TAX-FREEWEALTH

HowtoBuildMassiveWealthby

PermanentlyLoweringYourTaxes

ByTomWheelwright,CPA

Doyouhatetaxes?Feellikethere’snothingyoucandoaboutthem?Dreadtaxseasoneachyear?

Tax-FreeWealthisthebookforyou.Thetruthisthattaxesarefun,easy,andunderstandable—andthere’sa

multitudeofwaystopaylittle-to-nothingintaxesandtouseyourtaxsavingstogrowrich…fast.

Andthesolutionstoyourtaxproblemsareeasierthanyoueverimagined.InTax-FreeWealth,TomWheelwright,RobertKiyosaki’spersonaltaxadvisor,teachesyouinplainEnglishhowtousethetaxcodetomakeyouricher.

Withpricelessinsightsontaxesandtaxplanning,you’lllearn:• Whygovernmentswantyoutopaylesstaxes,• Why(seeming)complexityofthetaxcodeismadetohelpyougetrich• Howtoputtonsofmoneybackinyourpocketimmediately• Planningstrategiestoprotectyourassetsandyourfamily• Whyinvestorsandentrepreneursgetallthebreaks• Nottofearanaudit—andhowtosurviveone• Whattoexpectandlookforinataxadvisor• AndhowtouseyourtaxsavingstobuildtremendouswealthInTax-FreeWealth,Tomtakesthemysteryoutoftaxes—andbuildingtax-freewealthtoday.Thisbookisabouthowthetaxsystemworksineverycountry.Allcountriesusetaxestoimplementtheireconomic,agricultural,socialandenergypolicies.Tax-FreeWealthisabouthowtothinkabouttaxesandarrangeyouraffairssoyoupaytheleastamountoftaxes,legally,inanycountry.

Ifyou’rereadytostopfearingtaxesandtostartmasteringthem,youneedtobuythisbook.

Thispublicationisdesignedtoprovidecompetentandreliableinformationregardingthesubjectmattercovered.However,itissoldwiththeunderstandingthattheauthorandpublisherarenotengagedinrenderinglegal,financial,orotherprofessionaladvice.Lawsandpracticesoftenvaryfromstatetostateandcountrytocountryandiflegalorotherexpertassistanceisrequired,theservicesofaprofessionalshouldbesought.Theauthorandpublisherspecificallydisclaimanyliabilitythatisincurredfromtheuseorapplicationofthecontentsofthisbook.

Copyright©2012byTomWheelwright.Allrightsreserved.ExceptaspermittedundertheU.S.CopyrightActof1976,nopartofthispublicationmaybereproduced,distributed,ortransmittedinanyformorbyanymeansorstoredinadatabaseorretrievalsystem,withoutthepriorwrittenpermissionofthepublisher.

PublishedbyRDAPress

AnimprintofBZKPress,LLC

RichDadAdvisors,B-ITriangle,CASHFLOWQuadrantandotherRichDadmarksareregisteredtrademarksofCASHFLOWTechnologies,Inc.

BZKPressLLC

15170N.HaydenRoad

Scottsdale,AZ85260

480-998-5400VisitourWebsites:BZKPress.comandRichDadAdvisors.com

FirstEdition:March,2012

ISBN:978-1-937832-40-7

Dedication

Thisbookisdedicatedtomymother,DeborahAnnCoulamWheelwright,whotaughtmethatallproblemsaresimplychallengestoovercomeandthatsolutions

comefrommanysourcesanddirections.

Acknowledgments

Iwouldliketoacknowledgethemanyhandsandinspirationsthatallowedmetowritethisbook.Ofcourse,myeditors,JakeJohnsonandMonaGambetta,withoutwhomthisbookwouldsoundlikeanaccountantwroteit.Mybusinesspartner,AnnMathis,andmyprojectmanager,ClarissaUrquidez,whomadesureanyinaccuracieswereaddressedandcorrected,andwhogavemeconstantencouragementthroughoutthewritingandeditingprocess.Myotherbusinesspartner,RobDeines,whohasmanagedourCPAfirmforthepastseveralyears,allowingmetheluxuryoftimeforwritingabookonhowtodowhatweteachourclientstodo.

Thentherearemyinspirationsearlyinmycareer.ThankyoutoDr.Haney,myfirsttaxprofessor,whotrulylovedthetaxlawandinstilledthisloveintohisstudents.MyprofessorsattheUniversityofTexas,especiallySallyJones,wholovedteachingthetaxlawandinspiredmetoteachothers.Mymother,towhomthisbookisdedicated,whowasmyinspirationinallthingswhenIwasyoung,andwho,asthecontrollerformyfather’sprintingcompanywhereIworkedasanaccountingclerkthroughhighschool,wasmyfirstaccountingsupervisor.

ThanksalsotoRobertandKimKiyosakiforintroducingmetotheseminarandpublishingworldandforallowingmetobetheirtaxadvisor.Sometimes,I’mnotsurewhoisreallyadvisingwhom.Theyconstantlygetmetothinkaboutmoneyandbusinessdifferently,evenwhileIamteachingthemnewwaystothinkabouttaxes.

Lastbutcertainlynotleast,thankstomywifeandmychildren.Theyhavealwayssupportedmycareer.Mywife,Rosie,who,atatimewhenwehadnomoneyandtwoyoungboystosupport,firstsuggestedthatIshouldopenmyownaccountingfirm.Shehasputupwithalotofhoursattheofficeandlotsofdinnerdiscussionsaboutthetaxlaw,despitehertotallackofinterestinallthingsfinancial.Mysons,MaxandSam,havealwaysinspiredmetoreachhigherandbecomeabetterperson.

Contents

PrefaceForewordbyRobertKiyosakiIntroductionPartOne—HowtheTaxLawCanBeYourBestFriend

ChapterOneTaxesareStealingYourMoney,YourTimeandYourFutureChapterTwoTaxesareFun,Easy,andUnderstandableChapterThreeTheTwoMostImportantRulesChapterFourPutMoneyBackInYourPocket—NowChapterFiveEntrepreneursandInvestorsGetAlltheBreaksChapterSixYouCanDeductAlmostAnythingChapterSevenDepreciation:TheKingofAllDeductionsChapterEightEarnBetterIncomeChapterNineTakeAdvantageofYourTaxBracketsChapterTenCredits:TheCreamoftheTax-SavingCropChapterElevenConquerYourEmploymentTaxTrollChapterTwelveLowerYourProperty,Sales,andValue-AddedTaxesChapterThirteenEstatePlanningisGoodTaxPlanningChapterFourteenReducingYourTaxesinOtherLocations

PartTwo—YourTaxStrategyforTax-FreeWealthChapterFifteenPlantoTakeControlofYourTaxes:EntitiesChapterSixteenProtectYourWealthfromPirates,Predators,andOtherPlaintiffsChapterSeventeenPlantoRetireRich,NotPoorChapterEighteenBusinessCanBeYourBestTaxShelterChapterNineteenTheMagicofRealEstateChapterTwentyStocksCanLowerYourTaxesTooChapterTwenty-OneCommoditiesCanBeYourTaxFriendChapterTwenty-TwoDon’tFeartheReaperAuditChapterTwenty-ThreeChoosetheRightTaxAdvisorandPreparerChapterTwenty-FourWhatAreYouGoingtoDoWithAllYourExtraMoney?

EpilogueTax-FreeWealth—AFewFinalThoughtsAbouttheAuthorTomWheelwright,CPAReferencesandResourcesRecommendedReading

Preface

It’snoteasytowriteabookabouttaxesthatappealstotheaverageJoe.Mostpeoplearescaredtodeathoftaxes.Theybelievethatthetaxlawisouttogetthem.Foryearsandyears,themediaandso-calledfinancialadvisorshavetoldusthatthetaxlawisfartoocomplexformostpeopletounderstand.Whatthesegroupsarenottellingyouisthatthetaxlawisactuallyprettysimple.Yes,therearemanydetails,andyouneedagoodtaxadvisortohelpyousortthemout.Still,thefundamentalconceptsofthetaxlawareeasilyunderstoodbyanyonewithafifth-gradeeducation.

Ofcourse,thetaxlawswerenotinitiallyintendedtoevenincludetheaverageworkingmanandwoman.Theyweremeanttoreachonlytheexcessearningsofthemostwealthyindividualsandcorporations.Overthepastseveraldecades,however,theyhaveevolvedtobecometoolsofsocialandeconomicpolicymaking.

Whenthetaxlawswerefirstimposedonemployees,anaverageemployeeearningtheaveragewagewasexemptfromtax.Now,employeespaythehighesttaxes,andemployersandinvestorspaythelowest.Why?

Economicpolicymakersingovernmentdiscoveredthatpeoplerespondquicklyanddirectlytotaxincentives.So,ifyouwanttoencouragebigfamilies,yougiveataxcreditforeachchild.Ifyouwanttoencourageinvestmentindomesticoilproduction,yougiveabigtaxdeductionforeverydollarinvestedinoilandgas.Ifyouwanttoencourageinvestorstobuildapartmentsforlow-incomeworkers,yousimplygivethemacreditfordoingso.Anditgoesonandon.

Thisbookisnotacriticismoftheworld’staxlaws,orevenarecommendationthattheychange.Taxesarepartofourworldandwillalwaysbepartofourlives.So,insteadofcomplainingaboutthemandhopingforparliamentsandlegislaturestomakethemfairer,let’ssimplyunderstandthemandputthemtogooduseinourlives.

Taxeswilleithermakeyourichormakeyoupoor.Thetaxlawsofallcountriesarewrittentoencouragecertainactivitiesthatbenefittheeconomyandpromotesocialpolicy.It’sourjobtounderstandandtakeadvantageofthetaxlawsastheyarewritten.

Thisbookisnotaboutloopholes.Loopholesareunintendedconsequencesoflawsthatwereenacted.Thisbookisabouttheconsequencesthatlawmakersintended.Takingadvantageoftheintendedbenefitsisdoingwhatourgovernmentsaskustodo.Investwheretheysaytoinvestandyougetataxbenefit.Putyourtimeandtalentsintoactivitiesthatproducejobs,housing,andgrowtheeconomy,andyougettaxbenefits.Inmanyways,utilizingthetaxcodetothefullesttosaveasmuchmoneyintaxesaspossibleisoneofthemostpatrioticthingsyoucando.

Again,theconceptsofthetaxlawarenotdifficulttounderstand.Whilethisbookwillnotmakeyouanexpertinyourcountry’staxlaws,itwillteachyouthefundamentalprinciplesofthoselawssothatyoucantakeadvantageoftheminthewayyourgovernmentwants.Andindoingso,chancesarethatyouwillbecomemoreprofitableinyourbusinessandinvesting.Afterall,thetaxlawisreallyamap—atreasuremap.Asyoufollowthistreasuremap,yourtaxesgodownandyourprofitsandinvestmentreturnsgoup.Enjoythetreasurehunt,andyouwillfindthatyourfinancialfreedomiscloserthanyouthink.

Foreword

byRobertKiyosaki

Theoldsayinggoes:Therearetwoconstantsinlife,deathandtaxes.I’moftheopinionthatyouwanttodoallyoucantoputbothoffaslongaspossible—oratleastminimizethepaintheycause.

Toprolongmylife,Ieathealthy,exercise,andavoidthingslikedrinkingtoomuchandsmoking.Ivaluemyhealth.So,Iworkwithexpertswhohelpmekeepmybodyinshapeandtoputonlygoodthingsinsidemybody.Iputmymoneywheremymouthis.

Itdidn’tusedtobethisway.Iusedtoloveeatingjunkfood,enjoyedmydrinkalittletoomuch,anddidn’texercise.AndIpaidtheprice.Iwasoverweight,unhealthy,andhadaclosecallwithmyheart.

Ididn’tunderstandtherulesofmybodyandwasbreakingthoserules.Andthatwascostly.Thankfully,myhealthproblemsmotivatedmetogethealthy.Barringtheunforeseen,I’veaddedyearstomylife.

WhenIwasyounger,Ialsodidn’tunderstandtherulesoftaxes.Muchlikeyouprobablydo,Ilookedattaxesasamajorinconveniencethatcouldn’treallybeavoided.Thankfully,myrichdadtaughtmethattaxesaren’tunavoidable,andthat,quitethecontrary,theycouldevenbeusedtoyouradvantage.

Myrichdadwasnotmyrealdad.Hewasmybestfriend’sfather.Myrichdadwasanentrepreneur,whoownedretailstores,restaurants,andhotels.MyrealdadwasaschoolteacherwhoeventuallybecametheheadofeducationfortheStateofHawaii.

Itwasmyrichdadthatpointedouttohissonandmethattherearefourdifferenttypesofpeopleintheworldofmoney.Hedefinedthesefourtypeswiththediagrambelow,adiagramhecalledthe“CASHFLOWQuadrant.”

EstandsforEmployeeSstandsforSelf-employedorsmallbusinessownerBstandsforBigbusinessownerIstandsforInvestor

Asaboy,thankstomyrichdad,IknewthatthoseintheEandSquadrantspaidthehighestpercentageintax.IalsoknewthatthoseintheBandIquadrantspaidthelowestpercentage,sometimeszerointaxes.Followingmyrichdad’sadvice,IfocusedmylifeontheBandIquadrants…andhavedoneverywellfinancially.

AllIhadtoknowwastherulesandhowtoplaybythem.MyproblemwasfindingCPAswhounderstoodthetaxlawsasmyrichdaddid.

Overtheyears,IlostalotofmoneytotaxessimplybecauseIhadhighpriced,well-educatedCPAswhowerenotthebrightestmatchesinthebox—thatisuntilImetTomWheelwright.Foryearsnow,Tomhasbeenmyguidinglight,allowingmetodowhatIdobest,whichisbuildbusinesses,invest,createjobs,andmakemoney,allthewhilepayinglessandlessintaxes…legally.I’veencouragedTomtowritethismostimportantbook,especiallyatthistimeinhistory.Iamgladit’shereandItrustyou’llenjoyandlearnfromit.

Today,taxesarekillingmanypeoplefinancially.PerhapsyouknowwhatImean.Doyoulookatyourpaycheckeverymonthandwonderwhereallyourmoneyisgoing?I’lltellyou.It’sgoingtothepeoplewhoknowhowtousetaxestomakemoneyratherthanlosemoney.It’sgoingtopeoplelikeme.

Asyou’llfindoutmoreinthisbook,governmentswritethetaxcodestoincentivizeinvestorsandentrepreneurstobehavehowtheywant.So,ifagovernmentwantsmoreaffordablehousing,they’llprovidesomegreattaxincentivestomotivatedeveloperstobuildaffordablehousing.

Theproblemisthatthegovernmentsstillhavetopaytheirbills.Sowhomdotheytax?Themiddle-class.Andtheyusethosetaxestosubsidizepeoplelikemewhobehavehowtheywantinordertogettaxbreaks.

Asyouknow,todaythereisagrowingoutcryto,“Taxtherich.”Manybelievethericharetax-cheatsandarerippingoffthepoorandmiddleclass—andsomeare.Aslongastaxesexist,therewillbetax-cheats,andnotallofthemarerich.Thepoorandmiddleclasshavetheirfairshareoftax-cheats.Weallknowthereisalarge,underground,tax-freeeconomyineverycityoftheworld,allfilledwithtax-cheats.Youprobablyknowsomeofthesepeople.

TomWheelwright’sbookwillgiveyouadifferentperspectiveontaxes.Heseestaxesasgovernmentincentivesandeconomicstimulustokeepthewheelsoftheeconomygreasedandmoving.

Thatishowmyrichdadsawtaxes.Hesimplysawhimselfdoingwhatthegovernmentwanteddone,andinreturn,thegovernmentofferedhimtaxbreaks.

Again,myproblemhasbeen,gettingotherpeople,friends,family,businessassociates,andyes,CPAstoseetaxesfromthesamepointofview.

Mostpeoplecouldnotseethispointofview,simplybecausemostpeopleareterrifiedofthetaxman,evenmanyCPAs.Mostpeopleliveinfearofdoingsomethingwrong,whichiswhymanypeoplefeelbetterjustpayingmoreandmoreintaxesandthenprotestthatthericharetaxcheats.Thisisnotfinanciallyintelligent.

Today,IreceivetaxbreaksbecauseIprovidejobsthroughmybusinesses,providehousingthroughmyapartmenthouses,andprovideenergybydrillingforoil,keepingenergycostslowandtheeconomymoving.

Idon’twritethistorubitintoyourface.AndIacknowledgethatitdoesn’tevenseemfair.Butasnotjustmyrichdad,butalsoprobablyeverydadsaid,“Lifeisn’tfair.”Rather,IwritethisbecauseIwantyoutoknowthatyoucanalsousethetaxcodetoyouradvantagetohelpyoumakemoney—orattheveryleast,greatlyreduceyourtaxburden.

Andthat’swhyI’mveryhappythatmyfriendandpersonaltaxadvisor,TomWheelwright,wrotethisbook.Tome,thereisnobetterpersontoexplainhowtaxeswork,howthetaxcodecanhelpyougrowricher,andwhocan—I’mnotkidding—maketaxesfun.

Ithinkyou’llfind,asIhave,Tom’spassionfortaxes—andhelpingyousavemoneyintaxes—tobeinfectious.AndIknowyou’llfindthewealthofknowledgehebringstothetabletobelifechanging.

Hebringsgoodnews:youdon’thavetolettaxeskillyoufinancially.Therulesinthetaxcode,whetheryouknowitornot,aretheretohelpyou—notharmyou.

Allyouneedistheproperknowledgeandalittleguidance.Inthisbook,Tomoffersbothinspades.

Ifyoubelievethericharetax-cheatsandrip-offthepoorandmiddleclass,thisbookisnotforyou.You’llprobablyenjoyDasKapitalmore.

Ifyouwanttoearnmoreandpaylessintaxesbydoingwhatthegovernmentwantsandneedsdone,however,thisisthebookforyou.

–RobertKiyosaki,Capitalist

Introduction

WhenIwasaboy,Ilovedtoargue.Itdidn’tmatterwhetheritwasonthetenniscourtorplayingMonopoly®.Itwasn’tsimplythatIfeltIwasright;itwasthejoyofthedebate.IdiscoveredthatthemoreIlearnedaboutasubject,themorelikelyIwastowinanargument.Andwhat’sthepointofarguingifyoudon’tplanonwinning,right?

Ialsofoundthatthemorevaguethequestion,theeasieritwastoargue.Igrewtolovestudyingaboutanythingthatdidn’thaveafixedanswer.WhenIturned19,IwenttoParis,France,onmymissionfortheMormonChurch.EverybodyknowshowtheFrenchlovetoargue.Andtheyhavetherightlanguageforit.ArguinginFrenchisoneofthemostenjoyablethingsI’veeverdone.It’ssuchabeautifullanguage.AndtheFrenchloveagoodargument.UnlikeAmericans,theydon’ttakeitpersonally.Soyoucanarguewiththemforhoursonendwithoutanybodygettingtheirfeelingshurt.I’mconvincedthattheFrenchinventedtheseven-coursemealsothattheywouldhaveplentyoftimetoarguewithouttheirfoodgettingcold.(Iremembermorethanonemeallastingoverfourhours.)

Maybeitwasmyloveofagoodargumentthatdrewmetolawinthefirstplace.AlthoughIneverearnedmylawdegree(Ididn’twanttohangoutwithlawyers—ugh),Ilovedthethoughtofpracticinglaw.

Ialsoenjoyedlearningaboutmoney,earningmoney,andspendingmoney.SowhenIwenttocollegeItookaccountingcoursesandspecializedintaxaccounting.Beingataxaccountant,Icouldworkinthelawandwithmoneyatthesametime.

Duringmyfirst13yearsoutofcollege,IworkedasanemployeeforsomeBigFouraccountingfirmsandaFortune1000company.Iwasverysuccessfulasanemployee.Promotionscameeasilyandsteadily.Inmyfirstfirm,Ernst&Young,theygavemetheopportunitytoworkintheNationalTaxDepartment–agreathonorforayoungCPA.IdidequallywellattheFortune1000company,makinggreatstridesinreducingtheirsalesandpropertytaxes.WhenIleftthem,Iwentbackintopublicaccountingwithadifferentinternationalaccountingfirm.Oneday,onlysevenmonthsafterIstartedworkingthere,Iwentintomyoffice,onlytofindanoteonmydeskfrommybossthatIwastocomedownthehallto

seehimassoonasIgotin.Thiswasalittleodd,asIworkedinthePhoenixofficeandmybossworked

outoftheLosAngelesofficeandmybosshadnottoldmepreviouslyhewascomingtotown.Iimmediatelywentdowntotheofficehewasinandheinvitedmetocomein.Thefirstthinghesaidtomewastopleaseclosethedoor.Somethingwasup.Icouldn’ttellrightthenwhetheritwasgoodorbad.Thenhetoldmetopleasesitdown.Thatcouldn’tbegood.Heproceededtotellmethathehaddecidedtoletmego.“Soyouarefiringme?”Iasked?Henodded.

Thiswasquitetheshockforsomeonewhohadalwaysexcelledinschoolandwork.Iheadedhome.AsIwalkedinthedoor,mywife,Rosie,said,“It’salittleearlyforyoutobehome,isn’tit?What’sgoingon?”Itoldherwhathadhappened.Shehadafewchoicewordsformythenformerboss(Rosieneverpullsapunch).Thenwestartedplanningourfuture.RosiesuggestedthatIhadalwayswantedtostartmyownbusinessandperhapsthiswastheopportunitytodoso.Quitealeapoffaithwhenyouconsiderthatwewereasingle-incomehouseholdwithtwoyoungboysandthatIwasthesoleprovider.

Istartedwithtwoclients.Forthenextninemonths,Iworkedtirelesslytobuildmybusiness,speakingtoeveryoneIknewandevenmakingcoldcalls.IwassosuccessfulthatafterninemonthsIdoubledmybusiness.That’sright—Iwentfromtwotofourclients.Thatwasn’tgoingtopaythebills.Thenonedayafriendofmine,alsoaCPA,calledmetotellmethattherewasanaccountingfirmforsalelocatednotfarfromme.ItturnedoutthatIknewtheCPAwhowassellingthefirm.

TheonlychallengewasthatnotonlydidIhavenomoney,Iwas$40,000indebt.Iaskedmyfriendforadviceandheofferedtolendmesomeofthemoney.Theselleragreedtofinanceabout50%ofthesalespriceandmyparentsloanedmetherestofthemoney.Myfirstno-moneydowndeal.Withinayear,IwassobusyIhadtoaddapartner.

Aboutfiveyearslater,ImetRobertKiyosakiandbeganstudyingmoneyandbusinessunderhistutelage.Ilearnedacompletelydifferentwaytolookatmoneyandbusiness—andeducation.I’dneverseenteachinglikeRobert’sbeforeImethimandstartedattendinghisconferences.

HereIamnow,writingabookintheRichDadAdvisorseries.WithoutRobert,Iwouldneverhavewrittenthisbook.Infact,Icouldn’thavewrittenthisbook.Muchofthebig-picturethoughtprocessabouttaxesandwealthcontainedinthisbookcomesfrommymanymeetingsandseminarswithhim.

WhenRobertfirstapproachedmeaboutwritingthisbook,hetoldmethatit

hadtobeabouthowentrepreneursandinvestorscouldreducetheirtaxes.Andithadtobeinternationalinscope.IdidsomecheckinginthebookstoresandlibrariesandIcouldn’tfindasinglebookontaxeswithaninternationalperspective.Thispresentedagreatchallengetome.

HowcouldIwriteabookontaxesthatappliedtoeveryentrepreneurandinvestorineverycountry?IknowtheU.S.taxlawverywell.I’vebeenstudyingitfor30years.Butlikeeveryoneelse,IthoughtthatthetaxlawsofothercountrieswouldbequitedifferentthantheU.S.laws.

Myresearchrevealedsomethingentirelydifferent.Itturnsoutthatthetaxlawsinalldevelopedcountriesaresimilar.Theyaresosimilar,infact,thatabookcouldbewrittenthatappliestoentrepreneursandinvestorsaroundtheworld.Thisisthatbook.

Tobesure,thedetailsofthetaxlawsaredifferentineachcountry.Andwewilllookatspecifictaxstrategiesyoucanuseinyourcountryattheendofeachchapter.Butunlessyouareataxprofessional,you,theentrepreneurand/orinvestor,don’tneedtoknowallofthedetails.Youcanleavethosetoyourtaxadvisor.Youhavetoknowtheconcepts.Andtheconceptsarethesameregardlessofyourcountryoforiginorthecountryinwhichyoudobusiness.

Thisbookisabouttaxplanningconcepts.It’sabouthowtouseyourcountry’staxlawstoyourbenefit.Inthisbook,Itellyouhowthetaxlawswork.Andhowtheyaredesignedtoreduceyourtaxes,nottoincreaseyourtaxes.Onceyouunderstandthisbasicprinciple,younolongerhavetobeafraidofthetaxlaws.Theyaretheretohelpyouandyourbusiness,nottohinderyou.

Onceyouunderstandthebasicprinciplesoftaxreduction,youcanbeginimmediatelyreducingyourtaxes.Eventually,youmayevenbeabletolegallyeliminateyourincometaxesanddrasticallyreduceyourothertaxes.Onceyoudothat,youcanlivealifeoftax-freewealth.

Solet’sgetstarted.

PartOne

HowtheTaxLawCanBeYourBestFriend

ChapterOne

TaxesareStealingYourMoney,YourTime,andYourFuture

“Taxesareyourlargestsingleexpense.”–RobertKiyosaki

Everyday,taxesarestealingyourlifeaway.Incometax,salestax,valueaddedtax,employmenttax,andahostofothertaxesareeatingawayatyourlife.Youmaythinktheyarejusttakingyourmoney.Ifonlythiswasalltheyweretaking.Taxesdon’tjusttakeyourmoney—theystealyourtime—becausemoneyistime.Peoplewithlotsofmoneyhavelotsoftimebecausetheydon’thavetospendtheirlifetradingtheirtimeformoney.Instead,theycantradetheirmoneyfortime.

Taxesdon’tjusttakeyourmoney—theystealyourtime—becausemoneyistime.

Theaveragepersoninadevelopedcountryspends25to35percentoftheirlifeworkingtopaytaxes.Thatmeansmorethantwohoursofeveryworkdayarededicatedtofeedingyourgovernment.Andthreetofourmonthsoutofeveryyeararespentworkingsolelysothatyoucanpayyourtaxes.Thataddsuptoover13yearsinyourworklifeand20yearsinyourlifetime—20years.That’saprisonsentence.

Andit’snotgoingtogetbetteranytimesoon.Asinflationeatsawayatthespendingpowerofourcurrency,italsoputsusintohighertaxbrackets.Soweendupwithevenlesspurchasingpowerbecauseahigherpercentageofourincomeistaxed.Andwiththeincreaseinthenumberofentitlementprogramsineverycountry,thereisahigherdemandfortaxrevenuestosupportthem.TheUnitedStatesalonehasover$80trillionofunfundedsocialliabilitiesintheformofMedicareandSocialSecuritypromisestoitsagingpopulation.Andthisnumbergrowseverydayasnewentitlementprogramsareenacted.

Ithasn’talwaysbeenthisway.Intheearlyyearsoftheincometax,onlytheveryrichweresubjecttothetax.Itwasbelievedthatsincetherichhadmoreincomethantheyneededinordertolivecomfortably,theycouldaffordtopaysomeofthisbacktothegovernment.Andbecausetheyhadearnedthisincomeundertheprotectionoftheirgovernment,certainlyitwasfairthat,intimeofwar,theycouldpaybackthegovernmentsomeoftheirexcessinordertomaintaintheirfreedomsandtheprotectionaffordedbythegovernment.

ThisallchangedafterWorldWarII.Thegovernmentsoftheworldfoundthattheincometaxwasausefulrevenue-raisingtoolthatcouldbeusedtorebuildaneconomythatwasravishedbywar.Sothegovernmentsbegantaxingthemiddleclass.Atfirst,itwasonlytheexcessearnedbyemployeesovertheaveragecostoflivingthatwastaxed.Thegovernmentprovidedexemptionsforthefirstincomeearnedsothattheaveragepersoncouldliveontheirregularearningsandonlypaytaxontheexcessthatwouldotherwisegotoinvestments.

Astheywatchedthebehaviorofthepeoplewhowerenowpayingincometax,thegovernmentbegantotinkerwiththetaxlawtoseehowitwouldaffecttheactivitiesofthetaxpayers.Whattheyfoundwasthataminorchangetothetaxlawcouldhaveaprofoundeffectonthebehaviorofthepeople.Ifthegovernmentgaveataxincentivetoinvestinbusiness,morepeoplewouldinvestinbusiness.Iftheygaveataxbenefittothosewhoinvestedinoilandgas,morepeoplewouldinvestinoilandgas.

Andsothetaxlawgrewfromasimplerevenue-raisingvehicletoavastarrayoflawsthatgovernedtheeconomicactivityoftheland.Andsoitistodaythatthetaxlawsofeverycountryaremodifiedastheeconomychangesandassocialpolicieschange.

Youmaythinkthatyouhavenochoiceabouthowmuchtaxyoupay.Everyonehastopaytaxes,right?Wrong.Therearemillionsofpeoplewholegallypaylittleornotax.What’stheirsecret?Dotheyknowaboutloopholesthatareinthelawthatallowthemtogetawaywithnotpayingtax?No.Theysimplyunderstandhowthetaxlawworks.Theyunderstandthatthetaxlawisnotsomethingthegovernmentusesonlytoraisetaxes.Thetaxlawisatoolthegovernmentusestoshapetheeconomyandpromotesocial,agricultural,andenergypolicy.

…thetaxlawisamap(oracode)tovastamountsofwealth.Andthetaxcodedoesn’tonlyshowyouhowtoreduceyourtaxes.Ifyoufollowthetaxlawcarefully,youwill

discoverthatthesecretstoamassinghugeamountsofcashflowandwealtharefoundwithinitspages.

Thesepeopleunderstandthatthetaxlawineverydevelopedcountryisnowaseriesofstimuluspackagesforentrepreneursandinvestors.IntheUnitedStates,over95percentofthetaxcodeisintendednottoraisetaxesbutrathertostimulateeconomic,agriculturalandenergyactivities.Infact,thetaxlawisamap(oracode)tovastamountsofwealth.Andthetaxcodedoesn’tonlyshowyouhowtoreduceyourtaxes.Ifyoufollowthetaxlawcarefully,youwilldiscoverthatthesecretstoamassinghugeamountsofcashflowandwealtharefoundwithinitspages.

Thereasonisquitesimple.Thegovernmentwantstheeconomytogrow.Itwantsyoutoinvestinlocalenergyproduction.Itwantsyoutoinvestinlocalagriculture.Anditwantsyoutoinvestineconomicactivitiesthatprovidehousingandjobsforthepeople.Allofthisiscontainedwithinthetaxlaw.Whenyouunderstandthetaxlawofyourcountry,youwillunderstandwhatthegovernmentwantsyoutodowithyourmoney.Andyouwillunderstandthefundamentalprinciplesformakinglargeamountsofmoney.

TAXTIP:Includetaxplanninginyourwealthstrategy.Rememberthatit’snotjustwhatyoumakethatmatters,it’swhatyoukeep.Whenyoukeeptaxesinmindasyouinvest,youendupkeepingmoremoneyandmakebetterinvestmentdecisions.

Wasthetaxlawwrittenforthewealthy?Absolutely!Thekeytotakingadvantageofthetaxlawistobecomeoneofthewealthy.Dothoseactivitiesthatthegovernmentwantsyoutodo,andyouwillnotonlypermanentlyreduceyourtaxesby10to40percentormore,youwillalsobeginbuildingmorewealthandcashflowthanyouhadeverimaginedpossible.Justlookathowmuchfastera$10,000investmentgrowswithouttaxes.

Year PayTax NoTaxYear With40%Tax@10%

ReturnWithoutTax@10%

Return1 10,616.77 11,047.132 11,271.59 12,203.903 11,966.80 13,481.814 12,704.89 14,893.545 13,488.50 16,453.086 14,320.44 18,175.947 15,203.69 20,079.208 16,141.42 22,181.759 17,136.99 24,504.4710 18,193.96 27,070.4111 19,316.13 29,905.0412 20,507.50 33,036.4813 21,772.36 36,495.8414 23,115.23 40,317.4315 24,540.93 44,539.19

16 26,054.56 49,203.0317 27,661.55 54,355.2318 29,367.65 60,046.9319 31,178.99 66,334.6320 33,102.04 73,280.7321 35,143.70 80,954.1822 37,311.29 89,431.1423 39,612.57 98,795.7524 42,055.78 109,140.9625 44,649.69 120,569.4526 47,403.59 133,194.6427 50,327.34 147,141.8628 53,431.42 162,549.5429 56,726.95 179,570.6030 60,225.75 198,373.99

Thekeyliesinyourfacts.Yourfactsincludeyourbusinessactivities,yourinvestmentactivities,andyourpersonalactivities.Theyalsoincludehowyoukeeptrackofyouractivities.Alltaxesarebasedonyourfactsandcircumstances.Soifyouwanttochangeyourtax,changeyourfacts.It’sthatsimple.

Thisbookisdedicatedtoteachingyouhowtochangeyourfactssoyoucanloweryourtax.Youwillalsolearntheprinciplesofbuildingwealth.Thefactsyoumustchangetoreduceyourtaxwillatthesametimeincreaseyourincome.Youwillbecomeoneofthewealthyforwhomthetaxlawwaswritten.

BewareofTaxPreparerswho:1.Promisetheycanloweryourtaxesandwhoarereallytaxcheats.

2.Focusonpostponingor“deferring”taxestoalateryear.Realtaxplanningispermanentsoyouneverhavetorepaythetaxes.

SostoplettingtheIRS(theU.S.InternalRevenueService),CRA(CanadaRevenueAgency),HMRC(HerMajesty’sRevenue&Customs),orothergovernmentagenciesstealyourmoney.Don’tletthemstealyourtime.It’stimetogetoutofprisonandtheshacklesthatbindyou.Asyoulearnthetruthabouttaxes,thetruthwillsetyoufree.Youwillhavethetimeandthemoneythatyouwantsothatyoucanliveyourdreamoffinancialfreedom,comfort,andsecurity.

CHAPTER1:KEYPOINTS1.BecomeoneofthewealthyandstopgivingtheIRSyourtime.Learntotradeyourmoneyfortimeandengageinactivitiesthegovernmentusestoshapetheeconomy.Remember,thetaxlawisaseriesofstimuluspackagesforentrepreneursandinvestors.

2.Taxesarebasedonyourfactsandcircumstances—changingyourfactswillchangeyourtax.

TaxStrategy#1:IncludeTaxPlanninginYourWealthStrategy

Toomanypeopleignoretaxeswheninvestingandplanningtheirwealthstrategy.Theylookatthereturnoninvestmentasthereturnbeforetheypaytaxesontheirinvestmentincome.Thismakesnosense.Withtaxesasyourbiggestexpense,wouldn’tyouwanttolookateveryreturnoneveryinvestmentaftertaxes?Whenyoudo,youmayfindthatyouaremakingalotlessonsomeinvestmentsthanyouthoughtandaremakingmoreonothersincomparison.

Let’stakeacoupleofexamplesintheU.S.thatwewillgointoinmuchgreaterdetaillateroninthisbook.First,let’slookatrealestate.Regularly,Ihearonthenewsthatrealestateisonlyamoderatelysuccessfulinvestmentonaverage.Andifyouweretocompareitdirectlytosomeotherinvestmentbeforetaxandwithoutleverage(i.e.,debt),youwouldhavetoagree.Let’ssayyou

purchasedarentalpropertyfor$500,000,with$100,000ofyourownmoneyand$400,000ofthebank’smoney.Supposethattheannualreturnonyourinvestmentof$100,000is7%.Then,let’ssupposethatyoumakeasimilarinvestmentof$100,000inthestockmarketthatreturns10%.Whichinvestmentisabetterreturn?Itseemsobviousthatthestockmarketreturnof10%isclearlybetterthantherealestatereturnof7%,right?

Notsofast.The10%returnfromthestockmarketwillgetyou$10,000beforetaxes.Youwillpaycapitalgainstaxofabout20%,countingbothfederalandstatetaxes,leavingyouwithanaftertaxreturnof$8,000.The7%returnontherealestateinvestmentwillgetyouabeforetaxreturnof$7,000.Duetothemagicofdepreciation(chapter7),youwon’tpayanytaxonyour$7,000.Still,$7,000islessthanyouraftertaxreturnof$8,000inthestockmarket,soitseemsyouarestillbetteroffinthestockmarket.

Only,yourrealestateinvestmentdoesn’tjustgiveyoutax-freecashflow.Itactuallyreducesyourtaxesonyoursalaryand/orbusinessincome,becausewhilethereispositivecashflowof$7,000,thedepreciationdeductionofabout$27,000givesyouataxdeductionagainstyourotherincomeof$20,000($27,000less$7,000tooffsetrealestateincome).That$20,000additionaldeductionagainstyourotherincomeisworth$6,000ofreducedtaxesonyourotherincomeinatypical30%ordinaryincometaxbracket.

Soyourrealreturnfromyourrealestateis$7,000plusanadditional$6,000oftaxrefundontaxesyounormallywouldhavepaidonyoursalaryandbusinessincomeforatotalreturnof$13,000,or$5,000morethanyourafter-taxreturnfromthestockinvestment.

