This is something I have seen a lot in personal finance spheres. Especially from bloggers who are heavy into optimisation and running the numbers:
Well, I am here to tell you, you will not find that kind of posts here on Frugasaurus.
Firstly, we are in Norway and most of our readers are in the US, so it would not be applicable to most of our followers.
But secondly, neither Mr. E. nor myself have any interest in avoiding tax.
Yup, we are dirty, socialist hippies to the bone. And we are proud to be paying our taxes.
All right, let’s start with the exceptions, just because there are always people getting stuck on that. There used to be just one exception, but now there are three.
I have talked about this one on the blog several times already. Because Norwegian banks are required by law to demand at least 15 % downpayment for a house (or other, equal security), and because housing in Norway is quite expensive, there is an account called a BSU (abbreviation stands for “home saving young” in Norwegian).
In a BSU, you can save up to 25 000 NOK (almost $3 200) and recieve up to 5 000 NOK (20 %) of your savings back on your taxes the following year. If you take money out of the account for anything but a mortgage (or paying down a mortgage you already have), you will have to pay that tax back again. A nice deterrent for most people.
True, this isn’t a whole lot of money in the grand scheme of things, and you certainly would take a long time to save up for a minimum downpayment if you only saved 25k NOK every year. But it is encouraged by the government to increase savings in a market where those who have parents to help you can buy a home much sooner than those who have no one to rely on financially.
Our tactic is to save the maximum and pour the tax we get back directly back into the BSU. In our minds, that honours the spirit of the subsidising, and works much like compound interest.
In Norway, work has traditionally saved for your pension. It was not something you really had to think about.
But the further we get from WWII, the less people remember the intentions of the welfare state. Social security deteriorates more and more every year, and like a lot of people my age, I do not really believe the system will continue as it has in the past.
More and more responsibility of pension and old age is being put back on the individual, so in 2017, the IPS (individual pension saving) was launched.
Much like the BSU, you save up to a maximum annual sum (40k NOK) for a tax delay. You cannot access the money until you’re 62 years old, at which time you will also start paying income tax on what you are taking out. The kicker here is that this money is saved in funds, and obviously, I found the one set of index funds my bank offered and changed to that as soon as I got set up.
Generally, people are advised to fill up their BSU, get a house if they want one, then pay down any high interest loans like credit card debt before they start an IPS.
I have started very modest contributions to an IPS. At only 500 per month, I am nowhere near the upper limit per year. But much like Tanja and Mark at Our Next Life, I really like the idea of having a secondary safety net for later in life. Once we have a house and are more settled, we will probably save more here.
The last thing we are (planning on) doing which affects our taxes, is getting married.
I haven’t actually done all the math on this one, but we know that combining our finances for tax purposes will be advantageous. We get some higher limits for wealth tax and any debt (like student loans) carried by either of us will give both of us tax deductions.
All right, I am glad to have that out of the way. That is the only tax optimisation we are planning on doing for the foreseeable future. It is all of it encouraged and set up by the government. There are no loopholes or intricate knowledge of legislation required to pull these off.
One thing I’ve noticed on various podcasts and blogs is how appalled many people are about Norway and several other European countries (could be more, but I don’t know that much about Asian, African or South American taxation) having wealth tax.
Once we cross a net worth of more than 1 480k NOK (almost $190k, or twice that if you are married) we will incur a 0.7 % tax to the county plus a 0.15 % tax to the state.
Cue crowd gasps: “You mean your money is taxed twice??”
Yup. Once when I earn it and again every year once I am wealthy. We are not there yet, so I don’t know how that feels. But when we are that wealthy and financially stable, I think we can afford to share with those less fortunate in our society. Plus, I like societal perks like roads, schools, libraries and hospitals.
Of course, there are those on the right hand of politics who are as appalled by this as many American readers, but on the left hand side, we are not the only ones. We have people leading the way who earns substantial amounts of money, and who openly goes to the media and proudly proclaims that they do their best to pay 1 million NOK in taxes every year ($126k) and fights for increasing the wealth tax even more (Hans Olav Lahlum, article in Norwegian).
Considering the average annual growth of the stock market, this tax does not worry me. If we do not have enough money invested to cover this tax once we hit this milestone, we should be ashamed of our own investment strategy.
Of my current and moderate PhD salary, I am paying the state 31 % income tax. A lot of people think that is a lot for someone only on the lower end of a middle class salary.
But after talking to people from the US, I am left with the impression that I actually pay less tax than many US citizens do. Mostly because of your atrocious health insurance.
If you consider health insurance a tax (because Norway has free universal health care), then the percentage of your take-home pay that goes to taxes is much higher than what I have to pay. Plus, I don’t have the mental strain of worrying about whether or not my insurance will cover me. I do not have to carry a tag that says “If I have a seizure, please do not call an ambulance”, because I cannot afford the bill.
Did you think my dividends would be safe from the Norwegian tax system? Of course not. When you take out your dividends from any fund you are saving in, you incur almost 30 % taxation on your profits.
So we think about that as any other income. They are taxed the same after all.
While we are saving, they will incur no tax except wealth tax.
I suppose it is because we grew up with this system. I have already mentioned that I have several friends and family who are dependant on social security, not to mention grandparents and other family members who are living the last stretch of their lives on pensions.
It is an enormous privilege for us to be able to save up for something as big and hairy as financial independence and location independence. It is a big hairy goal of enormous proportions. And it is not only because of our income bracket, but also because we have time, resources and education to be able to look up information to teach us about such things.
I hope I never forget what a privileged position I am in, even though we are not yet at zero net worth. We have a lot of social capital working in our favour.
Will it take us longer to achieve financial independence because we live in Norway? Most certainly. But you might have noticed that we are not chasing after traditional FI. We are much more interested in employer independent sidehustles and online freelance work to pay our bills.
We will always be paying taxes. And we are proud of it.
Category: A Nordic Perspective, Philosophy Tags: BSU, income tax, IPS, life, marriage, mortgage savings account, norway, pritoties, Privilege, saving money, sharing, social equaliser, social responsibility, society, taxes, work
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