the bottom right-hand corner, there is a window of the stream of the discord channel assets as it's happening.
You can ask any questions you want. I do recommend not. Well, I can't give you any particular answers to your situation simply because we don't have an existing relationship. I'm not with very few exceptions. I'm not your tax repair. And also this is a public forum. So, I don't want to put your details out into the YouTube and podcast world like that.
We will stick to generalities and how certain kinds of things would be done, that sort of thing. And that part may or may not be recorded depending on the topics that we dive into and, and how much people ignore my suggestion. I'm not getting too into detail about their situation. So, if you have a question and you want me to not record, just let me know, and then I can stop the recording, and then we can talk about it live, but, they won't make it into YouTube and the podcast stuff.
That's kind of the structure. And if that sounds exciting to you, then let's dive in. So, part number one storytime. So the time I owed the IRS a million dollars. What happened was, I was younger, this was around 2003. It was kind of a saga stretching from 2003 to 2008. And what had happened was, so I had mentioned that I didn't want a corporate job and I found this out fairly early in my career as I was a senior in, in my degree program, I interned with AMD at advanced microdevices. They're out there, Texas campus, through that experience, I realized that this is not what I want to do. Of course, it's kind of late, this is my fourth year of college here.
That was kind of a shot to the gut. But after graduation, I started looking at other things. I started doing other things. I started getting more involved in investing and the markets, investing as a loose term trading, let's say that. So through no credit to myself. I ended up with a stockpile of about a hundred grand and I put it all into investment or trading accounts.
This was in the very early days of electronic trading. E-Trade was the thing, Ameritrade was a thing I don't think they had merged with TD yet. There were a couple of other platforms that were. Being in use, for people who are day trading, which is what I ended up doing. It was an interesting experience. I lasted about two years and, if you've ever thought about day trading, whether it be stocks or, or crypto or, or anything, I'd say don't, it's a terrible, terrible job. I got into this whole thing because I didn't want a job. Then, I ended up giving myself the worst job ever. Cause the thing about day trading, especially at that time there are no cell phones. No, I mean, cell phones existed, but no smartphones. So, I'd be sitting at my computer and the pre markets would open at eight 30 and I'd be sitting in my seat from 8:30 eight 30 until 4.
If the post-market was active, then maybe a little bit longer, afraid to go to the bathroom because you might miss something. It was just a total grind and it was miserable. So, if you're thinking about doing that thinking, Oh, I can day trade Bitcoin. Nope. That's a bad idea. So that is, that's not official financial advice, but it's just a recommendation of someone who's gone through it.
My trading career went through many stages of evolution basically through long and painful experiences. What I started off doing was, looking at the various asset groups in the stock market, and penny stocks from the thing. It's just hilarious to me too, when I look back on it because of how wrong I was, but back in those days so like I said, it was about 2003. There was what was called the OTC BB, which is the over-the-counter bulletin board trading system. Which were four companies that were not big enough to be listed on an exchange like the New York or the NASDAQ or the, of the American or the Philadelphia or whatever.
They were on the OTC market which means that they were traded to peers. It was sorta like defy before defy was a thing. Some market-makers maintained a market in these different issues. Then, their traits would come in. They would match up, buy, and sell just like the market makers on the NASDAQ too, or the specialists in NYC used to do.
If the stock price changed, then you could make money. The thing that's so attractive about these penny stocks and whether it be, say the same mechanics apply, whether it's penny stocks back then, or it's, microcap, cryptos today that the percentage gains can be enormous. That's attractive to the newbie trader. I can make 50% and I do that over and over and over again. And I'll turn my $1,000 into a million. So, I tried my hand at that. What was interesting though, there was, I got a very school of hard knocks kind of education there.
If you go to the NASDAQ or the NYC and you put in an order, and it's a valid order and the price hits that’s a price, whatever your order is, then the brokerage has to try to execute your order and it turns out in the OTCBB world that was not true. A market maker could just sit on your order and not trade it just because. I learned this through this painful experience. It was this weird cycle. I would make money Monday and make money Tuesday and make money Wednesday. All these little profit kind of days, it might be 50 trades, but I did not make any 400 bucks that day. If I could make 400 Monday, 400 Tuesday, 400 Wednesday, that's, that's a decent income. But then Friday rolls around and this didn't happen every Friday, but let's like, once every once in a while I would just get stuck in this trade and then lose everything. And then some, you know, everything that I built up then more so, you know, This having small, small wins and then large losses was not a system that ended up working for me.