Thisisjustoneexampleofhowthetaxlawcanhaveadramaticimpactonyourcashflowandyourwealth.Ifyoucomputedyourreturnjustbylookingatthecashflowbeforetaxes,yourreturnof$10,000iswaybetter($3,000better)thanyourreturnfromyourrealestate.Aftertaxes,though,itistheopposite.Yourreturnfromtherealestateaftertaxbenefitsis$13,000whileyourreturnfromthestockmarketaftertaxisonly$8,000.Seewhyyoushouldalwaysconsidertaxeswhenyoumakeyourinvestmentplans?

ChapterTwo

TaxesareFun,Easy,andUnderstandable

“Thehardestthingintheworldtounderstandisincometaxes.

–AlbertEinstein

DeathandTaxes

Death”and“taxes.”They’rethetwomostdreadedwordsintheEnglishlanguage—oranylanguage,forthatmatter.Andit’stotallyunderstandable.Youdon’twanttodie.Andyou’dprobablyratherdiethanpaytaxes.Perhapswelinktaxeswithdeathbecausetheyrepresentthedeathofallforwhichwe’veworked.Ormaybeit’sbecausewedon’tunderstandtaxesanymorethanweunderstanddeath.

Worldwide,theaveragepersonpays30to50percentormoreoftheirhardearned

incomeintaxes,eitherthroughincome,

sales,value-added,payroll,estate,orpropertytaxes.

Therealityisthattaxescankillyourhopesanddreams.How?Bystealingyourwealthanddiminishingyourqualityoflife.Thatsurprisevacationforyourfamily?Gone,thankstoUncleSam.Theimprovementsyouneedtomaketoyourhouse?Kissthemgoodbyecometaxtime.I’msureyoucanrelate.You’renottheonlyone.Worldwide,theaveragepersonpays30to50percentormoreoftheirhardearnedincomeintaxes,eitherthroughincome,sales,value-added,payroll,estate,orpropertytaxes.Thinkaboutthat.Almostathirdtoone-halfoftheworld’swealthishandedovertogovernments.That’sbadnews.

Buthere’sthegoodnews.Taxesdon’thavetokillyourdreams.Infact,90percentofentrepreneursandinvestorscanreducetheirtaxessimplybylearningthebasicsoftaxlaw.

Youmightbesaying,“Great—anotherbookthathelpsentrepreneursandinvestors.I’mjustaregularJoe.WhatcanIdotolowermytaxes?”

ToyouIsay,“Whatifyoubecamepartofthisprivilegedclassoftaxpayers?Whatifyoutooktherightstepsandmadetherightpreparationstonotonlymakemoremoneybuttoalsopaylesstothegovernmentintaxes?”

Soundshard,right?Well,asyou’lllearn,it’snot.Andwhenyoudotakethestepofbecominganentrepreneurorinvestor,youwilleasilypay10to40percentlessintaxesbylearninghowthetaxlawcanworkforyou—insteadofyouworkingforthegovernmentandpayinghightaxes.

TAXTIP:Investwhereyoutravel.Doyouhaveafavoritedestination?Considerinvestinginthearea.Itgivesyouagreatreasontokeepreturning,andyouturnthetravelexpensesyoualreadyhaveintodeductibleexpenses,keepingmoremoneyin

yourpocket

AnyoneCanUnderstandTaxes

Thismightmakeyoulaugh,butIabsolutelylovetaxes.Seriously.IhaveapassionforlearningeverythingIcanaboutthetaxlawandhowitcanbeusedtosavemoneyformyclientsandme.Istartedlearningaboutaccountingandtaxesatayoungage.

Inhighschool,Itookaclassonbusinesslawandlovedit.AndallthroughhighschoolIworkedintheaccountingdepartmentofmyfather’sprintingcompany.Ienjoyedworkingwithmoney,andIlovedlearningaboutthelaw.SoIdecidedtomajorinaccountingandspecializeintaxlaw.Thatway,Ireasoned,Iwouldgettoworkwithmoney,learnaboutthelaw,andnothavetospendmylifewithlawyers.

MyfirsttaxprofessorwasDr.Haney.Hewasalawyerwhotrulyhadagiftforteachingandwholovedtaxlaw.IwassoexcitedtotaketaxclassesthatItookallthreethatwereofferedinmyjunioryear,postponingmyupper-divisionaccountingclassesuntilmysenioryear.

Icouldn’twaittogetajobworkinginthetaxarea.Duringmyfirsttermoftaxclasses,ItookouttheYellowPagesandcalledallofthelocalCertified

PublicAccountant(CPA)firmsintownthathadmorethanonenameorhad“andAssociates”inthefirm’sname.Afterseveraldaysofthis,IlandedaninterviewwithafirmcalledFrancisandCompany.Mylongandthrillingjourneyasataxaccountantbegan.

Iinterviewedwiththeseniortaxmanagerthenextday.Heaskedmetheusualquestionsaboutmyexperience,education,andinterests.Andthenheaskedareallyoddquestion.“Tom,”hesaid.“Howgoodisyourprinting?”

Iwastakenabitoff-guardbythisquestion.Itturnsoutthattheypreparedalotoftheirtaxreturnsbyhand.Theyprintedtheminpencilandthenphotocopiedthemfortheirfiles.HewantedtomakesuremyhandwritingwaslegiblesothattheirclientsandtheIRSwouldn’tbefrustratedbynotbeingabletomakeoutthenumbersonthetaxreturns.Fortunately,myhandwritingwaslegible,becauseIhadworkedhardtolearngoodprinting.Hehiredmeonthespot.

Thatwasin1980.Sincethen,Ihavedevotedmylifetolearning(andloving)thetaxlaw.WhatI’vediscoveredovertheyearsisthatthebasicprinciplesofthetaxlawareactuallysimple.Sosimple,infact,thatanybodycanlearnthem,evenAlbertEinstein.(I’mconvincedthatDr.Einsteinwouldn’thavebeensofrustratedwiththetaxsystemifhehadjusthadsomeonetoteachhimthebasicprinciples).Theprinciplesaresosimplethatbythetimeyoufinishreadingthisbookyouwillknoweverybasicprincipleneededtopermanentlyloweryourtaxes.Andonceyouknowtherules,youcanlivealower-taxlife,whichIpromiseisaricherlifeineveryway.Infact,youmightevenbeabletolegallyreduceyourtaxestozeroandenjoytax-freewealth.

UnderstandingTaxesDoesn’tMeanDoingItYourself1.Youstillneedagoodtaxadvisorwhounderstandsthedetailsofthetaxlaw.

2.Agoodtaxadvisorcanhelpyoucreateandimplementsoundtax

strategiesbesidesdoingyourtaxreturns.

TaxesAreFun—Really

Anyonewhoknowsmeknowsthatforme,taxesarefun.Yes,Ididjustsay“fun.”Iknowhowwarpedthatmaysound,butIlovethetaxlaw.AndIfirmlybelievethateveryonecanfindoutjusthowfun,easy,andunderstandabletaxesarewithjustalittlebasicinformation.Don’tbelieveme?Well,thinkaboutthis.Haveyoueverreceivedataxrefund?Doyourememberhowhappyyouwerewhenyouopenedthatletterandsawabeautifulcheck?Thatwasfun,wasn’tit?Infact,didyouevernoticethattheword“refund”has“fun”rightinthemiddleofit?Okay,cornyjoke,butyougetthepoint.

Thisbookisdedicatedtohelpinggetyouabiggertaxrefund.Andwe’renotjusttalkingaboutaone-timedeal.Whenyouapplytheprinciplestaughtinthisbook,you’llgetanicerefundeveryyear.Andwhoknows?Youmayevenreduceyourtaxestozeroandenjoythefreedomthatcomeswithtax-freewealth.

Iguaranteeyourpathtotax-freewealthiseasier,simpler,andmorefunthanyoucanimagine.Thinkofthisbookasaguidetoafreerfinanciallife,alifewhereyougettokeepmoreofyourhardearnedmoneyrightwhereitbelongs—inyourpocket,andnotthegovernment’s.Let’sgetstarted.

CHAPTER2:KEYPOINTS1.It’stimetotakeactiononreducingyourtaxes.Don’tbetheaveragepersonpaying30to50percentormoreofyourhardearnedincomethroughincome,sales,value-added,payroll,estate,orpropertytaxes—startbylearningthebasicsofthetaxlaw.

2.Becomepartoftheprivilegedclassoftaxpayersbylearninghowthetaxlawcanworkforyouandhowyoucaneasilypay10to40percentlessintaxes.

TaxStrategy#2–InvestWhereyouTravel

AsyouwilllearninChapter6,almostanyexpensecanbedeductible.Itsoundsfunnytosay,butoneofmyfavoriteexpensesistravel.Ilovetotravelandmeetnewpeopleandexperiencenewcultures.Sometimes,Ijustwanttogetawayto

relaxandgetsomepeaceofmind.OneofmyfavoriteplacesonearthisHawaii.ThepeopleofHawaiiareso

genuineandlaidback.IgotoHawaiiatleastonceayearforacoupleofweeks.Ofcourse,IalsowantmytraveltoHawaiitobedeductible—and,thankfully,itcanbewithproperplanning.

Anytravelcanbedeductiblebymakingitabusinessorinvestmentexpense.Aslongasyourtravelhasitsprimarypurposeasbusiness,thenallofthetravelexpenses,includinghotel,airfareandmeals,willbedeductible.Inorderfortravel’sprimarypurposetobebusiness,theIRSsaysthatyouhavetospendmoretimedoingbusinessthanyoudoinrecreation.So,ifyouaregoingtoHawaiiforaweek,thenmorethanhalfyourtimetherehastobespentdoingbusiness.Thissimplymeansmorethan4hoursofaregular8-hourworkday,meaningyouneedtospendfourandahalfhoursworkingeachday.ButwhowantstoworkwhilevacationinginHawaii?Whatiftheworkisfun,interesting,andmakesyoulotsofmoney?Wouldyoudoitthen?WhatifyoumadeHawaiianrealestateamajorpartofyourinvestmentstrategy?Whenyouaddupthetaxbenefitsplusaddinallofthemoneyyoucouldmakeinvestingforfourandahalfhourseachday,youmaydecidethatspendingthattimelookingatrealestateandmeetingwithpropertymanagersisn’tsobadafterall.JusttakealookinChapter5atwhatthisstrategydidformyclientwhotravelstoNewMexicoeachyear.

ChapterThree

TheTwoMostImportantRules

“Anyonemaysoarrangehisaffairssothathistaxesshallbeaslowaspossible;heisnotboundtochoosethatpatternwhichwillbestpaytheTreasury.Thereis

notevenapatrioticdutytoincreaseone’staxes.”

–JudgeLearnedHand

Awhileback,oneofmygoodfriends,GuyZanti,taughtagroupofpeoplehowtoplayCASHFLOW101,afinancial-simulationboardgameinventedbyRobertandKimKiyosaki.PlayingthegameisanexcellentwaytonotonlylearnbutalsoputintopracticetheRichDadprinciplesonmoneyandinvesting.AsGuytalkedaboutsomeofthetaxbenefitsofrealestate,particularlytax-freeexchanges,awomanintheaudienceraisedherhand.

“Yes,ma’am,”Guysaid.“Don’tyouthinkthatit’swrongtoreduceyourtaxeslikethat?,”sheasked.

“Isn’titourresponsibilitytopaythetaxesthatweoweinsteadoftryingtofindwaystostealfromthegovernment?”

Guywasstunned.Hecouldn’tbelievewhathe’djustheard.Hecouldn’tcomprehendwhyshewouldthinkthatitwaswrongtoreducehertaxburden.Afterall,doesn’teveryonewanttoreducetaxes?Buttherealityisthatwe’retrainedtobelievethatwesomehowowethegovernmentourmoney.Thetruthisthatwedon’t.Infact,thetaxcodeissetuptohelpusreduceourtaxburden—andtodosolegally.

PlayingCASHFLOW101isanexcellentwaytolearntheRichDadprinciplesonmoneyandinvesting.

I’dsayit’sjusttheoppositeofwhatthiswomanandmanyothersthink;it’swrongtonotreduceyourtaxburden.Nottakingadvantageoftheaspectsofthe

lawthataretheretohelpyoumeansyouarestealingfromyourself,yourfamily,andyourfuture.

Nottakingadvantageoftheaspectsofthelawthataretheretohelpyoumeansyouarestealingfromyourself,yourfamily,andyourfuture.

Thesimplefactisthatthiswomandidn’tunderstandRule#1whenitcomestothetaxlaw.Andchancesare,youmaynoteither.

RULE#1:It’syourmoney,notthegovernment’s.

Unlessyouliveinadictatorship,themoneyyouearnandthewealththatyoubuildbelongstoyou.Yes,youmayberequiredtogivesomeofittothegovernmenttohelpbuildroads,maintainthemilitary,andsustainschools.Butfundamentally,it’syourmoney.

TAXTIP:LearnhowyourLLC(limitedliabilitycompany)canbewhateveritwantstobe.TheLLChasbecometheentityofchoiceforassetprotectionpurposes.Butwhat

abouttaxpurposes?YourLLCcanbewhateveritwantstobe—asoleproprietorship,apartnership,aCCorporation,oranSCorporation.This

flexibilitygivesyouthebestofthetaxandassetprotectionworlds.InsomecountrieswithoutLLCs,theLLP(limitedliabilitypartnership)maygiveyou

similarflexibility.

JudgeLearnedHand,aformerjudgeontheUnitedStatesCourtofAppealsfortheSecondCircuitandajudicialphilosopher,wasadamantaboutthisprinciple.Hewentsofarastosaythis:“OverandoveragaintheCourtshavesaidthatthereisnothingsinisterinsoarrangingaffairsastokeeptaxesaslowaspossible.Everyonedoesit,richandpooralike,andalldoright,fornobodyowesanypublicdutytopaymorethanthelawdemands.”

Youmaynotrealizethis,butit’strue:Thetaxlawsarewrittentoreduce

yourtaxes,nottoincreasethem.IntheUnitedStates,forexample,thereareover5,800pagesoftaxlaw.Onlyabout30pagesaredevotedtoraisingtaxes.Oneline,Section61(a),says,“Exceptasotherwiseprovidedinthissubtitle,grossincomemeansallincomefromwhateversourcederived…”

Youmaynotrealizethis,butit’strue:Thetaxlawsarewrittentoreduceyourtaxes,nottoincreasethem.

Therearethenseveralpagesoftaxratesandafewothermiscellaneoustaxes.Theremaining5,770pagesaredevotedentirelytoreducingyourtaxes.Inotherwords,0.5percentofthetaxcodeisdevotedtoraisingtaxes,andtheremaining99.5percentexistssolelyforthepurposesofsavingyoumoney.SohereisRule#2.

RULE#2:Thetaxlawiswrittenprimarilytoreduceyourtaxes.

YoumaynotbelievemeaboutRule#2.Sogoaheadandaskyourownaccountanthowmuchofthetaxlawinyourcountryisdevotedtoraisingtaxes.Youraccountantwilltellyouthetruth—verylittle.ThatthewomaninGuy’sclassfeltit’sourpatrioticdutytopaythemosttaxesisbothridiculousandcompletelywrong.Infact,asI’llshowyouinthenextfewchapters,it’sactuallyyourpatrioticdutytoreduceyourtaxesbyalllegalmeans.

BewareofTaxAdvisorsWhoReallyWorkfortheGovernment1.Manytaxadvisorsareafraidofthetaxlawsotheywon’tlearnhowtotakeadvantageofthelawforyou.

2.Sometaxadvisorsaremoreinterestedinprotectingthemselvesthan

reducingyourtaxes.

YoumaybewonderinghowIcanreallysaythatwithastraightface.Well,thinkaboutit.If99.5percentofthetaxlawiswrittentohelpyoureduceyourtaxes,thenthegovernmentmustreallywantyoutodojustthat.Ifthatweren’ttrue,whywouldtheyenactsomuchlegislationaimedathelpingyoudoso?Alloftheso-calledcomplexityofthetaxlawisreallyjustaimedatreducingyourtaxes,notincreasingthem.

Alloftheso-calledcomplexityofthetaxlawisreallyjustaimedatreducingyourtaxes,

notincreasingthem.

Untilyoureallybelieveandarecommittedtothesetwofundamentalrulesoftaxlaw,therereallyisnothingyoucandotolimityourtaxes—andthisbookwillbeworthverylittletoyou.Youwillkeeponunnecessarilypaying30to50percentofyourhardearnedincometothegovernment.Maybethat’swhatyouwant.ButIhaveahunchitisn’t.

Onceyoutrulybelievethesetworulesandhavethemfirmlyplantedinyourmind,you’llrealizethatyouhavetherighttoreduceyourtaxeseveryminuteofeveryday.Allyouhavetodoislearntherulesofthegame.Andthat’swhenthisbookbecomespriceless.

Thegoodnewsisthatthetaxrulesareeasytounderstand.Afterall,youalreadyunderstandthefirsttworules,right?Fromhereonout,it’sjustamatteroflearningwhothetaxlawsarewrittenforandwhy,andlearninghowtochangethewayyouthinkaboutyourmoneyandtaxes.

Soifyoubelievethatyourmoneyisyoursandnotthegovernment’s,andthatthetaxlawexiststoreduceyourtaxes,thenyou’rereadytoreadonandlearnhowtomakethetaxlawworkforyou—andnottheotherwayaround.Let’sgettowork.

CHAPTER3:KEYPOINTS1.SomeofusaretrainedtobelieveweowethegovernmentOURmoney(it’sjustnottrue).

2.Thetaxcodeissetuptohelpusreduceourtaxburden—andtodoso

legally.

3.Nearlyall—99.5percent—ofthetaxcodeexistssolelyforthepurposeofsavingyoumoney.

4.Alloftheso-calledcomplexityofthetaxlawisaimedatreducingyourtaxes,notincreasingthem.

TaxStrategy#3:ElectHowYourLimitedLiabilityCompanywillbeTaxed

Yourlimitedliabilitycompany(LLC)canbewhateveryouwantittobe.TheLLChasbecometheentityofchoiceforU.S.assetprotectionpurposes.Butwhataboutfortaxpurposes?Thegoodnewsis,yourLLCcanbewhateveritwantstobe—asoleproprietorship,apartnership,aCCorporation,oranSCorporation.Thisflexibilitygivesyouthebestofthetaxandassetprotectionworlds.InsomecountrieswithoutLLCs,thelimitedliabilitypartnership(LLP)maygiveyousimilarflexibility.Thekeyhereisthatyoucanfrequentlyhaveyourcakeandeatittoowhenitcomestothetaxlaw.SimplybyunderstandingthatLLC’scanbetreatedanywayyouwantfortaxpurposes,youhaveassetprotectionandstillgetthetaxadvantagesoftheScorporation,Ccorporationorpartnershiprules.GarrettSutton,RichDadAdvisorforassetprotectionandlegalservices,talksindetailabouttheassetprotectionadvantagesoflimitedliabilitycompaniesinhisbestsellingbook,StartYourOwnCorporation,BZKPress,2012.Onceyoudecidewhichtypeofentityyouwantfortaxpurposes,besureyoumaketheproperentitytaxelectionbycheckingtheproperboxontheIRSentityelectionform.Ifyoudon’tmaketheelection,theIRSwillchooseforyouwhichtaxentityyouwillbe—asoleproprietorshipforsingle-memberLLCsorapartnershipformultimemberLLCs.Youcanmakeyourentityelectionatanytimeduringtheyear.Thiselectiongivesyougreatflexibilityinyourtaxplanning.Supposeyouarejuststartinganewbusiness.Youmaywantyourentitytobetreatedasasoleproprietorshipintheearlyyearswhenthereisalossornotmuchincomesoyoudon’thavetofileanothertaxreturn(corporationshavetofileaseparateincometaxreturnfromtheirowners).Whenyou’rereadytochangetoanSCorporationtoreduceyouremploymenttaxes(seeChapter11),youcanchecktheboxontheformandfiletheelectionwiththeIRS.

ChapterFour

PutMoneyBackinYourPocket—Now

“Theonlydifferencebetweenataxmanandataxidermististhatthetaxidermistleavestheskin.”–MarkTwain

Asachild,Iwasalwayslookingforwaystomakemoney.Istartedmyfirstbusinessventurewithabuddyofminewhenwewerenineyearsold.Wenoticedthatthemarigoldflowershaddiedandgonetoseed.Thoseofyouwhoaren’tgreenthumbsmaynotknowthis,butmarigoldseedsaresomeoftheeasiestthingsintheworldtoharvest.Allyouhavetodoisripthetopofthefloweroffanddumpawholeslewofseedsintoyourhand.MybuddyandIthoughtitwasprettycoolhoweasyitwas,andwecameupwiththebrilliantideaofcollectingalltheseedsintheneighborhood,packagingthem,andsellingtheseedsbacktoourneighbors.Itworkedlikeacharm.Thesameneighborswhoallowedustotaketheseedsfromtheirgardeninthefallboughtthembackfromusinthespring,whichprovesthatbusinessisn’talwaysaboutdoingsomethingotherpeoplecan’tdoforthemselves;it’sdoingsomethingtheyhaven’tthoughttodoforthemselves.

…businessisn’talwaysaboutdoingsomethingotherpeoplecan’tdoforthemselves;it’sdoingsomethingtheyhaven’tthoughttodoforthemselves.

Andthentherewastheneighborhoodcarnivalwedecidedtoholdwhenwewere11yearsold.Wecreatedacupcakewalk,a“fish”pondwherepeoplefishedforprizes,andsomeothergamesofskillandchance.Weletallofourfriendsknowaboutthecarnival,andweworkedhardtogetreadyforit.Infact,lookingback,itwasalotofwork.Whenthecarnivalwasover,wesatdowntocountourmoney.We’dmade$20.Backthen,thatwasprettygoodforacouple

of11-year-olds.Today,peoplecometomeprofessionallyallthetimeaskinghowtheycan

makemoney.Manyofthemneedcashrightaway.I’mnotabelieveringet-rich-quickschemes,andIsteermyclientsawayfromthosetypesoffolks.Myclientsarehardworkingpeoplewhoarelookingforabetterwaytoincreasetheircashflowandtheirwealth.I’msureyou’relookingtodothesamething.Andthere’sgoodnews.There’sonewaytoputcashinyourpocketalmostimmediately,asshowninRule#3:reducingyourtaxes.

RULE#3:Thefastestwaytoputmoneyinyourpocketistoreduceyourtaxes.

Thinkaboutit.Byreducingyourtaxes,youcanimmediatelyreducehowmuchmoneycomesoutofyourpaycheck.Or,ifyou’reanentrepreneurorinvestor,youcanreduceyourquarterlytaxpayments.

Andyoudon’thavetowaituntiltaxtimetoenjoythebenefitoflowertaxes.Inmanycountries,includingtheUnitedStates,youcanfileamendedreturnsanytime,whichcorrecterrorsonreturnsforuptothepreviousthreeyearsifyoulearnthatyoupaidtoomuchinaprioryear.Oryoucanevencarrybackalossfromthecurrentyeartoaprioryear,usethelosstooffsettheprioryear’sincome,andgetarefundnow.

Byreducingyourtaxes,youcanimmediatelyreducehowmuch

moneycomesoutofyourpaycheck.

NoticewhatIsaid:youcanputmoneyinyourpocketbyreducingyourtaxes.Theoperativewordis“you.”You,andonlyyou,havethepowerandthecontroloveryourmoneyandyourtaxes.Nobodyelse.Thisincludesyourtaxpreparerandyourtaxadvisor.Theycannotreduceyourtaxes.Theycanonlyhelpequipyoutodoso.

Youmaysay,“Mytaxadvisorhandlesmytaxes,”butthatisamythaboutincometaxes.Yourtaxadvisorcannothandleyourtaxes.Theycanprepareyourtaxreturns.Theycangiveyouadviceaboutwhattodoinaparticularsituation.Quitepossiblytheycaneventellyousomerulesthatwillhelpyoureduceyourtaxes.Buttheycannottaketheactualstepstoreduceyourtaxes.Onlyyoucandothat.

Don’tWaitforYear-EndtoDoTaxPlanning1.Everydayyoucouldbereducingyourtaxes.

2.Year-endtaxplanningisimportantbutyear-roundtaxplanningisbetter.

Thegoodnewsisthatyoucanreduceyourtaxesrightnow.Anybodycan.Andyoucandoiteverydayoftheweek.Allyouhavetodotochangeyourtaxistochangeyourfacts.Therearetwosimpleprinciples(representedinRule#4)thatyouneedtokeepinmindasyouconsiderhowtoreduceyourtaxes:Everydollar,pound,oreuroyouearncanincreaseyourtaxes,andeverydollar,pound,oreuroyouspendcandecreaseyourtaxes.Andeveryinvestmentorbusinessdealyoudowillaffectyourtaxesforgoodorforill.

Allyouhavetodotochangeyourtaxischangeyourfacts.Andthereallycoolpartisthatevery

expensehasthepotentialtoreduceyourtaxes–really,everyexpense.

RULE#4:Everythingyoudoeitherincreasesorlowersyourtaxes.

Youmightaswelllearnhowtomakeeverythingyoudoaffectyourtaxesforgood,right?Thankfully,it’snotcomplicated.It’ssimplyamatteroflearningthedifferencebetweenbad,good,andbetterincome—andthenlearninghowtoturnyourexpensesintotaxdeductions.Andthereallycoolpartisthateveryexpensehasthepotentialtoreduceyourtaxes—really,everyexpense.

TAXTIP:

Eatwhileyouworkandsavetaxes.Businessmealsareagreatwaytospendtimewithemployees,clients,andcustomers.Youcandiscussbusinessandturnyour

mealexpenseintoadeductibleexpense.

Let’sfaceit,thebestpartofhavingmoneyisspendingit.Butwhenyoucannotonlyspendyourmoneybutalsodecreaseyourtaxeswhiledoingso—well,thenyou’rereallycooking.

Iknowalotofpeoplewholovetoshopforbargainsandconstantlylookforsalesandspecials.It’slikeaprofessionalsporttothem.Youwouldn’tbelievetheamountoftime,energy,andeffortthattheyputintofindingdealsandsavingmoney.They’rethrilledwitha20to30percentdiscountontheirpurchases.Butwhenitcomestodoingtheirtaxes,theydon’twanttotakethetime.Idon’tgetit—well,actually,Ido.Taxreturnscanbearoyalpain.Andmostpeoplejustwanttogetthemdoneandoverwithasquicklyaspossible.Butwhatifyoucouldgeta20to30percentdiscountonallofyourpurchasesanytimeoftheyear?That’sexactlywhathappenswhenyouchangeyourexpensesfromapersonalexpensetoabusinessdeduction.Thegovernmentessentiallypaysfor20to30percentofyourpurchaseintheformofataxdeduction.

Butwhatifyoucouldgeta20to30percentdiscountonallofyourpurchasesanytimeoftheyear?That’sexactly

whathappenswhenyouchangeyourexpensesfromapersonalexpensetoabusinessdeduction.

IliketoshopatCostco,adiscountstorethatsellsgroceriesandothereverydayitems.Costcoalsosellsgasoline.Peoplelineup,sometimeswaitingforlongperiodsoftime,inordertobuytheirgasatCostcobecauseit’sroutinely10percentlessthanothergasstations.

IneverbuymygasatCostco.Why?Costcodoesn’tallowmetousemybusinesscreditcard.Andsince

mostofmycaruseisforbusiness,IgetadeductionforthegasifIusemybusinesscreditcard(plusIgetfrequentflyermiles).Thatdeductionisworth20to30percenttomeinlowertaxes.Soit’sworthpayingalittlemoreatthegasstationdownthestreetinordertogetthetaxdeduction.It’sthelittledecisionslikethese,madeeveryday,thatadduptobigsavingsinyourtaxes.

Bynowyou’reprobablydyingtofindouthowyoucanstartpayinglessin

taxeseveryday.

CHAPTER4:KEYPOINTS1.Thereisonewaytoputcashinyourpocketalmostimmediately:reducingyourtaxes.

2.Learnhowtomakeeverythingyoudodecreaseyourtaxes.

3.Learnhowtochangeyourexpensesfromapersonalexpensetoabusinessdeduction.

TaxStrategy#4–DeductyourMeals

Almostanyexpensecanbedeductibleintherightcircumstance,includingfood,entertainment,travel—evenyourhouse,ifyouchangeyourfactssothattheexpenseisabusinessone.What’sabusinessexpense?IntheUnitedStates,thetaxlawrequireseachbusinessdeductiontomeetthreetests.First,theexpensemusthaveabusinesspurpose,whichmeanstheprimaryreasonforspendingmoneywasforyourbusiness.Takemealsasanexample.Tobedeductible,thepurposeofamealmustbebusiness.Thismeansyouneedtohaveaconversationaboutbusinesswithyourdiningpartnerbefore,during,orafterthemeal.Theothervalidbusinessmealwouldbeifyouweretravelingawayfromhomeonbusiness.Second,theexpensemustbeordinary.Anexpenseisordinaryifitis“customaryandusual.”Thismeansthatwithinyourindustry,theexpenseshouldbetypicalofwhatwouldbespent,bothintheamountoftheexpenseandhowoftenapersoninyourpositionwouldhavetheexpense.Suppose,forexample,thatyougoouttodinnerwithabusinessassociate.Inyourindustry,whatwouldbethecostofatypicalbusinessmeal?Ifyou’reatruckdriver,thetypicalbusinessmealisgoingtobedifferentthanifyou’reamoviestarorprofessionalathlete.Aninsuranceagentmightgotolunchwithaclientorbusinessassociateeveryday,whileanautopartsmanufacturermightonlygotolunchonbusinessonceaweek.ThekeyhereisthatwhateveristypicalinyourindustryandyourpositionwithintheindustryiswhattheIRSwillallowasordinary.

Third,theexpensemustbenecessary.Necessarymeansthatthepurposeoftheexpenseistomakemoremoneyforyourbusiness.It’snotenoughjusttogotolunchwithsomeoneandtalkbusinesssimplybecauseyouarefriends.Yourconversationatlunchmusthavetheintentionofincreasingtheprofitsinyour

business.Thesethreerulesarenotdifficulttomeet.Let’ssay,forexample,thatyourbusinesspartnerisyourspouse.Ifyou’relikemostbusinesspartners,you’realwaystalkingaboutbusinessandalwayslookingforwaystoimproveyourbusiness.Soprettymucheveryopportunityyougettohaveaquietmealtogetherinarestaurantyouwilldiscussbusiness.Justdon’tbeextravagantaboutitonaregularbasis.Oneruleofthumbhereisthat“pigsgetfatandhogsgetslaughtered.”Ifyouaregreedyandgoouttoexpensiverestaurantsonaregularbasis,theIRSmaynotlooksokindlyonyourdeductionsformeals.Still,oneofthemostcommonmistakesIseeiscoupleswhoarealwaystalkingaboutbusinesswhentheygoouttodinnerbutnotpayingfortheirmealswiththeirbusinesscreditcard.

ChapterFive

EntrepreneursandInvestorsGetAlltheBreaks

“Ifyouwantmoreofsomething,subsidizeit.”–MiltonFriedman

InMarch1995,Istartedmyprofessionalaccountingpractice.Overtheyears,mypartnersandIhaveenlargedthefirmthroughmarketingandacquisitions.MymostnotableacquisitionwasthatofaPhoenix-areataxpracticein2001.EarlierthatyearI’dbeenthroughanastypartnershipbreakupwiththreeotherCPAs.Fortunatelyforme,about50percentoftheclientsstayedwithmynewpartnerandme,andallbutoneofthefirm’semployeesstayedwithus,meaningwehadmoreworkersthanwork.

Ontopofthis,laterinthesummeroneofmyformergraduatestudentscametomelookingforwork.Shewasagoodstudent,andIthoughtshe’dmakeanexcellentemployee.WetooktheadviceofJimCollinsinhisexcellentbook,GoodtoGreat,toputtherightpeopleonthebusandfindthemseatslater,anddespitehavingmoreworkersthanwork,wehiredher.

Theendresultwasthatwehadfarmorepeopletodoworkthanwehadactualworktodo.SoIstartedlookingforapracticetoacquire.Oneday,acardcameinthemailfromabusinessbrokerindicatingthathehadacoupleofpracticesforsaleinthePhoenixarea.Icalledthebrokerandsoonlearnedthatoneofthepracticeswasagoodfitforus.Thepracticedidalotofhigh-endtaxplanningandhadsomehigh-qualityclients.Oneoftheclientswasagoodfriendofmine,KimButler.AnotherclientwasRobertKiyosaki.

Ihadn’tpreviouslyheardofRobertKiyosakiorTheRichDadCompany,butwantingtobewellversedonmyclients,Iimmediatelywentoutandpurchasedhisbest-sellingbook,RichDadPoorDad.Ilovedthebook.ThenIhadlunchwithmyfriendKimButlerwhoIknewhadbeendoingsomeworkwithRobertandaskedherabouthim.ShehadnothingbutgoodthingstosayaboutRobertandhisorganization.Aboutthesametime,Ireceivedanoticeinthemailfromoneofmyfriends,GeorgeDuck,tellingmethathehadjustchangedjobs.

Amazingly,hisnewjobwasCFOofTheRichDadCompany.Wasitacoincidencethatalloftheseoccurrencesleadingmetoagreat

businessrelationshipwithRichDadhappenedatthesametime?Idon’treallyknow.WhatIdoknowisthatI’velearnedanenormousamountaboutteaching,money,andtheeconomyfromRobertandKimKiyosaki.OneofthefirstthingsIlearnedaboutwastheCASHFLOWQuadrant.

WhatIdoknowisthatI’velearnedanenormousamountaboutteaching,money,andtheeconomyfromRobert

andKimKiyosaki.OneofthefirstthingsIlearnedaboutwastheCASHFLOWQuadrant.

TheCASHFLOWQuadrantseparatesincomeearnersintofourquadrants.Ontheleftsidearetheemployees(E)andtheself-employedindividuals(S).Ontherightsidearebigbusiness(B)andinvestors(I).WhenIfirstsawthediagram,mythoughtsnaturallywenttothetaxconsequences(andbenefits)ofbeingineachofthequadrants.Iquicklyrealizedthatthosewhoearnedtheirincomefromtheleftsideofthequadrantpaymuchhighertaxesthanthosewhoearntheirincomefromtherightsideofthequadrant.

Overtheyears,sincefirstlearningabouttheCASHFLOWQuadrant,I’vecontinuedtolookatthetaxlawandapplyittothediagram.ThereasonwhythoseontheBandIsideofthequadrantpaysomuchlessintaxthanthoseontheEandSsidehasbecomecleartome.It’sbecausethat’swhatCongressorParliamentwanted.

ThereasonwhythoseontheBandIsideofthequadrantpaysomuchless

intaxthanthoseontheEandSsidehasbecomecleartome.It’sbecausethat’swhatCongresswanted.

ThinkaboutthegoalsofCongress,Parliament,oranyothergoverningbody,forthatmatter.Thegovernmentwantstoencouragecertainactivities,andtheyhavetwowaysofdoingthat,eitherbyforceorbypolicy.And,aswequotedatthebeginningofthechapter,itwasthegreateconomistMiltonFriedmanwhosaid,“Ifyouwantmoreofsomething,subsidizeit.”Theeasiestandmostefficientwaytosubsidizesomethingisthroughthetaxlaw.Overtheyearsit’snotonlybecomeeasiertosubsidizethroughthetaxlawbutit’salsobecomethewayagovernmentsteersthecountry’seconomicbehavior,asshowninRule#5.

RULE#5:Thetaxlawisastimuluspackageforentrepreneursandinvestors.

Sowhatdoesthegovernmentwant?First,theywanttocreatemorejobs.Whocreatesjobs?Entrepreneurs.Therefore,entrepreneursgetallsortsoftaxbreaksthatactassubsidiestoencouragejobcreation.Whatelsedoesthegovernmentwant?Affordablehousing.Realestateinvestorsgetallsortsoftaxbreaksthatactassubsidiestoencouragebuildingofaffordablehousing.

Sometimesgovernmentsmakethemistakeofthinkingtheycancreatejobs

orbuildhousingbetterthanthefreemarket.Eventually,theyrealizethatthemarketdoesabetterjob.Anditcoststhegovernmentalotlesstogivetaxbenefitstobusinessownersandinvestorsthanitdoestoaddjobsorbuildhousingthroughgovernment-sponsoredprograms.

Itisbecauseofthesegoalsthatgovernmentgivesentrepreneursandinvestorsallthetaxbreakstheyget.Governmentsevengetmorespecificaboutthetypesofinvestingandjobstheywantthemarkettocreatebygivingspecifictaxbreaksforoilandgasinvesting,farmingandotheragriculture,greenenergy,andlow-incomehousing.

Don’tStartaBusinessJustfortheTaxBenefits1.Togettaxbenefits,thebusinessmustberealandintendtomakeaprofit.

2.Payingtaxesislessexpensivethanfailingatbusiness.Besuretogeteducatedbeforeyoubegin.

It’snotreallythatthoseontheEandSsideoftheCASHFLOWQuadrantarepunished.Theyjustdon’tgettherewards(i.e.,subsidies)thataregiventothoseontheBandIsideofthequadrant.Ifyouwanttoknowwhatthegovernmentwantstoseehappeninyourcountry,takealookatthetaxlaw.Wherearealloftheincentivesgoing?That’swherethegovernmentwantsyoutoputyourmoneyandyoureffort.That’swhyIsayit’smorepatriotictoarrangeyouraffairstopaylessintaxes.Whenyoudoso,you’reactuallydoingwhatthegovernmentwantsyoutodo:creatingjobs,buildinghousingandotherusefulbuildings,andproducingfoodandenergy.

