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Art vs Science in Personal Finances and Taxes

College is different from the real world. When the professor hands out an exam the data points are known and accepted as true. There is a real answer that a real human being knows. It is an absolute.

The real world has few absolutes. Data points are best guesses based upon research. Many factors have to be assumed. In the real world, there is a real answer, just like in college. The difference is that nobody actually know what that real answer is. Your job is to get as close as possible to that real answer without a professor backing you up with a pat on the back for getting it right or a raised eyebrow if you don’t.

Nowhere is this more apparent than in the accounting/tax field and in personal finance. People don’t keep accurate records, lose receipts and neglect to report all their income. Every accountant can share stories of the dreaded shoebox of receipts poured out on their desk.

Personal finance is even worse. We delude ourselves with terminology like savings rate, rate of return and the 4% rule as a safe withdrawal rate in retirement. Of course this is all based on assumptions. You would not know it from the way some writers toss these phrases around.

Assumptions abound. Planning for retirement has more what-ifs than you can shake a fist at. If you begin your wealth building journey as assets bounce from a low, advancing for years, you have an advantage. On the other hand (where is Truman’s one-handed economist when you need him?), if you enter retirement, by choice or by circumstances, when the market is in a serious decline, you have added challenges as you navigate those early retirement years.

Keeping What You Earn

If you stand around my office for any amount of time you will hear me say, “…there is more art than science in taxes.” I follow up with the above catch phrase that there is a real world answer, but no one knows exactly what it is. Your job? Get as close as possible to that unknown answer.

And when it comes to money, including accounting for it, there is always a fair amount of license involved. How else can the tax professional deal with a box of receipts? 

Sometimes nobody is at fault. The information is just not available. Then what? Let me give an example from the tax preparation world. You can expand my thought process to your situation. (Don’t worry! We will get to personal finance and retirement soon.)


Inherited property is the bane of my professional life. Recently a client had a common situation; she inherited a house from dad.

Well, not exactly inherited. The house was gifted to her from dad which means her basis is dad’s basis plus gift tax paid. Mom died a few years back, dad is in a nursing home. The property was purchased in the early 1960s as raw land and a home was built on the land in the 1970s. To add some spice to my workload, the original land purchase was 40 acres with a house on it. The house was sold off sometime later.

The register of deeds does have a record of the property transfers. However, back in the 1960s there was no record kept of the actual amount of money involved in the transfer. And even if they did it would not matter. Remember, they “built” a house on the property. If they didn’t keep all their receipts or some kind of record, there is no way of knowing the “exact” basis of the property. 

What is one to do?

You can’t take $0 as the basis! You can’t just guess either!!! You need to get as close to the real answer as possible without knowing what the exact answer is. 

There is a way of backing into a reasonable basis (original purchase price, plus improvements). You could check out the IRS actuarial tables. They are online now. (There was a time the IRS set me back something like $800 for the printed book.) There is another way that I think is easier and the IRS has never had an issue with my methodology.

I need to find the original basis first for my client. That requires a reasonable way of calculating what the value of the property was back in the 1960s. The Bureau of Labor and Statistics has excellent resources for doing this.

Using BLS data, you can back out the value based upon the selling price.  In this case the property was sold for $530,000. Most of the acreage was sold off so we can work with the residence in a vacuum. Here we apply art to the process. How much of the sale price is allocated to land? How much for the building?

This is not an exact science. (Surprise, surprise!) It requires a guess. I will apply 15% to land with 85% going to the building. It seems like a fair breakdown. If the property were located in town I would probably do a 20/80 split and if in a high cost city even as much as a 30/70 or 35/65 split. Facts and circumstance, kind accountants, as you raise your artistic brush to create reality.

BLS date has these wonderful charts showing you the price level at any period in time back to the mid 1910s. The prices value for the month of estimated purchase (art applied again) compared to the value for the month of sale is all the data you need to calculate the basis. Example: If the prices indicator is 427.6 in the month of sale and 126.9 for the month of estimated purchase, you subtract the indicator on the purchase date from the indicator on the sale date and divide the result by the sale date indicator. (427.6-126.9=300.7/427.6=70.3227%) Applying this percentage to the sale price gives you a gain of $372,710.31. That means the basis is $157,289.69.

Of course you need to run these calculation several times, accounting for the land as one value and the building as another.

Since the client lives in a martial property state, dad gets a step-up in basis for mom’s half which needs to be accounted for. I will not walk through all of that because I trust you, kind readers, understand the process. 

Now we need to turn to personal finance where everyone has consequences.

This 1999 IRS book of actuarial tables set back tax professionals hundreds of dollars. Now it is available at no cost online.

Wealth Building and Retention

If you think taxes take some artistic expression, consider personal finance. 

While most tax issues are straight forward with only special situations requiring the application of art, wealth building and retention, and retirement planning always require a bit of art.

Almost all data points are estimates when financial planning. What will the markets returns be? Will you outlive your money/How long will you live? Will the market be on a high, low or somewhere in between when you enter retirement? 

Using art in accounting and taxes is not a crime. It is required in many cases and justifiable when looking for a reasonable answer. We can say, “Good enough for government work.” and mean it. 

It is also not a crime or even a social faux pas to guess when financial planning. If you started your wealth building program in 1968 you had 14 long years of no real returns and a few massive sell-offs in the market along the way. You can’t fully prepare for that.

But just because you don’t have solid answers to the questions does not give license to guess without some logic behind the guess. As in taxes, we need to take reasonable steps as we prepare.

For example, you can use actuarial tables to determine how long you will live. But it is better to consider your health and family history. If your family has a history of living to 100, you might want to bypass the actuarial tables and use 100 as a data point to assure your money outlasts you.

A reasonable guess can be made for long-term market returns. As I write inflation is high. Interest rates are likely to follow. Historically this does not bode well for the types of returns investors are familiar with these past many years. It is reasonable, when applying artistic expression, to use a lower estimated rate of return for the next decade with more traditional rates of return afterwards.

Timing the market is a Chump’s Game. Rather than time the market—hoping retirement and a market high coincide—better to adjust your cash levels for the stage of life you are in. I previously provided a detailed plan for doing this that mitigates market risk. It is worth reading (or re-reading).

Perfection is the enemy of efficiency. This applies to accounting/taxes and personal finance. Demanding an exact answer rather than an approximation results in taking no steps to build your wealth, the worst possible answer. You might not have an exact answer for your tax situation. Then bring it to a tax professional who will use a bit of art when providing the scientific answer. 

There is no reason to delay investing (wealth building)! A high market, low market, inflation, war. . .  None of these things are a good reason to delay your financial plans. If you are young you invest and keep investing because time will smooth out your results. And you have plenty of time. As you approach retirement, read the linked article mentioned to secure a stable retirement regardless of the market level.

And when you really get down to it, most of life requires some art, even when working in science. Yes, the proverbial rocket scientist may have to act like a perfectionist from time to time. For the rest of us, we make reasonable estimates based on research of the available facts. 

If you do it right your financial plans can be a work of artistic beauty.


Art vs science. Some things require perfection, others a close approximation to achieve goals.


More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

dale m

Wednesday 9th of March 2022

Thanks for posting this at what has to be a busy time of year.

A curious quote from your earlier (excellent) article about cash reserves "... when markets are down many goods and services become cheaper..."

Hmmm. Maybe not always. Or as has been said, "this time is different."