After a few months of realizing that I was fighting the system and that the system would, when I graduated in my trading career and I moved on to two listed stocks, it was trading well, Google wasn't a thing yet. I have another story about that. I trade at T and T or T TJ Maxx, or, whatever was active that day. Typically then, the biggest movers of the day were things that revolve around earnings reports. I have to stay up late or get in early and I say, get in, go from one bedroom to another bedroom in my house. I'll check the earnings reports and if there's a positive surprise, I would go along and play that whole game.
Over the year, I ended up with a net loss because you know, I would have these small gains and then, you know, these blow-up losses, which is kind of a typical pattern for a day trader, you make those small wins and you think, you know what you're doing, and then life comes around and it shows you otherwise. So, I ended up with a net loss at the end of the year. My broker statements showed that I lost whatever it was, 10,000, $20,000 not including the money I had just taken out to live on during this time. This a hundred grand was going pretty fast. So, I thought at the time that, oh, I lost money.
I don't have to file taxes. That's a two, my 22, 23-year-old brain. That makes sense. And I thought I had heard that somewhere and it turns out that's not true. This goes on, like I said, for two years I don't file taxes. The following year I don't remember what had happened, but at this point, 2005, I had to file for a couple of years. I got a job. I ended up working as a tutor for kids in high school teaching them SATs math, basically everything except for foreign languages is what I ended up tutoring. And about 50% that was sat kind of prep. And of course, I'm a W2 employee now. So I get my W2. I was making barely enough to survive on. So, I think the first year I didn't file either and because at this point, I was afraid, I got this, I got my W2 at the end of the year. I was like, well, I haven't filed taxes for, three to four years, and now what happens if I file now?
Does that trigger something? I just didn't know. And I didn't know who to ask. It was just some kind of inaction caused by paralysis. I start getting letters from the IRS. Letter number one says, Oh, you know you need to file letter number two says you need to file letter number three, this goes on for a little while. Then, they start being a number on these letters that I owe a million dollars. It was like 1.2 million, something like that. At that point, I was just laughing to myself because there was no way I would owe any kind of anything remotely related to that. I saw that it was related to that trading that I did, those years ago.
I just continued to ignore it just through that fear of that paralysis. After a while in the IRS process, what happens is they start sending you certified letters, still, you have to sign for them with the mail and everything so they know you got it. I got a couple of those. I still ignored it. If you ignore those and they have determined that you do owe this money, what happens is, and you have a paycheck, then they start garnishing your wages. This is what got my attention. So I remember I went to work. I got a call from HR. The way this was going at the tutoring place, they had different branches all over the place. There was a corporate central location. I got a call from the central location and they told me, Oh, you know, the IRS is calling us about you and we have to garnish your paycheck. I'll send you this thing, you have to sign. And so, sign it.
I remember I got the thing, they printed it out and I signed my acknowledgment, but I thought you and I said, this is not a valid, a valid debit or valid tax or something like that. Sure enough, they started garnishing my paycheck and I wasn't making much, to begin with at that point. I forget how much they were taking, but I was left with like $300 per pay period. Every two weeks and that was not enough to pay my rent. It was not enough to buy food and all those kinds of costs of living sort of things. That's when I woke up and said I gotta do something about this. And so, I had met this person who happened to have a father who was a Texas. I ended up talking to him and you know, we went through the whole thing. And what happened was that back in those days, it's changed since then.
Back in those days, when you sold stock in a brokerage account, the brokerage would report the sale to the IRS and own the sale. The IRS gets all these, all these 10 99 B's, which is the statement of sale. They would say, you sold this, you sold that.
The computers add them up and the total sale ended up being like 4 million during that year that I was day trading. And then because of the tax on $4 million, it is a million dollars. It's one point. That's where the IRS got their information. So, we go through the whole thing and I dig up my old brokerage accounts and there is a net loss on the account.
Therefore, I have to go back and I have to go years in the past and, and file returns because what happens in the IRS process is that if you don't file for a few years, they do what's called an SFR and that's a substitute for return. What they do is they take the information that they have from third parties, whether it's W2's from your employers, 10 99 signs and all the different versions of 10 90 nines, there's 10 and nine miscellaneous there's new one this year called 10 99, NEC IMTS divs 10 and nine BS, 10 and nine S so these are all statements of, of information provided by third parties saying this particular kind of transaction happened regarding this taxpayer tonight. K is another one. There's also the 10 90 eights, which is your, like your mortgage interest. It'd be a 10 98. The various collect all the data that they can and they create a substitute return. Of course, it's the worst possible way you could file a tax return and no deductions, no anything.