It’snotreallythatthoseontheEandSsideoftheCASHFLOWQuadrantarepunished.Theyjustdon’tgettherewards(i.e.subsidies)thataregiventothoseontheBandI

sideofthequadrant.

Thereisevenmoregoodnewsforentrepreneursandinvestors.Whenyoufollowthegovernment’srulesinordertogetyourtaxbenefits,youalsoreceiveotherbenefitsandmakemoremoney.Letmeshareanexampleofthis.

Anewclientofminewasveryanxioustoreducehisincometaxes.I’dalreadytoldhimthatanyexpensecouldbedeductible,giventherightsituation.HeandhiswifewerehugefansofNewMexicobecauseofitsserenebeauty,andtheytraveledthereoften.SincetheytraveledtoNewMexicosofrequently,myclientwantedtousetheirtravelasataxdeduction.Iexplainedthathehadtomakethetravelrelatetohisbusinessinordertomakeitdeductibleunderthelaw.

HewasveryexcitedthenexttimeIsawhim.Icouldtellhehadastoryforme.HeexplainedthatheandhiswifetookatriptoNewMexicoandthatsincetheywantedtodeductthetravel,theyspentmuchoftheirtimelookingforrealestatedeals—andtheyfoundone.Infact,thisrealestatedealwassogoodthatheexpecteditwouldnethimover$1millionbeforetaxes.Whilehewasexcited

aboutthe$3,000intaxeshewasgoingtosavebecauseheturnedhistravelintoatax-deductiblebusinesstrip,hewasevenmoreexcitedaboutthe$1millionhewasgoingtomakefromthedeal!

TAXTIP:Putyourfamilytowork.Makeyourbusinessafamilybusiness.Thenwhenyoutravelforbusiness,yourfamily’stravelisdeductible.Andyoucanshiftincomefromyourhighertaxbrackettotheirlowertaxbracket.Thiscreatespermanent

taxsavings.

Congressunderstandsthatwhenpeoplespendtime,money,andeffortonbusiness,thosepeoplewillmakemoney.Andtheyunderstandthatmoneyproducesjobs,housing,andevenmoretaxrevenueforthegovernment.Evenwithgoodplanning,the$1millionthatmyclientmakesonhisrealestatedealwillresultin$300,000intaxrevenuefortheU.S.government.Thatdealwouldneverhavehappenedwithoutthe$3,000taxincentivegivenforthetrip—andmaking$300,000on$3,000isagooddealinanyone’sbook.Ofcourse,thedealwouldn’thavehappenedifmyclienthadn’tunderstoodhowtoturnthecostsofthattripintoataxdeduction.

Youmightbethinking,“Thatsoundsgreat,butwhataboutme?I’montheEandSsideoftheCASHFLOWQuadrant.”Thetruthisthatthesebusinessdeductionsaren’tavailabletoyou,buttheycanbe.Youjustneedtoshiftsomeofyourincome-earningactivitiestotheBandIsideofthequadrant.Thankfully,that’snotdifficulttodo.Thousandsofindividualsallovertheworldhavehome-basedbusinessesorinvestinrealestate,energy,oragriculture—andtheyallenjoythebenefitsthatcomefromsavingmoneythroughthetaxcode.

Youmightbethinking,“Thatsoundsgreat,butwhataboutme?I’montheEandSsideoftheCASHFLOWQuadrant.”Thetruthisthatthesebusiness

deductionsaren’tavailabletoyou,buttheycanbe.

Andyoudon’thavetospendallofyourtimeandmoneyinbusinessorinvestingtoenjoythosebenefits.Youjustneedtogetstarted.Butbeforeyoudo,

you’regoingtowanttodosomeplanning.That’swhatwe’lltalkaboutnext.

CHAPTER5:KEYPOINTS1.TheCASHFLOWQuadrantisaterrificdiagramthatshowsthefourwayspeopleearnincome,whichhashugeimplicationsforyourtaxes.

2.ThoseontheEandSsideofthequadrantdon’texperiencethetaxbenefitsofthoseontheBandIside.

3.Governmentssteereconomicbehaviorthroughthetaxcode.Theyrewarddesiredbehaviorwithtaxbreaks.That’swhyreducingyourtaxesisactuallypatriotic.(4?)

4.YoucaneasilyshiftthewayyouearnincometotheBandIsideoftheCASHFLOWQuadrantandbegintoenjoythetaxbreaks.

TaxStrategy#5–PutYourFamilytoWorkinYourBusinessandInvesting

OneofthegreattaxbenefitsofexistingontheBandtheIsideoftheCASHFLOWQuadrantistheabilitytolegallyshiftincometoyourchildren.Childrenaretaxpayerstoo,andtheyhavetheirowntaxbracketswhenitcomestoearnedincome,whichisincometheyworkfor.Whentheyearnincomethroughanoutsidejob,theypaytaxattheirownrates.

Kidscanalsoearnincomefromworkinginthefamilybusinessorfrominvestments.Thenicethingabouthavingyourchildrenworkforyouisthatyougetataxdeductionatyourhighertaxbracketforthepayrollandtheyreporttheincomeattheirlowertaxbracket.

Mylong-timefriendandclientdidthiswithhis9-year-olddaughter.Heputhertoworkdoingthebookkeepingforhisrealestateinvestments.Sheisaveryintelligent9-yearoldandhasnoproblemunderstandingthebookkeeping.Hermother,whoisinchargeoftheirrealestate,supervisesher.Shegetsareasonablewageforherworkascomparedtootherbookkeepers.Inayear,shemightearn$4,000.That$4,000willbeadeductiontoherparents.Shedoesn’tearnanyotherincomeandthestandarddeductionplusherexemptionsismorethan$4,000.So,shedoesn’tpayanytax.Inmyclient’s40percenttaxbracket,that$4,000inpaytotheirdaughtermeansataxsavingsof$1,600.

Now,forthebestpart.Myclient’sdaughterislearninghowtodobookkeepingandbecomingpartoftheirbusiness.Sheisgainingaskillthatwillbenefitherforherentirelife,andsheisbeginningtounderstandrealestateinvesting.NowonderCongressallowsthistypeofplanning.

Infact,Congressnotonlyallowsitbutalsoencouragesit.MyfriendgetsataxbreakonSocialSecuritytaxesaswellforemployinghisdaughterinsteadofemployingsomeoneelsetodothebookkeeping.Hedoesn’thavetopayanySocialSecuritytaxesonherwages.

Sodon’thesitatetoputyourchildrentoworkinyourbusiness.Therearegreattaxbenefitsforyou,hugeeducationalbenefitsforthem,andyouhavesomeoneinplacetotakeoverwhenyouarereadytoretire.Whatanincredibleexitstrategy!It’sonethattherichhaveknowaboutforyearsandyears.That’showtheykeeptheirmoneyinthefamily,andkeepthebusinessgoingaftertheyaregone.

ChapterSix

YouCanDeductAlmostAnything

“Iwouldliketoelectrocuteeveryonewhousestheword“fair”inconnectionwithincometaxpolicies.”–WilliamF.Buckley,Jr.

StopBeingAverage

Taxesaren’tfairtotheaveragetaxpayer.Justwhoistheaveragetaxpayer?Theaveragetaxpayerhasajob,afamily,andamortgageorrent.Theaveragetaxpayerhaslittletonofinancialeducation.TheaveragetaxpayergetshisadvicefromCNNandH&RBlock.Theaveragetaxpayer’sonlyavailabletaxbenefitsarepersonalexemptionsanditemizeddeductions,suchashomemortgageinterest,propertytaxes,andcharitablecontributions.Oh,and,ofcourse,a401(k)orIRAintheU.S.orRRSPinCanadatopostponeaportionoftheirtaxburdenuntilretirement.

Therealityisthataveragetaxpayershaveaveragetaxbenefits.Averagetaxpayerscometomefromtimetotimeaskingformyadvice.Theyaskhowtheycanreducetheirtaxes.Shouldtheyputmoreintotheir401(k)?Shouldtheybuyabiggerhouse?Whilethey’reatit,shouldtheyhavemorechildren?

Therealityisthataveragetaxpayershaveaverage

taxbenefits.

Myanswertothesefolksisthataslongasthey’relivingthelifeofanaveragetaxpayer,there’snothingmuchIcandoforthem.Thesolutionistostopbeingaverage.Instead,becomeanabove-averageorsupertaxpayer.StartdoingwhatCongressorParliamentwantsyoutodobycontributingmoretotheeconomy.Thegoodnewsisthatyou’reonyourwaytobecomingafarbetterthanaveragetaxpayerjustbyreadingthisbook.You’regainingfinancialintelligencewitheachpageyouread.Whenyouapplytheconceptsyoulearn

here,you’llreallytakeoff.

Myanswertothesefolksisthataslongasthey’relivingthelifeofanaveragetaxpayer,there’snothingmuchIcandoforthem.Thesolutionisto

stopbeingaverage.

Likemostprofessionals,IstartedadvisingpeopleonwhattodoregardingtheirtaxeslongbeforeIfollowedmyownadvice.Evenbeforefinishinggraduateschool,Igavepeopletaxadvice.ItoldbusinessownershowtoreducetheirtaxeseventhoughIdidn’townabusiness.ItoldrealestateinvestorshowtoincreasetheirdeductionslongbeforeIownedanyrealestateofmyown.Wastheadvicegood?Sure.Iwasasmartkidwho’dappliedhimselfatschoolandlearnedthelaw.Wastheadvicegreat?No.

HowcouldIpossiblygivegreatadvicetootherpeoplewhenI’dneverappliedwhatI’dlearnedinschooltomyownsituation?Itwasn’tuntilIstartedmyownbusinessandlaterbeganinvestinginrealestatethatIreallybegangivinggreatadvicetobusinessownersandinvestors.OnceIappliedmyknowledgeinmyownlife,Ifinallyunderstoodmyclients’businessesandgavethemtop-notchadvice.ThemoreIpersonallyappliedmyknowledge,thebetterIbecameatgivingadvicetoothers.

Thesamewillbetrueforyou.Onceyoustartapplyingtheconceptsofthisbookinyourownlife,you’llstarttoseehowitallworks.Onceyoubeginreapingtherewardsoflowertaxesandmorecashflow,you’llbetterunderstandwhatyou’velearnedwhileatthesametimereapingallthebenefitsofyourknowledge.That’scalledwisdom.

Sowhat’sthefirststeptobecomingasupertaxpayer?UnderstandingRule#6.

RULE#6:Youcandeductalmostanythinggiventherightcircumstance.

It’strue.Almostanyexpensecanbedeductiblefromyourincomegiventherightsituation.Howcanthatbepossible?It’showthelawworks.RememberwhenIsaidthatthetaxlawsfavorentrepreneursandinvestors?That’sbecauseentrepreneursandinvestorsgenerallyputmoneyintotheeconomytoproduceratherthanconsume.Thekeytomakinganexpensedeductibleistomakeitabusinessorinvestmentexpense.Aslongasthepurposeoftheexpenseisto

producemoreincome,itcanbedeductible.

Aslongasthepurposeoftheexpenseistoproducemoreincome,itcanbedeductible.

Andyes,thisprincipleappliesworldwide.Allincometaxesindevelopedcountriesarebasedonnetincome,whichissimplyincomeafterdeductions.Anddeductionscomefromexpenses.Businessexpensesarethebestkindofdeductions.Realestateexpensesarethenextbest.Dependingonyourcountry,chancesarethatexpensesrelatingtoenergyaregoodaswell.Evenexpensesrelatedtoinvestinginthestockmarketarepartiallydeductible,thoughthesearetheleastdeductiblebecausetheyaren’tactiveinvestments.

Yourfirststeptoincreasingyourdeductibleexpensesistobecomeanentrepreneurorinvestor.Untilyoutakethisstep,you’llalwaysbeanaveragetaxpayerandthetaxlawswillbestackedagainstyou.Thegoodnewsisthatyoudon’thavetoquityourjob.Youjusthavetostartactinglikeanentrepreneuroraninvestor.Thatmeansthefirstthingyouneedtodoistoincreaseyourfinancialintelligencebyinvestinginfinancialeducation.Startingabusinessorinvestinginadealwithoutfinancialeducationistheriskiestactionyoucantakewithrespecttoyourmoney.

BecomeanEntrepreneur

Here’smyadvicewheneverstartingout:Startsmall.Takeacourseinrealestateorsomeothertypeofinvesting.Takeacourseinentrepreneurship.Startahome-basedbusiness—preferablydealingwithsomethingyouknowabout.

That’showIgotstarted.Manyyearsago,afterI’dleftpublicaccountingandbecamethein-housetaxadvisorforaFortune1000company,Idecidedtogobackintopublicaccounting.Imissedtheclients,andImissedthechallenge.ButinthattransitionImadeabaddecisionandtookthewrongjobwiththewrongcompany.Sevenmonthslater,Iwasfired.Forthefirsttimeinmylife,I’dfailedatajob,andajobhadfailedme.Itturnedouttobeoneofthebestdaysofmylife.

IsuddenlyrealizedthatnothavingajobfreedmeuptodowhatI’dalwayswantedtodo—startmyownbusiness.Ihadamaster’sdegreeand13yearsofexperienceasataxadvisor.Itwastimetostartmyownfirm.Withthe

encouragementofmywifeandtwoyoungsons,Ididjustthat,startingmyfirmoutofmyhouse.Iworked10hoursadaytomakecontactsandbuildmypractice.Ittookmeninemonthsjusttogetmyfirstfourclients.Sincethen,I’veneverlookedback.I’veneverbeenhappierinmywork.AndI’veneverpaidlessintaxes.

I’mnotsuggestingyougetfiredorquityourjob.ButIamsuggestingthatyouprobablyhaveasetofmarketableskillsthatyoucouldusetostartyourownbusiness.Startpart-time.Setasidearoominyourhouseforyourbusiness.Don’tspendmoneyonaniceofficeandlotsofadvertising.Juststartsmallandthinkbig.Thinkaboutthefreedomthatwillcomewhenyoucandevotemost,ifnotall,ofyourtimetoyourbusiness,yourinvestments,andyourfamily.

Anditallstartswithgoodtaxplanning.Whenyoustartabusiness,youroptionsfordeductibleexpensesskyrocket.Andmakingmostofyourexpensesdeductibleiseasy—makesurethatwhenyouspendmoneyyourintentionistomakeevenmoremoney.TheU.S.taxlawcallsthishavingabusinesspurposeforyourexpenses.

Whenyoustartabusiness,youroptionsfordeductibleexpensesskyrocket.Andmakingmostofyourexpensesdeductibleiseasy—makesurethatwhenyouspendmoneyyourintentionistomakeevenmoremoney.

Then,becarefulwithyourmoney.Don’tspendmoneyonstupidstuff.Spenditonthingsthatwilllikelygrowyourbusiness.Spenditonthingsthatotherpeopleinyourbusinessmightbuy.Thisiscalledmakingexpendituresthatareordinaryinyourlineofbusiness.Makeyourexpensescount.Makethemworkforyou.Whenyoudothat,yourexpensesbecomenecessary.Andwhenyourexpensesarenecessary,voilà,they’redeductible.

BecomeanActiveInvestor

Nowlet’ssupposethatyoudon’twanttostartabusinessbutyoustillwanttobeasupertaxpayer.Whatdoyoudo?Youbecomeaninvestor.RememberthattherightsideoftheCASHFLOWQuadrantincludesbothbusinessownersandinvestors.Butthere’sonecatch;youcan’tbeatypicalinvestorifyou’regoingtoenjoythetaxbenefitsofinvesting.Youhavetobecomeanactiveinvestor.Thatmeansyouhavetobeaninvestorwhoactivelyinvestsforpassiveincome,not

earnedincome.Verysimply,passiveincomeisincomethatcomesfromdividends,rents,andbusiness.It’staxedatamuchlowerratethanearnedincome,whichcomesfromappreciationandcapitalgains,orfromyourpaycheck.Inordertobecomeasuperinvestor,youmustfindgood,cash-flowinginvestmentsthatproducepassiveincome.AgreatbooktoreadonthistopicisRobertKiyosaki’sUnfairAdvantage:WhytheRichGetRicher,EveninAFinancialCrisis.(PlataPublishing,2011)

Youmightbethinkingthatbecominganactiveinvestorsoundshard.It’snot.Becominganactiveinvestorisactuallyquitesimple.Justaswithbecominganentrepreneur,itallstartswithyourfinancialeducation.Youdon’tneedafour-yeardegreeinfinance.Youdon’tevenneedatwo-yeardegree,butyoudoneedtotakesomecoursesinthetypeofinvestingyouthinkyoumightenjoy.Don’tknowwhatyoumightlike?Takeavarietyofcoursesonavarietyofinvestments.Takeacourseinrealestate.Takeacourseinstockinvesting.Ortakeacourseinbusinessinvesting.Youneverknowwhatyou’lllikeuntilyoulearnaboutit.AgreatresourceforbecominganactiveinvestorisRichDadEducation.

Learnmoreatwww.TaxFreeWealthBook.com.

Becominganactiveinvestorisactuallyquitesimple.Justaswith

becominganentrepreneur,itallstartswithyourfinancialeducation.

Onceyouhaveanideaofwhattypeofinvestingyouwanttodo,findamentororcoachtohelpyouwithyourinvesting.Thensimplystartinvesting.JustasIadvisedwithstartingabusiness,startsmall.Doonesmallrealestatedeal,acoupleofsmallstockmarkettrades,ormakeasmallinvestmentinaprivatecompany.Youdon’thavetoriskalotoftimeandmoney.Andalongtheway,solongasyoukeeptrackofallofyoureducationandinvestmentexpenses,andyourtaxpreparerreportsthemproperly,youshouldbeabletodeductsomeoralloftheseexpensesonyourtaxreturn.

ThePassiveInvestor

Thereisoneothertypeofsupertaxpayer.That’sthepassiveinvestor.Andno,I’mnottalkingaboutthetypicalinvestorwhoinvestsinthestockmarketthroughamutualfundoranexchangetradedfund(ETF).I’mtalkingaboutsomeonewhoinveststheirmoneywithanactiveinvestorwhoisworkingdirectlyinabusiness,realestate,agricultureorenergy—thetax-preferredtypesofinvestments.Passiveinvestorsalsoenjoythebenefitofdeductingmanyoftheirexpenses.Withtherighttaxstrategy,theycanevendeductlossesfromtheinvestmentagainstincometheyearnfromothersources.

Thekeytogoodpassiveinvestingisagoodteam.Youneedagreatinvestmentadvisorandastellartaxadvisor,aswellasagoodlawyerandaknowledgeablebanker.Alloftheseteammembersneedtoworktogethertomakesureyourbestinterestsaremet.I’vefoundthebestwaytogetteammemberstoworkwelltogetheristohireawealthstrategist.Thiscanbeoneoftheadvisorsontheteamoraseparatestrategistaltogether.Thestrategistcanworktomaintaintherelationshipsbetweenyouandtheotherteammembers.

Thekeytogoodpassiveinvestingisagoodteam.

Inmanycountries,onlycertainindividualsareallowedtobepassiveinvestors.IntheUnitedStates,theseindividualsarecalled“accreditedinvestors.”Accreditedinvestorsmeetcertainminimumwealthandearningguidelinessetupbythegovernment.InAustraliathesearecalled“sophisticatedinvestors”or“professionalinvestors.”Therearealwaysminimumwealthrequirementsandinsomecountries,thereareadditionalcertificationrules.Thethinkingisthatifyouhaveenoughmoney,youeitherhaveahighenoughfinancialeducationtoproperlyevaluateadealoryoucanaffordtolosesomeofyourmoney.Eitherway,youqualifyunderthegovernmentguidelinesforbecomingapassiveinvestor.

Whilethelossesandexpensesofapassiveinvestorcanbedeductible,therulescanbealittletricky.Ifyou’rethinkingofgoingthisroute,besuretositdownwithyourtaxadvisorandlethimorherknowwhatyouareplanningso

thatheorshecanexplaintherulestoyouandmakesureyougetthebenefitofyourexpensesandlosses.

Don’tBeCheapwithYourTeamMembers1.Youoftengetwhatyoupayforwithteammembers.

2.Lowfeesdon’ttranslateintoagooddealwhenitcomestoadvisors.Agoodteammemberisworththeirweightingold.

DocumentEverything

Thelastkeytobecomingasupertaxpayerisexcellentdocumentation.Allgoodtaxplanningalsoleadstosoundbusinessandinvestmentdecisions.Oneofthebestbusinessorinvestmentdecisionsyoucanmakeistokeepgooddocumentationofyourincomeandexpenses.Thismeansthatyoukeepaccuratebooksandrecords.Makesureyourbookkeepingisuptodateatleastonceeachweek.Themorethoroughandaccurateyouraccounting,thebetterbusinessandinvestmentdecisionsyou’llmake,andthelesslikelihoodyouwillhavedifficultiesinanaudit.

Thelastkeytobecomingasupertaxpayerisdocumentation.

TAXTIP:Document.Document.Document.TheIRS,RevenueCanada,theHMRC,ATO,

andothertaxcollectorslovedocumentation.

Ifyoudecidetostartabusiness,eventhoughyouarestartingsmall(asadvisedearlierinthischapter),thinkaboutyourbusinessasifitwereoneofthebigdogs,suchasIBMorMicrosoft.Thinkaboutallofthegoodreportingtheyneedtodoinordertostayinbusinessandtokeepinvestors,bankersandmanagementinformedaboutwhat’sgoingon.Youcandothesamewithyoursmall,start-upbusinessthatyourunoutofyourhomeoffice.Whenyoudo,chancesaretheIRS,CRA,orothertaxofficialswillbeinandoutofyourlifequicklyandpainlesslyifyou’reeveraudited.You’llalsohaveaccuratefinancialinformationtohelpyoutomakewiseandinformedbusinessandinvestmentdecisions.Bestofall,yourexpenseswillbedeductible,andyouwon’thavetoworryaboutwhetherthegovernmentwillallowthem.Why?Becauseyou’vefollowedthelawexactlyasitwasmeanttobeapplied.

Theresultwillbelowertaxesandlessstress.SonowyouknowwhatImeanwhenIsaythatalmosteveryexpensecanbedeductibleundertherightcircumstances.Everytimeyouspendmoneyyoucanalsoreduceyourtaxes,whetherit’sfillingupyourcaratthegasstation,goingouttodinnerwithyourspouseandbusinesspartner,orevengoingtoNewMexicotolookatrealestate.

Thebasicdifferencebetweenanaveragetaxpayerandasupertaxpayerishowserioustheyareaboutincreasingtheirwealth.Anaveragetaxpayerturnshisorhermoneyovertosomeoneelseandhopesandpraysthattheirinvestmentsgoupinvalue.Thesupertaxpayerisactivelyinvolvedincreatingwealth,eitherthroughactivelyinvestinginabusiness,realestateorthestockmarketorthroughactivelyseekingoutactiveinvestorswhowilldothatforthem.Supertaxpayersalsobuildagreatteamofadvisors,mentorsandotherrelationshipswhoactivelyhelpthembuildtheirwealthandreducetheirtaxes.Here’sachartillustratingthebasicdifferencebetweenanaveragetaxpayerandasupertaxpayer.Prettysimple,isn’tit?

Next,we’regoingtolookatthekingofalldeductions,depreciation.

CHAPTER6:KEYPOINTS1.Mostpeopleareaveragetaxpayerswhoonlyexperienceaveragetaxbenefits.

2.Thekeytosavingmoreintaxesisbecomingasupertaxpayerandenjoyingthebenefitsofdeductibleexpenses.

3.Thebestwaytoenjoydeductibleexpensesistostartabusinessortostartinvestingforpassiveincome.Youdon’thavetoquityourjob.Juststartsmall.

4.Oneofthebestbusinessandinvestingpracticesistodocumentyourincomeandexpenses,andtodocumentthemwell.

TaxStrategy#6–Document,Document,Document

Beingabletoimmediatelyprovidedocumentationuponrequestduringanauditisalwaysanimpressivetactic.Ifyouractivitiesandexpensesareproperlydocumented,thenthetaxcollectorwillhaveahardtimemakingacaseforanychanges.Plus,havingyourdocumentationinplacereducestheamountoftimeyourCPAbillsyouforanaudit.Documentationisasuccessfuldefensestrategythatenablesyoutoalwaysbereadyforanauditandreducestheassociatedcosts.Documentationofreceiptshasbeenmadealoteasierwithcomputers.Now,youcanscanyourreceiptsintoyourcomputer.Thisway,youdon’thavetohavea

filedrawerjustforreceiptsandyoudon’thavetoworryaboutthemfadingovertime.Haveyoueverpulledoutacreditcardreceiptthatwasayearortwoold,onlytofindablackpieceofpaper?Thishappensallthetime.Whatifyouwerebeingauditedandwenttopullthosereceiptsonlytofindtheywerealljustblankpiecesofpaper.Besuretoscanthereceiptsintoafileonyourcomputer.TheIRSlovesitwhentheycanjustlookatscannedreceiptsinsteadofgoingthroughfadedpaperreceipts.

YouwilllearnmoreaboutdocumentationinChapter22whenwetalkaboutIRSaudits.Justrememberthatthisisonetaxstrategyyoucandoeveryday,anditdoesn’ttakemuchtimeoreffort.

ChapterSeven

Depreciation:TheKingofAllDeductions

“Theavoidanceoftaxesistheonlyintellectualpursuitthatcarriesanyreward.”–JohnMaynardKeynes

TheMagicofDepreciation

Severalyearsago,notlongafterImethim,RobertKiyosakiaskedmetocomewithhimtoaninterviewattheArizonaRepublic.Thetopicwasinvesting.ThejournalistwasinterestedinRobert’sclaimthatanyonecouldearn30to40percentontheirinvestments.Robertwantedmethereasbackup.Ithinkitwasthefirsttimeinhistorythatanaccountanthadbeenbroughtalongasthe“muscle.”

Aftertheinterview,RobertandIwalkedovertotheArizonaCentertohavelunch.Ontheway,heaskedme,“Whatdoyouthinkaboutdepreciation?”

“Depreciationislikemagic,”Itoldhim.“Yougetadeductionforsomethingthatdoesn’tcostyouanymoney.Youcreatemoneyoutofthinair.”

Andthatreallyisthemagicofdepreciation.Whenyoubuyanassetthatproducesincome,youcandeductaportionofiteachyearyouownit.Ifit’saphysicalasset,suchasrealestateorequipment,thedeductioniscalleddepreciation.Ifit’sanintangibleasset(oneyoucan’tfeelortouch,suchasacustomerlistorcomputersoftware),thedeductioniscalledamortization.Butintheend,thebenefitisthesame.

TypesofDeductionsForIncome-ProducingAssets

Type Examples

Depreciation= TangibleAssets:Suchasrealestateorequipment

IntangibleAssets:Suchascustomerlistsor

Amortization= computerSoftware

ChezPierre

Letmeexplain.Let’ssay,forinstance,thatmyfriend,Pierre,buysacommercialbuildinginwhichtohousehisrestaurant,ChezPierre.Duetothemagicofdepreciation,hegetstotakeadeductionforaportionofthecostofthatbuildingeveryyearforasetnumberofyears.Howmanyyearsdependsonthetypeofbuildinghe’spurchasedandthecountryinwhichhelives.Hegetstodothiseventhoughthebuildingmaynotwearoutforhundredsofyearsandmayactuallyincreaseinvalue.That’swhyIcalldepreciationmagic.Yougetadeductionthatreallyhasn’tcostyouanything.

Sure,Pierrepaidforthebuilding.Butthebuildingisn’tgoingdowninvalue.Infact,overthelongterm,inmostcases,itwillgoupinvalue.AndifPierreisasmartinvestor,thebuildingcostsarecoveredbythecashflowthebuildinggenerates.SoPierreisn’treallypayinganythingoutofpocketforthisexpense—andhemightevenbemakingmoney.Despiteallthis,Pierrestillgetstotakeadvantageofdepreciation,adeductionthatwascreatedspecificallytoencouragepeopletobuyandconstructbuildingsandequipment.

Youmightbeasking,“Whywouldthegovernmentwanttoencouragethistypeofinvestment?”It’ssimple.RememberthatCongress/Parliamentwantindustrythatcreatesjobs.Andtheyalsowantthemarkettocreatehousingandcommercialbuildings.Depreciationisoneofthemajorcatalystsforbusinessesandinvestorstodojustthat.Let’sgetbacktoourexampleofmyfriendPierreandhisrestaurant.

Let’ssayPierrepays$1millionforhisbuilding,includingtheland.Thelandbyitselfisworth$220,000.Becauseeventhegovernmentunderstandsthatlanddoesn’twearout,thereisn’tadepreciationdeductionfortheportionofthepricethatrelatestotheland.Still,thatleaves$780,000todepreciate.ThatmeansthateveryyearPierrewillgetadeductionequaltoasetportionofthe$780,000.

HowmuchPierregetstodeductdependsonhowfastthegovernmentwillletPierredepreciatethebuilding.IntheUnitedStates,forinstance,commercialbuildingsarecurrentlydepreciatedover39years.ThatmeansthatPierrewouldgetadeductioneachyearof$20,000for39years($780,000÷39).That’sabout2.5percentperyear.InCanada,thedepreciationrate,orcapitalcostallowance,isalmostdoublethatoftheUnitedStatesat5percent(andevenhigherinsome

cases).Imagineadeductionof$40,000peryearthatdoesn’tcostyouanythingoutofpocket.

Sure,youmayhaveinterestexpensefortheloanorcertainout-of-pocketexpensesassociatedwithmaintenance,butthoseexpensesarealsodeductible.Theactualbuildingcostisanon-cashexpense(anexpensethatdoesn’treduceyourcashflow)thatgivesyouadeduction.Evenbetter,younotonlygetadeductionforthemoneyyouputintothebuildingbutyoualsogetadeductionforthemoneythebankputsintothebuilding.That’sright,yougetadepreciationdeductionfortheentirecostofthebuilding,evenifyouborrowedallthecashtopayforitfromsomeoneelse.Nowthat’swhatIcallmagic.

Andbelieveitornot,itgetsevenmoreamazing.WhenPierreboughtthelandandthebuildinghealsoboughtwhatwasinsidethebuildingandthelandscapingandotherimprovementsoutsideofthebuilding(suchasthefencingortheparkinglot).Heboughtallofthefloorcoverings,thewindowcoverings,thecabinetry,andmore.Soaportionofthe$780,000pricetagforthebuildingreallyappliestotheseotheritems.Thisisimportantbecausetheseotheritemscanbedepreciatedfasterthanthebuilding,puttingmoremoneyintohispocketfaster.

Oneofthekeystotakingfulladvantageofdepreciationistoquicklygetasmuchofyourdeductionasyoucan.Themoredeductionsyoucangettoday,themoremoneyyoucanputinyourpocket.Andthemoremoneyyouhaveinyourpockettoday,themoremoneyyouhavetoinvestbackintoyourbusinessorintootherinvestments.

Oneofthekeystotakingfulladvantageofdepreciationistoquicklygetasmuchofyour

deductionasyoucan.

Let’ssaythatofthe$780,000pricetagforthebuilding,$100,000reallybelongstothecabinets,floorcoverings,windowcoverings,andotherthingsthatcamewiththebuildingbutaren’treallyapartofit.This$100,000isdepreciatedmuchfasterthanthebuilding.Insteadofgettinga2.5to5percentdeductioneachyear,Pierrewillgeta20percentormoredeductioneachyearforthisportionofhispurchase.That’sanother$20,000eachyearindeductions.

Intotal,Pierregetsadeductioneachyearofabout$37,500[($680,000÷39years)+($100,000x20%)],whichmeansthat$37,500ofhisrestaurantincomewon’tbetaxable.Andthiscanpayoffinabigway.

TAXTIP:Avoidthetaxcollector’straps.Thetrickistoproperlydocumentthevaluesofalltheitemsyoudepreciateinacostsegregationorchattelappraisal—evenbetter,haveataxprofessionalorengineerdocumentthemforyou.Withoutit,thetaxcollectorcanmakeyourtaxsavingsfromdepreciationdisappear.Protect

yourtaxsavingswithgooddocumentation.

PickYourBracket

Let’ssayPierreisinataxbracketwherehisincomeistaxedat40percent.Thedepreciationdeductionssavehim$15,000thathecanputbackintohisbusinessorinvestsomewhereelseeveryyear.Orhecouldusethemoneytotakeaverynicevacation.Afterall,he’sbeenworkinghardintherestaurantanddeservesabreak.Isn’titnicethatthegovernmentispayingforhisvacation?

Wouldn’tyoulikethegovernmenttopayforyourvacation?Orevenbetter,wouldn’tyoulikethegovernmenttosubsidizeyourbusinessbygivingyoubigdepreciationdeductions?

Ofcourse,youdon’tonlygetdepreciationdeductionsforbuildings.Youalsogetthemforequipment.Inmanycountries,thisincludesyourcarsolongasyouuseitprimarilyforbusiness.Itcouldevenincludetheportionofyourhousethatyouuseforanoffice.Therearetonsofpossibilities.

Depreciationreallyisfreemoneyfromthegovernment,becauseifyou’reasmartinvestororbusinessperson,you’regoingtomakemoneyfromthebuildingsandequipmentyoupurchase.Andeventhoughyou’reprofitingfromyourpurchases,youstillgetataxdeductionforthem.Howcoolisthat?ThisiswhyIcalldepreciationthekingofalldeductions.Inessence,thegovernmentpaysyouformakingmoneyandbeingproductive.

ThisiswhyIcalldepreciationthekingofalldeductions.Inessence,thegovernmentpays

youformakingmoneyandbeingproductive.

RealEstateInvestingandDepreciation

Depreciationdoesn’tapplytoonlyregularbusinesses.Italsoappliestoreal

estateinvesting.Let’ssaythatyoudon’twanttobeabusinessowner.Instead,youwanttoinvestinrealestate.Obviously,therearegreatfinancialbenefitstobeingarealestateinvestor.Youbuyapropertymostlywiththebank’smoneyandgetatenanttopayenoughinrenttonotonlymakeyourpaymentstothebankbutalsopadyourpocketsalittle.Andifyoubuyyourrealestateright,chancesareitwillincreaseinvalueovertime.

Thetaxbenefitsoflong-termrealestateinvestingcanbeequaltoorevengreaterthanthecashflowandincreaseinvalue(appreciation)fromyourproperties.Let’ssaythatPierre,inadditiontobuyingabuildingforhisrestaurant,decideshewantstoinvestinrealestate.Hewouldliketobuyasmallapartmentbuilding.Afteradiligentsearch,hefindsagoodfitforhisinvestmentstrategy,paying$800,000foragreatapartmentbuildinganditsland.Hiscashflowfromtheapartmentstotals$12,000ayearafterpayingthebankandallotherexpenses.

Thelandisworth$200,000.Sothebuildinganditscontentsareworth$600,000.Let’ssupposethat$100,000ofthe$600,000isforthecontentsand$500,000isforthebuilding.DepreciationintheUnitedStatesonresidentialpropertyisabout3.6percentperyear.ThatmeansPierrewillgetadepreciationdeductionforthebuildingofabout$18,000andanother$20,000ofdepreciationonthecontents(20percent,remember?)eachyear.That’satotalof$38,000.

Example:Pierre’sDepreciationonInvestmentProperty

CostofApartmentBuilding $800,000MinustheValueofLand $200,000

EqualsdieValueoftheBuildingandContents= $600,000DepredationofBuilding

ValueoftheBuildingandContents= $600,000MinusContentsofBuilding- $100,000EqualsValueofBuilding= $500,000

MultiplyValueofBuildingbytheDepreciationrateintheU.S.onResidentialPropertyX

3.6%

EqualBuildingDepreciationDeduction= $18,000

DepreciationofContentsContentsofBuilding= $100,000Multipliedby20%X 20%

EqualsContentsDepreciationDeduction= $20,000TotalDepreciationforBuildingandContentsBuildingDepreciationDeduction= $18,000

PlusContentsDepreciationDeduction+ $20,000Equalstotaldepreciationdeduction= $38,000

Sincehiscashflowfromtheapartmentsisonly$12,000,whenhesubtractsthedepreciationexpense,Pierreendsupwithalossfortaxpurposesof$26,000.SoPierre’s$12,000ofcashflowisentirelytaxfree.Inaddition,Pierrehas$26,000oflosstouseagainstotherincome.IfPierreisina40percenttaxbracket,this$26,000oflosswillcreateataxrefundforhimofover$10,000.Again,Pierrecanusethatmoneytoreinvestinhisbusinessorinrealestate.Orhecantakeavacation,improvehishouse,ordoanythingelsehewantstodo.Afterall,it’shismoney.

TaxConsequencesCashFlowfromRealEstate= $12,000

Minustotatdepreciationdeduction(expense)- $38,000Equalsalossof= ($26,000)

Pierre’scashflowof$12,000isEntirelyTax-Free.PotentialTaxRefund

Amountoflossthatcanbeusedagainstotherincome=

$26,000

Multipliedby40%(taxbracket)X 40%Equalsapotentialtaxrefundof= $10,400

InPierre’scase,thegovernmentessentiallypaidhimtoinvestinrealestate.Andthey’lldothesameforyou.Youcangetthegovernmenttosubsidizeyour

businessandyourrealestate,orpayforyourvacationorhomeimprovements,simplythroughthemagicofdepreciation.

Justasmallnotehere:Insomecountriesdepreciationiscalledcapitalcostallowance.It’sadifferentnameforthesamething.Don’tbefooledbythelanguage.Thesameprinciplesareatwork.

