Paying IRS more in taxes than personal spending each year?

[patjk]

I've been following MMM for several years now (and love the ideas) and have always lived a frugal life.  I've been working online building various ecommerce sites and making a living online for many years, and have spent most of the last 8 years outside the US. In the last 2 years the amount of money my business has made has gone way up, though I've kept my living costs the same.  It sometimes feels strange having to pay the IRS more money in taxes than I spend on myself each year, and seems to somewhat make me question how frugal I should be on myself.  I don't do it just for the money savings, but it is a big reason why I'm frugal.

Anyone in a similar boat? Curious of thoughts.  My tax situation is quite complicated (I have a non-US corp which owns my US LLC) and I qualify for the FEIE.  I basically put all extra profits from the business into indexes, though currently holding cash and slowing investments into the US stock markets as I think it's all over valued (still have money going in each month to my Wealthfront and Schwab accounts).  I just setup an account at Interactivebrokers to diversify outside the US more.

Looking for general suggestions, feedback, and thoughts on how others handle these challenges.
Cheers!

[Much Fishing to Do]

My business net income varies greatly year to year, but I have had a couple of years like that, and 2018 will be even more so I think.

It sometimes feels strange having to pay the IRS more money in taxes than I spend on myself each year, and seems to somewhat make me question how frugal I should be on myself. 

It does feel strange given I'm not used to it either, as just 5-6 years ago I had a tax year where I owed pretty much zero except for payroll tax, but I'm not sure why you would question your frugalness as it doesn't change the reasons at all.  Making so much money is a blessing that just allows you to get to FIRE so much faster (allows for a higher savings rate at the same or even higher expenses), and the high taxes (relative to what you spend) is just a corresponding drag on that faster pace. 

It does make tax planning much more important given the effect it can have.  For 2017 I made about 7.5x my annual expenses.  Basically of what I made for 2017 I spent one years expenses, saved 4.5x expenses, and paid taxes equal to 2x expenses.  For a moment I selfishly get pissed I'm handing over what my family could live on for 2 years, but that only lasts a moment as I also enjoyed the other end of things of paying so little tax when things were tight and I know how lucky I am. 

I also pour it into index funds.  I max out the solo 401k ($54k last year) which is of great help with taxes.  For last year and this year I will be making large contributions of appreciated stock to a Donor Advised fund.  Basically the plan will be to use this fund throughout decades of early retirement to make my charitable contributions from, as those will be worth little to nothing in tax deductions to me then but are of extremely great value now, to the level of these contributions only truly costing me half of what I put in after tax.  Without these two moves my taxes would have cost another half-year of expenses, so the effect can be great.

If I was to do this for a couple more years I would have looked into a defined benefit pension plan to lower the tax bill even more, but I think my business winding down after this year and the extremely fluctuating net income I face made this difficult to take on without risking penalties.

Now if AFTER you've reached your comfortable fire number AND you're still making a lot, then I think its time to reevaluate your frugalness and/or your continued work, but before that if your happy with what you spend now I don't know why you'd change whats working.  I think some see a high income and savings rate and have the intent to continue working and making the same money to the point they extrapolate that they are over-saving...but a lot of things out of your control can happen, so I've continued with the theory you get to FIRE first and then if you find yourself over-saving at that point you spend/give more and do so with peace of mind

[BlueHouse]

A few years ago (before I bought my clown house and had expenses surge), I started making boatloads of money and didn't have anything to do with it except save up for a downpayment for my clown house and invest.  It was my first or second year using an accountant and I printed out the main "Accounts Overview" page from Quicken and showed it to my accountant, demanding to know what was wrong with the picture.  Picture a pie chart with three items on it.  3/4 of the pit was taxes, and the rest was split into "housing" and "other".  I just knew I was paying too much in tax! 
The accountant pointed out that the accounts overview pie chart only showed "spending" (no saving/investment).  Since I wasn't spending much, the tax portion looked enormous in the overall view. 

Yep, consider yourself lucky and save as much as you can and DON"T do what I did and increase your expenses by buying a clownhouse or a clown car (unless you have other reasons for doing so, which I did). I would be FI now if I had kept my expenses as they were. 

[terran]

Taxes are just a cost of doing business (whether that business is a real business as in your case or a W2 job). Minimize it to the extent that minimizing doesn't hurt the business just like any other business expense, but don't compare it to your personal spending. Say you're a small-time home builder building a few $500k-$1 million custom homes a year with a "profit" (including your own wages) of $75-100k (not totally unrealistic, and could be even lower for some of these guys -- I have family in this industry). So basically the business has expenses of at least $900k, while the builder has a before tax income of $100k. Should they go and spend all kinds of money on personal expenses just because they "spend" nine times their salary on business expenses, so why does it matter? Of course not. They have a profitable business doing something they're happy with that pays a decent salary that just so happens to be capital intensive so they have a ton of money that was never really theirs passing through their hands from the client to the subcontractors and suppliers. Same thing with you and your taxes -- you have a bunch of money passing through you from your customers to the government because you're lucky enough to own a very profitable business that has low expenses (other than taxes) relative to income.

All that matters for FI is the amount you need to spend to maintain your desired standard of living and the amount you are able to save. You might have some small amount of tax you'll have to pay to maintain your standard of living once you shut down the business depending on how much you spend and your mix of tax deferred withdrawals, dividends and capital gains, but other than that, a large tax bill is something you should ignore since it has no bearing on how much you should be spending on personal expenses.

[LessIsLess]

My tax situation is quite complicated (I have a non-US corp which owns my US LLC) and I qualify for the FEIE. 

  I hope you're not having to pay state income taxes, too.  Anyway, if it makes you feel better, you can always ramp up your spending.  No point in a amassing a fortune if you won't enjoy some of it.

[maizefolk]

I don't think I will this year, but in several recent years I have indeed paid more to the IRS than my total personal spending (self-employment tax sucks from a psychological perspective). And then paid income tax to several states on top of that.

As others have said, that's just the way life when your savings rate is high. I do my best to optimize tax efficiency, but I do not track taxes as an expense (I had to pull up the cover sheets from some old tax returns to double check what I told you above), and I try to only think about my income in after tax terms (although this is a lot easier for W-2 income than LLC/S-Corp income).