Then, they assess the tax would be on their version. They went ahead and did this and then they came up with its number and it spits out. If it's a positive number in that you owe tax, they start getting these letters and you start going into the process. So, what ended up happening was, I went through this whole chain of events and because their return was never filed. I was able to address the issue by filing and just filing the right way, to begin with. We went ahead and did that and sure enough, Iris agreed that yes, I had $4 million in sales, but I had like $4.1 million of purchases. It ended up being a net loss of about 30k that first year and maybe another 20 the next year, something like that. So, when that percolates through their computer systems the whole issue just disappears. And that's what ended up happening.
I had this million-dollar debt with the IRS and they were taking my money they took from my paycheck and never got back because there's a statute of limitations on refunds, which is that I think they kind of did me dirty here, but that you have three years to claim a refund.
The IRS has 10 years to go after you. I guess who writes the rules, you know? So you can file further than three years back. But, if it's beyond that and you're owed a refund, then it's just, sorry, Charlie, you'll get a little letter in the mail saying, Oh, you know, you have.
We have processed your claim for a refund, but because it's past actual limitations, you don't go pound sand.
I got one of those for the amounts that I had already paid towards this. That is something to keep in mind if you haven't filed. We're in 2021, which means three years ago was 2017 or no, 2018 rather. In 2018 we were filing 2017 taxes. The window is 2017, it's coming to a close here in just a month or two or three months, I guess at this point. So I ended up clearing the whole issue, a million dollars, just poof disappears. And I was able to continue my life. And, since then, I've gotten into what they call compliance and I have kept my filings up-to-date so burying your head in the sand, as I did is the exact wrong thing to do because really.
What the IRS is trying to do, and you can debate the merits of whether the tax laws are fair or whatever, but what they are trying to do, the people who work in the offices there, they are trying to get people to file, get people to file accurately. So as long as you're doing that they're okay. If you are not filing or if you're doing fraudulent filings and other things like that, then, there are problems. But if you owe tax, if you get tax refunds, they don't care. It's just file and file accurately. I have a lot of clients who asked me, it's like, I'm getting a $20,000 refund. Is that a red flag? It's like, no, it's not a red flag. It's just a number as far as that, as far as they're concerned and it's backed up by everything that has gone on throughout the tax year and against Neil. That was my shenanigan. Fortunately, I ended up meeting the right person.
Like I said, this tax attorney that I studied under for years and years. He ended up bringing me into the business and I learned the tax business at his side. He was an old wall street guy which was interesting. So, if you've ever had a 60, 40 long-term versus short-term capital game, on index options, he was part of that whole creation because they used to handle the specialists on the New York stock exchange and their firm. That's a story for another day. But that's my story, since then I've been in the tax world and like excited one through. 50,000 tax returns at this point. I've seen a lot of stuff. A lot of things people bring in with that are just craziness.
A story on another show that we'll do is the time that this couple comes in and their brother, it causes them to file a fraudulent tax return and back and forth with that. That was a crazy one. But that's my story. Hopefully, that gives you some insights.
When people come into me while they don't come in anymore, we close the office. My office was in Boca Raton, but now I'm in my basement here in Atlanta doing everything virtual because of the COVID. So, people would come in and say, the IRS says I owe $15,000. What am I going to do? And I understand that kind of stress because I was there, I am, and my number was way bigger. So I tell these people, it's like if he makes you feel any better, I owed the IRS a billion dollars and we got it all sorted out. Usually, that does make them feel better because having that frame of reference puts their stuff in perspective.
Now, don't get me wrong. 50 grand, 15 grand is a lot of money. You certainly don't want to pay that if you don't have to, but the point is that the process works. The filing system that the IRS has can be very slow. It can be very tedious and it can be kind of painful, but it does. I ended up working in the rare situations where it doesn't, then you have. Organizations like the taxpayer advocate service which is supposed to be your voice with the IRS. We'll get into that another time I suppose, but at this point, I wanted to change gears just a little, well entirely.