TheMagicofAmortization

Nowlet’ssaythatyoubuysomethingthatisn’taphysicalitem.It’swhatwecallanintangible.Thismeansthatyoucan’ttouchit.Itcouldbeacustomerlist,computersoftware,oratrademarkorpatent.Yourgovernmentwantstosubsidizeyourpurchaseanddoessothrougharuleverysimilartodepreciationcalledamortization.Amortizationismagicaltoo.Infact,theonlypracticaldifferencebetweenamortizationanddepreciationisinthename.Theprinciplesarethesame.Yougettotakeadeductionforaportionofthecostoftheassetoveraperiodofyears.

Youcangetthegovernmenttosubsidizeyourbusinessandyourrealestate,orpayforyourvacationorhomeimprovementssimplythrough

themagicofdepreciation.

RememberYourTaxReturnElections1.Youmustelecttodeductamortization.

2.Someamortizationelectionshavetobeclearlystatedonyourtaxreturnintheyearyoufirststartusingyourintangibleproperty.

IntheUnitedStatesthatperiodoftimerangesfrom5to15years.Othercountrieshavedifferenttermsforamortizingnonphysical,orintangible,assets.

Buttheruleworksjustthesameasdepreciation.Let’ssay,forexample,thatPierrebuysabunchofrecipesfromanotherchef.Thischefcreatedsomesecretrecipesthatpeoplelove,andPierrewouldliketoutilizethemtoimprovehisbusiness.Pierrepays$75,000fortherecipes.

Example:Pierre’sAmortizationonCostofRecipes

CostofRecipes= $75,000Dividedby15Years(basedonU.S.periodoftime)

÷15

Equalsdeductiontakenfor15years= $5,000

Pierregetstotakeadeductionforthecostofthoserecipesoverfifteenyears.Thatamountstoadeductionof$5,000everyyear.AndallthewhilePierreismakingoodlesofmoneyusingtherecipestocreatewonderfulfoodthathesellsathisrestaurant.Hemayevenlicensehisrecipesandletotherpeopleusethem,andhemightmakeevenmoremoneyfromlicensingthanhedoesfromhisrestaurant.Andstill,thegovernmentgiveshimataxdeductioneachyearforaportionofthecostoftherecipes.Isn’tamortizationgreat?

Don’tCheatYourself

EverysooftenIseeataxreturnfromanew,real-estate-owningclientthatdoesn’tshowdepreciation.Andit’snotbecausetheclienthasownedtherealestatefor40years.No,it’sbecauseforsomereasontheclientorhisorheraccountantdidn’ttakethedepreciationdeduction.Thisisnotonlywrong—it’salsostupid.Whynottakethededuction?Ifyoudon’t,you’reinessencecheatingyourself.Itmakesnosensetome,butIseeitatleastonceamonth.

What’smore,Irarelyseeabreakdownofthedifferentcomponentsofabuildingonanewclient’staxreturn.Whenyoupurchaseabuilding,youreallypurchasetheland,thebuilding,thelandimprovementsandthecontentsofthebuilding.JustlikePierredidwhenhepurchasedthebuildingtohousehisrestaurantorwhenhepurchasedhisapartmentbuilding,everyinvestorshouldbreakoutthelandimprovementsandthecontentsofthebuildingfromtheportionofthecostthatrelatedtothelandandthebuilding.What’sinsideofthe

buildingshouldbeseparatedfromthephysicalstructureonthetaxreturn.Usually,Ijustseeland,building,andwhateverequipmenttheclient

purchasedafterheorsheboughtthebuilding.Thismeansthatthetaxpayer’staxpreparerwastoolazyoruneducatedtobreakoutthecomponentpartsofthepurchase.(Breakingoutthecomponentpartsofabuildingiscalledacostsegregationorchattelappraisal.)Howdumbisthis?Theclient’stax-returnpreparerhaspostponedthedeductiontoamuchlateryearandpenalizedtheclientbecauseoflaziness.Insteadofgettinghismoneybackfromthegovernmentnow,theclienthastowaitforseveralyears.Remember,it’syourmoney.Don’tletthegovernmenthaveitanylongerthanneeded.

CanyounowseewhyIdevotedanentirechaptertothismagicaldeductioncalleddepreciation?Nothingisbetterthanadeductionyoudon’thavetopayfor.AndnowheredoIseemoremistakesmadeontaxreturnsthanwhenitcomestothiscriticaldeduction.Takeadvantageofwhatthegovernmenthasofferedtoyou.Getyourdepreciationdeductiondoneright.Findareputableaccountantwhoreallyknowswhatheorsheisdoing,andmakesuretodouble-checkyourreturnbeforefiling.Ultimately,ifyoumissoutonyourfairreturn,it’snobody’sfaultbutyours.Increaseyourfinancialintelligenceandfindgoodadvisorstohelpyoualongtheway.

Nothingisbetterthanadeductionyoudon’thavetopayfor.

Inournextchapter,we’regoingtotalkaboutwhattypesofincomearethebest,whattypesaretheworst,andeverythinginbetween.

CHAPTER7:KEYPOINTS1.Depreciationislikemagic.Itcreatesmoneyoutofthinair.

2.Deductionsoverasetnumberofyearsonhardassetssuchasbuildingsarecalleddepreciation.Deductionsoverasetnumberofyearsforintangibleassetssuchasrecipesarecalledamortization.

3.Manypeopledon’ttakefulladvantageoftheirdepreciationandamortizationdeductionseitherbecauseofignoranceorlaziness—orboth—ontheirpartortheiraccountant’spart.

4.Ultimately,you’retheoneresponsibletomakesureyou’renotcheatingyourself.Alwaysdouble-checkyourreturn..

TaxStrategy#7–CostSegregationsofBusinessandRentalProperties

Afewyearsago,IwaslookingattheforumofaCPAwebsiteandnoticedsomechatteraboutcostsegregations(pullingpersonalpropertyoutofrealpropertyclassificationtoallowforquickerdepreciation).Whatsurprisedmemostwastheamountofdebateaboutwhethercostsegregationswerelegal.About50percentoftheCPAsinthediscussionfelttheywereillegaloradmittedthattheydidn’tknowiftheywerelegal.Another30percentthoughttheywereveryaggressivetaxplanning.So,hereistherealscoopaboutcostsegregations.NotonlyarecostsegregationslegalbuttheyarespecificallysanctionedbytheIRSandtechnicallyrequiredbylaw.Now,theIRSdoesn’tenforcetherequirementbecauseitmeanslessrevenueforthem,andtheIRSknowsthatthelazierthetaxpayerand/oraccountant,themorerevenuetheUnitedStatesTreasurymakes.Hereishowyoucantelltheyarelegal.First,theIRShasanauditguidetotelltheiragentshowtohandlecostsegregations.Thisguideisalsousefulfortaxpayers.AnyonecanseethisguideontheIRSwebsiteatIRS.gov.Second,andmoreimportant,ishowthelawtreatscostsegregations.Whenyoudoacostsegregationonabuildingyouhaveownedforseveralyears,youmustfileaform3115,“ChangeinAccountingMethod.”Therearetwotypesofchangesonthisform.Oneisachangefromonecorrectmethodofaccountingtoanothercorrectmethodofaccounting.Thisislikewhenyouchangeyourbasicaccountingmethodfromthecashmethodofaccountingtotheaccrualmethodofaccounting.(SeeChapter18foranexplanationofthecashandaccrualmethodsofaccounting.)Theotherchangeisachangefromanincorrectmethodofaccountingtoacorrectmethodofaccounting.Guesswhereacostsegregationfalls?That’sright,it’sachangefromanincorrectmethodofaccountingtoacorrectmethodofaccounting.Whenyoudon’tdoacostsegregation,youaredoingyourdepreciationincorrectly.Hereareacoupleofhintsfordoingacostsegregation.First,accordingtotheIRSauditguide,youmustemployprofessionalstodothestudy.YoucaneitheruseengineersorCPAs.AtmyCPAfirm,ProVision,weusebothanengineerandaCPAtodothecostsegregationstudy.Next,rememberthatyoucandoacostsegregationatanytime.Youdon’thavetodoitwhenyoufirstbuytheproperty.Thisallowsforsomegreattax

planning,asyouwanttodothecostsegregationinayearwhenyouareinthehighesttaxbracketsothatyougetthemosttaxbenefits.Rememberthatdepreciationisadeduction,notacredit,soyourbenefitisbasedonyourtaxbracket.WediscusscreditsinChapter10.Adeductioninahightaxbracketisalwaysbetterthanadeductioninalowtaxbracket.Andhereisapieceofinformationveryfewpeopleunderstand.Whenyoudoacostsegregation,nomatterhowmanyyearslater,yougettocatchuponallthedepreciationyouwouldhavetakenifyouhaddoneyourcostsegregationintheyearyoupurchasedtheproperty.So,ifyouhaveownedthepropertyforseveralyears,youwillhavealotofextradeductionsintheyearyoudothecostsegregation.Besureyoumeetwithyourtaxadvisorandaskaboutcostsegregationsforallofyourbusinessandinvestmentrealestate.Youcouldbemissingoutonalotoftaxsavingsotherwise.

ChapterEight

EarnBetterIncome

“Theonlydifferencebetweendeathandtaxesisthatdeathdoesn’tgetworseeverytimeCongressmeets.”–WillRogers

WhenIwasakidlookingforwaystomakemoney,Ididn’treallycaremuchabouthoworwhereIgotit.Iwasjustashappy(perhapsevenhappier)gettinganallowancefrommyparentsasIwasearningmoneyforshovelingsnowinthewinterormowinglawnsinthesummer.Ineverdistinguishedbetweentypesofincomebecausetheendresulttomewasalwaysthesame—cashinmypocket.

Ofcourse,backthenIneverearnedenoughmoneytoworryaboutpayingtaxes.Itdidn’treallymatterhowIgotit,justsolongasIhadenoughtobuycandyorabaseballglove,or,lateron,goonadatewithaprettygirl(myfavoriteuseformoneyinhighschool).

ThesedaysIcarealotabouthowIearnmymoney.Andmyfavoriteincomeisnaturallythenontaxablevariety.Myleastfavoriteincomeisthetypethatrequiresnotonlyincometaxbutalsoothertaxessuchasemploymenttaxes.

Ineverycountry,therearedifferenttypesofincome,andtheyallhavedifferentassociatedtaxrates,costs,andbenefits.Forexample,inmostcountries,long-termcapitalgains(incomemadefromthesaleofpropertyandotherassets)aretaxedatalowerratethanordinaryincome(retirementplans,bonds,etc.).InAustralia,forinstance,longtermcapitalgainsareonlytaxedathalftherateofordinaryincome,andsomecapitalgainsarenottaxedatall,suchasgainsfromthesaleofapersonalresidence.

Ineverycountry,therearedifferenttypesofincome,andtheyallhavedifferentassociatedtaxrates,costs,

andbenefits.

Earnedincomeistaxedatthehighestratepossible.Thisincludesincome

youearnasanemployee,self-employedindividual,orpartner.Andinsomecountries,includingtheUnitedStates,earnedincomeissubjecttoadditionaltaxescalledemploymentorself-employmenttaxes.ThesimplestwaytodetermineifincomeisgoingtobetaxedatahighrateoralowrateistogobacktotheCASHFLOWQuadrant.

ThesimplestwaytodetermineifincomeisgoingtobetaxedatahighrateoralowrateistogobacktotheCASHFLOWQuadrant.

Incomereceivedontheleftsideofthequadrantwillnormallybetaxedatahigherratethanincomereceivedontherightsideofthequadrant.RememberwhatItoldyouaboutthegovernmentsubsidizingbusinessesandinvestors?Wealreadydiscussedonewaytheydothat.Theyallowtaxdeductionsforthosepeopleandorganizations.Anotherwaytheybenefitbusinessesandinvestorsisbyreducingthetaxrateontheirincome.

Thinkaboutthesupertaxpayer.Thesupertaxpayerisabusinessownerorinvestor.Howdoesheearnhisincome?Heprobablygetssomeofhisincomefromasalary,whichistaxedatthehighestrate.Butmostofhisincomeisfromeitherhisbusinessorhisinvestments.Let’stakealookathowthisincome(fromtherightsideoftheCASHFLOWQuadrant)istaxed.

First,thereistheincomethesupertaxpayerearnsinhisbusinessthatheputsbackintothebusinesstomakeitgrow.Thisincomeisn’ttaxedatall.Why?Becausewhenhespendsthemoneytogrowhisbusiness,hegetsadeductionforeverydollarhespends,eitherdirectlyorthroughdepreciationoramortization,aswediscussedinthelastchapter.

Let’susetheexampleofmyfriendPierreagain.Remember,he’stheonewhoownstherestaurant,ChezPierre.Supposeheearns$200,000afterhisnormalexpensesthroughhisrestaurantthisyear.Ifhetookallofthatmoneyoutofthebusiness,itwouldbetaxedatregularrates.Hedoesn’twanttodothat.Soinstead,let’ssayheputs$80,000backintothebusinessintheformofadditionalsuppliesandequipmentthatwillmakeevenmoreincomeforhiminthefutureandthenputsanother$20,000intomarketing.

AllofthemoneyPierreputsbackintohisbusinessisdeductibleagainsthis$200,000ofincome.Thatwouldleavehimwith$100,000.Nowlet’ssaythathehasahomeofficeandthathisvanisusedprimarilyforbusiness;thatwhenhespentmoneyonavacation,hetookhiswifeandchildren,whoareallownersofthebusinesswithhimandthattheyspentmorethanhalfofeachweekdayonbusiness;andthatwheneverPierreandhiswifewenttodinnerduringtheyear,theyhadabusinessdiscussion.

Intotal,Pierrecouldeasilyhaveanother$30,000inexpensesthathecouldusetooffsethisincome.Thatleavesonly$70,000tobetaxed.Andafterhisdeductionsforhismortgage,taxes,andcharitabledonations,he’sdownto$40,000oftaxableincome.Andafterhispersonalexemptions,he’sdowntoless

than$20,000.Ifhe’sintheUnitedStates,this$20,000willbetaxedata10percentrate.Soheonlyhastopay$2,000intaxeson$200,000ofincome.IfhewereanemployeeontheleftsideoftheCASHFLOWQuadrantmakingasalaryof$200,000,evenafterhetookhisdeductionsformortgageinterest,taxes,charitabledonations,andpersonalexemptions,hewould’vepaidataxrateofabout20percentontheremaining$150,000—that’s$30,000.

ExampleofPossibleDeductionsLeftSideofCashHowQuadrant RightSideofCashHowQuadrant1.MortgageInterest 1.BusinessSupplies2.PropertyTaxes 2.BusinessEquipment3.CharitableDonations 3.MarketingExpensesforBusiness4.PersonalExemptions 4.HomeOfficeExpensesfor

Business 5.VehicleUseforBusiness 6.Meals(discussingBusiness) 7.TravelandEntertainment 8.MortgageInterest 9.PropertyTaxes 10.CharitableDonations

11.PersonalExemptions

Ofcourse,insteadofputtingthe$100,000backintohisbusiness,Pierrecould’veusedhis$100,000tomakeotherinvestments.Withgoodtaxplanning,themoneywouldn’tbetaxedinthatcaseeither.Ifthemoneyisinvestedinenergyorrealestate,forinstance,he’slikelytogetenoughtaxbenefitsfromthoseinvestmentstooffsetthetaxhewouldotherwisehavetopayonhisbusinessincome.

Suppose,forexample,Pierreinveststhe$100,000inoilandgasdrillinganddevelopment.IntheUnitedStates,he’dreceiveadeductionequaltotheentire$100,000withintwoyearsofmakinghisinvestment.Sohestilldoesn’thavetopaymorethan$2,000onhistotalincomeof$200,000.Hecouldgetalmostas

goodofaresultfrominvestinginrealestate,dependingonthetypeofrealestateheinvestsinandhismeetingcertainothertechnicalrequirements.Andallthewhile,he’dbemakingevenmoremoneyfromthe$100,000investmentwhilestillgettingthesetaxbreaks.

TAXTIP:Modifyyourinvestmentstrategy.Somerealestateinvestmentshave“builtin”taxsavingsthatdon’trequireyoutodoanythingextratowriteoffthelosses

againstanyotherincomeyouhave.Oilandgasareexamplesoftheseinvestments,whereasmuchas100percentoftheinvestmentcanbewrittenoff

inthefirsttwoyears.

BucketsofMoney

Thinkaboutyourincomeasifyouhadtoputitintooneoffivebuckets.EarnedIncomeThefirstbucketisyourearnedincome.Thisbuckethassomeseriousholesinit.Yourincomerunsoutofthoseholesintheformofhighincometaxesandhighemploymenttaxes.Evenifyou’reinacountrywhereyouremployerpaystheemploymenttaxes,thinkabouthowmuchhigheryourincomecouldbeifyouremployerdidn’thavetopaythosetaxes.

OrdinaryIncomeThesecondbucketisyourordinaryincome.Thisisincomefromyourpensionplan,your401(k)plan,yourregisteredretirementsavingsplan(RRSP),orPensionandcertainotherincomethatdon’tfitintooneoftheotherbuckets.Whilethisbucketisbetterthantheearnedincomebucket,it’sstilltaxedatthehighestincometaxrates,butatleastitdoesn’tgethitwithemploymenttaxes.

InvestmentIncomeThethirdbucketisyourinvestmentincome.Thisincludesincomefromcapitalgains,interest,anddividends.Inmostcountries,thisalsoincludespassiveincomefrominvestmentsinbusinessesandrealestate.Asarule,thisincomeistaxedatlowerrates.We’vealreadydiscussedtheexampleofcapitalgains.Dividendincomealsomaybetaxedatlowerrates.Forinstance,intheUnitedStates,dividendsaretaxedatthecapitalgainsrate.InAustralia,dividendsaren’treallytaxedatallduetoatechnicalitycalledthefrankingcredit.Othertypesofinvestmentincomegetbettertaxratesaswell.IntheUnitedStates,interestincomefromstateandlocalbondsisn’ttaxable.Lifeinsuranceproceedsarealsotax-free.

Andthentherearetheproceedsfromlike-kind(tax-free)exchanges.Thesearealsocalled1031exchangesintheUnitedStates,afterInternalRevenueCodesection1031.InAustraliaandGreatBritain,thesearereferredtoasrollovers,

andinCanadatheyarereferredtoasreplacements.Theeffectisthesameinallofthesecountriesandmanyothers.Ifyousellonepropertythatwasusedinabusiness(includingarentalbusiness)andreplaceitwithasimilarproperty,thenthegainontheoldpropertyisnottaxeduntilyousellthereplacementpropertyanddon’trollthatmoneyintoanotherproperty.

Themagicoflike-kindexchangesisthatifyoureplaceanewpropertywithyetanotherpropertyandcontinuetodosountilyoudie,youmayneverhavetopayanytaxes.Yougetallofthedepreciationdeductionsallowedunderthelawwithouteverpayingataxwhenthepropertyissold.Inthecaseofrealestate,thenewpropertydoesn’thavetobeexactlyliketheoldproperty.Youcanmovefromsinglefamilyhomestoapartmentcomplexestocommercialpropertytolandandbackagainwithouteverhavingtopaytax.

Like-kindexchangesareparticularlywellsuitedforgoodestateplanning.

Somepeoplemightbeconcernedthatwithlike-kindexchangestheywon’tbeabletogetanyactualcashintheirpocketsfromthesaleoftheirproperty.Thisisn’ttrue,however,becauseyoucanalwaysrefinancethepropertyandpullouttax-freeappreciatedvalue.Andevenifyoudothat,youcanstilldoanotherrolloverorexchangelateronandnotpaytaxes.

Throughlike-kindexchangesyoucankeepbuyingmoreandmoreexpensivepropertiesasyourpropertiesgoupinvalue,allwithouteverpayingtax.Prettycool,huh?Thisisoneofmyfavoritetypesofincomebecauseitallowsmetocontinuereinvestingwithouteverhavingtopaytaxes.Besureyoumeetwithagoodtaxadvisorwhounderstandstherulesofthesetypesofexchanges.Therolloverrulesareveryspecific,andtheydon’tapplytoeverytypeofasset.Forexample,intheUnitedStates,youcannotdoalike-kindexchangewithstockunlessyouownmostofthestockinacompany.

DotYour‘I’sandCrossYour‘T’sinYourLike-KindExchange1.Tax-freeexchangeshaveverydetailedrulesyoumustfollow.

2.Ifyoudon’tfollowEVERYruleprecisely,yourexchangewillnotbetaxfree.Youwillhavetopaytaxes.

Myfriendandclient,GuyZanti,cantellyouallaboutthebenefitsofalike-kindexchange.OnedayasIsatinmyoffice,Guycalledme.Hetoldmethathewasabouttofinalizethesaleononeofhisrentalproperties,andhewantedtoknowiftherewasanythinghecoulddotoreducehistaxesonthesalesincethegainwasprettybig.Iaskedhimwhathewasplanningtodowiththecashfromthesale.Hetoldmethatheplannedonbuyingmorerealestate.

Immediately,Ithoughtoftax-freeexchanges.ItoldGuythatifhemadeafewchangestohissalesagreementhecouldcompletelyavoidanytaxfromthesale.Afewhourslaterhecalledmeuptoletmeknowthathe’dmadethechanges.Iwashappytoinformhimthatbymakingthesefewchangeshewasgoingtosave$20,000intaxes.ThatwasagooddayforbothGuyandforme.IloveitwhenIcanhelpaclientconvertincomefromtaxabletonontaxable.

GiftsorInheritanceThenextbucketofincomeisthemoneyyoureceiveasagiftorasan

inheritance.Inmostcountries,thepersonwhoreceivesthismoneyisnotrequiredtopaytaxesonit.Instead,ifit’staxed,thepersonwhogivesthemoneyortheestateofthepersonwhobequeathsthemoneyisrequiredtopaythetax.Lateron,we’llspendanentirechapteroninheritanceandgifttaxes.Therearemanywaystoavoidthesespecialtaxes.Andinsomecountries,there’snoinheritancetaxatall.

Like-kindexchangesareparticularlywellsuitedforgoodestateplanning.Whenyoudie,ifyouplanyourestatewell,youwon’thavetopayanyestatetaxand,atleastintheUnitedStates,yourheirswon’thavetopayincometaxonthegainwhentheysellthepropertybecausethegaingoesawayuponthedeathoftheowner.

Ihadaclientwhohassincepassedaway.Sheownedseveralrentalproperties.Let’stakealookathowgoodestateplanninghelpedherfamilyononeparticularproperty.She’doriginallypaid$200,000forthepropertyandtookdepreciationof$75,000overthetimesheownedit.Whenshedied,thepropertyhadgrowninvalueto$300,000.

Ifshe’dsoldthepropertyforcashthedaybeforeshedied,shewould’vebeentaxedonhergainof$175,000($300,000less$200,000plusthe$75,000ofdepreciationshe’dtaken).Butsinceshedidn’tselltheproperty,hersondidn’thavetopayanytaxwhenhesoldthepropertyfor$300,000threemonthsaftershedied.Andsinceshehaddoneherestatetaxplanningwell,she(meaningherestate)didn’toweanyestatetaxeither.Intheend,shesaved$35,000intaxesduringherlifetimeandforherfamilybysimplyholdingontothepropertyuntilshedied.Nowthat’smykindofincome—completelynontaxable.

PassiveIncomeIntheUnitedStates,thereisonemorebucketofincome—passiveincome.Thisincludesincomefromanybusinessorrealestateinvestmentthatyoudon’tpersonallymanage.Thisincomeistaxedatregulartaxrates,buttherearemanywaystoreducetheamountofincomethatistaxed.

Lossesfrompassiveinvestmentsinbusinessandrealestatecanonlyoffsetincomefromthosesameorsimilarinvestments.Whilethismayseemlikeachallengeforpassiveinvestmentactivities,it’sreallyagreatbenefit.Thekeyistomanageyourinvestmentssothatyouhavebothpassiveincomeandpassivelosses.Rememberthatthemagicaldeductionofdepreciationcanreallyhelphere.Forinstance,depreciationfromyourrealestateinvestmentscanoffsettheincomefromyourbusinessinvestments.

Thebucketsareimportantnotonlybecauseofthedifferenttaxratesbutalsobecauseofthedeductionsthatmaybeavailableonlytoacertainbucketofincome.Forexample,capitallossescanonlyoffsetcapitalgains.And,insomecountries,includingtheUnitedStates,interestexpenseonaninvestmentloancanonlybedeductedagainstinvestmentincome.

Soit’sjustamatterofmakingsurethatyourlossesandincomeineachbucketmatchup.Thisiswhereagoodaccountantandtaxadvisorcanreallyhelp.There’snoneedforyoutokeeptrackofthisallbyyourselfwhenhelpisonlyaphonecallaway.Havingaspecialisttakecareofthisworkwillfreeyouuptofocusonmakingmoremoneythroughyourbusinessorinvestments.

Nowyouseewhyit’simportanttounderstandhowthedifferenttypesofincomearetaxedsothatyoucanhavearealdiscussionwithyouraccountantandsothatyoucankeepalookoutforthegood,better,andbesttypesofincome(i.e.,thosewiththelowesttaxes).Evenifyouaren’tgoodatmathoratkeepingtrackofthingslikethis,youcanstillhavealloftheadvantagesoflow-taxedincomejustbyhavingtherightpeopleonyourteamandfindingagreataccountanttoassistyou.

Next,we’regoingtotalkabouttaxbrackets.Mostcountrieshaveaprogressiveincometaxsystem,whichmeansthatthemoreincomeyoumake,thehigherthetaxrateonyourincome.Sowewanttogetthebenefitofasmanylowtaxbracketsaspossible.Thereareanumberofstrategiesavailabletoaccomplishthis.

CHAPTER8:KEYPOINTS1.Themoremoneyyoumake,themoreconcernedyoushouldbewhereit’scomingfrom.

2.Certaintypesofincome,suchasearnedincome,aretaxedathigherratesthanothertypesofincome,suchaspassiveincome.

3.Oneparticularlygoodestateandtaxplanningstrategyislike-kindexchangeswherebyyoucanexchangeonesimilarassetforanotheronetax-free.

4.Therulesonmanyofthesetaxstrategiesaredetailedandtheworkinvolvedinproperlybalancingyourincomeandexpensesisintensive.Hiringagoodaccountantwillbeveryhelpfultoyouandwillallowyoutofocusonyourbusinessandinvestments.

TaxStrategy#8–PIGSareyourPALS

Mostaccountantsseemscaredtodeathofinvestmentsthatcreatepassiveactivitylosses(PALs).I,however,lovethem.Whileotheraccountantsareworriedthatthepassivelosseswillnotbeusedformanyyears,IliketofindwaystousePALs.Oneofmyfavoritewaystousethemistomodifyyourinvestmentstrategytoincludepassiveincomegenerators(PIGs).

Thepassivelossrulesworklikethis.Supposeyouinvestinabusiness.Ifyouspendasignificantamountofyourtimeinthebusiness,generally500hoursperyear,youareconsideredtobe“materiallyparticipating”inthebusiness.Thismakesyouanactivebusinessownerandtheincomeandlossfromthebusinessistreatedasordinaryincomeandloss.Ifyoudon’tspendmuchtimeinthebusiness,youareconsideredtobeapassiveinvestor,andincomeandlossfromthebusinessthatisreportedonyourreturn(throughapartnershiporScorporation)istreatedaspassiveincomeandloss.

Rentalrealestateispersepassive,meaningthatregardlessofanyotherfacts,theincomeandlossfromtherealestateispassive.AswediscussedinChapter7,it’sfairlyeasytocreatetaxlossesfromyourrentalrealestate.Thechallengeisthattheselosseswillnormallybeconsideredpassivelosses,sotheywon’tbeavailabletooffsetordinaryincome.

However,theycanoffsetotherpassiveincome.Thekeyistodevelopawealthstrategythattakesintoaccountyourpassivelossesandalsogeneratespassiveincome.Let’slookatanexample.

Supposeyouhave$10,000inpassivelossesfromyourrealestate.Yourfriend,Paul,hasabusinessthatneedsmorecapital.Youresearchhisbusinesscarefullyanddecidethatithasgreatpotentialtogrow.It’salreadyearningincomeanddoingfairlywell.Soyouinvest$100,000inPaul’sbusinessinexchangefor5percentownership.

Paul’scompanyisformedasanScorporation,soyouwillreport5percentoftheearningsfromPaul’sbusinessonyourtaxreturn.Let’ssaythatinthefirstyearofyourinvestment,Paul’scompanyearns$100,000.Youreport$5,000(5%)onyourtaxreturn.Yourrealestatelossesof$10,000willoffsetyourincomefromPaul’scompanysoyoudon’thavetopayanytaxonthe$5,000ofincome.Andsinceyoudon’tuseallofthe$10,000oflosses,therestofthoselosses($5,000)carryovertothenextyear.

Nextyear,youhaveanother$10,000ofrealestatelosses.Thistime,Paul’scompanyearns$300,000.YourshareoftheincomefromPaul’scompanyisnow$15,000(5%x$300,000).Yourrealestatelossescantotallyoffsetthisincome.Youhave$10,000fromthisyearplusyoucarriedover$5,000fromlastyear.So,youhavetotallyshelteredtheincomefromyourinvestmentinPaul’scompany.ThismakesyourinvestmentinPaul’scompanyalotmorevaluable.Imaginetax-freemoney.That’swhathappenswhenyoucombinePIGswithyourPALs.

ChapterNine

TakeAdvantageofYourTaxBrackets

“Humanbeingsaretheonlycreaturesthatallowtheirchildrentocomebackhome.”–BillCosby

Myyoungersonturned20awhileback.Whatarelief.Nomoreteenagers.Andyet,evenat20,hewasstilllivingathome.What’sworse,sowashisolderbrother.It’snotthatIdon’tlovemyboys.Ido.Infact,Ievenlikethem.It’sjustthatIlefthomeat19andalwaysfiguredthatwasalsoagoodageformychildrentoleavehome,getoutontheirown,experiencelife,getajob,orgointobusiness—tobeindependent.

Iunderstandthatgettingoutonone’sownisn’teasytodoinachallengingeconomy.Atleasttheyaren’tteenagersanymore.Thoseteenageyearscanberough.ThereweredaysIwassurethatmy14-year-oldsonwasn’tgoingtolivetohis15thbirthdayandthatIwasgoingtobeinprisonfortherestofmylifeforkillinghim.I’mkidding,ofcourse,butifyouhaveteenagers,I’msureyouunderstandwhereI’mcomingfrom.

Asavinggraceisthatbothofmyboyshavebeenandcontinuetobegreatformytaxes.AndI’mnotjusttalkingaboutchildtaxcreditsordependencyexemptions.Thoseareverysmalltaxbenefitscomparedtotheenormoustaxbenefitofusingtheirtaxbracketstoreducethetaxesonincomefrommyinvestmentsandbusinesses.

Believeitornot,childrencanbeoneofthebesttaxsheltersaround.Andifyoudoitright,youcanalsoreduceorgetridofyourestatetaxthroughgoodincometaxplanningwithyourchildren.Here’showitworks.

Believeitornot,childrencanbeoneofthebesttaxsheltersaround.Andifyoudoitright,youcanalsoreduceorgetridofyourestatetaxthroughgoodincometaxplanningwith

yourchildren.

NoKidding

MyclientandgoodfriendGeorgehassixchildren(yes,he’sMormonlikeme).About10yearsagoGeorgeaskedmetohelphimreducehisincometaxes.He’djuststartedabusinessthathadn’tmadeaprofityet.Becauseofthis,thetimingprovedtobespectacularfortaxplanningpurposes.Why?Thebusinessdidn’thaveanyvalue,whichmeantthatgivingasubstantialportionofthebusinesstohischildrenwasfreeofanygifttax.

George’sgoalwastohavehisincometaxedatthelowestratepossible,preferablynotmorethan15to20percent.Hewasseriousabouthistaxplanning,whichmadehimamanaftermyownheart.He’devenlookedintousingoffshoretaxhavensintheCaribbeantoreducehistaxes.ButwhenIlookedattheproposalforhisoffshoretaxplanning,Isawthatjusttheadministrationfeestothebankingandtaxprofessionalsinthetaxhavencountryforcarryingouttheplanwereabout15to20percentperyear.Nottomentionthattheoffshoretaxstrategywasprettyrisky,sinceGeorgewouldhavelostcontrolofhisassetsandtheIRSwouldhavelikelychallengedtheplanandassessedadditionaltaxesandpenalties.IaskedGeorgeifinsteadofthisriskystrategy,he’dratherkeephismoneyonshore(intheUnitedStates),havelessrisk,andstillonlypay15to20percentperyearwithminimaladministrationcosts.Ofcourse,hesaidyes.

Welookedatthetaxbracketsforbothsingleandmarriedindividuals.Taxbracketsareportionsofyourincomethataretaxedataspecificrate.Forexample,in2012thefirst$8,700oftaxableincomeistaxedat10percentintheUnitedStates.Thenext$26,650ofincomeistaxedat15percent,andsoonuptothehighestrateof35percentonincomeover$388,350.Using2012taxratestoreachGeorge’sgoal,wewouldhavewantedeachownerofthebusinesswhowasmarriedtoreceivenomorethan$70,700ofincomeandeachownerwhowasn’tmarriedtoreceivenomorethan$35,350ofincomeeveryyear.

2012U.S.ProjectedFederalIncomeTaxBrackets

TaxRate MostSingleFilers MarriedCouplesFiling

Jointly10% $0–$8,700 $0–$17,40015% $8,700–$35,350 $17,400–$70,70025% $35,350–$85,650 $70,700–$142,70028% $85,650–$178,650 $142,700–$217,45033% $178,650–$388,350 $217,450–$388,35035% Over$388,350 Over$388,350

Georgehadtwomarriedchildrenandfourunmarriedchildren.Plus,ofcourse,therewasGeorgeandhiswife,Martha.Bydividingownershipofthebusinessbetweenhimselfandhisfamily,Georgestoodtosavealotofmoney.Intotal,becausehischildrenwereallstillinschoolatsomestageanddidn’thavemuchtaxableincomeoftheirown,thebusinesscouldearn$353,500andstillhaveeverydollartaxedatonly15percentorless—provideditwasstructuredcorrectly.Let’scomparethistowhatwouldhavehappenedwithnotaxplanning.

IfGeorgeandMarthawerethesoleownersofthebusinessandhadtopaytaxontheentire$353,500,theywould’vepaidover$93,000offederalincometaxonthebusinessincomeinadditiontoanyemploymenttaxestheyowed.Instead,theypaidlessthan$49,000intaxes—ataxsavingsofmorethan$44,000.What’smore,theyreceivedthisbenefitandmoreeachyearastheincomegrew.Evenwhenthechildrenstartedearningtheirownincome,GeorgeandMarthawerestillsavingthousandsofdollarsoftaxeveryyearbecausetheywereusingtheirchildren’slowertaxbrackets.

GeorgeandMartha’sTaxPlanningExample

BusinessEarnings

FederalIncomeTaxesPaidwithoutTaxPlanning

FederalIncomeTaxesPaidwithTaxPlanning

$353,500 >$93,000 <$49,000TaxSAVINGSof$44,000EachYear…

WhatmakesthisplanningevenbetteristhatGeorgewasabletomaintaincontroloverthecashflowfromhisbusinessbyusingtrustsandotherentities.

Hisbusinesswasownedinalimitedliabilitycompany(LLC),ofwhichhewasthemanager.Hecontrolledhowthemoneywasusedanddistributed.ThechildrenownedtheirinterestsinthecompanythroughtrustsofwhichGeorgeandMarthawerethetrustees.SoGeorgehadtwolevelsofcontrol,oneasthemanagerofthecompanyandanotherasthetrusteeofthechildren’strusts.(Ofcourse,healsohadparentalcontrol,whichoftenisthebestcontrolofall.)ThisleadsustoRule#7.

RULE#7:It’snothowmuchyouownthatmatters,it’showmuchyoucontrol.

Everycountryisalittledifferentwhenitcomestousingchildren’staxbrackets.Adultchildrengettheirowntaxbracketsineverycountry.Butwhenitcomestominors,somecountriesimposeaflattaxoncertainpassiveincome.Others,suchastheUnitedStates,nowtaxminorchildrenattheirparents’rates.Evenso,therecanbemanyotherbenefitstospreadingincometoyourminorchildren,simplybecauseitgetstheincomeoffofyourtaxreturn.

TAXTIP:PartnerwithyourParents’lowerafter-taxdollars.FormanLLCandhaveyourelderlyparentsbecomemembers.YoucangiveaportionofyourLLCtoyour

parentsandtheincomewillbetaxedattheirlowertaxrates.

TheBigBadCorporation

Ofcourse,childrenaren’ttheonlywaytotakeadvantageofdifferenttaxbrackets.Corporationsarealsogoodforthis.Corporationsarelegalentitiesthatownabusiness.Theyhavetheirowntaxrulesandtaxbenefits,includingtheirowntaxbrackets.Soifyouownyourbusinessinacorporation,thecorporationpaystaxontheincome.Youonlypaytaxontheportionoftheincomeyoutakeoutofthecorporation.Taxbracketsforcorporationsworkmuchastheydoforindividuals.Theystartlowandgraduallyincreaseasthecorporationearnsmoreincome.Ideally,youwanttohavelotsofcorporationssothatyoucouldspreadyourincomeamongalotoflowtaxbracketsandpayverylittleintaxes,right?Soundtoogoodtobetrue?Itistoogoodtobetrue.

U.S.CorporateTaxRatesTaxRate TaxableIncomeOver NotOver15% 0 $50,00025% 50,000 75,00034% 75,000 100,00039% 100,000 335,00034% 335,000 10,000,00035% 10,000,000 15,000,00038% 15,000,000 18,333,33335% 18,333,333 ...............

Youcanhavemultiplecorporations.However,ifyouownallthosecorporations,theyhavetosharethelowertaxbracketswitheachother.Still,thereissomegreatplanningyoucandowithcorporatetaxbrackets.Oneexampleisfranchises.

Anumberofyearsago,Iranacrossafastfoodfranchisethatdidsomegreattax-bracketplanningwithcorporations.Everyindividualrestaurantwasinitsowncorporation.Themainownerofthefranchiseowned49percentofeachcorporation.Themanagersandemployeesownedtherest.Therewerecontractsinplacesothatthemainownerwasincontrolofwhathappenedwiththestores.RememberRule#7,It’snothowmuchyouownthatmatters,it’showmuchyoucontrol?Theresultwasthateachcorporationpaidtaxonitsincomeatitsowncorporatetaxrates.AndintheUnitedStates,thatmeantthatthefirst$50,000wasonlytaxedat15percent.Thisfranchiseownerhadhundredsofstores,whichtranslatedintohundredsof15percenttaxbrackets—andmillionsofdollarsoftaxsavings.

Youcandothistoo.Andyoudon’thavetogiveup51percentoftheownershiptootherpeopletodoit.Youandyourspousecaneachown100percentofyourowncorporations.That’stwo15percenttaxbracketsrightthere.Andifyouhavebusinesspartners,theycaneachowntheirowncorporation.

Sohowdoyousplitupabusinessintoseveralcorporationswhenyoudon’townafranchise?It’sactuallyverysimpleinthisdayandageofspecializationandoutsourcing.Rule#8issoimportantwhenyoudocorporatetaxplanning.

RULE#8:Treatyourbusinessjustasyouwouldifitwereabigpubliccompany.

Rule#8meansthatyoushouldlookatyourbusinessjustasabigcompanywouldlookatitsbusiness.You’veprobablynoticedthatmanybigcompaniesoutsourcemuchoftheirworktoothercompanies.Amarketingcompanymayhelpwithmarketing.Accountingfirmswillhandletheirbooks.Infact,majorcorporationslikelyusehundredsofdifferentcompaniestodospecialprojectsforthem.

Youcandothesamethingwithyoursmallcompany.Youcanhaveoneofyourcorporationsdothemarketing.Youcanhaveanotherdothebookkeepingandadministrativework.Ifyouareinthehealthcareindustry,youcanevenhaveaseparatecompanydothebillings.Myfavoriteservicetoplaceinaseparatecompanyishumanresources.Iloveitwhenbusinessesuseaseparatecorporationtohandleallofthepayrollandemployeebenefits.

Therearealsomanygood,non-taxreasonstousedifferentcompaniesfordifferentservices,whichleadsustoRule#9.

RULE#9:Alltaxplanningmusthaveabusinesspurposeotherthanreducingtaxes.

Outsourcinghumanresourcesisoneexample.Supposeyouhavemultiplecompanies.Youwouldnormallyhavetodopayrollandpayrolltaxreportsforeachofthesecompanies.Insteadofthat,however,youcanhaveasinglecompanywhosesolepurposeistohandlepayrollandotherhumanresourcesforavarietyofcompanies.Thissinglecompanypaysalloftheemployeesoftheothercompaniesandhandlesallhumanresources.Itchargestheothercompaniesforthisserviceandtheirpayrollcosts,plusaprofit.Theformaltermforacompanysuchasthisisaprofessionalemploymentorganization(PEO).TherearemanylargePEOsintheUnitedStatesandCanada.ByutilizingaPEO,youhaveacompanythathasabusinesspurposeoutsideoftaxsavings—youonlyhavetodopayrollandhumanresourcereportinginonecompany.CanyouseehowaPEOmightmakelifeeasierforyou?

Solet’sputthisalltogether.Startwithyourprimarybusiness(youhavetohaveabusinessinthefirstplaceforthistowork).IfyouaresolelyintheEquadrant,thenthis(andmostoftheotherstrategiesinthisbook)won’tworkfor

you.Thisstrategyalsodoesn’tmakealotofsenseintheIquadrant.Butthere’sgoodnewsforyouintheSquadrant.Thisstrategycanworkforyou,thoughitworksbestintheBquadrant.Youshouldbeseeingapatternhere.TaxplanningisalwayseasiestfromtheBquadrantbecausegovernmentsfavorbusinessowners.

Let’stakemyfriend,Sanjay,whoisadentistintheUnitedStates.SanjayisdefinitelyintheSquadrant,becausehehasonlyasinglepracticeandistheprimarydentistinthatpractice.Sanjayearnsabout$400,000eachyearfromhisdentalpractice.Thisputshiminthe35percenttaxbracket.Ifhepaystaxesonthisincomeasasoleproprietor,hisincometaxwillbeabout$109,000using2012taxratesformarriedindividuals.Thisdoesn’tevencounttheself-employmenttaxhehastopay.We’lltalkaboutthatinalaterchapter.

Insteadofbeingtaxedpersonallyasasoleproprietor,Sanjaycouldownhisbusinessthroughacorporation.IntheUnitedStates,however,it’snotagoodideaforhimtoownhisdentalpracticethrougharegular,orC,corporation.Thereasonisthatprofessionalservicecorporations,suchasdentists,doctors,lawyers,andaccountants,aretaxedataflatrateof35percent.Ifheplacedhispracticeinacorporation,histaxburdenwouldactuallyincreasefrom$109,000to$140,000.Notagoodidea.

Instead,hecanownhispracticethroughanLLCoranScorporation.Thisway,anyincomethatisleftinthecompanyistaxeddirectlytoSanjayastheshareholder.Butwait.Sincewewanttousethetaxbracketsavailabletoregularcorporationstoreducehisoverallincometax,wewillneedtoformtwomorecorporations.Hewillownonecorporation,andhiswifewillownanother.

Nowweneedtothinkofwhatservicesthoseothercompaniescanprovide.Theycan’tprovide“professionalservices”ortheywillhavetheterrible35percentflattaxrate.Buttheycouldprovideothertypesofservices.Onecouldprovidemarketingservices,forinstance.Theothercouldprovidepayrollandadministrativeservices.Whateverservicestheyprovide,theyhavetobeservicesthatjustifybeingpaidwell.

AllTransactionsMustHave“EconomicSubstance”1.Theremustbeabusinesspurposeforsettingupyourseparatecorporations.

2.Yourcorporationsmusthaveapurposeotherthanjusttaxsavings.Theymustotherwisehelpyourbusinesstobemoreprofitable.

Ideally,we’dlikeeachofthetworegularcorporationstoendupwithnetincomeofabout$50,000.Thatwayweshiftthehigh-bracketincomefromSanjay’spersonal35percentand33percenttaxbracketstothecorporations’lower15percenttaxbrackets.Toaccomplishthis,we’llpayeachcompany$50,000fromthedentalpracticeand$10,000fromeachother(it’simportantforPEOstoservetwoormorecompanies—yourtaxadvisorcantellyoumoreaboutthesedetails).Now,Sanjay’spersonalincomeisonly$300,000.Onthatincome,hewillpayabout$76,000intaxesusing2012taxrates.Thenhewillpay$15,000ontheincomeinthetwocorporations,foratotaltaxburdenof$91,000.That’sataxreductioneveryyearof$18,000.Evenwiththeaddedcostofbookkeepingforeachofthecompaniesandforpreparingadditionaltaxreturns,that’sstillasubstantialsavings.

JustthinkwhatSanjaycandowithanadditional$18,000.Hecantakeaverynicevacation,makethosehomeimprovementshiswifehasbeenwanting,or,betteryet,investthe$18,000eitherbackintohisbusiness(hegetsanothertaxdeductionforthat)orinvestitintorealestateorsomeotherI-quadrant

investment.Thebestpartofallisthatthe$18,000hesavesintaxesistax-free.Sohegetstheentire$18,000.

RemembertoDocumentYourIntercompanyTransactions1.Paymentsfromoneofyourcompaniestoanothermustbewelldocumented.

2.Manygoodtaxstrategieshavebeenlostbecausedetailsanddocumentslikenotesforloansandmanagementfeeagreementshavenotbeenproperlymaintained.

Thisexample,ofcourse,usesU.S.incometaxrates.MostothercountrieshaveevenhigherindividualincometaxratesthantheUnitedStatesandevenlowercorporateincometaxrates.SothisstrategyworksevenbetteroutsideoftheUnitedStates.InCanada,forinstance,smallbusinesscorporationshaveanespeciallylowtaxratewhencomparedwiththeindividualtaxrates.InAustralia,thecorporatetaxrateisaflat30percent,whiletheindividualtaxrategoesashighas45percent.Anyonewhomakesmorethan$80,000ofincomefromtheirbusinessinAustraliacanreallybenefitfromusingacorporationtotakeadvantageoflowertaxrates.

PlanWell

Ofcourse,wealwayswanttomakesurethatwearetakingfulladvantageofourownpersonaltaxbrackets.Wouldn’titbeashametoloseour10percentor15percenttaxbracketsbynotplanning?Youmightthinkthatcouldneverhappen,butithappensprettyoften.Iseeithappenespeciallyindowneconomies.

Ofcourse,wealwayswant

tomakesurewearetakingfulladvantageofourownpersonaltaxbrackets.Wouldn’titbeashameto

loseour10%or15%taxbracketsbynotplanning?

Let’ssaythatyouhaveabadyearinyourbusinessorinvestingandyoulosemoney.Youoryourspousemayhaveajob,butoverall,yourincomeisalotlessthannormal.Youcouldenduplosingthebenefitoflowtaxbracketsandevenlosedeductionsthatyoucannevergetback.That’sbecauseifyoudon’thaveenoughincomeduringtheyeartouseyouritemizeddeductionsorpersonalexemptions,thenyousimplylosemostofthosetaxbenefits.Youdon’tgettocarrythemovertoalateryearasyoudowithalossfromabusiness.

Forexample,myfriendJoehadadownyearacoupleofyearsago.Aftertakingallofhisdeductionsandpersonalexemptions,hehadalossfortheyear.Theresultwasthathewasabouttoloseabunchofdeductionsandthebenefitofhislowtaxbrackets.Sowedidsomethingthatyoumaynotnormallythinkof.Wecreatedincome.Actually,wejustpostponedsomedeductionsandcausedsomeincometoberecognizedthatyearthatwouldnormallyhavebeenrecognizedinalateryear.

Howwedidthisisalittletoocomplicatedforthescopeofthisbook.Butifyoufindyourselfinthissituation,sitdownwithyourtaxadvisorandfigureouthowyoucanhaveincometaxedinyourlow-incomeyearinsteadofalater,high-incomeyear.Andbesureyoudon’tloseanyofthosepreciousdeductions.It’snotdifficult.Itjusttakesalittleattentionandrealizingwhereyouarefinanciallyduringtheyear.

IhopeyoulikedthegreattaxbenefitsIexplainedinthischapter.Therearemanygreatwaystosaveontaxes.

CHAPTER9:KEYPOINTS1.Agreatwaytoreduceyourtaxableincomeistotakeadvantageofthetaxbrackets.

2.Bygivingaportionofyourbusinesstoyourchildrenandfamily,youcanreducetheoveralltaxburdenforyoupersonallyandtakeadvantageoflowertaxbrackets.

3.Youcandivideyourbusinessamongfamilyandpartnerswithoutlosingcontrolbymakingsureyouragreementsareclearandbyutilizinglegal

toolssuchastrusts.It’snothowmuchyouownthat’simportant—it’showmuchyoucontrol.

4.Bycreatingservicecompanies(PEOs)tohandlethingssuchashumanresourcesandmarketing,youcansignificantlyloweryourtaxes.

TaxStrategy#9–MakeYourParentsYourBusinessPartnersandReaptheTaxBenefits

We’vediscussedseveraltaxstrategiesforyourchildren.Butwhatifyoudon’thavechildren,oryourchildrenaregrown,successful,andinahightaxbracket?YoucanuseCcorporationslikewediscussedearlierinthischapter,butanotherwaytomakethemostofthetaxbracketsistoinvolveyourparents.Manypeoplehaveelderlyparentswhoareinaverylowtaxbracket.Didyouknowthatyoucangiveapartofyourbusinessorrealestatetoyourparentsandreapmajorincometaxsavings?Here’showitworks.Yougiveaportionofyourlimitedpartnership,Scorporation,orLLCtoyourparents.Anyincomefromtheirshareofthebusinessthenflowsthroughtotheirincometaxreturnandistaxedattheirrates.SinceyouarestillthemanageroftheLLC,majoritystockholderoftheScorporation,orgeneralpartnerofthelimitedpartnership,youremainincontrol.Aslongasyouarecarefulabouthowmuchyougive,youwon’thaveanygifttax.Andwiththecurrentestateandgifttaxexemption,chancesaretheywon’thaveanyestatetaxonthebusinesswhentheypassaway.Thereareotherpossiblebenefitsaswell.Besuretogooverthisplancarefullywithyourtaxadvisor.Whenyoudomeetwithyouradvisor,askaboutthepossibilityofa“basisstep-up”inthebusinesswhenyourparentspassaway.Thisisanaddedbenefitthatrequiressomeone-on-onediscussiontimewithyouradvisor.Andalsocheckoutthepossibilityofgivingalotmorethroughtheuseofdiscounts,whichwewilldiscussmoreinChapter13.

ChapterTen

Credits:TheCreamoftheTax-SavingCrop

“Theremaybelibertyandjusticeforall,buttherearetaxbreaksonlyforsome.”–MartinA.Sullivan

Afewyearsago,Ilookedatmyselfinthemirroranddidn’tlikewhatIsaw.AndIlikeditevenlesswhenIgotonmybathroomscale.Iwas40poundsoverweight,anditshowed.Iwaswearingsize40pantsandhadnomuscletone.RightthenIdecidedIwasgoingtolosetheweightandgetintoshape.

MysonMaxwasalsoworkingonhisweightatthetime.He’dsignedupforaprogramwherehereceivedtrainingonwhatfoodstoeat,andweighedineveryweek.Healsoreceivedsomebookslistingthecaloriesandfatcontentforalargevarietyoffoods,includingmostofthechainrestaurants.Idecidedtojoinhim.WhatwasmostattractivetomeabouttheprogramwasthatIcouldchoosewhatfoodIateaslongasIkeptwithinacertainnumberof“points.”

Theprogramwastough.Iwashungrymuchofthetimeintheearlystagesandhadtobedisciplined.Iwouldn’tbelyingifIsaiditwasoneofthemostdifficultthingsI’veeverdone.Withinthreemonths,I’dlost20pounds.Overthenext12months,Ilosttherestoftheweight.WhenIwasfinallyfinished,IpromisedmyselfI’dnevergaintheweightbackbecauseIneverwantedtogothroughsuchadifficultprocessagain.

Manytimesduringtheprogram,I’dwishedIhadamagicpilltoloseweightinsteadofgoingthroughallthepainandhardworktolosethose40pounds.Isn’tthiswhateveryonewants,amagicpilltoloseweightandbehealthy?Butitdoesn’tworkthatway,doesit?Weallknowthatexerciseanddietingarehardworkandtakegreatdiscipline.

Thoughthere’snosuchthingasamagicweight-losspill,ifyou’relookingtolosethoseexcesspounds(ordollarsoreuros)oftaxweight,there’sgoodnews.There’samagicpillforsomemajortaxreductionswithoutdoingalotofwork.Thatmagicpillisthetaxcredit.

CreamoftheCrop

Here’showtaxcreditswork.YoudocertainthingsthatCongressorParliamentwantsyoutodoandyougetanimmediatereductioninyourtaxes.Whatcouldbeeasierthanthat?Allyouhavetodoislearnwhichthingsthatthegovernmentwantsyoutodoandknowthatthereisataxcreditavailablefordoingthem.Youmayalreadydosomeofthesethingswithoutevenknowingthatthecreditisthereforyou.

Ataxcreditisthecreamofthetaxsavingscropbecauseitoffsetsyourtaxesdollarfordollar.It’snotlikeadeductionthatonlyreducesyourtaxableincome.Itgoesdirectlyagainstyourtaxes.Soifyouhaveataxcreditof$1,000,itreducesyourtaxesby$1,000,nomatterwhatyourtaxbracketis.

Ataxcreditisthecreamofthetaxsavingscropbecauseitoffsetsyourtaxesdollar

fordollar.

TAXCREDITSVS

TAXDEDUCTIONSGodirectlyagainstyourtaxes–dollarfordollar

Reduceyourtaxableincome

Taxcreditsarereallyadirectsubsidy.Thereasonthatthegovernmentdoesn’tjustsendyouacheckisthatit’smuchsimplerforthemifyouinsteadclaimthecreditonyourincometaxreturn.And,ofcourse,subsidiesareneveraspoliticallycorrectastaxcredits.Inaddition,noteveryonehastheknowledgerequiredtoclaimtaxcredits.Sothegovernmentisn’toutasmuchmoneyastheywouldbeiftheysentyouacheckdirectly.Ofcourse,sometimestheydosendoutchecks—butonlywhentheyneedvotes.

Therearetwoprimaryversionsoftaxcredits.Thefirstisarefundablecredit.Youcanreceivethiscreditevenifyoudon’thaveanytaxesdueinthefirstplace.SoyoucouldcompletelyeliminateyourtaxableincomethroughsomeofthetechniquesI’mteachingyouinthisbookandyouwouldstillgetarefundfromthegovernmentfortheamountofthecredit.

Theotherversionoftaxcreditsisthenonrefundablecredit.Youonlygetthis

creditifyouactuallyhavetaxdue.Mostcreditsarelikethis.Forsomeofthesecredits,ifyoudon’tusethem,youcancarrythemovertoanotheryear.Forothers,ifyoudon’tusethem,youlosethem.It’scriticalthatyouknowwhatyourtaxesaregoingtobeduringtheyearsothatyoucanmakesureyouhaveenoughincometouseupthecredits.Ifyoudon’thavesufficientincome,youcouldlosesomeofthecreditsjustasyoucouldloseyourdeductions.Andwecertainlydon’twanttoloseanytaxbenefits,dowe?

TypesofTaxCredits

Sowhatareactivitiesthatgovernmentstypicallyrewardwithcredits?Theyfallintoseveralcategories.

FamilyCreditsFirst,therearethefamilycredits.Manycountries,includingAustraliaand

theUnitedStates,givetaxcreditsforchildren.Theamountofthecreditdependsontheagesofthechildrenandhowmanyyouhaveinyourhome.Whenyouthinkaboutit,thisisarewardandencouragementforraisingchildren.Countrieswithchildtaxcreditswanttohelpthosewhoincreasethepopulationofthecountry.

EducationCreditsManycountriesalsohaveeducationcredits.Typically,thesecreditshelpyou

offsetthecostoftuitionandrelatedcostsatuniversities.Thesecreditsmaybeaportionofyourtuitionandbookcosts,ortheymaybeaflatamountperstudent.Theyalsotendtovarybasedonhowlongtheindividualhasbeeninschool.

TAXTIP:Watchoutfortraps.Manyeducationsavingsvehiclespermitearningstogrowtax-freeanddistributionstobetakentax-free.Whilethissoundslikeagreatidea,besuretotakeacloserlook.Often,theseeducationsavingsvehicles

severelylimityourinvestmentoptionsandhowthefundscanbeused.Thiscaninturnlimittheoverallearningpotentialandworkagainstthegoalofmakingyourchild’seducationmoreaffordable.Understandinghoweducationsavings

vehiclesworkcanhelpyoumaximizeyouroverallearningpotential.

Working-PoorCredits

Therearealsoworking-poorcredits.ThesecreditsincludetheearnedincomecreditintheUnitedStatesandcreditsforhelpingtheworkingpoor.Creditsforearningpoverty-levelincomeareusuallyrefundable.Creditslikethisareprimarilyintendedtoprovideassistancetothosewhoareatthepovertylevelorjustabove.

Still,don’tfallintothetrapofthinkingthatjustbecauseyoumakeagoodincomethatyouaren’teligibleforworking-poorcredits.Remember,ifyouareinbusinessorifyou’reaninvestor,yourdeductionsmaybehighenoughtoreduceyourincometoaverylowlevel.Wehaveseveralclientswhodothisandarethenabletoqualifyforearnedincomeandchildcreditseventhoughtheircashflowmaybe$200,000ormoreperyear.

Someofyouarethinkingthisisn’tfair.Peoplewhomakeasubstantialincomeshouldnotreceivebenefitspresumablydesignedforthosewhocan’taffordmanyofthebasicnecessitiesoflife.Youwouldberightinthinkingthetaxlawisn’tfair.Andit’snotmeanttobefair.It’smeanttoencouragecertainactivities.Theprimaryactivitiesthatthetaxcodeencouragesarebusinessandinvesting.Businessownersandinvestorsgetcertainprivileges.Theseprivilegesincludereceivingcreditsthathelptheworkingpooraslongasthetaxpayercansoarrangehisaffairstoqualifyforthecredit.

Youwouldberightinthinkingthatthetaxlawisn’tfair.Andit’snotmeanttobefair.It’smeanttoencouragecertainactivities.

Sodon’tsendmeletterscomplainingthatthetaxlawshouldorshouldn’tbenefitacertaingroupofpeople.Instead,becomeoneofthoseitbenefits.Thereasonyou’rereadingthisbookistolearnhowtoreduceyourtaxesandhavemorecashflowtocreateabetterlifestyleforyourself,yourfamily,andthosearoundyou,right?Focusonthat.Ifyouwanttogivebacksomeofthatmoney,youcan.Andyou’llgetadeductionforit.That’swhatthedeductionforcharitabledonationsisfor,toencourageyoutogiveback.

CharityCredits

Andspeakingofcreditsforgivingback,that’swhatwe’rediscussingnext—charitycredits.Manycountriesandstatesorprovincesgivetaxcreditstoincentivizepeopletogivetoschools,tothepoor,andtoothercharities.Often,thesecreditsareinadditiontothedeductionallowedforcharitabledonations.Theremayevenbetimeswhenyouendupwithmoremoneyinyourpocketbygivingthroughthecombinationofataxcreditandataxdeductionthanifyouhadn’tdonatedthemoneyinthefirstplace.Nowthat’sanincentivetogive.

InvestmentTaxCredits

Asyou’veprobablyalreadyguessed,thebiggesttaxcreditsarereservedforbusinessownersandinvestors.Thesearecalledinvestmenttaxcredits.Theyrangefromcreditsforbuildinglow-incomehousingandbuyingequipmenttocreditsfordoingresearchanddevelopmentofnewproductsandprocesses.Thereareliterallyhundredsofinvestment-typecredits.

Ifyouwanttoknowwhatthegovernmentreallyvaluesthemost,lookatwhatcreditsitofferstobusinessownersandinvestors.Thinkoftaxcreditsassuperdeductions,becausetheydirectlyoffsetyourtaxes.

SampleofTaxCredits

1. FamilyCreditsThesecreditsareforhavingchildren,andtheamountdependsontheagesandhowmanythereareinthehome.

2. EducationCredits Thesecreditshelpoffsetthecostoftuitionandrelatedcostsatuniversities.

3. Working-PoorCreditsThesecreditsareprimarilyintendedtoprovideassistancetothosewhoareatthepovertylevelorjustabove.

4. CharityCredits Thesecreditsincentivizepeopletogivetoschools,tothepoor,andtoothercharities.

5. InvestmentTaxCredits

Thesecreditsarereservedforbusinessownersandinvestors,andincludecreditsforbuildinglow-incomehousing,buying

equipmentanddoingresearch,anddevelopmentfornewproductsandprocesses.

Let’stakealookatoneofmyclientsandseehowshe’susedcreditstoreducehertaxes.Debbieisintheconstructionbusiness.Shespendsmostofhertimebuildingapartmentcomplexesforrealestatedevelopers.It’sdefinitelyaspecialty.Asaresult,shereallyknowstheapartmentbusiness.She’sgoodatwhatshedoes,andshemakesalotofmoney.Inagoodyear,herincomecanbeashighas$10millionormore.

Asyoucanimagine,Debbiehasaserioustaxchallenge—a$4milliontaxchallengetobeexact.Sheaskedmehowshecouldreducehertaxestoamorereasonablelevel,andwediscussedhersituation.Isuggestedthatsheinvestsomeofherexcesscashintolow-incomehousingprojectsandthatshecouldeveninvestinprojectsthathercompanybuilds.ThecreditsareveryhighforthistypeofinvestmentintheUnitedStates.

Bydoingthis,Debbiehasanadditionalbenefitofinvestinginsomethingthatsheunderstands,andsheknowswhichlow-incomehousingprojectsarelikelytobeprofitable.Sonotonlyisshegettinganexcellenttaxbenefitthroughthecreditsbutshe’llalsoreceivegoodcashflowfromthispassiveinvestment.

Let’slookatanothertypeofinvestmenttaxcredit.MyfriendandlongtimeclientMelissadecidedthatshewantedtolearnhowtorenovateoldhouses.Shehasaknackfordesignandlovesbringingolderhomesbacktotheiroriginalcondition.SheandIsatdowntodiscusshersituation.Irecommendedthatshechoosehomesthatqualifyforthehistoricbuildingtaxcredit,a25percenttaxcredit.Ofcourse,therearecertainrequirementsshe’dhavetomeet,butthatdidn’tstopher.Sheactuallyfoundthattherequirementsfitrightintoherplans.

Theresultwasthatthegovernmentcontributed25percentoftheconstructioncostsoftherenovationsthroughtaxcredits.Thatmorethandoublesherprofitfromeachproject.

DebbieandMelissaaretypicalexamplesofpeoplewhotakeadvantageoftaxcreditstonotonlyreducetheirtaxesbuttoalsoincreasetheirprofits.Byfollowingthegovernment’srules,theyfocusonprojectsthatwillincreasetheircashflownowandforyearsintothefuture.

YourCreditsMustHave“EconomicSubstance”1.Bewareofpromoterswhowantto“sell”youtaxcredits.

2.Ifyoudon’thaveaprofitmotiveforyourinvestmentotherthantaxcredits,youprobablywon’tgettousethecredits.

Noticethatinbothcasestheseclientschoseinvestmentsthatnotonlyhadgoodtaxbenefitsbutalsomadegoodsensefromaprofitandcashflowstandpoint.Thisisessential.Don’teverinvestinaprojectsolelyforthetaxbenefits.Alwayslookattheprofitopportunitiesfirst.And,asDebbieandMelissadid,chooseinvestmentsthatyouknowsomethingabout.You’llmakealotmoremoney(andlosealotless)ifyou’reknowledgeableabouttheindustryandprojectsinwhichyouinvest.

Don’teverinvestinaprojectsolelyforthetaxbenefits.Alwayslookatthe

profitopportunitiesfirst.

That’sitforourdiscussiononthesupertaxbenefitscalledtaxcredits.Startlookingforthesepersonalstimuluspackagesrightaway.Chancesarethatyoualreadyqualifyforsometaxcreditsandyoumaynotevenknowit.

We’regoingtotalknextaboutpayrolltaxes,suchasSocialSecurityandhealthinsurancetaxessuchasMedicare.

CHAPTER10:KEYPOINTS1.Taxcreditsarethecreamofthetax-savingscropbecausetheyreduceyourtaxesdollarfordollarratherthanjustreducingyourtaxableincome.

2.Therearetwotypesoftaxcredits:refundableandnonrefundable.Refundabletaxcreditsarereceivableevenifyoumakenoincome.

Nonrefundabletaxcreditsrequiretaxableincome.Mostcreditsarenonrefundable.

3.Manytaxcreditsmeantforlow-incomefamiliesareavailabletoinvestorsandbusinessowners—iftheyplanright.Thisisn’tfair,buttaxesaren’tfair.Incentivesaremeanttoencouragecertainbehaviors.

4.Neverinvestinaprojectbecauseithasgoodtaxbenefits.Firstfindsolidprojectsofwhichyouhaveknowledgeandthentakeadvantageoftaxcredits.

TaxStrategy#10–SavingforYourChild’sEducationwithMaximumTaxBenefits

ThechallengeIhavewithgovernment-sponsorededucationalsavingsplansisthatthegovernmentisincontrolofyourmoney,howyouuseit,whenyouuseit,andhowit’staxed.Forexample,ina529plan(alsocalledaCoverdellIRA),youcandeductmoneyyoucontributetotheIRAandthenwhenyouuseittax-freeforyourchild’seducation.Soundsalmosttoogoodtobetrue,doesn’tit?Whatsortoflimitationsdoyouthinkthegovernmentplacesonthesefundsinordertocontrolyourmoney?First,theycontrolhowmuchyoucancontribute.Then,theycontrolwhatyoucandowiththemoneyintheplan,evencontrollinghowyouinvestthemoney.Next,theycontrolwhatexpensesyoucanpayforwiththefund.Onlycertaineducationalexpensesqualify.Finally,ifyoudon’tusethefundsforeducation,youhaveonlytwochoices.Onechoiceistotransferthemoneytoarelativewhocanuseitfortheireducation.Theotheristodistributeittoyourselfandpaytaxesandpenalties.So,ifyoumaketoomuchmoneyfromyourinvestmentsintheplan,youpayapenaltyfornotusingallofthemoneyforeducation.Whatifyoucouldhaveallofthetaxbenefitsofa529planwithoutgivingthegovernmentanycontroloveryourmoney?Wouldn’tthatbealotbetter?Intaxstrategy#5wetalkedaboutpayingyourchildrentoworkinyourbusiness.WhenIteachthisprincipleinmyRichDadEducationtaxclass,thequestionalwayscomesupaboutwhattodowiththemoneyyoupaythem.ThisistheperfectopportunitytohaveyourchildrenpayfortheirowneducationwithouthavingtorelyonSection529plansorothertax-deferred,governmentcontrollededucationalsavingsplans.YourchildrencancontributetheirmoneytoanLLC,limitedpartnership,orScorporationthatownsabusinessorinvestments.Likea529plan,yougetadeductionwhenyoupay

yourchildasalary.Likea529plan,thereisnotaxtothechildwhenreceived.Likethe529plan,withgoodplanning,especiallyinrealestate,thereisnotaxonthecashflowfromtheinvestment.Butunlikea529plan,youhavefullcontrolovertheinvestment.Unlikea529plan,youcantakeitoutanduseitforanyexpenseforyourchild(exceptforsupport,likefoodandclothing),andyoucantakeitoutanytimeyoulike.Unlikea529plan,therearenopenaltiesfordistributingthemoneyoraccumulatingahugeamountoveralifetime.Nowisn’tthatamuchbetterplanthanagovernment-controlledsavingsplan?Stopusinggovernmentplansandmakeyourownplan.Youwillhavemuchmorecontrolandgetbettertaxbenefitsthanthegovernmentplans.

ChapterEleven

ConquerYourEmploymentTaxTroll

“Thereisnoworsetyrannythantoforceamantopayforwhathedoesnotwantmerelybecauseyouthinkitwouldbegoodforhim.”–RobertA.Heinlein

I’mtheyoungestofsixchildren.Sogrowingup,Ialwayshadfivepeople,plusmyparents,tellingmewhattodo.Thatdoesn’tevencountschoolteachersandchurchleaders.WhenIwasyoung,thiswasn’treallyachallenge.Itwasnicetohavesomeoneelsedirectingmylife.

ButbythetimeIwaseightornineyearsoldIwasgettingprettytiredofbeingtoldwhattodoallthetime.Ifyouhaveoldersiblings,thenyouunderstandthattheyhaveawayoftellingyouwhattodoinanot-so-niceway.Oneofmybrotherslikedtellingmewhattodoatdinnerbykickingmylegunderthetable.SoifIputmyelbowsonthetable,chewedwithmymouthopen,orsaidsomethinghedidn’tlike,I’dgetasharponetotheshins.Prettyannoying.

Mysisterandbrothersalsolikedtoplaytricksonme.Iremembertheyoncetrickedmeintoeatingaturnip.Asachild,Ihatedvegetables(Istilldon’tlikemostofthem).IwouldneverhaveeatenaturnipifIknewitwasavegetable.Theyconvincedmeitwasanewkindofpotatothatweweretryingout.Sincemymotherwasalwayssigninguptotryoutnewproducts,thiswastotallybelievable.Ilikedpotatoes.Infact,meatandpotatoesweretwoofmyfourprimaryfoodgroups(theothertwowerepeanutbutterandmilk).Butyuck.Thisnewkindofpotatowasawful.Mysiblingsstartedlaughinghysterically.ThiswasjustoneofmanywaystheygotmetodosomethingIdidn’treallywanttodo.

Withallofthesetrickyanddomineeringfamilymembers,Istartedrebellinganytimesomeonetoldmewhattodo.YoucanimaginewhatkindofemployeeIturnedouttobe.MyfirstjoboutofcollegewaswithErnst&Young(thenErnst&Whinney)inSaltLakeCity.I’donlybeenthereaboutayearthefirsttimeI

toldmyboss,thepartnerinchargeoftaxaccountingfortheoffice,totakeahike.Iwasn’tverycalmaboutiteither.Hehadmadeamistakeandthenloudlyconfrontedmeinthehallwaysuggestingthatthemistakewasmine,nothis.Iturnedrightintohimand,infullvoicesotheentireofficecouldhear,toldhimtogotohell.Fortunately,Ididn’tlosemyjob,andlaterheevencameintomyofficeandapologized.

IremembertwoothertimeswhileIwasworkingatErnstthatIdidsomethingsimilar.WhenIwasinthecompany’snationaltaxdepartmentinWashington,DC,Ihadaratherfrankconversationwithmyimmediatesupervisor.AndthathappenedagainwithoneofthetaxpartnerswhenImovedtoPhoenixasaseniortaxmanager.

Doyouseethepattern?Ididn’tatthetime.Ididn’trecognizehowmuchIhatedbeingtoldwhattodo.SoIstayedonasanemployeeforalongtime—13years,infact.WhenIfinallyleftthebig-companyemploymentworldandstartedmyownfirm,thefirstthingmyfriendssaidtomewas,“It’sabouttime.”

PerhapsthisisthereasonIfeelsostronglyaboutthegovernmentnottellingmewhattodo.Idon’tmindthemofferingmeincentivestobeinbusinessandtoinvestinrealestate,oil,andgas.Ilovethat.ButwhatIhateisthegovernmenttellingmethatIhavetocontributetoSocialSecurityandMedicare—especiallysinceI’llprobablyneverusethem.

Forthoseofyouwhoareemployers,Isuspectyoufeelthesameway.I’vedonesomeresearchonSocialSecurity,nationalinsurance,andothergovernment-sponsored“savingsplans”aroundtheworld.It’sprettyamazinghowmuchallofthegovernmentprogramsarealike.AsmallsavinggraceisthattheUnitedStateshasloweremploymenttaxesthanmanyothergovernments.GermanyandGreatBritain,forexample,arebothhigherthantheUnitedStates.

Still,wouldyoupayemploymenttaxesifyoudidn’thaveto?Asanemployee,even,wouldyoupayintoSocialSecurityifyouhadachoice?ForthoseinFrance,wouldn’tyouratherhaveyouremployergiveyouthemoneytheypayintotheCSG(generalsocialcontribution).Myguessisthatmostofyouwouldratherhavecontroloveryourmoneyinsteadofentrustingthatcontroltoagovernmentprogram.Andthat’sprobablytrueevenifyouaren’ttheyoungestofsixchildren.

Ifyoudon’tfeelthisway,that’sfine.Youcanskipthischapterandpaythemaximumnationalinsurancerates,SocialSecurity,orCSGpayments.Butifyoudowanttoreduceyourpaymentstothegovernmentforemployment-relatedtaxes,readon.

Ifyouhappentobeinacountrywithlowemployercontributionrates,considerthis:Ifyouremployeesdidn’thavetocontributesomuchintothestate-sponsoredpensionplans,youcouldprobablypaythemless.

Ifyouremployeesdidn’thavetocontributesomuchintothestate-sponsoredpension

plans,youcouldprobablypaythemless.

Therealityisthatyoucanalwaysgethigherreturnsonyourinvestmentsthanthegovernmentwillgiveyouthroughthestate-sponsoredpensionplan.IntheUnitedStates,mostpeopleundertheageof50(andmanyolderthanthat)expectthattheywillnevergetpaymentsoutofSocialSecurity.Bythetimetheygettoretirementage,SocialSecuritywillbebankrupt.Heck,bythetimemostpeopleintheUnitedStatesgettoretirement,theentireU.S.governmentmaybebankrupt.ButI’llleavethatdiscussiontomyfriendRobertKiyosakiandhisbookConspiracyoftheRich:The8NewRulesofMoney.

Let’smoveonwithassumingthatyou’dliketoreducehowmuchyoupayintoyourcountry’sgovernment-sponsoredmedicalinsuranceandpensionplans.Therearemanycompellingreasonsforwantingtopayless.You’dhavealotmoremoneytoinvestforyourself,andwiththepropereducationyou’dreceivemuchhigherreturnsonthoseinvestmentsandhavecontroloverwhenyoureceivetheincomefromthoseinvestments—andhowthatincomeistaxed.

Remember,pensionbenefits,evenwhentheycomefromthegovernment,arenormallytaxed.Manyofthesebenefitsarenotdeductibletoyouwhenyoupaythemintotheplaneither.Howisthatfair?Youdon’tgetadeductionforthepaymentandyoustillgettaxedifandwhenyoureceivethepaymentbacktoyou.That’sjustwhathappensintheUnitedStateswithSocialSecurity.Notallcountriesworkthisway,butmanydo.