I had a special request. Rollin sent me a message for the first show to get into some of the Biden tax stuff. I wanted to do that as the first part of our Q and A. So, what I'm going to do here is just pivot a bit and talk about the things that Biden is TA is suggesting as far as his plans for tax changes, because right now it's January 18, 2021. Biden's going to be sworn in in two days, and he's promised, this, that, and the other, when it comes to taxes.
Obviously, the way the tax code works is that Congress creates a tax law.
The IRS implements the tax law. So, Congress has to create a bill and it has to be passed by both houses. Then, it has to be signed by the president or you have the whole veto override kind of thing. Then, it goes to the IRS. The IRS is responsible for implementing whatever changes that they come up with. That's not a short process.
For 2021 and 2022, the Democrats control the house and the Senate, and the presidency. Whatever large changes that are going to occur are likely going to occur in that window probably sooner rather than later.
So, the Congress has to be convened for 2021. They have to pass a bill and then it has to go to the Senate, all that kind of stuff. Historically, what has happened is that most tax bills like this, go through and they get passed and then they start to apply to the following year. There had been a few circumstances. This is where I'll have to tell my life story intro again. It's only recording.
There have been a few circumstances where the current Congress has passed a new tax bill and has applied it to the current year. That is something to be aware of. It's unlikely, but it could happen. With all these changes that we're going to be talking about here in a second, just keep that in the back of your mind. I have an old one, it's like a four months old patient deck, on how Trump versus Biden plans differently. I'm going to be grabbing some of these screenshots and I'll drop them here. If the Shreem were working perfectly, then you'd be able to watch and follow along, but I'll just do a cut and paste kind of thing here.
So, individual income tax rates. Here's Biden versus Trump and how Trump's side doesn't matter anymore. We'll just focus on the Biden stuff. Biden's proposing increasing the top rate back to third, 9.6% where it's at before the tax cut and jobs act. Tax cuts and jobs act, or tick is the Trump tax reform that was passed at the end of 2017. There was a case where the vast majority of provisions in the tax cut and jobs act applied to the following year 2018. There were a couple of little nuances that did apply to 2017. That was partially retroactive capital gains and dividends. Capital gains and dividends are this is a big one Biden's proposal. Would increase the top marginal income tax rate on long-term capital gains to 39.6% for taxpayers earning more than $1 million annually. What does that mean? That means when you sell some kind of property or security like crypto or a stock or a piece of real estate or whatever, it's a capital gains event meaning that it has its separate taxation. A long-term capital gain means that you held that piece of property for at least a year.
Again, you could have been a stock, could have been some Bitcoin could have been a piece of real estate. If it's over a year, it gets lower taxes. The amount of tax would depend on how much total income you have that year. But under the current system, it's either gonna be 0%, 15%, or 20%. Now on top of that, there may be an additional 3.8% tax, which is one of the Obamacare taxes If it's a large sale and your total income, that year is a couple hundred thousand dollars, you're looking at a combined everything of basically 24%. Let's say you sell a piece of real estate for a million dollars and it's a gain of a million dollars and you'd be paying 24% of that to the federal government. Then, your state's rate would be, which varies from zero up to like 13.
What he says is that if your total income that year is a million dollars or more, you lose the lower tax rate entirely, and that whole gain gets taxed at your top rate, which in this case is going to be 39.6 because of the previous provision, that's it. So, if you're selling a business or you're selling something that is appreciated a lot, then, you go over that billion-dollar threshold, then all of a sudden you go from 24% to 40%.
When you add on the States on top of that, if you're in California or New York or any of these high tax States, you're talking about 50% plus because of the total amount of tax there. That is a huge disincentive to sell things. If you're selling stock or you're selling crypto or something like that, then you can actually have a good deal of control because you can decide how much to sell. You can sell just under the threshold and you'll be okay, assuming that this ends up this bill, that there will, I'm sure it will pass something, ends up being what Biden's proposing here. On the other hand, if you're selling, let's say a business that you have then you can't do well, I mean you can, but it's, it's really difficult to sell just a small part of a fractional part. It's usually an all or nothing kind of deal. I have a lot of clients in the online business world where they own websites, it could be an e-commerce site. It could be a content site. It could be an Amazon FBA business and typically those sell for three times three to four times their annual income. So, if a business is making $500,000 a year, it could sell for 1.5 to 2 million, something like that, depending on the particulars. All of a sudden, because the multiple was three, maybe four it's like, am I going to sell for let's say it's making 500. I sell for 1.5. Now, I've got to pay half of it to the government in tax because there's no preferential treatment for capital gains. I'm left with seven 50 versus the $500 making. Is that worth it? It’s hard to make that argument and there are tax planning things you can do to do that, but they all revolve around you not getting the money for her lifestyle.