Asanemployee,thereisverylittle,ifanything,youcandotoreduceyouremploymenttaxes.ThisincludesyourSocialSecurity,Medicare,orothernationalinsurancecontributions.Butyoucanreducethesepaymentsinmanycasesifyouareself-employedandplancorrectly,orifyouareinbusiness.Andinmanycountries,investmentincomeisnotsubjecttothesetaxesatall.

Thinkaboutthat.Asanemployeeorevenasaself-employedindividual,youwillhavetopayhighgovernmentinsurance(e.g.,Medicare)and/orSocialSecuritytaxesonmostorallofyourincome.If,ontheotherhand,youearnall

ofyourincomethroughinvestments,suchasstockdividendsandcapitalgains,realestaterentals,oilandgasinvestments,orbusinessdistributions,youcanavoidmostifnotalloftheseadditionaltaxes.Andyes,theyareadditionaltaxesbecausetheyaretaxesinadditiontoyourincometax.

EandSLeftSideoftheCashFlow

QuadrantVS

BandIRightSideoftheCashFlow

Quadrant•Payhighgovernmentinsurancetaxes •Canavoidmostifnotallof

thesetaxes•PayhighSocialSecurityallofthesetaxes.

UnderstandingYourBase

Infiguringouthowtoreduceyourpayroll-relatedtaxesifyouarerunningabusiness,startbylookingatthe“taxbase”forthesetaxes.Howarethetaxesmeasured?Aretheyaflatrateperemployee?Aretheybasedonapercentageoftotalwages?Aretheyapercentageofnetincomefromthebusiness?Andaretherelimits?InCanadaandtheUnitedStates,atleastfornow,someofthepayrolltaxesonlyapplytoacertainamountofwages.Afterthat,thetaxesdon’tapplyatall.

IntheUnitedStates,forexample,wagesandsalariesinexcessofabout$100,000arenotsubjecttoSocialSecuritytaxes.TheyareonlysubjecttoincomeandMedicaretaxes.InCanada,theamountsubjecttoemploymentinsurancepremiumsisalotless.

Onceyouunderstandthebaseormeasureofthetax,youcanfindwaystoreducethatbaseinordertoreducethetax.Let’stakeasimpleexampleintheUnitedStates.

Onceyouunderstandthebaseormeasureofthetax,youcanfindwaystoreducethatbase

inordertoreducethetax.

MyclientMichaelisachiropractor.Likemanychiropractors,heisself-employed.Healsohasacoupleofotherchiropractorsworkingforhimona

contractbasis.HeusedtoreportallofhisincomeonScheduleCofhispersonalincometaxreturn.Inotherwords,hedidn’tuseaseparateentityforhisbusiness.Notonlywasthisabadideafromthestandpointoflegalliability(hewaspersonallyliableforeverythingthatcouldgowronginhispractice,whetherornothewastheonewhocausedtheproblem),thisalsocausedhimtopaythemaximumamountofSocialSecurityandMedicaretaxes.Likemanycountries,theUnitedStatestreatsself-employmentincomeinthesamewayittreatssalariesandwages.Sothekeytoreducinghisemploymenttaxeswastoreducehisamountof“self-employment”income(seeRule#10).

RULE#10:Whenyouwanttoreduceatax,reducethebaseonwhichit’smeasured.

IntheUnitedStates,dividendsfromcorporationsarenotsubjecttoemploymenttaxes.Thisistrueinmanyothercountriesaswell,sincetheyarenot“earnedincome.”WereducedtheamountofMichael’sself-employmentincomebyconvertingsomeofhisincometodividenddistributions.WedidthatbysettingupacompanytoownMichael’smedicalpractice.

Now,insteadofbeingself-employed,Michaelisanemployeeofhiscompany,aswellasanowner.Asanowner,hisshareoftheincomeispaidtohimasadistributionofthecompany’searnings.Thisamountisnotsubjecttoemploymenttaxes.Asanemployee,hisearningsforservinghispatientsarepaidtohimassalary.

WewantthesalaryportionofthemoneyMichaelmakesfromhiscompanytobeaslowaspossibleandhisdistributionsordividendstobeashighaspossiblesothathecanpaytheleastamountofemploymenttaxes.Thegovernmenttaxcollectorsunderstandthisaswell.Sotheywantthesalarytobe,attheleast,reasonablefortheservicesMichaelrenderstothecompany.

UnreasonablyLowSalariesCanCostYouinanAudit

1.Taxcollectorsarealwaysonthelookoutforsalariesthataremuchhigherormuchlowerthannormalforyourindustry.

2.Ifyoutaketoolowofasalary,thegovernmentmaytreatALLoftheincomefromyourcompanyasself-employmentincomesubjecttoemploymenttaxes.

What’sreasonable?ReasonableiswhatMichaelwouldpaysomeoneelsetodotheworkthathedoesforthecompany.Well,Michaelknowswhathewouldpaysomeoneelsebecauseheisalreadydoingso—hepayscontractedchiropractors.Michaeljusthastopayhimselfthesameratehepaystheotherchiropractors.

Ifyoudon’tknowwhatareasonablerateistopayforyourpositionatyourcompany,therearemanyresources,suchaswww.salary.com,thatwillprovideyouwithagoodestimate.Andifyoustillcan’tfindtheinformationyou’relookingfor,justestimate.Solongasyoumakeareasonableefforttopayafairsalarytoyourself,youshouldbeokay.Anddon’tforget,youcanalwaysaskyourtaxadvisorforhelpwiththis.Theyhavelotsofotherclientsandprobablysomeinyourindustry.Theycangiveyousomeideas.

TAXTIP:Don’tpayyourselftoomuchortoolittle.Toomuchsalarymaymean

overpayingpayrolltaxes.Buttoolittlesalaryandyourcompanycouldbeatargetforanaudit.Reduceyourchancesofauditbypayingareasonablesalary.

Itcansaveyouover$4,500inannualemploymenttaxesandreduceyourchancesofaudit.

EXAMPLEConvertingMichaelfromanStoaB

(MovingfromtheLefttotheRightSideoftheCASHFLOWQuadrant)BeforeConversion

LeftSideofCASHFLOWQuadrantAfterConversion

RightSideofCASHFLOWQuadrant•Michaelisself-employed •Setupanewentitythatowns

Michael’spractice.

•MichaelreportsallincomeonScheduleCofhispersonaltaxreturn.

•Michaelfilesaseparatetaxreturnforhiscompany.

•Michaelispersonallyliableforallrisks.

•Michaelisonlyliableforhisownmistakesandnotthoseofhisemployeesorpartners.

•MichaelpaysthemaximumamountofSocialSecuritytax.

•Asanowner,partsofMichael’searningsarenowpaidtohimasdistributions,whicharenotsubjecttoemploymenttaxes.

•MichaelpaysthemaximumamountofMedicaretax.

•OnlytheportionMichaelreceivesassalaryissubjecttoemploymenttaxes.

ChooseYourEntityWisely

NowintheUnitedStates,inparticular,thetypeofcompanyyouformisgoingtobeimportantforincometaxpurposes.YouprobablywanttobetaxedasanScorporationforyourprimarybusiness.AnScorporationisprettysimpletooperateandavoidsanypotentialdoubletaxationthatcomesfromoperatingyourmainbusinessasaCcorporation.

Inothercountries,youmaywanttobealimitedpartnerinapartnershiporasmallbusinesscorporation.Again,you’llwanttositdownwithyourtaxadvisortodeterminetheexacttypeofentitythatmakesthemostsenseforyourbusiness.Justrememberthatoneofthegoalsofforminganentityistoreducetheemployment-relatedtaxesyoupayonyourincomefromyourbusiness.

Aslongasyoufocusonthetaxbase,thatis,theamountthenationalinsuranceorpensionorother“contribution”(don’tyoulovethatword—contribution—asthoughitwerevoluntary?)isbasedon,youcanreduceyouremployment-relatedtaxesfairlyeasily.Andisn’titalotbetterforyoutohavethatmoneytocontrolandinvestforyourselfthantogiveittothegovernmenttocontrol,invest,andmaybepaybacktoyousometimeinthedistantfuture?Youdon’thavetobetheyoungestchildtoenjoythebenefitsofcontrollingyourownmoneyandyourfinancialfuture,andcontrollingyouremploymenttaxesisoneofthebestwaystodothis.

Youthoughtthiswasgoingtobeabookthatonlytalksabouthowtoreduceyourincometaxdidn’tyou?Notso.Infact,it’snotonlyemploymenttaxesthatwecanandoughttocontrolandreduce;it’salsopropertytax,value-addedtax,

andothersalesandexcisetaxes.We’lltalkaboutthosenext.

CHAPTER11:KEYPOINTS1.Someofyourbiggesttaxcostswillcomefromemploymenttaxesintogovernment-sponsoredprogramssuchasSocialSecurityandMedicare.

2.Inordertoloweryouremploymenttaxes,youmustunderstandyourtaxbaseandloweryourtax-baseliability.

3.Incomederivedfrominvestmentssuchasdividendsanddistributionsarenottaxedas“earnedincome”andsignificantlyreduceyouremployment-taxburden.

4.It’simportanttoconsultwithyourtaxadvisortodiscusswhattypeofentitycanbesthelpreduceyourtax-baseliabilityandloweryouremploymenttaxes.

TaxStrategy#11–ReducetheWagesYouTakefromYourBusiness

Whenyouownyourowncorporation,youarerequiredtopayyourselfareasonablesalary.Bydefinition,youareanemployeeofyourcompany.Youwanttopayyourselfthelowestsalarypossible,however,becauseyouwanttokeepyouremploymenttaxesdown.Sohowdoyoudeterminetheamountofsalaryyoushouldpayyourself?Thebasicanswerisprettysimple.Youhavetopayyourselfwhatyouwouldpaysomeoneelseifyouhiredsomeonetodoyourjob.So,ifyouownaCcorporationthatdoesbillingsforyourmedicaloffice,andyoudothebillingwork,youhavetopayyourselfwhatyouwouldpaysomeoneelsetodothatbillingwork.Thereareseveralwebsitestogoto,suchassalary.com,foranideaofwhatsomeonewouldmakeinyourposition.ThesameistrueifyouownanScorporation.Youmustpayyourselfa“reasonable”salary.Otherwise,theIRScan(andlikelywill)challengetheamountofpayandwillreclassifysomeorall(probablyall)ofyourdistributionsassalary.Thiswillresultinamuchhighersalarythanifyouhadjustbeenreasonableinthefirstplace.Remember,though,thatpayincludesallformsofcompensation.SoifyouhaveamedicalexpensereimbursementplaninyourCcorporation,yourpayincludesyourmedicalbenefitseventhoughthemedicalbenefitsaren’ttaxedtoyou.Thesameistrueofanyotherbenefitsthatyouprovideyouremployee(s).

So,youmayendupwithasmallersalarythanwhatyoufindontheInternet.Youalsoneedtopayyoursalaryatleastmonthly,sincethat’swhatyouwoulddowithsomeoneworkingforyou.Don’tputthisoffuntiltheendoftheyear.Ifyoudo,theIRShasadditionalammunitionforsayingthatyoursalaryisnotreasonable.

ChapterTwelve

LowerYourProperty,Sales,andValue-AddedTaxes

“Theartoftaxationconsistsinsopluckingthegooseastoobtainthelargestpossibleamountoffeatherswiththesmallestpossibleamountofhissing.”Jean-

BaptistColbert

Mosttaxprofessionalsspendtheirentirecareerdealingonlywiththeircountry’sincometaxsystem.Theyneverthinkabouttheothertaxestheirclientshavetopay.Forthefirstsevenyearsofmycareer,Iwasnodifferent.Thatis,untilmyfirstdayonthejobatPinnacleWest.

PinnacleWestisoneofthelargestcompaniesinArizona.ItownsthelargestpublicutilityinArizona,andatonetimealsoownedoneofthelargestrealestatedevelopersinthestate.Ididn’thaveanyexperienceinpublicutilitieswhenIstartedatthecompany,butIhadatremendousamountofexperienceinrealestate.SoIwashiredtohandletheincometaxworkfortherealestatecompanyandcontributetotheincometaxmattersforthepublicutilitycompanyaswellasotherPinnacleWestcompanies.

SoonafterIstartedmynewjob,mybosstoldmethatwe’dbeheadingtoWashington,DC,tospeaktosometaxattorneysaboutarulingwewereseekingfromtheIRS.Afewyearsearlier,PinnacleWesthadpurchasedasavingsandloanrightbeforethecollapseoftheentireU.S.savingsandloanindustry.BythetimeIarrivedin1990,thesavingsandloancompanywasworthless.

WewereaskingtheIRSwhetherPinnacleWestcoulddeductinfullthelossesfromthepurchaseandsubsequentdemiseofthesavingsandloancompanyagainsttheincomestaxesofourothercompanies.Withinacoupleofmonthswehadtheanswer,anditwasyes.ThiswasahugewinforPinnacleWestanditsshareholders.

Ofcourse,italsomeantthatPinnacleWestwouldn’thavetopayincometaxesforyearstocome.Myjobastaxadvisorseemedalotlessimportant.SoIlookedforotherwaysIcouldhelpthecompany.Idiscoveredthattherewere

manyothertaxesthatthecompanywasrequiredtopaythatweren’toffsetbythelossfromthesavingsandloan.Theseconsistedmostlyofsalestaxesandpropertytaxes.Atthetime,publicutilitiesinArizonapaidhugepropertytaxes,muchmorethanmanyothertaxpayers.AndsincePinnacleWestoperatedseveralcoal-firedelectricgeneratingplantsandoneofthelargestnuclearenergyplantsintheworld,thecompanypaidalotofsalestaxesonitspurchases.

Fromthatexperience,Ilearnedthatpropertytaxandsalestaxcouldbereducedalmostaseasilyasincometax.Justasincometax,allittookwaslearningtherulesandthenapplyingthemtoreducethetaxes.Thiswasgreatforme.Itwasafreeeducation.IdiscoveredtwonewtaxesthatI’dknownnothingaboutbeforejoiningPinnacleWest,andthecompanygavemealltheresourcesIneededtolearnaboutthemandthenreducethem.

Thereareasmanyexemptionsandtaxbenefitsinthesalesandpropertytaxrulesasthereareintheincometaxlaw.Thesearetaxesthatmanytimesaresimplyignoredbybusinessownersandtheirtaxadvisors.Wejustcometoacceptthemasnormal.Wehaveatendencytocomplainalotlessaboutsalestaxinparticularthanwedoaboutincometax.Yetthedollarsinvolvedareenormous.Letmeshowyoujusthowimportantthesetaxescanbe.

Thereareasmanyexemptionsandtaxbenefits

inthesalesandpropertytaxrulesasthereareintheincometaxlaw.

SalesTaxes

Let’ssayyourbusinessearns$100inincome.Mostbusinesseshaveexpensesequaltoatleast80percentoftheirincome.Sointhiscase,youhave$80ofexpensestooffsetyour$100ofincome.Thatleavesyouwithnetincomeof$20.Supposeyouhaveataxrateof30percentonyournetincome.Thatmeansthatonthe$100ofgrossincome,youenduppayingincometaxof$6.

Comparethattoyoursalestax,goodsandservicestax,orvalue-addedtax.EvenintheUnitedStates,wherethereisnonationalsalestax,thesalestaxonyour$100ofincomecouldbearound$8,dependingonwhatstateyoulivein.That’stwomoredollarsthanyourincometax.Andinmostcountrieswherethereisanationalsalestaxitcanbeashighas15to20percentormore.You

couldhavethreetimesasmuchsalestaxasincometaxonthesamerevenue.Sopotentially,thesalestaxisalotmorethantheincometaxonthesame

amountofincome.Ofcourse,thestandardanswertothisisthat,astheseller,yougettopassonthistaxtothebuyer.Soyoureallydon’thavetopaythetaxatall,right?Thisistrueforthetaxesonyoursales.Butwhataboutthesalestaxesonyourpurchases?Howmuchareyoupayingintaxeseachtimeyoupurchasesuppliesorequipment?

WhileatPinnacleWest,Ifoundthattherearemanydeductionsandotherbenefitsrelatedtosalestaxes.InArizona,asinmoststates,purchasesofmanufacturingequipmentarenotsubjecttosalestax.Thesameistrueforpurchasesofequipmentusedinresearchanddevelopment,andpurchasesofinventoryandrawmaterialsthatyoueventuallyselltoyourcustomers.Infact,therearehundredsofdifferentitemsthatarenotsubjecttotax.

Youmaythinkthatyouraccountantknowsallofthis.Asanaccountant,Ididn’t,andyouraccountantprobablydoesn’teither.I’dbeeninthenationaltaxdepartmentofoneofthelargestaccountingfirmsintheworldanddidn’tknowallofthis.Sowhatmakesyousosurethatyouraccountantknowsaboutthesesalestaxbenefits?

Youmaythinkthatyouraccountantknowsallofthis.Ididn’t,andyour

accountantprobablydoesn’teither.

PurchasesNotSubjecttoSalesTax(InManyU.S.States)•PurchasesofManufacturingEquipment•PurchasesofInventory•PurchasesofEquipmentusedinResearchandDevelopment•PurchasesofotherSuppliesBesuretocheckwithyouraccountanttoensureyouaregettingallthesalestaxbenefitsavailabletoyou.

Ifyoudon’tliveintheUnitedStates,itcanbeevenworse.Canada,Australia,andEuropeallhavehighersalestaxratesthantheUnitedStates.Thevalueaddedtax(VAT)inFrance,forexample,is19.6percent.Youpayataxof

almost20percentoneverypurchase.Whatifyoucouldreducethattoonlypayingtaxon80percentofyourpurchases?Orevenless?Allthemoneysavedwouldgostraighttoyourbottomline,which,ifyou’retheownerofthecompany,actuallygoesstraightintoyourpocket.It’slikegettinga20percentdiscountoneverythingyoubuy.

Andthenthereisthequestionofchargingthesetaxestoyourcustomers.Whodoyoucharge?Doyouchargeeveryone?Whataboutpeoplewhodon’tliveinyourprovinceoryourstate?Orevenyourcountry?InthisageofInternetsales,whichcustomershavetopaytax?

Manypeoplethinktheydon’thavetochargesalestaxtoanyonewholivesoutsideoftheprovinceorstatewheretheircompany’shomeofficeisbased.Thismaynotbetrue.YourcompanycouldberequiredtocollectsalestaxorvalueaddedtaxonInternetsalesorcatalogsalestopeopleinseveraldifferentstatesorprovinces.Andwhathappensifyoudon’t?Itisn’tpretty.

TAXTIP:Whenindoubt,collectit.Notsureifyourbusinessneedstocollectsalestax?Whenindoubt,collectit,remitit,andfileataxreturn.Thecostisminimalbut

theresultissubstantial,becauseitsignificantlyreducesyourexposure.

NottoolongagoIwastalkingtomyfriendTim,whoputsonseminars.Timoftenhasseveraldifferentspeakersteachingathisseminars.Afterthey’redonespeaking,thesepresenterswilloftensellbooks,tapes,orothereducationaltoolstotheaudience.ThesepresenterstravelfromallovertheUnitedStatestoTim’sseminar.Andmanyofthestudentsarealsofromdifferentstates.SoTimdoesn’thavetoworryaboutcollectingsalestaxattheseminar,right?Wrong.

Onlyafewmonthsago,thestatetaxexaminerscametoTimandaskedhimifhe’dbeenchargingsalestaxonallofthesalesathisseminars.Hehadn’t.Theytoldhimthathe’dhavetopaytaxonallofthesalesforthepastfouryearsateveryoneofhisseminars.Thecost?Inexcessof$1million.Ouch.

AskYourselfThis:

Ifthestatetaxexaminerscametovisityoutoday,canyouconfidentlysayyouarechargingsalestaxonalltaxablesales?

CouldTimgobacktothestudents,oreventhespeakers,andchargethemforthesalestax?Noway.Thinkofthebadfeelingspeoplewouldhavetowardshimifhetriedtodothat.Fortunately,Timwasabletopaythetaxandstayinbusiness.Butthisisn’talwaysthecase.Salestaxhasputalotofcompaniesoutofbusiness.Andtheworstpartisthatifanownerofacompanysimplyunderstandstowhomhehastochargesalestax,thecustomerswillgladlypaythetax.Instead,itbecomesaproblemthatpotentiallyputshimoutofbusiness.

Thinkofallthethingsmyfriendcould’vedonewiththat$1millionthatheendeduppayingthestate.I’msureallofthethingsyoucancomeupwitharebetterthanpayingoffthegovernment.Sogetwithyouraccountantortaxadvisorandfindoutwhichcustomerswillowesalestaxeswhentheybuyfromyou.Youmayevenhavetochargetaxtosomecustomerswholiveoutsideofyourstate,province,orcountry.Astheoldadagegoes,it’sbettertobesafethansorry.

UnreportedSalesTaxCouldPutYouOutofBusiness1.Salestaxshouldalwaysbecollectedunlessyouhaveclearproofthatnotaxisdue.

2.Unpaidsalestaxescangrowwithoutyourknowledgeformanyyears.Allcompaniesshouldhaveasalestaxprofessionaldoareviewoftheircollectionrequirementseveryfewyears.

PropertyTaxes

Salestaxisn’ttheonlylocaltaxthatcanbechallenging.Propertytaxisanother.EverycountryI’velookedatchargessomeleveloftaxonthevalueofpropertythatyouown.Andthiscanbetrueforindividualswhoarenotinbusinessaswellasthosewhoareinbusiness.

Propertytaxisespeciallyhardtoswallowindifficulteconomictimes,

becausepropertytaxisn’tchargedonlyifyoumakeaprofit.Anditdoesn’tnecessarilygodownwhenthevalueofyourpropertydecreases.That’sbecausesometimesthegovernmentwillraisethetaxratetomakeupforthedecreaseinvalue.

Thegoodnewsisthatjustaswithincomeandsalestaxestherearemanywaystoreduceyourpropertytax.Let’sspendafewminutestalkingabouttwodifferenttypesofpropertytaxes:therealestatepropertytaxandthepersonalpropertytax.

RealEstatePropertyTax

Onetypeofpropertytaxisonthevalueofyourrealestate.Thisisthetaxpeoplemostoftenassociatewithpropertytaxesbecauseinmanycountriesyouhavetopaypropertytaxonyourhome.Inmostcountries,thesetaxesarealsoleviedagainstyourrentalandbusinessproperties.

Thegoodnewsisthatjustaswithincomeandsalestaxestherearemanyways

toreduceyourpropertytax.

Thepropertytaxisusuallycalculatedasapercentageofthevalueofyourrealestate.Sotheobviouswaytoreduceyourpropertytaxistochallengethevalueplacedonyourproperty.Thisisespeciallytruewhenpropertyvaluesaregoingdown.Theassessor(thepersonatthetaxofficewhodetermineswhatthevalueofyourpropertyisfortaxpurposes)doesn’talwayskeepupwithwhat’shappeninginthemarket.Soyoucouldenduppayingtaxonlastyear’svalue.Insomecases,suchasthepresentU.S.housingdownturn,thiscouldbedevastating.

Besuretopayattentionwhenyougetyourpropertytaxbill,evenifyourmortgagecompanyorbankpaysyourpropertytax.Onlyyoucanprotestthevaluetheyputonyourproperty.Keepinmindthattherearetimelimitsforprotestingthevalueaswell.

Therearetwowaystoarguethatyourpropertyshouldbevaluedatalowerfigurethanwhatthetaxassessorsays.Oneistoshowthatthevalueofyourpropertyisalotlessthanwhattheysay.Youcouldgetanappraisal,or,ifthepropertyisarentalpropertyorusedinyourbusiness,youmaybeabletouse

yourreducedrentalincomeandthereducedrentsofsimilarpropertiesasevidencethatyourpropertyshouldbevaluedatalowerdollarvaluethanitwasvaluedatoriginally.

Anotherwaytopaylesspropertytaxistoshowthatyourpropertyisbeingvaluedatahigherdollarvaluethanasimilarproperty.Inmanycases,propertiesofsimilaruse,size,andlocationarerequiredtobevaluedthesame.

IhadaninterestingexperienceseveralyearsagowhenIbuiltmyhouse.Myhousewasoneofthefewhousesatthetimewithabasement.Thebasementisalittlelessthanhalfthesizeofthemainfloor.Ilovemybasement.Itstayswarminthewinterandcoolinthesummer.Asaresult,myutilitybillforthebasementisalotlowerthanforthemainfloor.

WhenIreceivedmyfirstpropertytaxvaluationnotice,Iwasshocked.ItshowedavaluemuchhigherthanI’dexpected.Iwenttothecountyandcheckedthevalueofmynext-doorneighbor’shome.Thathouseistwostorieswithoutabasement.It’salittlebiggerthanmineintotal.WhenIcheckedthevalue,though,thecountyshowedittobeamuchlowervaluethanmyhouse.

Idecidedtoappealmyvaluation.Ihadafriendwhowasanexpertinpropertytax.Heagreedtogowithmetotheassessor’sofficetohelpmewithmyappeal.Isatdownwiththeassessor,andheexplainedthatmyhousewasvaluedmorethanmyneighbor’seventhoughitwassmallerbecauseminewasallonelevel.

Itseemsthatone-levelhousesinArizonaareworthmorepersquarefootthantwo-storyhouses,andbecauseofthistheyaretaxedhigherthantwo-levelhouses.Thatwasallfineanddandy.Onlymyhousewasn’tonelevel.Itwastwo.WhatIlearnedthatdayabouttheruleswasmorethanalittlesurprising.

Itturnsoutthatthecountyonlycountsahouseashavingtwofloorsifthesmallerofthetwofloorsisatleasthalfthesizeofthelargerfloor.Myneighbor’shousewasaboutthesamesizeonbothfloors.Sincemybasementwaslessthanhalfthesizeoftheupstairs,itwastreatedasasingle-storyhome.I’vebeenpayinghighertaxesforfifteenyearsonmyhomesimplybecauseIdidn’tbuilditbigenough.It’sataxaccountant’sworstnightmare.

HadIknowntheruleswhenIdesignedthehouse,Iprobablywould’vemadeitlarger.Itwould’vecostalittlemoretobuild,butIwould’vehadtheextraspaceandmytaxesactuallywould’vegonedown.

2012U.S.Projected

ReducingYourRealEstatePropertyTax1. Toreduceyourpropertytax,challengethevalueplacedon

yourproperty.2. Payattentiontothefactthatyourpropertytaxbillstatesthe

timeperiodwithinwhichyoumustprotestorappealthevalueplacedonyourproperty.Challengeorprotestyourpropertytaxesby:

a.Gettinganappraisalthatwillproveyourvalueislessthanwhatisstated

b.Showingthatyourpropertyisbeingvaluedhigherthanasimilarproperty

PersonalPropertyTax

Theotherpropertytaxesyouneedtoknowaboutaren’tleviedonrealestate.They’recalledpersonalpropertytaxes,andtheyusuallyonlyapplytobusinessproperty.Andtheycanbehuge.

Thegoodnewsisthattherearemanyspecialbenefitstobusinessesthatcanseriouslyreducethetaxesonbusinesspersonalproperty.Justlikeincometax,thesebenefitsgotothosebusinessesthatthegovernmentwantstoencourage.Yourbusinesscouldbeoneofthem.

Thegoodnewsisthattherearemanyspecialbenefitstobusinessesthatcanseriouslyreducethetaxesonbusinesspersonalproperty.

Therearemanytaxreductionsforpropertyusedinresearchanddevelopmentandinhightechmanufacturing.Thesebenefitscomethroughthemethodologyusedtosetavalueontheequipmentandotherproperty.Insteadoflookingatcomparisonsofvaluetoothersimilarequipment,thesetypesofpropertyareusuallytaxedbasedontheircostlessareductionfordepreciation.

TwoTypesofTax-FavoredPersonalProperty1. Personalpropertyusedinresearchanddevelopment.

2. Personalpropertyusedinhigh-techmanufacturing.Besuretocheckwithyouraccountanttoensureyouaregettingallthetax

benefitsyoudeserve.

Don’tbefooledintothinkingthatthedepreciationforpropertytaxpurposesisthesameasforincometax.Theydon’thaveanythingincommon.Thedepreciationforpropertytaxisoftenalotmorethanwhatyouwouldgetforincometax.Andthedepreciationoftendependsnotonlyonthetypeofequipmentbutontheindustry.

Takeaseriouslookatyourbusinesspropertytaxes,bothforrealproperty,suchaslandandbuildingsandpersonalproperty,suchasmachineryandequipment,andlookforwaystoreducethepropertytaxonyourhomeifyouliveinacountrythattaxespersonalhomes.

Mostofall,rememberthattherearemanytaxesyoucanreducebesidesyourincometax.I’vejustscratchedthesurfacehere.Besidessalesandpropertytaxes,therearealsomanyexcisetaxesoneverythingfromtirestooilandgas.Thesetaxescombinedcanbemuchmorethanyourincometaxes,andtheyhavejustasmanydeductionsandotherbenefitsavailable.Justbesurethatyourtaxadvisorisexperiencedinthesetaxesandthatyouknowwhatyouneedtodotoreducethem.

Wearegoingtotalknextaboutanothertax—theestatetax.Thisisthetaxthatattemptstoconfiscateatyourdeathwhattheincometaxwasn’tabletogetduringyourlife.

CHAPTER12:KEYPOINTS1.Mostpeopleandtaxprofessionalsonlyfocusonreducingincometaxes,ignoringpotentiallybiggertaxessuchassales,property,andexcisetaxes.

2.Thereareasmanyexemptionsandtaxbenefitsinthesalesandpropertytaxrulesasthereareintheincometaxlaw.

3.Notunderstandingwhentochargesalestaxesandhowtoreduceyoursalestaxliabilitycanadduptomajorlossesforyouandyourcompany.

4.Therearetwotypesofpropertytaxes,realestatepropertyandpersonalproperty.Eachhasitsownsetofdeductionsandwaysofbeingreduced,alongwiththeirpotentialformajorsavings.

TaxStrategy#12–ReduceYourSalesTaxBurden

Asabusinessowner,youpaysalestaxontwobasictypesoftransactions:itemsyoubuyforyourbusinessandproductsyourcompanysells.Doyouknowwhichofthesetwotransactionshasthebiggesteffectonyourbottomline?Mostpeoplewouldsaythattheitemsyoupurchaseforyourbusinessareabiggerexpensesinceyoucan’tpassonthosetaxestoyourcustomers.Therealityisthatformostcompaniesthebiggerchallengeisthetaxonproductsyousell.

Thereasonisthatifyoudon’tcollecttaxonproductsthatyousell,andthestatelaterauditsyouandassessestax,thetaxburdenshiftsfromyourcustomerstoyourbusiness.Forthisreason,youshouldalwayscollectsalestaxunlessyouaresurethatnosalestaxisdue.Letmegiveyouanexample.

AnumberofyearsagoabigbankmovedintoArizonaandpurchasedanotherbank’sassets.Amongtheseassetswasanautomobileleasingcompany.Thenewbankdidn’trealizethatinArizonayoumustchargesalestaxonautomobileleasepayments.Whenthestatecameinandauditedthem,theywerepresentedwithanenormous—andunexpected—taxbill.Thebankwentbacktoitscustomersandaskedthemtopaythesalestax.Formostofthecustomers,thisamountedto$1,000ormoreinbacktaxes.Thecustomersrebelled,calledthenewspaper,andthebankmadefront-pageheadlines—andnotinagoodway.Thebankhadtobackoffandpaythetaxes.Thisstory,whileunfortunate,isnotuncommon.Ihaveseenmorebusinessesputoutofbusinessforuncollectedsalestaxthanforanyothertaxreason.It’srarefortheIRStoputacompanyoutofbusiness.It’snotnearlyasrareforthestatesalestaxauditorstoputacompanyoutofbusiness.

Customersareusedtopayingsalestax.So,theydon’tmindseeingitonthebottomofaninvoice.Unlessyourcustomercanprovethattheyshouldn’tpaysalestax,besuretocollectit.Ifyouareunsureaboutwhetheryouarecollectingtaxintherightstates,hireaqualifiedCPAtodoasalestaxstudyforyourbusiness.Youmightfindthattherearemorestatesinwhichyoushouldbecollectingtax.It’salwayscheapertocollectataxandfileasalestaxreportthantofindouttoolatethatyoushouldhavebeencollectingtaxinthatstate.

ChapterThirteen

EstatePlanningisGoodTaxPlanning

“Thepurposeofataxcutistoleavemoremoneywhereitbelongs:inthehandsoftheworkingmenandworkingwomenwhoearneditinthefirstplace.”–

SenatorRobertDole

Mymotherwasbrilliant.Bythetimeshewasfouryearsoldshewasanavidreader.Bythetimeshewas12yearsoldshewasinhighschool,andbythetimeshewas15yearsoldshe’dgraduated.Shehadsomeverydistinctthoughtsonhowtoliveherlife—andsheneverwaveredfromherprinciples.

Oneofmymother’sphilosophieswasthatherchildrenshouldworkfromayoungage.Ithinkeveryoneofussixchildrenhadajobbythetimewewere12.Wealldidsomekindofworkat“ThePlant.”ThePlantwasmyfather’sprintingbusiness.Itwasaprettysizablecompany,atonetimehaving40employees.Weallworkedindifferentpartsofthebusiness.Forexample,mysisterworkedintheartdepartment,oneofmybrothersworkedinthephotographydepartmentandpressroomand,ofcourse,Iworkedintheaccountingdepartment.

Mymotherfeltthatworkwasagoodthing,somethingthatshouldbestartedasearlyaspossibleandcontinuedthroughoutlife.Itwasherbeliefthatherchildrenshouldbeabletohaveagoodworkethictoprovidefortheirownfamilieswhentheywereolder.Sowhensheandmydadpreparedforretirement,shemadeadecisionthatwasconsistentwithherphilosophy.Shedecidedthattheyshouldbreakevenwhentheydied.Shedidn’twanttoleaveanydebtsoutstandingthatwewouldhavetopay—andshedidn’twanttoleaveusanyassetseither.

Andthat’sprettymuchwhathappened.Mymotherdiedattheageofeighty,afewyearsbeforemyfatherpassedaway.Whenshedied,theyhadalittlebitofstockandtwohouses,theirprimaryhomeandtheirsummerhomeinBearLake,Idaho.Thestocksharescarriedmydadfortherestofhislife.Whenhepassedaway,thesummerhomewenttomysister,Peggy,who,alongwithherhusband,

tookcareofmyparentsintheirlateryears.Theonlythinglefttotherestofthekidswastheprimaryhouse.

I’vealwaysbeenhappyaboutthis.Myparentstookgoodcareofuswhenwewerechildren.Wealwayshadplentyoffoodonthetableandshelteroverourheads,andwetookavacationeveryyear.Andtheypassedontheirvaluesandtheirwisdomtouskids—that’sfarmoreimportantthantheirmoney.

Still,theplanningformyownfamilyisalittledifferentbecauseourcircumstancesaredifferent.Mywifeisretired,andmysonsstillaren’tontheirfeet.Iwanttomakesurethatifsomethinghappenstome,theyarewellcaredfor.Oncetheboysgettheircareersgoing,IsuspectIwillfeelmuchasmymotherdid—theyshouldworkforthemselvesandtakecareoftheirownfamilies.

Thatbeingsaid,Idoliketheideaofbuildingsomeassetsformychildrenandgrandchildren.WhileIwasfinewithmyparents’decisiontospendmostoftheirwealthwhiletheywerealive,thereareafewthingsIwanttoprovidemychildrenandgrandchildren.Forexample,I’dliketohaveplentyofmoneyformygrandchildrentoattendthebestschoolsthroughouttheirlivesandformetobeabletotravelwiththem.And,ofcourse,IwanttoownmydreamhomesfreeandclearofanymortgagessothatmyfamilycanenjoythemevenafterI’mgone.

I’dalsoliketoleavemoneytocharitywhenIdie.Thereisalotofgoodthatcanbedoneinthisworldwhenmoneyisusedfortherightpurpose.Isuspectalotofyoufeelthesame.Iknowmyclientsdo.Mostpeople,Ifind,wanttoprovidefortheirfamiliesandforsomecharitablecauseswhentheydie.

Thechallengecomeswithgettingyourestatesetupjustrightsothatyougettochoosewhogetsyourwealth.Thatincludeschoosinghowmuchofyourwealththegovernmentgetswhenyoudie.Likemymother,Idon’twanttoleaveanyonewithmydebts.NordoIwantthegovernmenttohavemyassets.YouknowbynowhowIfeelaboutthegovernmentgettinganythingmorethanIhavetopaythem.ThisincludeswhenIdie.

Morethananything,Idon’twantmyfamilytohaveanyhassleswhenIdie.Iwanteverythingtogosmoothlyforthem.It’senoughthatthey’llhavetodealwithmydeath.Idon’twantthemworryingabouthowmyassetswillbedistributed,dealingwithcourtsoveracontestedwill,oranythingelse,forthatmatter.

That’swhyIfeelsostronglyaboutdoinggoodestateplanning.Estateplanningcomesdowntotwothings:makingthefinancialaspectsofyourdeath

aseasyaspossibleforyourfamilytohandleandmakingsureall,oratleastmost,ofyourassetsgotoyourfamily,yourcharities,andothersyouchoose—andnottothegovernment.

Estateplanningcomesdowntotwothings:makingthefinancialaspectofyourdeathaseasyaspossibleforyourfamilytohandleandmakingsureall,oratleastmost,of

yourassetsgotoyourfamily,yourcharities,andothersyouchoose—andnottothegovernment.