You can set it aside and keep it in a tax favorite place. But, that means you're just not enjoying the fruits of your labor at least for a long time. That is a huge disincentive to any kind of business MNA kind of activity. I think that's going to be felt by the small entrepreneurs, which is my people, the vast majority of my clients are small business people. Whether they have their insurance practice or the real estate agents or their online business owners, they are the ones who will be hit the most by this kind of thing.
Now, the other capital gains provision that they're talking about, or the binders propose, is eliminating the step-up in basis. This is a huge one, and this is a middle-class tax increase. Don't let anybody tell you otherwise, because the step-up in basis is when you inherit property from someone who passed away. Your tax basis for eventual capital gains calculations is whatever the market value is on the date. You receive it. That's called the step-up. Let's say, grandma has a house, she bought it for $5,000 back in 1962 and she passes away and leaves it to usually a child or a group of children or grandchildren.
So, she paid $5,000 for it. Now it's worth, let's say $400,000 just because the market has evolved in those 50 years.
A lot of times what happens is that the inheritor will turn around and sell that piece of property. Cause they're not living there anymore and it's a valuable asset. Now, they sell it for $400,000 and they effectively bought it for tax purposes. For $400,000 through zero gain, you just go on your merry way. This is a generational transfer of wealth, and this is a big part of how that transfer of wealth happens between generations in the middle-class a lot of people on the lower end of the economic spectrum don't own a property like this. On the higher end, it may happen, but it's not as significant because it's just a smaller percentage of the state. This is a very relevant issue for that middle group where the house value is a significant chunk of the net worth. What they're saying here is they're going to get rid of that.
If grandma and butter for $5,000 and you inherit it, you bought it for $5,000. Then now, you're selling it for 400, let's say maybe you're in that kicks you up into that higher bracket where you pay 50% or 44% plus state into that of that sale. Maybe you're below that threshold. You're only quote, unquote paying you to know, 24% plus state tax. But this is a big deal and I don't see anybody talking about this. The IRS invented time machines. Well, this is Biden's proposal. People like to blame the IRS and the IRS has a lot of stuff. That's blameworthy, but the law is set by Congress. So, when people came to me we had a great situation for I think it was two years. We had the Congressman had his local office just down the hall from our office. And so people say, you know, why is this way? I was like, well, talk to your Congressman. And he's down the hall now. He was different there. I think I saw him once, but his staff was there and we just sent them over. He ended up moving his office across the street. I didn't know if it was because of being saying this kind of stuff, but I liked to pretend that it was.
It’s Congress, you need to complain to. Then, as I said, the implementation is the IRS. You got to place the blame where it is but, those are the two major capital gains that apply to dividends as well. But that's less of a thing. Next, they are things to implement tax time machines. That's right. The next issue is the payroll tax. If you have your own small business and you're paying payroll, you may have noticed that you could have taken a discount on your social security taxes. This is we'll get into this just a little bit in that when somebody gets paid a payroll from an employer. There's the actual wage portion and the employee pays seven-point a, what is it? 7.6, 5% in social security and Medicare tax on that, the employer also pays the same amount in social security and Medicare tax. Together that adds up to 15.3%. Also, whenever withholdings that the employee has on their income tax, we're touched on my social security Medicare tax here.
Under the current system if you make above $137,000 in pay in W2 income, then your social security tax stops. Similarly, on the employer side, it stopped. That's a big discount. It's the majority of that 15.3% is social security tax. On top of that, because of the COVID crisis, Trump passed this little deal here where employers have the option to defer paying the social security portion of that tax. They would have to pay it and half by the end of 2021 and a half by the end of 2022. But it was a nice little float. It's a loan, a stealth loan from the government to employers. A lot of employers took advantage of that. So, during the election, Trump was saying that, if he gets reelected instead of a loan, we're just gonna forgive it and you won't have to ever pay it back. I knew this is saying no, no, no. So, that is an issue then is going to potentially affect current employers. On top of that, employer and employee buying is talking about getting rid of the cap on social security. Once you have income above $400,000, This is a very weird proposal, because let's say you make, your wage is $300,000 and you have investment income and whatever else. Then, you end up with $399,000. Now, you only pay social security tax on 137,000. Same with your employer. And what this is saying is that once you go above 400,000, all of a sudden you owe social security tax on that difference and your employer does too. It creates a very weird dynamic in that there's this gatekeeping threshold between one 37 and 400.