ThreeStepstoSuccessfulEstatePlanning

Intheremainderofthischapter,we’lllookatstepsyoushouldtakethatwillsimplifytheprocessyourheirswillneedtofollowafteryourdeathandincreasetheamountofyourwealththattheyhaveavailabletothem.

ThreeStepstoSuccessfulEstatePlanning

1.Placingassetsintrusts

2.Creatingawill

3.Avoidingtheestatetax

PlacingAssetsinTrusts

Let’sstartwithmakingthefinancialaspectsaseasyaspossible.Whilenotallcountrieshaveaninheritancetax(AustraliaandCanadagotridofityearsago),everyonehastodealwiththeotherfinancialaspectsofdeath.I’mnotjusttalkingabouthavinginsurancesothatthere’senoughmoneyforyourcoffinandfuneralexpenses.I’malsotalkingabouthavingthetitleofyourassetstakencareofbeforeyoudiesothatyourfamilydoesn’thavetogothroughprobate.

Probateistheprocessofchanginganasset’stitle(i.e.,whoownsthem)fromthepersonwhodiedtothatperson’sheirs.Heirsaresimplythepeopleororganizationsthatgetyourassetswhenyoudie,suchasyourfamilyoryourfavoritecharity.Probateisbadforafewreasons.It’sbadbecauseit’sapainfulprocessthatincludesthecourt,ajudge,andlawyers.It’sbadbecauseitcanbeexpensive.Andit’sbadbecauseit’spublic.Thatmeansthatallthefinancialpiratesouttherecan(andwill)pounceonyourspouseandyourchildrentryingtoconvincethemtoinvestorspendtheirinheritanceonscams.

ProbateistobeAVOIDEDbecause:

1.Itincludescourts,judges,andlawyers

2.It’sexpensive

3.It’spublic(everyoneknows)

Thereisaneasywayoutofprobateinmostcountries.Makesureallofyourassetsaretitledtoatrust.Youcanbethetrustee(owner)ofthetrust,andyoucanevenbethebeneficiary(therecipient)ofthetrustassetswhileyou’realive.Thetrustdocumentsayswhatwillhappentotheassetswhenyoudie.It’sbasicallyyourtickettocontrolyourassetsafterdeath.Wouldn’titbegreatforyourlovedonestonothaveanyargumentsoverwhogetswhat?Andtonothavetogothroughprobate,keepingyourfamilymattersprivate?Yougetallthisandmoresimplybysettingupatrustthatownsallofyourmajorassets.

Thereisaneasywayoutofprobateinmostcountries.Makesureallofyourassetsaretitledtoatrust.

TAXTIP:Giveandtakewithyourcharitablegiving.Ifyouhavecharitableintentionswithyourestate,thenconsideracharitabletrust.Withacharitabletrust,youcangiveyourassetstothecharitynowbutstilltaketheincomestreamfromtheassetsfortherestofyourlife.Youstillgettheincome,butthevalueoftheassetsinthe

trustwillavoidestatetax.

WhereThere’saWill

Oneotherdocumentyouneedinordertomakelifeeasierforthosewhosurviveyouisawill.Justbecauseyouhaveatrustdoesn’tmeanyoucanskipputtingtogetherarock-solidwill.Thisisparticularlytrueifyouhavesmallchildren.Awillallowsyoutoappointthepersonwhoisgoingtobetheguardianofyourchildren.Inawillyoucanalsobeveryspecificaboutwhogetswhichofyourassets,andyoucanshareyourfuneralrequestsandanyotherspecialrequests.Betweenawillandatrust,youshouldhavemostbasescovered.

Betweenawillandatrust,youshouldhavemostbasescovered.

SetUpaTrustandaWill1. ATrustwill:

a. Controlyourassetsafteryourdeath.b. Avoidprobate.c Maintainprivacy.

2. AWillcan:a. Appointaguardianforyourchildren.

b. Specifythedistributionofyourassets.c. Specifyanyotherspecialrequests.

AvoidingtheEstateTax

Determiningwhereyourassetsgoisonlyonepartoftheequation.Youstillhavetofigureouthowtokeepthegovernmentoutofyouraffairsandoutofyourpocketwhenyou’regone.Thisisespeciallytrueforthoseofyouwholiveinacountrywithanestatetax,ataxleviedonyourassetswhenyoudie.

France,GreatBritainandtheUnitedStates,amongothercountries,allhaveaninheritancetaxorestatetaxthat’sbasedonthevalueofyourassetswhenyoudie.Andthetaxcanbehigh—asmuchas60percentinFrance.Inotherplaces,suchasCanada,thereisn’tataxonthevalueofyourassets.ButinCanadayoustillgettaxedwhenyoudie.That’sright.Justbecausethereisn’tanestatetaxinCanadadoesn’tmeanthatthereisn’tataxwhensomeonedies.Itjustgoesbyadifferentname.It’sbasicallyanincometaxleviedonaperson’sassets,whichareconsideredsoldatthefairmarketvalueonthedaythepersondies.Theeffectisthesameasanestatetax,thoughyoudogetfavorablecapitalgainsratesonmanyoftheassets.SoifyouliveinCanada,estateplanningisstillveryimportant.

LowerIsBetter

Thekeytogettingaroundanestatetaxistolearntherules.Thefirstruleisthattheloweryourassets’value,theloweryourestatetax.Thatmeansthatthefewerassetsyouownwhenyoudie,theloweryourtaxeswillbe.Thekeyistogetasmanyassetsasyoucanoutofyourestate(i.e.,yourownership)duringyourlifetimewhilestillmaintainingcontrolofthoseassets.

Thekeytogettingaroundanestatetaxistolearntherules.

ESTATETAXRULE#1:Theloweryourassets’value,theloweryourestatetax.

Theobviousthingtodowouldseemtobetogiveyourassetsaway,right?Well,that’sfineexceptfortwothings.One,youwanttostillcontroltheassetswhileyou’realiveincaseyouneedthem.Andtwo,everycountrywithanestatetaxalsohasagifttaxthatisatleastasmuchastheestatetax.Thegifttaxisspecificallycreatedtonipthiskindofbehaviorinthebud.

Tolowerthevalueofyourestate,then,youneedtolearnsomemoreoftheestatetaxrules.Thesecondruleineverycountryisthatportionsofyourassetsaren’ttaxable.Thisiscalledanexemption.Somecountries,suchastheUnitedStates,haveaveryhighexemption.Others,suchasGreatBritain,havealowerexemption.Stillothers,suchasFrance,haveadifferentexemptiondependingonwhoisinheritingtheassets.Soyouwillneedtofindouttheexemptionamountinyourcountry.Ontheplusside,mostcountries’exemptionsworknotonlywhenyoudiebutalsoforthegiftsyoumakeduringyourlifetime.

ESTATETAXRULE#2:Thereisaportionofyourassetsthatarenottaxable(thisiscalledanexemption).

Sinceyouwanttoreducethevalueofyourestate,oneofthetrickstoloweringyourestatetaxistogiveawayassetssuchasrealestateandbusinessesthatyouthinkwillgoupinvalue.Therearetworeasonstheseassetsaregoodonestogiveawayduringyourlifetime.First,youcangiveawaythevaluewithoutgivingawaythecontrolbyusingalimitedpartnershiporsimilarentity.Second,youcanutilizediscounts.

Inyourestateplanning,giveawayassetswhere:

1.Yougiveawayvaluewithoutgivingawaycontrol

2.Youcanminimizethegifttaxbygivingawayportionsofeachasset

GivingAwayValuewithoutGivingAwayControl—LimitedPartnerships

Alimitedpartnershipisanentitythathastwotypesofowners.Oneownerisageneralpartnerandoneisalimitedpartner.Ageneralpartnerisinchargeofthepartnershipevenifheonlyownsasmallportionofthepartnership.Alimited

partnerhasnosayintheday-to-dayoperationsofthepartnership.Thismeansthatyoucanbethegeneralpartner,owningaslittleasonepercentofthepartnershipandstillbeincontrol.

Sowhenyougiveawayalimitedshareofthepartnership,thepersonyougiveittowon’thaveanysayinwhathappensinthepartnership.Ilovethis.IcancontrolsomethingthatIdon’tevenown.Andduringmylifetime,allIcareaboutiscontrollingthebusinessorrealestate—notwhetherItechnicallyownit.Asthegeneralpartner,Icanevenpaymyselfasalaryfromthepartnership.

Duringmylifetime,allIcareaboutiscontrollingthe

businessorrealestate—notwhetherItechnicallyownit.

OutcomesofSettingUpaLimitedPartnership1.Youcangiveawayassets(limitedshares)tothelimitedpartners,andasthegeneralpartner,youmaintaincontrol.

2.Youcanpayyourselfasalaryfromthelimitedpartnership.

3.YourestategetsBIGtaxsavings.

ReducingYourGiftTaxbyOnlyGivingawayaPortionofEachAsset

ThesecondreasonIliketogiveawaybusinessandrealestatesharesisthatIcangivemoreofthemawaythanIcanwithsomeotherassets,allthewhilenotusingupallofmyexemption.Idothisbygivingawayonlyaportionofeachassetatatime,usingatoolcalledadiscount.Gifttaxisataxonthevalueofagift.Insomecases,thevalueisobvious.Forexample,ifyoumakeagiftofcash,thevalueofthecashistheamountofmoneyyougaveaway.Thesamewouldbetrueofgoldorsilverorsharesofstockinapubliclytradedcompany,suchasIBMorMicrosoft.That’sbecausethepersonwhoreceivesthegold,silverorsharescouldturnaroundandconvertthemtocashsimplybysellingthemtothepublic.

Whathappens,though,whenyougiveawayasmallportionofaprivatecompany?Thepersonyougivethesesharestomaynothaveanyvoteorothercontrolofthecompany.Thiswouldmaketheshareslessvaluable.Asmallshareofacompanywheretheownerhaslittlecontrolorvoteiscalleda“minorityinterest.”Nobodywillpaythesameamountforsharesofacompanythattheycan’tcontrolastheywouldforsharesofacompanythatgivesthemarighttovoteonhowthecompanyisrun.Soaminorityinteresthaslessvaluethenaninterestthatcontrolsthemanagementandsaleofacompany.

Thenagain,whenyougiveawayashareofaprivatecompany,canthepersonyougiveittoeasilygooutandsellitforcash?Itcouldbeverydifficulttoselltheshares,astheremayberestrictionsonwhocanbuythesharesortheremaysimplybenomarketfortheshares.Soyoumayhavetosellthematadiscount,orareducedpricefromwhattheywouldbeworthiftheshareswereofapubliccompanyandcouldbesoldinthestockmarket.

Thesetworeductionsinvaluearecalled“discounts.”Thefirstdiscountiscalleda“minorityshare”discount.Itworkslikethis.

Supposeyourbusinessisworth$500,000intotal.Thatmeansthatthereissomeoneouttherewhowouldbewillingtobuyyourbusinessforthatamount.Let’ssayyoudecidetogiveaway20percentofyourbusinesstoyourchildren.Youmightthinkthat20percentofa$500,000businessisworth$100,000,right?Wrong.Because20percentwon’tletsomeonehaveanysayinwhathappensinthebusiness,it’sworthalotlessthan$100,000.Itcouldbeworthaslittleas$60,000.Thisiscalledaminoritydiscount.Thismeansthatyoucouldgiveaway20percentofyourbusinessandyoumightonlyuseup$60,000ofyour

exemption.That’slikegettinganextra$40,000exemption.

OutcomesofaMinorityDiscount

1.Youcangiveawayassets(minorityshares)andstillmaintaincontrol.

2.Theportionorpercentageyougiveawaycouldbeworthlessthantheactualfigure,whichmeansyouonlyuseaportionofyourlifetimeexemption.

3.YourestategetsBIGtaxsavings.

Theotherdiscountthatcouldbeavailableisforapartialownershipthatisdifficulttosell.Thisiscalledamarketabilitydiscount.Let’susethebusinessexampleagain.Ifthesharesofthebusinesswerelistedonthestockexchange,youwouldbeabletosellyoursharesanytimeyouwantatthepricelistedontheexchange.Privatecompanysharesdon’tworkthisway.Peopledon’tlikebuyingintoafamilybusinesswhentheyarenotpartofthefamily.Thereisalotofriskthattheymaynotknowabout.Or,thesharesmighthaverestrictionsonwhocanbuythemoratwhatprice.Sothecourtsallowadiscountonthevalueoftheshares.

Insummary,themarketabilitydiscountisallowedbecauseit’sdifficulttomarketandsellapartialinterestinacloselyheldbusiness.Theminoritydiscountissimplybecauseyoudon’tcontrolthebusiness(youmaynothaveanysayatall).Youcouldevenownamajorityofabusinesswithoutcontrollingit.

OutcomesofPartialOwnershipDiscount

1.Youcangiveawayassets(partialownership)andstillmaintaincontrol.

2.Thepartialownershipyougiveawayisdiscounted.

3.YourestategetsBIGtaxsavings.

BeSuretoUseaQualifiedAppraiserWhenGiftingAssets1.Determiningthevalueoftheassetsanddiscountsallowedrequirestheservicesofavaluationexpert.

2.Makesureyourvaluationexpertisexperiencedingiftandestatetaxvaluationsanddiscounts.

Intheend,allthatreallymattersisthatthevalueofyourgiftisdiscountediftheassetisasmall(lessthancontrolling)shareofabusinessthatisn’tpubliclytraded.Realestateworksthesamewayasabusinesswhenitcomestovalue.Soyoucangiveasmallorminorityshareofrealestateawayandstillgetadiscount.Indoingso,youendupwithasmallerestatetaxbecauseyou’vegivenawaysomeofyourassets.Andsinceyouexpectthoseassetstogoupinvalue,it’sareallygooddealtogivethemawayearly.

Asaquickexampleofhowvaluablegoodestateplanningis,let’stakealookatmyfriendfromChapter8,George,whogavemostofhisbusinesstohischildrenbecausehewantedtousetheirincometaxbrackets.Byplanninghisestatewell,notonlydoeshegettheincometaxbenefithewasseeking,healsogetsanestatetaxbenefit.That’sright,sincehischildrennowown85percentofhisbusinessonly15percentistaxedwhenhedies.Thatwilladduptosomebigsavingsforhislovedones.

Therearemanyother,morecomplex,waystoreduceyourestatetax.Agoodestate-planningattorneyandaccountantcanhelpyouwiththose.Inmostcases,youcancompletelyeliminatetheestatetax.Thekeyistocontrolyourassets,notownthem.Andwithgoodestateplanning,youcanevencontrolthemafteryoudie.That’sespeciallygoodnewsforallofyoucontrolfreaksoutthere.

Inmostcases,youcancompletelyeliminatetheestatetax.Thekeyistocontrolyour

assets,notownthem.

Evenforthoseofyouwhoaren’tcontrolfreaks.Wouldn’tyoustilllovetokeepthegovernmentfromgettingatyourhard-earnedwealthwhenyoudie?Itjusttakesagoodgiftingprogramliketheonewedescribedhereandgoodknowledgetoplanwell.Andthemoreyouknow,thelesstaxyouandyourfamilywillhavetopaywhenyoudie.

We’regoingtogoovertaxesinmultiplelocationsnext.We’lllookattaxesyoumighthavetopayinforeigncountriesandtaxesyoumighthavetopayindifferentstatesandprovinces.You’llbeamazedathoweasyitistoreduceyourtaxesinthesedifferentplacesandhowit’sjustaseasytoenduppayingmuchmorethanneeded.

CHAPTER13:KEYPOINTS1.Estateplanningisimportantbecauseitsavesyourfamilythestressofmanagingyouraffairsanditallowsyoutokeepcontroloveryourassets.

2.Anessentialpartofyourestateplanningshouldbeatrustandawill.Manyofyourbaseswillbecoveredwithjustthesetwoitems.

3.Manycountrieshaveanestatetaxthatisleviedagainstthevalueofyourassetsafteryourdeath.Goodplanningcaneliminatemuchifnotallofyourestatetax.

4.Twovaluablewaystoloweryourestatetaxarelimitedpartnershipsanddiscounts.

TaxStrategy#13–ReducingYourEstateTaxesthroughCharitableTrusts

Lotsofpeoplethesedaysareverycharitablyminded.Peoplewanttogiveasmuchastheycantotheirfavoritecharity.Charitabletrustsareanamazingtoolfordoingthis,especiallysincetheyallowyoutoreduceyourincomeand/oryourestatetaxeseventhoughthecharitymaynotgettheassetsuntilyoudie.Therearetwoprimarytypesofcharitabletruststhatyoucanuse.Hereisalittleprimeronthem.

Thefirstquestiontoaskyourselfiswhatyouwanttodowiththeassetsduringyourlifetimeandwhereyouwantthemtogowhenyoudie.Ifyouwanttheincomefromtheassetsforyourlifetimeandthenwantacharitytohavethe

assetswhenyoudie,youshoulduseacharitableremaindertrust(CRT).InaCRT,yougetalloftheincomeduringyourlifetime.Onceyoudie,theassetsgodirectlytothecharity.Theydon’tgothroughyourwill,sinceyoudon’townthemanymore—thetrustownsthem.

Ifyouwantthecharitytogettheincomewhileyouarealiveandthenyouwanttheassetstogotoyourfamilywhenyoudie,youwantacharitableleadtrust(CLT).InaCLT,thecharitygetstheincomewhileyouarealiveorforaspecificnumberofyears.Whenyoudie,yourassetsgotoyourfamilyoranyoneelseyouchoose.

Thegreatthingaboutbothofthesetrustsisthatyougetanincometaxdeductionforthedonationintheyearyousetupthetrust.Inaddition,withaCRT,yougetanestatetaxdeductionforthefullvalueoftheassetswhenyoudie.EveninaCLT,youmaygetanestatetaxdeduction.

Thesevaluabletoolsrequiredetailedsetupandassistancefromyourtaxadvisor.Donotsetthemupbyyourself.Andbesureyoutalktoyourfamilyaboutwhatyouaredoingsothattheyaren’tsurprisedtofindoutthatsomeofyourassetsareinacharitabletrust.

ChapterFourteen

ReducingYourTaxesinOtherLocations

“IamproudtobepayingtaxesintheUnitedStates.TheonlythingisIcouldbejustasproudforhalfofthemoney.”–ArthurGodfrey

Ilovetotravel.EversinceIwaslittle,I’velovedseeingnewplaces,meetingnewpeople,andexperiencingdifferentcultures.Asachild,wetookfamilyroadtrips.SometimeswewenttoCaliforniatoseemyGrandmaMarcoandvisitDisneyland.Othertimeswe’dgototheFourCornersareatoseetheNativeAmericanruinsatMesaVerde.OrwewenttotheGrandCanyon,BryceCanyon,orYellowstone.

WhenIgotalittleolder,Istartedtakingtripsonmyown.Asateenager,ItwicevisitedWashington,DC,oncewhenIwasaBoyScoutandagainwithmyhighschoolchoir.Itwasfascinatingtoseeallofthedifferentpeopleandsites.

AsIstatedatthebeginningofthebook,whenIwas19IwenttoFrancetoserveamissionfortheMormonChurch.IlovedbeingamissionaryandgoingouttotalktopeopleabouttheChurch.EverydayImetsomeonenewandinteresting.Irememberoftenhavinglongconversationswithpeopleonastreetcorneroratabusstop.TheFrenchlovetoargue,andIlearnedtoenjoytheFrenchargument—neverpersonal,alwaysintenseandeducational.Itwasn’tlongbeforeIfellinlovewiththeFrenchpeople.I’velovedthemeversince.

Thesedays,Idomostofmytravelingforbusiness.Ispeakatseminarsorvisitclients.I’vebeentoAustralia,CanadaandaroundtheUnitedStatesonbusiness.SometimesI’minalocationforjustadayortwoandothertimesforanentireweek.

I’mnotaloneindoingbusinessinalotofdifferentplaces.Thesedays,mostbusinesseshavecustomersthroughoutthecountryandaroundtheworld.TheInternetcanbringuscustomersfromeventheremotestcornersoftheplanet.

You’reprobablywonderingwhatallthishastodowithtaxes,right?Alot,actually.Everwonderifabusinesshastopaytaxesinalltheplacesithas

customers?Wouldn’tthatbeanightmare?Butwouldn’titbeworseifyouweresupposedtopaytaxesinthoseplacesanddidn’tuntilthetaxcollectorcameknockingatyourdoor,wantingback-taxes,penalties,andinterest?Ifabusinesswaitsforthetaxcollectortocomeknocking,chancesareitwillpaymuchhighertaxesthanifitdidalittleplanningearlyon.

Doingbusinessorinvestinginmultiplelocationscanbealittletricky.Understandingthebasicprinciplesinvolvedcanmakethingsmucheasier.Andyou’llbeabletosleepbetteratnightnotworryingabouttaxcollectorsfromotherstates,provinces,andcountriescomingafteryouforunpaidtaxes.Notonlythat,chancesareyoucanreduceyourtaxesoveralljustwithabitofsimpleplanning.

Doingbusinessorinvestinginmultiplelocationscanbealittletricky.Understandingthebasicprinciplesinvolvedcanmakethingsmucheasier.

KnowYourGeography

Let’sstartwithsomeofthemostbasicprinciplesofdoingbusinessinmultiplelocations.Thefirstthingyouhavetoknowiswhereyou’regoingtobetaxed.Ofcourse,you’regoingtobetaxedwhereveryouownpropertyorhaveanoffice.You’llprobablyalsobetaxedwhereveryouhaveemployeesandsometimesevenwhereyoujusthavecontractors.

BasicPrinciplesWhenDoingBusinessinMultipleLocations

1.You’llbetaxedwhereyouhaveproperty.

2.You’llbetaxedwhereyouhaveanoffice.

3.You’llbetaxedwhereyouhaveemployees.

4.Youmaybetaxedwhereyouhavecontractors.

Forexample,takemyaccountingfirm,ProVision.Becauseweservice

clientsallovertheworld,wedoeverythingbyphone,fax,andemail.Clientscanbeanywhere,andwecanstilltakeexcellentcareoftheirtaxandwealthstrategyneeds.Thesameistrueforouremployees.Theydon’treallyhavetoliveinArizona,wherewehaveouroffice.Everythingwedoisdoneelectronically,overtheInternet,fax,andphonelines;wedon’tevenhavetousethepostofficemostofthetime.

Atanyonetime,wemayhaveemployeesinArizona,Utah,Nevada,orseveralotherstates.Wecouldevenhaveemployeesindifferentcountries.Andwehavetofileincometaxreturnsinanystate(orcountry)inwhichwehaveemployees.

Youmayalsobetaxedwhereyouhavecustomers,evenifyouhavenoofficeandnoemployeesinthatlocation.ManyofthestatesintheUnitedStatesareveryaggressiveinforcingbusinessestopaytaxeswherevertheyhavealotofcustomers.Andthey’rewinningincourt.TheruleintheUnitedStatesisthatifyougetfinancial,legalorotherbenefitsfromastate,suchasfireprotectionforarentalpropertyorjustthelegalprotectionofthestatecourtsystem,thestatecantaxyou.Moreandmorecourtsaresayingthatifyougetsalesfromastate,thenyouarefinanciallybenefitingfromthestateenoughtoallowthestatetotaxyou.Theremaycomeatimeinthenearfuturewhenbusinesseshavetopayincometaxineverystateorcountrywheretheyhaveacustomer.

U.S.GENERALSTATERULE:

Ifyougetbenefitsfromastate,thestatecantaxyou.

Thismaynotbeallbad.Whenyouaretaxedinmultiplelocations,youcanenduppayingalotlesstax.That’sbecausedifferentstateshavedifferentrulesabouthowmuchofyourincomeistaxableintheirstate(seeRule#11).

RULE#11:Everylocationhasdifferenttaxrules,andpayingtaxinseverallocationscanresultinpayinglesstotaltaxthanyouwouldifyoudidbusinessinonly

onelocation.

WorktheRules

Inmanycases,youcanpaytaxonaslittleashalfofyourincomejustbyworkingtherulesofthedifferenttaxlocationsagainsteachother.Haveyoueverwonderedwhatitwouldbeliketopayhalfthetaxesyoudonow?Soundstoogoodtobetrue,doesn’tit?Well,Ihavegoodnewsforyou.Noteverythingthatsoundstoogoodtobetruereallyisuntrue.Sometimes,it’sjusttrue.Andthat’showitiswithyourlocal(state,city,andprovincial)taxes.Withtherightplanning,youcancutyourlocalincometaxesbyasmuchas50percent.

Inmanycases,youcanpaytaxonaslittleashalfofyourincomejustbyworkingtherulesofthedifferenttaxlocations

againsteachother.

Therearesomebasicprinciplesyoucanusetoseriouslyreducethesetaxes.Themostimportantprincipletorememberisthatitisbettertobetaxedintwostatesthaninjustone.Ifyouareonlytaxedinonestate,allofyourincomewillbetaxedbythatstate.Ifyouaretaxedintwoormorestates,thensalestostatesinwhichyoudon’thaveanyconnection(employees,propertyorcontractors),couldescapetaxaltogether.Thisisbecauseoftheformulathestatesusetodeterminehowmuchincomegoestoeachstate,calledtheapportionmentformula.Thesamecanhappenwhenyouaretaxedinmultiplecountries.Salestocountriesinwhichyouhavenoconnectioncouldescapetaxaltogether,andattheveryleasttheycouldescapestateorprovincialtaxes.

TAXTIP:Operatinginmultiplestatescanworktoyourbenefit.Doingbusinessinstatesthathavelowornoincometaxratescanhelpreduceyouroverallstatetaxes.

Whenstructuredproperly,someofyourbusinessincomecanbecome“nowhere”incomeandescapestatetaxaltogether.

Thisisnosmallmatter.Planningyourlocaltaxstrategywellcansaveyoutonsofcash.Manylocaleshavetaxesashighas10percentorevenhigher.IntheUnitedStates,severalstateshaveratesashighas11percent.InCanada,provincialratescanexceed17percent.

Ifyouknowtherules,youcanenduppayingtaxesonlessthan100percentofyourincome.Conversely,ifyoudon’tknowtherules,youcanenduppayingtaxonmorethan100percentofyourincome.It’sactuallypossibleforyoursales

tobetaxedinbothyourhomestateandthestateyousellinto.Thisisalsotruewhenyouaredoingbusinessinmorethanonecountry.Ifyouaren’tcareful,youcaneasilypaytaxtwiceonthesameincome,onceinyourhomecountry(orstate)andonceintheothercountries(orstates)whereyouhaveoffices,employees,orcustomers.Sobesuretoformulateacompletemulti-stateandmulti-countrytaxstrategywithyourtaxadvisorsothatyoucanbesuretopaytheleastamountoftaxpossible.

IfYouDon’tUnderstandtheRulesinDifferentLocations:1.Youcouldenduppayingtaxintwolocations.

2.Youcouldpaytaxtwiceonthesameincome.

TheForeignTaxCredit

Let’stalkaboutthemechanicsofpayingtaxesinanothercountry.Inmostcountries,youmusthaveanofficeinthatcountrybeforeyou’llberequiredtopaytaxesthere.Ofcourse,thatmightbeastrivialastheofficeyourforeignemployeeusesoutofhishouse.Eachcountryhasdifferentrulesforthis.Soyou’llwanttoworkwithyourtaxadvisortofindoutwhichcountriesrequireyoutofileataxreturn.

Supposeyoudohavetopaytaxesinanothercountrybesidesyourown.Howdoyoumakesureyoudon’tenduppayingtaxestwice?Thekeyistheforeigntaxcredit.Mostcountriesallowacreditfortaxespaidtoaforeigncountryonincomethat’searnedinthatcountry.Thecreditisusuallythesmalleroftheamountoftaxesyouactuallypaidinthatcountryorthetaxesyoupaidinyourhomecountryonthatincome.Let’slookatanexample.

TedhasabusinesswithalocationinNewYorkandanotherlocationinFrankfurt.BecausehisbusinessisheadquarteredinNewYork,hehastopaytaxon100%oftheincomeofhisbusiness,nomatterwhereitisearned.Ofcourse,

GermanyalsowantstotaxtheincomehisbusinessearnsinFrankfurt.SothepotentialisdoubletaxationontheGermanincome;onceintheUnitedStatesandagaininGermany.Thewaythisdoubletaxationisavoidedisthroughtheforeigntaxcredit.

Let’ssayTed’sbusinessearns$1millionofnetincomeoverall.IntheUnitedStates,hepaystaxof$350,000onthatnetincome.Supposehisbusinessearns$100,000inFrankfurtandthattheGermanincometaxesonthat$100,000is$45,000.Tedreceivesaforeigntaxcreditof$35,000tooffsethisU.S.taxliabilityof$350,000.ThisiscomputedasthelesserofthetaxhepaidinGermanyonhisGermanincome($45,000)ortheincomeearnedinGermanymultipliedbyhisU.S.taxrate($100,000x35%=$35,000).BecausehisU.S.taxrateislowerthanhisGermantaxrate,hereceivesacreditfortheamounthepaidintheUnitedStatesthatwasalsotaxedinGermany,butattheU.S.taxrates.WhilehestillpaysmorethanifhehadearnedtheentireamountintheUnitedStates,Tedstillonlypaystaxesonceontheincomeheearns,justatthehigherofthetwotaxrates.

Inmanycases,youcanpaytaxonaslittleashalfofyourincomejustbyworkingtherulesofthedifferenttaxlocations

againsteachother.

Foreigntaxcreditsusuallydependonyourcountryhavingataxtreatywiththeothercountry.Thetreatywillsaythattheothercountry’scitizensandbusinesseswillgetacreditfortaxespaidtoyourcountryandthatyourcountry’scitizensandbusinesseswillreceivethesametreatment.Alittletitfortat,youmightsay.Thechallengeismakingsurethatyouareusingtherightentitiesinbothcountriessothatyou’reabletotakefulladvantageoftheforeigntaxcreditforthatcountry.Here’sthekey.

RULE#12:Toreceivetheforeigntaxcredit,thesametaxpayer(entity)whopaysthetax

intheforeigncountryhastoreporttheincomeinthehomecountry.

Thisseemsobvious,doesn’tit?Butwhathappenswhentheentityyouuseforyourbusinessintheforeigncountryistaxeddifferentlythanitisinyourhomecountry?Ifindthisalot.Let’stakealookatCanadaandtheUnitedStates

asanexample.SupposeyouliveandworkintheUnitedStatesandyourbusinessisowned

throughalimitedliabilitycompany(LLC).IntheUnitedStates,yourbusinessistaxedtoyouasasoleproprietor.YoudecidetoopenanofficeinCanada,andwantingthingstobeeasy,youopentheofficeinthenameofyourU.S.-basedLLC.

Whatyoudon’trealizeisthatLLCsinCanadaaretreatedascorporations—notassoleproprietorships.SotheLLCwillbesubjecttocorporateincometaxinCanada.IntheUnitedStates,though,you’llbetaxedpersonallyontheincomeearnedinCanada.Theresultisthatadifferenttaxpayer(yourcorporation)ispayingtheCanadiantaxthanthetaxpayer(you,individually)payingtheU.S.tax.Theproblemhereisthatyou’llonlygettheforeigntaxcreditifthesametaxpayerpayingtheU.S.taxisalsopayingtheforeigntax.AveryeasymistakelikethiscanendupmakingyouliabletopaycorporatetaxinCanadaandindividualincometaxintheUnitedStatesonthesameincome.That’sdoubletaxation.

Howdoyoufixthis?It’ssimplyamatterofchoosingtherightentityinbothcountries.OneoptionwouldbeforyoutouseacorporationforyourbusinessintheUnitedStatesandusethatsamecorporationoracorporationownedbyyourcorporationfortheofficeinCanada.Thatway,it’sthecorporationpayingthetaxinbothcountries.IntheUnitedStates,yourcorporationwillreceiveataxcreditforthecorporatetaxespaidinCanada.Youonlypaytaxonce.

GoingOffshore

Nowlet’stalkabouthowtoreduceyourtaxesevenfurther.Startbylookingatwhereyou’retaxed.Chancesareyou’llbetaxedinyourhomecountryonalloftheincomeyouearnaroundtheworld.Soyoumaywanttochangeyourhomecountry.Thatdoesn’tmeanyoupersonallyhavetomove.Yousimplyformandoperateyourbusinessoutofanothercountry.

Othercountriesmayhavelowertaxratesthanyours.Ortheymayhavetaxbenefitsforyourindustrythatarealotbetterthanthecountrywhereyoulive.Somecountriesdon’thaveanytaxatall.Therearemanybusinessesthatcaneasilyoperateoutofoneofthesenon-taxcountries,manyofwhichareintheCaribbean.Andyoujustmightenjoyvisitingyouroperationsandspendingalittletimeonthebeachwhileyou’rethere.

Settingupbusinessoperationsoffshore(i.e.,notinyourhomecountry)can

beabitchallenging.Ican’tstressenoughhoweasyitistomessupstructuringaforeignbusiness.You’llwanttohavegreatadvisors,includinganattorney,ataxadvisor,andabankerwhounderstandthelawsofbothyourhomecountryandthecountrywhereyouwanttosetupbusiness.

Thatit’sachallengedoesn’tmeanyoushouldn’tdoit.Everybusinessownerandinvestorwhohasdonegreatthingshashadagreatteam.Don’tbeafraid.Justgettherightteaminplace.

Ifyourbusinessisn’tonethatyoucaneasilysetupinacountrywithouttaxes,thenlookathowyoucanoperateincountriesandstillpaythelowesttaxes.Let’ssayyourhomecountryisGermanyandyouwanttosetupabusinessorinvestmentoperationintheUnitedStates.Unlessyouhavetobeinaspecificstate,chooseastatethathasgoodtaxlaws.Forinstance,therearefourstatesintheUnitedStatesthatdon’thaveacorporateincometax:Nevada,Washington,SouthDakota,andWyoming.Thesestates,plusFlorida,don’thaveindividualincometaxeseither.

InCanada,theprovincialtaxratesvarywidely.Albertahasmadea

consciousefforttokeepitstaxrateaslowaspossible.Forsmallbusinesses,Canadahasanespeciallylowfederaltaxrate,andsomeoftheprovinceshavelowtaxratesaswell.Francehasgreattaxcreditsforresearchanddevelopment.Soifyourcompanyislookingtodoresearchanddevelopmentoffshore,youmaywanttoconsiderFrance.

Everycountryhastaxbenefitsforbusiness.Allyouhavetodoisworkwithyourtaxadvisortodeterminewhichcountriesofferthebestonesforyourbusiness.Ifyoudon’twanttochooseyourlocationbasedonwheretheyhavethelowesttaxes,thenbesuretolearnallofthetaxbenefitsthatareavailablewhereyoulocateyourbusinessorinvesting.

Everycountryhastaxbenefitsforbusiness.Allyouhavetodoisworkwithyourtaxadvisortodeterminewhich

countriesofferthebestonesforyourbusiness.

Youmayevenbeabletoavoidyourbusinessbeingtaxableinyournewlocation.Ifyoudon’thavetohaveanofficeoremployeesinthatlocation,andifyouaren’tbuyingorleasingrealestate,youmaybeabletoavoidbeingtaxedatall.Itwilldependonthelocallawsandhowmuchotherpresenceyouhavethere.

Intheend,therearemanywaystoreduceyourtaxliabilityfordoingbusinessinotherlocations.Makesuretoconsultyourtaxadvisoronputtingtogetherawinningstrategyforyouandyourassets.

Sofarinthisbookwe’vediscussedalotofwaystoreduceyourtaxes.Nowweneedtotalkabouthowtoputalloftheserulestogethertocreatealife-longtax-savingsplan.

CHAPTER14:KEYPOINTS1.Everylocationhasdifferenttaxrules,andyoucanusethoserulestopaylowertaxesthanifyouonlydidbusinessinonelocation.Manystatesandcountrieshavelowtaxes—orevennotaxesatall.

2.Youcanavoiddoubletaxationifyoutakeadvantageoftheforeigntaxcredit.Toreceivetheforeigntaxcredit,thesametaxpayer(entity)whopaysthetaxintheforeigncountryhastoreporttheincomeinthehomecountry.

3.Youcansetupyourbusinesssothatyoudon’thavetopaytaxesanywherebesidesyourhomecountry.

4.Allstates,provinces,andcountrieshavespeciallydesignedtaxbenefitsforcertaininvestorsandindustries.Youjusthavetofindthelocationthathasthebesttaxbenefitsforyourbusinessorinvesting.

TaxStrategy#14–BeingTaxedinMultipleStatesorCountriesCanSeriouslyReduceYourTaxes

OneofthebiggestmistakesIseewithtaxpayerswhohavebusinessesorinvestmentsinmultiplestatesisatendencytoignoretheimpactofstatetaxes.Becausestatetaxesaresomuchsmallerthanfederaltaxes,alloftheemphasisgoesonreducingfederalincometax.Consider,though,thatstateincometaxescanbeashighas10percentormore.Wouldn’titbeworthwhiletospendtimereducingthesetaxesaswell?

Oneofthebestwaystoreduceyourstatetaxesinabusinessistomakesurethatyouaretaxedinmorethanonestate.Mostpeopleunderstandthattheywillbetaxedinthestatewheretheyhavetheirbusiness.Youmaynotknowthatyouarealsotaxedinanystatewhereyouhaveemployees,orwhereyouhaveanofficeorinventory.Whilesomebusinessownersaretryingtoavoidbeingtaxedinmorethanonestate,ProVisionwantsallofourbusinessclientstobetaxedinatleasttwostates.