You would think that if they are going to get rid of it, they're just going to get rid of it. I think that's what they will end up doing. I wrote an article on this a couple, like a year or two ago, and I'll see if I can dig up the link. If they get rid of the cap entirely, then they can extend the lifetime of social security by basically two years. Just based on the statistics at that time.
I think that is much more likely of what's going to happen. They'll just remove the cap entirely and forget this one 37, 400 stuff. Just go to, pay as you go over the whole thing and corporate tax rates. Part of the tax cut and jobs act was that the corporate rates were lowered down to 21% for C corporations. C corporation is a company that pays its taxes. Any kind of publicly-traded company has revenue. It has expenses. It has a profit at the bottom. It pays a percentage of that profit in tax under the tax cut jobs act, which is current policy. It's 21%. Then, if it pays a dividend, that dividend money gets taxed at the individual level as, as part of your dividend taxes. That's if you've ever heard the phrase double taxation, that's what they're talking about. That money was paid tax at the corporate level, and then it's paid tax again, at the individual level, as a dividend tax.
What he's talking about here is that 21% is going to raise 28%. Additionally, Biden proposes a minimum tax on corporations with book profits of a hundred million dollars or more than book profits versus tax profits. That gets into some depreciation and credits and that kind of thing. Not relevant, for our discussion right here, but it's just one of those things. So, 21% to 28%, you might say a 7% increase. You might also say it's a 33% increase because it's whether you're looking at the absolute scale or the relative scale. Either way, it's a big increase.
The 21% rate, plus the dividend rate came out to 36%, which was pretty close to the 35% of high-income people. Anyways. The 21% was picked as a pretty neutral level four C corporation. Profits and by raising that, you are going back to the system that we used to have, where having secret relations was disadvantaged by, 7% and then a qualified business income.
Deduction. This was a new thing that was created in T in the tax cut and jobs act where if you have a pass-through like an LLC or a, or an escort or something like that, then you got a break on the taxable income, which was called the qualified business income deduction or QBI. That whole thing is a nice little bonus for people who own their businesses or who get K ones from things. Biden's talking about getting rid of that for again, above this 400,000. A bunch of other differences. One thing that I just want to hit on real quick, before we run at a time here is the child tax credits. Child tax credits for patient repatriation of profits, energy tax incentives, all this kind of stuff. I'll have differences and we'll see what ends up passing, but the child tax credit was specifically, we hit in Biden's speech. The other night, I had a $1.9 trillion proposal here that he plans to submit to Congress, right away.
Under the current law, if you have a child under 17, a scaredy-cat says, just to make sure I don't have a business that makes 400 K less than digested. It depends on what's passed. These are proposals at the moment. So, these are the things to be aware of. Under the under tax cut and jobs act, a kid under 17 is worth up to 2000 in tax credits, and probably that's refundable. Part of that's not refundable, but 2000 bucks. Biden is saying, we're going to raise that to $3,000, and children under six will be up to 3,600. That is a big increase and the texts and drop Jack was already a big increase on the tax credits. It's interesting. If you are in the range of income where you get these tax credits for children, which is a pretty wide range then each kid is gonna be a nice chunk of money. I've got two kids. One is four, one is six right now. So under this plan, I would get well for the following year, there would be five and seven.
I would get $6,600 in tax credits for them. We'll see how much ends up being cashed back versus just a reduction of taxes, but still a nice chunk of change. They're also talking about grants to childcare centers and those kinds of things to help, with the COVID stuff. Lots of money being thrown around here and just a quick little summary graph that was prepared by Deutsche bank who's been in the news for other reasons lately. They're saying that under Biden's plan, then your after-tax income change will be this graph. You’ll get more money in the lowest half, of the taxpayer brackets. Then, in the upper 20%, especially the upper 10%, you will end up losing money. Top 0.1%, they said, we'll lose like 22% or something like that of actual after-tax income. That is a big chunk to those top 0.1 percent. But to get to that level, you're talking about huge numbers. The vast majority of people, according to Georgia bank will come out. Okay. Or possibly slightly hurt. We'll see what I said, what ends up passing as a bill, and how the IRS ends up implementing that stuff? We will all be there by 2022.
We will all be in that 0.1% group because the crypto is going to the moon. After Bitcoin hits 400 in December. That is I know we went a little bit longer there, but that is an expanded section or first segment of the show, which is the stories and news kind of stuff. We're going to keep coming up with Biden's plan as it evolves as he gets sworn in and as things start to go through the house but that's the proposal that they have right now.
We have what looks like seven minutes left and now is the time for the Q and A.
If anybody has anything that they want to talk about feel free to drop it in the chat. Again, I don't want anything too personal because this is a public thing and Ron says, sounds like you enjoy what you do. And I do. I love doing taxes. A large part of my background that I didn't get into yet. My philosophy of life? I get a huge rush out of keeping money away from the government and that's in two parts. Part number one is, just that much less money going to, like me personally with proper tax planning and implementing structures and all this kind of stuff, I probably keep. I don't know, $20 million, something like that away from the government each year. Then, the other side is, I like helping people, my whole life has been one version of that or another. Like when I was tutoring, I love that because I was helping these kids get into the colleges that they wanted. I liked helping them learn new things and I love helping business owners especially everybody, but particularly the business owner, keep more of their money and make it work for them and make their lives better. All that kind of stuff around, let's say only five minutes for Q and A. Only five minutes this time. Cause we went a little bit longer on their terms and said it's nerdy by 11. We appreciate everybody. Who's in the chat and everybody who's gonna watch this later. I hope you join in the chat. On our future shows, it's going to be Mondays at 3:00 PM Eastern. That's the time to get in there.
It says your slogan should be helping create generational wealth. I like that. That's pretty good. Crim is a Canadian. She loves listening to our tax code show. I am a tax person. Its systems are similar around the world, but specifics vary. You have to keep that in mind.
So, if anybody has any questions they want to hit real quick, otherwise I have some people who wrote in ahead of time, I hit up some of my mastermind groups that we did. We did some Biden tax changes. Here it's a good one debit cards, refunds, stimulus payments.
Debit card refunds. In US tax, you can get your refund in a couple of different ways. You can get a check in the mail, you can get a direct deposit to your bank account. Various intermediaries can kind of tweak this a bit where they get the direct deposit and then they front you alone. It's going to refinish the refund into the patient loan, or they can give you a debit card or whatever drawn on there, their balance of your refund. But the other way is you can get a debit card straight from the IRS. This is craziness because when you find people or you see news stories, they try out a few every year where it's like, we found this tech scammer who's stolen all these people's identities. You would find like 200 tax returns in their home. That's because of the debit cards. If you get a debit card in the mail, that's it, that money is spendable, right? There's no tracking. There's nothing on those. So these scammers steal people's identities. I wasn't like I said, I was in South Florida. I was in Boca Raton for years and years and years and South Florida's number one in the country for identity theft because of the medical offices that are around there. Then, these scammers would file fake tax returns and they would get some crazy refund and they would get them as these debit cards because once the debit card is issued, it's gone, they can sell the debit card. They can just go to another common element of the scheme was they would go to a Publix in the grocery store and they would buy other gift cards or money orders. This is a major source of the fraud that is perpetrated by the IRS.
The IRS keeps doing it. With the stimulus payments, they came out with a post or a press release a couple of days ago saying that some people are getting direct deposit. I already got my direct deposit. Some people get checks, but some people will get these debit cards. You got to know that a good portion of that stimulus money is just going right out the window to these scammers. This is infuriating to me and it's been going on for years and years. As I said, every tax season, there's a new story or two. We caught this ring of scammers and they had so much tax fraud and all this kind of stuff. They caught this ring that had like 200, 500, whatever the IRS spends, billions, billions every year on tax fraud, scams, or through identity theft, and they recouped a million. Okay, congratulations. But, you're not making a serious dent in the problem. That was the steamy scam, some kind of scam inception.
Scaredy cat says, get that debit card so they can load your unemployment money, food, stamp, money, anything else you can qualify for? And don't get scammed yet. Miami is financial fraud, capital of the US, which is true, but down to and see all the stuff that's going on there. I guess that is the end of the first show here.
We've got five seconds left. So I want to thank everybody for coming in and we'll be back here every week. We'll do more of the same.