Ifyouareonlytaxedinonestate,youwillpaytaxon100percentofyourincometothatstate.However,ifyouaretaxedinmultiplestates,youcanactuallypaytaxonlessthan100percentofyourincome.Sometimesyoucanreduceyourstatetaxby40to50percent.Wouldn’tthatbeworthalittletimeandeffort?Hereishowitworks.

Whenyouaretaxedinmultiplestates,thestatesdivideupyourincomebyaformulatodecidehowmuchincomeistaxedinwhichstate.Whileeachstatehasitsownformula,allofthestates’formulasincludewhatiscalledasalesfactor.Howmanysalesyouhaveinthestatehelpsdeterminehowmuchofyourincomeistaxedinthestate.Whetherasalebelongsinastatedependsonwheretheproductisshipped.IftheproductisshippedtoNewMexico,thatsalebelongstoNewMexico.Ifit’sshippedtoNebraska,thesalebelongstoNebraska.

So,let’ssayyouhaveyourmainofficeinArizonaandyouhaveawarehouse

operationinNevada.Youdon’thaveanyofficesoremployeesanywhereotherthaninthesetwostates.ThatmeansthatwhenyoudoyourArizonataxreturn,youwillonlyreportsalesshippedtoArizona.SinceNevadadoesn’thaveanincometax,allothersaleswillbe“nowhere”sales.SoyouendupbeingtaxedononlyasmallportionofyourincomeinArizonaandyouaren’tsubjecttotaxinanyotherstate.Prettygreat,isn’tit?IfyouwereonlysubjecttotaxesinArizona,allofyourincomewouldbetaxedinArizonanomatterwherethesaleswereshipped.

Somakesureyouaresubjecttotaxinmorethanonestatewhenyouhavesales.Sitdownwithyourtaxadvisorandfigureouthowyoucanbesureyouaretaxedinatleastoneadditionalstatesothatyoudon’thavetopaystatetaxesonallofyourbusinessincome.

PartTwo

YourTaxStrategyforTax-FreeWealth

ChapterFifteen

PlantoTakeControlofYourTaxes:Entities

“Yougottobecarefulifyoudon’tknowwhereyou’regoing,becauseyoumightnotgetthere.”

–YogiBerra

Beingtheyoungestofsixchildren,I’veneverlikedbeingtoldwhattodo.I’vealwayswantedtodothingsmyway,tobeincontrolofmylife.That’swhyearlyonIlearnedtoplanahead.AnytimeIdidn’tplan,IfoundthatIwaslefttothewhimsofothers.Byplanning,Iwasabletotakecontrol,likewhenIwenttograduateschoolattheUniversityofTexasatAustin(UT).

IlookedatalotofgraduateschoolsbeforesettlingonUT.I’dlookedatNewYorkUniversity’slawschool,BrighamYoungUniversity’smaster’sprogram,aswellasthemaster’sprogramsattheUniversityofSouthernCaliforniaandArizonaStateUniversity.WhatIlikedbestaboutUT’sprogramwastheflexibilityitgavemetoplanmyownscheduleandwhatcoursesIcouldtake.Iwantedtotakesomebusinesslawclasses(IendeduptakingthreeofthematUT),andIwantedsomeotherdiverseclassessuchasaclassoninvestingandanotheroninsurance.UniversityofTexasgavemetheflexibilitytodothiswhilestilltakingallofmytaxclasses.Iwasincontrolofmyeducation.

It’sonlynaturalthatmycareerspecialtyistaxplanning.Creativetaxplanningistheultimateinflexibilityandcontroloveryourlife.Insteadofthegovernmentcontrollingyourlife,youcontrolit.Anytimeyouplanforsomethinglong-range,youincreasetheflexibilityinyourlife.

RecentlyatmyCPAfirm,ProVision,we’vetakentaxplanningtoanentirelynewlevel.Nowwestartwitheverynewclientbycreatingalong-term,comprehensivetaxstrategyspecificallysuitedtotheirspecificneeds.Astrategyissimplyaplanofactionintendedtoaccomplishaspecificpurpose.Inthecaseofourtaxclients,thespecificpurposeistopermanentlylowertheirtaxesfortherestoftheirlife—andforgenerationstocome.

Astrategyissimplyaplanofactionintendedtoaccomplishaspecific

purpose.

RULE#13:Taxpayerswithlong-term,flexibletaxstrategieswillalwayspaylesstax

thanthosewithoutstrategies.

Taxstrategiesareprettysimple.Startbydecidingwhatyouwanttoaccomplish.Doyouwanttodecreaseyourincometaxes?Aretherestateandlocalorprovincialtaxesyouwanttoreduce?Whataboutpropertytaxes?Doyouownequipmentinyourbusinessorrealestatethat’staxedonitsvalue?Ifyouownabusiness,youalsowanttoreduceyoursalestax,value-addedtax,excisetaxes,andpayrolltaxes.Andyouprobablywanttoreduceyourestatetaxesifyouplanonleavinganythingtoyourchildrenorgrandchildren.

PermanentTaxSavings

Eachofthesetaxesrequiresitsownspecificstrategytokeepthemaslowaspossible.Let’sfocusrightnowonincometax,sincethat’stheonethatkeepspeopleupatnight.Sayyou’reina30percenttaxbracket.It’sprettyeasytobeinthisbracketwhenyoucountboththefederalincometaxandthelocalincometaxes.Andlet’ssayyouwanttopermanentlyreduceyourtaxes.

WhatdoImeanbypermanenttaxreduction?Asyouwouldexpect,permanentistheoppositeoftemporary.Mosttaxplanningthroughouttheworldistemporary.Likemanypeople,youprobablyhaveanIRAor401(k)ifyouareintheUnitedStates,anRRSPifyouareinCanada,apensioncontributionifyouareintheUK,orsomeotherplanthatyouputyourmoneyinnow,getataxdeductionwhenyoudo,andpaytaxonthemoneywhenyoutakeitoutforretirement(i.e.,thetaxesaredeferredorpostponed).

Theprimaryargumentforthistypeoftaxplanningisthatyouwillbeinalowertaxbracketwhenyoutakethemoneyoutthanwhenyouputthemoneyin.Really?Thissuggeststhatyouareplanningtoretireonlessmoneythanyouearnnow.Soinotherwords,youareexpectingtoretirepoor.MyclientsandIhaveatoughtimewiththiswayofthinking.Wewanttoretirerich.Infact,thereareseveralreasonsnottoputyourmoneyintoa401(k),IRA,RRSPorPension.

PlanningonRetiringPoor?

HigherTaxBracketwithSameIncomeShift15%CapitalGainsto35%orHigherOrdinaryIncomeTaxRatesLoseallTaxBenefitsofRealEstateandBusinessInflationCreatesevenHigherTaxBrackets

Therealityisthatifyou’regoingtohaveasmuchmoneywhenyouretireasyoudonow,thenyouprobablywillbeinahighertaxbracketthanyouaretoday.Why?Becauseyoulikelywon’thavethedeductions,exemptions,orcreditsyoucurrentlyenjoyforyourchildren,foryourhouse,orevenforyourbusiness.Afterall,youwanttoberetired.

Therealityisthatifyou’regoingtohaveasmuchmoneywhenyouretireasyoudonow,thenyouprobablywillbeinahighertaxbracket

thanyouaretoday.

Therealreasonthatmosttaxplanningaroundtheworldistemporaryisthatthistypeofplanningiseasy.It’sparticularlyeasyforthetaxplanners.Thechallengeisthatbesidesbeinginahighertaxbracketwhenyouretire,youlosecontroloveryourmoneywhileit’sinthetax-deferredsavingsplan.Thetypesofinvestingyoucandoandthetypeofincomeyoucanearnislimited.Also,mostcountriesrestrictwhenyoucantakeoutyourownmoney.

TaxPlanningDeferral Permanent

•TemporaryTaxSavings •PermanentTaxSavings•RetirePoor •RetireRich•LimitedEarnings •UnlimitedEarnings•RestrictedWithdrawals •UnrestrictedWithdrawals•LimitedControl •UnlimitedControl

AsI’vesaid,Iliketobeincontrolofmymoneyandmytaxes.SowhenIcreateataxstrategyforaclient,Ialsowantthemtobeincontroloftheirmoneyandtheirtaxes.Inmyfirm,wefocusalmostentirelyonpermanenttaxsavings.Bypermanent,Imeantaxsavingsthatweneverhavetogivebacktothegovernment.Allofthetaxsavingswehavediscussedoverthepreviouschaptersarepermanenttax-savingopportunities.Usingthepermanenttax-savingstechniquesavailabletoentrepreneursandinvestorsavoidsallofthepitfallsoftemporaryordeferraltechniques.Insteadofraisingyourtaxrates,youpermanentlyloweryourtaxrates;insteadoflosingcontroloveryourwealth,youincreaseyourcontroloveryourwealth;ratherthanincreasingyourriskinthemarket,youreduceyourrisk;andbymaintainingcontroloveryourwealth,youareabletoincreaseyourreturns.

Whenyoubuildyourtaxstrategy,remembertwothings:Youwantittobeflexibleandyouwanttolookatthebigpicture.

TaxDeferralPlans

ThinkingThroughYourTaxStrategy

Let’smoveonwithyourtaxstrategy.You’renowfocusingonagoalofpermanentincometaxsavings.Ofcourse,wewantyourincometaxtobeaslowaspossibleunderthelaw.Thenextstepistodeterminewhereyouaretodayandwhereyouwanttobeinthefuture.Justasifyouweregoingonatrip,knowingwhereyouarestartingfromandwhereyouwanttogowillhaveamajorimpactonthedirectionyoutake.Afewquestionsyoushouldaskare:

•WhatinvestmentsdoIhavenow?•Whatbusinessentities(e.g.,corporationsandpartnerships)doIownnow?•Whataremyplansformybusinessesandinvestments?•HowsureamIthatmytaxreturnsarebeingpreparedinthebestwaypossible?

•HowoftendoIhearfrommytaxadvisor?(Youshouldhearaminimumoffourtimesayearfromyourtaxadvisor.)

•Howoldaremychildren?•DoIplantohavemorechildren?•Aremychildreninterestedinworkinginmybusiness(ordoIwantthemtobe,iftheyaretooyoungrightnow)?

•DoIneedtosetasidemoneytohelpmyparentsintheiroldage?•Howsecureismyjob?Theseareafewofthequestionstoaskyourselfasyoubeginyourtax

strategy.Onceyouhaveagoodpictureofwhereyouwanttogoandwhereyouaretoday,youcanstartformingyourstrategy.

Whenyoubuildyourtaxstrategy,remembertwothings:Youwantittobeflexibleandyouwanttolookatthebigpicture.Byflexible,Imeanyouwantyourstrategytoallowforchangesinyourlife.Theonlythingwereallyknowforsureisthatlifetomorrowwillbedifferentthanlifetoday.Youmayhavemorechildrentomorrow,yourbusinessmightchange,andevenyourmaritalstatuscanchange.Besureyourtaxstrategyisbuiltwiththesepossiblechangesinmind.

Andbesuretolookatthebigpicture.Don’tdosomethingthatgivesyoubigtaxsavingsonlytocauseproblemsforyouinyourbusinessoryourfamily.Ihadaclientyearsagowhodidsomeverygoodtaxplanning.He’dputtheownershipofhiscompanyintothenameofhisfourchildren.Thiswasbothgoodestateplanning(hetransferredtheownershipwhenthebusinesswasnotworthmuch)andgoodincometaxplanning(thechildrenhadlowertaxratesthanmyclient).

Thechallengewasthatthiscreatedpersonalissuesforatleastoneofhisdaughterswhenshewasgrown.Shemarriedamanwho’dneverhadmuch

money.Hewasagoodguy,butdidn’thavemuchfinancialeducation.Eachyear,hewouldlookattheirtaxreturnandwonderwhyhewasworkingsohardwhenhiswifewasatrust-fundbaby.Heputpressureonhertogetmoneyfromherdadsinceshewasanownerofthebusiness.Herdad(myclient)saidno,thatthiswasjustatax-planningstrategy,andthattherewasn’tmoneytogivetothem.Thiscausedhardfeelingswiththedaughter’shusband.Eventually,itcontributedtothebreakupoftheirmarriage.

Don’tLettheTaxTailWagtheDog1.Taxesareimportantbutnotnearlyasimportantaspersonalandbusinessgoals.

2.Makesureyourtaxplanningdoesn’tinterferewithpersonal,wealthand/orbusinessgoals.

Therealityisthatgoodtaxplanningisn’talwaysgoodfamilyplanning.Inthecaseofthisclient,asimplechangetotheplanningearlyonintheprocesswouldhaveallowedmyclientsomeflexibility,andtheincomeforhisbusinesswouldnothaveshownuponhisdaughter’staxreturn.Youmaywonderifthiswassimplyacaseofbadadvice.Idon’tthinkso.Iknowthetaxattorneywhohelpedwiththeplanning.Ithinktheyjustdidn’tanticipatethedaughtermarryingsomeoneforwhomthiscouldbeanissue.

PickanEntity

Whenworkingwithaclienttocreatetheirtaxstrategy,Ialwaysliketobeginwiththebusinessentities.Therightentitycanreduceyourtaxesalmostimmediately.Remember,anentityisjustaformofownership,suchasacorporationoralimitedliabilitycompany.Eachcountryhasitsownbestentitiesfordifferentpurposes.Let’slookatthedifferenttypesofentitiesandsomegeneralrulesforwhenyouwillwanttousethem.Therearefourprimaryentitytypes.Mostcountrieshavesomeformofeachoftheseentities,thoughtheymaybecalleddifferentnamesindifferentcountries.Theseentitiesaretrusts,partnerships,corporations,andlimitedliabilitycompanies.

Trusts

Trustsareprettyuniversalthroughouttheworld.Threeprimarypeopleareinvolvedinatrust.Firstisthesettlororgrantor.Thisisthepersonwhoformsthetrustandputstheassetsintothetrust.Thesecondisthetrustee.Thisisthepersonorcompanyinchargeoftakingcareofthetrust.Technically,thetrusteeistheownerofthetrust.Thethirdpersonisthebeneficiary.Thisisthepersonwhowillreaptherewardsofthetrustassets.Anytrustcanhaveoneormultiplegrantors,trustees,andbeneficiaries.

Trustsareusedforavarietyofpurposes,butthey’reprimarilyusedtotransferassetsfromonepersontoanother.They’reparticularlyusefulinfamily

planningwhereparentsorgrandparentswanttotransferassetstotheirchildrenorgrandchildren.Theycanalsobeusedintransferringassetstocharitiesandotherpeopleororganizations.They’reessentialfordoinggoodestateplanning.

Partnerships

Partnershipsareperhapsthemostflexibleofthedifferententities.Apartnershipexistswhenevertwoormoreindividualsorentitiesownandoperateabusinessorinvestmenttogetherandhaven’tdecidedtouseanothertypeofentity,suchasacorporation.Theincomeandlossfrompartnershipsisreportedonthepartners’taxreturnsinsteadofpayingtaxinthepartnership.Partnershipscomeintwocommonvarieties;generalpartnershipsandlimitedpartnerships.

Generalpartnershipsalloweverypartnertomakedecisionsforthepartnership.Andallpartnersaretypicallyresponsibleforthedebtsofthepartnership.Soyoucanimaginethatgeneralpartnershipscanbealittledangerousifthereisachancethepartnershipmightgetsuedatsometimeinthefuture.

Limitedpartnershipsincludeatleastonegeneralpartnerandonelimitedpartner.Alimitedpartnerislimitedtoinvestingandhasnosayinthedailyoperationofthepartnership.Andtheydon’thaveanypersonalresponsibilityforpartnershipdebtsbeyondtheamounttheyinvested.Additionally,intheUnitedStates,theincomereceivedbylimitedpartnersusuallyisclassifiedaspassiveincome.

Limitedpartnershipsaregoodtousewhenonepersonisinchargeofthebusinessandtheothersarepassiveinvestors.Theyalsoworkwellaspartofanestateplaninwhichchildrenorgrandchildrenarethelimitedpartnersandtheparentsorgrandparentsarethegeneralpartners.Thisisonewaytotransferpartialownershipofsomeassetstotheyoungergenerationwhilekeepingcontroloftheassetsinthehandsoftheoldergeneration.

Everycountryhastaxbenefitsforbusiness.Allyouhavetodoisworkwithyourtaxadvisortodetermine

whichcountriesofferthebestonesforyourbusiness.

Corporations

Corporationsaretheentitiesmostrecognizedaroundtheworldforowningandoperatingbusinesses.Mostcountrieshavespecialtaxrulesforsmallbusinessesthatgivespecialincentivestothesebusinesses.InCanada,therearespecial,lowertaxratesforsmallbusinesses.IntheUnitedStates,therearelowercapitalgainsratesforsmallbusinesses,specialbenefitswhenasmallbusinesslosesmoneyorgoesoutofbusiness,andthereisevenaspecialclassofsmallbusinessescalledanScorporationthatallowtheownerstoreportthebusinessincomeontheirpersonaltaxreturnsinsteadofpayingtaxesinthecorporation.

TAXTIP:Haveabusinesspartner?FormyourownentitytaxedasanSCorporationandhavethatentitybethepartnerinyourbusinessratherthanyoupersonally.This

structurewillreduceyourself-employmenttaxesandprovidemaximumflexibilitytoyouandyourpartner.

Corporationsareparticularlyusefulifyouplantobecomeapubliccompany,thatis,acompanythatisownedbylotsofpeople.They’realsogoodforprotectingyourpersonalassetsfromlawsuits,aswewillseeinthenextchapter.

LimitedLiabilityCompanies

Finally,wehavelimitedliabilitycompanies(LLC).Theseentitiesareknownbyothernamesinothercountries.InGermany,theyarecalledaGMBH.TheUnitedStateswasoneofthelastcountriestostartusingtheseentities.LLCshavedifferenttaxrulesineachcountry.InCanada,forexample,LLCsaretaxedascorporations.IntheUnitedStates,they’retaxedaspartnershipsunlessyouchoosetohavethemtaxedascorporations.

Limitedliabilitycompaniesexistsothatyoucanhavetheassetprotectionthatyouwouldnormallygetasalimitedpartnerwhilestillhavingasayinthecompany.Remember,limitedpartnerscannotcontrolthecompany.MembersofanLLC,though,canhavefullmanagementcontrolwithoutbeingfullyliable.Forthisreason,manybusinessesintheUnitedStatesarenowformedusingtheLLCinsteadofasapartnership.

Eachoftheseentitieshasaplaceinyourtaxstrategy.Forexample,youmaywanttouseanLLCtoownyourrealestateinvestmentproperties,acorporation

(orLLCtaxedasacorporation)toownyourbusiness,andalimitedpartnershiptoownassetsyouwanttotransfertoyourchildren.Andyoulikelywillwanttousetruststoprotectassetsyousetasideforyourchildrenfromcreditorsandothers,particularlywhilethey’reyoung.

You’lldefinitelywantyourattorneyinvolvedinthisprocessalongwithyourtaxadvisor,especiallyintheUnitedStateswheretherearesomanylawsuitsandprotectingyourassetsfromthoselawsuitsissoimportant.

Entitiesarethefoundationforyourtaxstrategy.Onceyouhaveyourentitiesinplace,youcanbegintousealloftheothertaxbenefitswe’vealreadydiscussedtopermanentlyreduceyourincome,estate,andothertaxesnowandforgenerationstocome.Insummary,therearefourpartstoagoodtaxstrategy:

FourpartsofagoodTaxStrategy

Part1 Knowwhereyou’restarting.Part2 Knowwhereyou’regoing.Part3 BuildflexibilityintoyourstrategyPart4 Lookatthebigpicture.

Onceyouhaveyourstrategyinplace,youneedtoimplementit.Thismeanslivingiteverydayofyourlife.Themoreyouuseyourstrategy,themorecomfortableyouwillbecomewithit.Rememberthatyoucanloweryourtaxeseverydayjustbyputtingyourtaxstrategyintoaction.

Inthenextchapterwe’llturntoanaspectofyourtaxstrategythatdoesn’tinvolvetaxes.I’mtalkingaboutassetprotection.ParticularlyintheUnitedStates,youmustprotectyourassetsfromlawsuitsatthesametimeyouareprotectingthemfromthegovernmenttaxcollectors.Thebesttimetocreateyourassetprotectionstrategyiswhileyou’reformingyourtaxstrategy.

CHAPTER15:KEYPOINTS

1.Thebestwaytoprotectyourassetsandreduceyourtaxespermanentlyandinthelongtermistodevelopacomprehensivetaxstrategy.

2.It’sessentialforataxstrategytobebothflexibleanddealwiththebigpicture.

3.Whendevelopingyourstrategy,it’simportanttoknowwhereyouarestartingfromandwhereyouwanttoendup.

4.Thefirststeptodevelopingasolidtaxstrategyistodecidewhichtypeofentityismostappropriateforyourgoals.

TaxStrategy#15–UseaCombinationofEntityTypestoReduceyourTaxes

OneofthequestionsIgetthemostwhenI’moutspeakingiswhichentitysomeoneshoulduseforbusinessorinvesting.Thisisalittlelikeaskingwhatcaryoushouldbuy.Theanswerisalwaysgoingtobe,“Itdepends.”Likeacar,whichentitytousedependsonwhatyouuseitforandhowyouuseit.

Businessentityadviceisn’taseasyassuggestingthatyouuseanScorporationforabusinessorapartnershipforrealestate.Somebusinessesarebetterofftaxedaspartnerships,andsometimesrealestateshouldbeheldinanScorporation(suchaswhenyouareplanningtoquicklyselltherealestate).

Oneofmyfavoritetaxstrategiesistocombinedifferententitiesintoasinglestrategy.Letmegiveyouonegoodcombination—apartnershipandtwoScorporations.Let’ssupposeyouandyourfrienddecidetoopenabusinesssellingwidgets.Youwouldliketohavetheself-employmenttaxbenefitsofanScorporation.(RememberChapter11?)Youarealittleworried,though,aboutsomeofthecorporatetaxrulesandarethinkingthatmaybeyouwouldlikeapartnership.Whichonedoyouchoose?

Whynotchooseboth?WhynotownthebusinessinanLLCtaxedasapartnershipandthenownyourinterestinthepartnershipthroughanLLCtaxedasanScorporation.Itwouldlooksomethinglikethis:

Thebenefitsofthiscombinedentitystructurearehuge.Becauseyouownthebusinessasapartnership,youcandistributeincomedifferentlythanyouallocateincome.Orsupposeyoubothneedcompanycars.YouwanttodriveaFerrariandyourfriendwantstodriveaHonda.Chancesarethatyourfrienddoesn’twanttopayforhalfofyourFerrari.IfyouformedyourbusinessasanScorporation,youwouldn’thaveachoice.SinceyourfriendownedhalfoftheScorporationstock,hershareoftheincomefromthecompanywouldgoinparttopayforyourFerrari.Inapartnership,youcanspeciallyallocatedeductions.YoucouldallocatethecostoftheFerraritoyouandthecostoftheHondatoher.Youmightwanttodothesamewithhomeofficedeductions,travel,meals,orentertainmentexpenses.Thisisjustonesimpleexampleofacombinedentitystructure.AtProVision,wehaveclientsthatuseseveraldifferenttypesofentitieswithintheirtaxstrategyandwhoreceivethousandsandthousandsofdollarsintaxbenefitsfordoingso.It’soneofthefewwaysyoucanhaveyourcakeandeatittoo.So,don’tgetcaughtinthetrapofthinkingthatonetypeofentityfitsallorthatyoushouldevenonlyhaveoneentityaspartofyourtaxstrategy.Thereisalotofflexibilitywhenyouhaveaclearunderstandingofthe

differententitytypesandyourtaxadvisorhasaclearunderstandingofyourgoalsandcircumstances.

ChapterSixteen

ProtectYourWealthfromPirates,Predators,andOtherPlaintiffs

“AgovernmentwhichrobsPetertopayPaulcanalwaysdependonthesupportofPaul.”–GeorgeBernardShaw.

TrueFreedom

Mypassionisbuildingwealthforothersandformyself.IlovethefreedomthatcomeswithhavingenoughmoneytonotworryaboutthepriceofthegroceriesI’mbuying,whetherIcanaffordapersonaltrainer,ifI’mgoingtomakemymortgagepaymentthismonth,orwhetherIcanaffordtotakemyfamilyonourannualtriptoHawaii.That’struefreedom.

Ihaven’talwayshadthatkindoffreedom.Likemanyofyou,Ihadajobandamortgage,andIknewthatifIdidn’thavethatjob,Iwasn’tgoingtobeabletopaythatmortgage—letaloneputfoodonthetable.It’sonlybeeninthelastseveralyearsthatI’vehadenoughassetstopaymyexpenseswithoutworkingeveryday.

IloveRobertKiyosaki’sdefinitionofanasset.Hesaysthatanassetissomethingthatputsmoneyinyourpocket.Anythingelseisaliabilitybecauseittakesmoneyoutofyourpocket.Sobythisdefinition,yourhomeisnotanassetbecauseittakesmoneyoutofyourpocketanddoesn’tputmoneyintoit.Ontheotherhand,yourbusinessorinvestments(includinginvestmenthomes)canbeassetsiftheyproducecashflow.

Inrecentyears,I’vebeenfortunatetobuildmyassets,especiallymybusiness,tothepointwhereIdon’thavetogointotheofficeveryoftenandhavetheluxuryoflivingofftheincometheyprovide.Muchofmycurrentwealthistiedupinmybusiness.Therestisinmyrealestate.Thiswealthisthefoundationofmyfreedom.It’swhyIhavethetimetowritethisbookandteachseminarsallovertheworld.There’snothingmoreimportanttomethan

protectingmyfamily’sfreedom.SoIhavetoprotectmywealthjustasIexpectourgovernmenttoprotectourpersonalfreedoms.

AssetProtection

Partofprotectingthisfreedomissettingupadequateassetprotection.Ihaven’talwaysdoneagreatjobofprotectingmyassets.Anumberofyearsago,wehadanofficeinanotherstate.WefoundaCPAtoputinchargeofthatofficeandworkedwithanattorneytodevelopapartnershipagreement.Wehadhighhopesforthatpracticeofficebecausewehadmanyclientslivinginthatareaevenbeforeweopenedit.

Forseveralyearstheofficestruggledtomakemoney.Itneverseemedtomakeasmuchasourotheroffices,eventhoughweseemedtospendatleastasmuchtimeworkingwithitsstaffandclientsaswedidwiththestaffandclientsinourlocaloffice.MypartnerAnnandIdecidedthatwewerespendingtoomuchtimeandeffortonthisofficeforthesmallamountofmoneyitmadeandthatweneededtosellit.

Wetoldourpartneraboutourplansandthatwewantedtoincludehiminthediscussionssothathe’dbecomfortablewithwhoeverpurchasedthepracticeandsothathecouldcontinuetomanagetheclients.Wethoughtthiswouldbeagreatwinforusandforhim,andweputthepracticeonthemarketinlateNovember.Thelistingbrokerwhowasmarketingourpracticedidn’tfindabuyerpriortoJanuary.Wedecidedtogetthroughtaxseason(JanuarythroughApril)andthenputitbackonthemarketinthespring.

Thisdecisionturnedouttobecatastrophic.AttheendofJanuary,wereceivedanemailfromourpartner.Hedecidedthatratherthansellthepractice,he’djusttakeitover,keepalloftheclientsandemployees,andleaveuswithnothing.Ofcourse,thiswascompletelycontrarytoourpartnershipagreement.Ourpartnershipagreement,writtenbysomeexcellentlawyers,spelledoutexactlywhatwassupposedtohappenifapartnerdecidedtoleave.Insteadoffollowingouragreement,however,ourpartnerdecidedtotakeacompletelydifferentpaththanwe’danticipated.Wespentthenextninemonthsincourtdealingwiththischallengewhiledoingourbesttokeepourclientshappy.

Theresultwasthousandsofdollarsinattorneys’fees,hundredsofhoursoflosttime,uncertaintyformanyofourclients,andtheeventuallossofmanyofourclientsinthatstate,nottomentionanincredibleamountofstressandlostsleep.Thattranslatedtoalossofabout75percentofthetotalvalueofthatentire

practice.Howdidthishappen?We’dworkedsohardtobuildthisbusiness,andnowmostofitwasgone.Thesimplereasonwasthatwe’dignoredthemostimportantruleforprotectingyourassets.

RULE#14:Youmustmaintaincontrolofyourassetsatalltimesandinall

circumstances.

Wethoughtwewereincontrol.Wehadagreatpartnershipagreement.Wespoketoourpartneratleasttwiceeveryweek.Butweweren’treallyincontrol.Wedidn’thavecontrolofourfiles,ouroffice,orourclients.Sowewerevulnerable,andlostenormousamountsoftimeandmoneyasaresult.

Whyarewetalkingaboutthisinabookabouttaxes?Becausesavingontaxesissimplyonewayofprotectingyourassets.You’reprotectingthemfromthegovernment.Whenyoutakethetimeandenergytocreateastrategyforprotectingyourassetsfromthegovernment,it’salsothebesttimetocreateastrategyforprotectingyourassetsfromfinancialpiratesandotherpotentialpredators,includingyourpartners,youremployees,andyourtenants.Whenyoucreateataxstrategy,youarelookingatwhichentitiestouseandhowtocontrolyourbusinessandinvestments.Theseallimpactyourassetprotectionstrategyaswell.

Whenyoutakethetimeandenergytocreateastrategyforprotectingyourassetsfromthe

government,it’salsoagoodtimetocreateastrategyforprotectingyourassetsfromfinancialpiratesandotherpotentialpredators,includingyourpartners,youremployees,andyourtenants.

Therulesforprotectingyourassetsarefairlysimple.Youhavethreegoals.

AssetProtectionGoals

Goal#1Preventalawsuit.Goal#2Stayundertheradarsothatyouarelesslikelytobesued.Goal#3Winanylawsuit.

Inthischapter,I’monlygoingtodiscussGoal#1.Goal#3isgood,butevenifyouwinalawsuit,youstillhavetospendtime,money,andenergyonit.WhilemypartnerAnnandIhiredgreatlawyerstowriteourpartnershipagreement,andwhilewewonourlawsuit,intheendwestilllosthundredsofthousandsofdollarsandenormousamountsoftimeandenergy.Thisiswhyhavinggoodinsurance,whileimportant,isnotenough.AndasforGoal#2,it’scertainlynicetostayundertheradar,butmyexperienceisthatasmartattorneywillfindyoueventually.Solet’sfocusonGoal#1.

PreventingLawsuits

Ifyou’reeverwonderinghowsomeonewillactinafinancialsituation,it’sagoodpracticetosimplyfollowthemoney.Forinstance,ifyou’reinvesting,followthemoneytofindoutwhoisgoingtobenefitfromyourinvestment—youoryourfinancialadvisor?Ifyouwanttoprotectyourassets,youalsowanttofollowthemoney.Whoisgoingtobenefitfromalawsuitagainstyou?

Theobviouspeoplewhocouldmakemoneyfromsuingyouaretheplaintiffs(thosesuingyou).Whomightwanttosueyou?Theanswerisanyonewhothinkstheycangetatyourassets.Ifpeoplebelievethattheycangetmoneyfromyou,they’lldoeverythingintheirpowertousethecourtsystemtodipintoyourpocket.

Andit’snotjusttheplaintiffsthatmakemoneyinalawsuit.It’sthelawyers.Sometimesthelawyersmakeevenmoremoneythantheplaintiffs.It’softenthelawyerswhoconvincetheirclientstofilethelawsuitinthefirstplace.That’swhyattorneysintheUnitedStatespaymillionsofdollarstoruntelevisionadsthroughoutthedaytellingyoutotalktothemfirstifyou’reinanaccidentorotherwisefeeldamaged.

Don’tRelySolelyonInsurancetoProtectYourAssets

1.Insurance,especiallyapersonalumbrellapolicy,whilecriticaltoyourassetprotectionisnotenough.

2.Besureyourassetprotectionstrategyworkstopreventlawsuits,notjustprotectyouincaseyoulosealawsuit.

Thekeytoprotectingyourassetsfrombothplaintiffsandtheirattorneysistosetupyourbusinessandinvestmentssothatiftheydosueyou,theylikelywon’tgetanymoney.Inmanycountries,lawyersgetpaideveniftheydon’twinthelawsuitsincetheychargetheirclientsanhourlyfee.Inthesecountries,theclienthastobesurethey’regoingtowin(orbesoupsettheylosereason)beforetheygoaheadwithalawsuit.

Thisisn’tthecaseintheUnitedStates.TheUnitedStatesallowslawyerstoacceptcontingentfees.Acontingentfeeisafeethatisonlypaidiftheplaintiffwinsthecaseorconvincesyouoryourinsurancecompanytosettlethecase.Ifyoucanconvincethelawyerstheywon’tgetanymoneyeveniftheywin,thentheylikelywon’ttakethecase.Lawyershatenotgettingpaid.

Howdoyousetupyourbusinessandinvestmentssothatthechancesareslimthataplaintiffwillgetmoneyfromyoueveniftheywinalawsuit?Let’slookatafewtipsforprotectingyourassetsfromlawyersandtheirclientsthatcanbedonewhileyouarecreatingyourtaxstrategy.MydisclaimerhereisthatI’mnotanattorney.ThetipsI’mgivingyouarewhatI’velearnedthroughmyownexperienceandfromdiscussionsI’vehadwithattorneys.Youmusthaveanytaxandassetprotectionstrategyreviewedbyaqualifiedattorneybeforesettingitup.IwouldalsosuggestreadingGarrettSutton’sbook,StartYourOwnCorporation,foracompleteanalysisofassetprotectionstrategies.

TAXTIP:Combineyourtaxstrategywithanassetprotectionstrategy.Thetwogohandin

hand.Intheend,youwillhaveastrategythatprotectsyoubothfromthegovernmentandfrompotentialplaintiffs.

TheRightEntity

Justasprotectingyourmoneyfromthegovernmentrequirestherightentitystructure,themostimportantstepinprotectingassetsfrompirates,predators,andotherplaintiffsistousetheproperentitytoownyourbusinessand

investments.Rememberthatthelawsthatprotectyourassetsfromplaintiffsareoftendifferentthanthetaxlaws.Soyouwanttoformataxstrategyusingentitiesthatalsoprotectyoufromfutureplaintiffs.

Makesurethatyourtaxadvisorhasagoodunderstandingoftheassetprotectionrulesinyourstate,province,andcountryaswellasathoroughunderstandingofthetaxlaw.Youwillalsowantyourtaxadvisorandyourassetprotectionattorneytospeaktoeachotheratleastonceortwiceasyouformulateyourtaxandassetprotectionstrategy.

Fortunately,inmanylocations,youcangetbothmaximumtaxsavingsandassetprotectionthroughtheuseoftherightentities.TherearesomanydifferentassetprotectionentitiesandopportunitiesthatIcan’tpossiblycoverthemallinthisonechapter.SoI’mgoingtoreviewsomeofthebasicentitieslikeIdidintheprevioustaxstrategieschapterandexplainhowtheseentitiescouldhelp(orhinder)yourassetprotection.We’lllookatassetprotectionentitiesinthesameorderwedidwhenwetalkedabouttaxstrategy.

Trusts

Let’sstartwithtrusts.Imentionedinthepreviouschapterthattrustsareparticularlygoodformovingassetsfromonegenerationtoanother.Theyarealsoparticularlygoodforassetprotection.

Trustshavebeenavailableforthousandsofyears,sotherearemanycasestellingushowtrustswillbehandledinalawsuit.Thegeneralruleisthatifthebeneficiaryofthetrust(thepersonwhoeventuallygetstheincomeortheassets)isdifferentthanthegrantor(thepersonputtingthemoneyorassetsintothetrust),thencreditors(peopletowhomyouowemoney,includingplaintiffs)cannotgetattheassetsofthetrust.

Trustshavebeenavailableforthousandsofyears,

sotherearemanycasestellingushowtrustswillbehandledinalawsuit.

Let’ssayyouwanttoleaveyourmoneytoyourchildrenandthatyouwantthemtobetaxedontheassetsnowbuttonotgettheassetsuntilafteryoudie.Youcandothisbyputtingtheassetsintoatrust.Anothergreataspectoftrustsisthatthetrustdocumentsayswhocangettheincomeorassetsofthetrustandwhen.Thetrustdocument,whichyouneedtowritewiththehelpofanattorney,cansaywhenyourchildrengettheassetsorincomeofthetrust.Inthisway,youcanevencontrolyourassetsafteryoudie.

Youcanalsousetrustsforgivingassetstoacharity.Infact,youcangivetheassettothecharity(the“corpus”inlegalterms)andkeeptheincome.Thisway,thecharitygetstheassetwhenyoudie,yougettheincomewhileyoulive,andtheassetisprotectedfrompotentiallawsuits.Inaddition,youcangetataxdeductionforthecharitablecontributionnoweventhoughtheassetisn’tactuallyusedbythecharityuntilyoudie.

Therearelotsofusesfortrustsinassetprotectionstrategies.You’llneedthehelpofbothyourattorneyandyourtaxadvisortomakethesestrategieswork.Don’tbeafraidofthemjustbecausetherearealotoflegaldocumentsandlotsofoptions.Askquestionsandbesureyourtaxadvisorandattorneycanspeakplainlyandexplainsimplywhattheyaresuggestingtoyou.

Partnerships

Whenitcomestoassetprotection,partnershipscanbeeitherverygoodorverybad.Generalpartnershipsareawful.Thinkofageneralpartnershipasthoughyouandyourpartnerarestandingnakedinthemiddleofafieldwithpeoplethrowingrocksatyouboth.Youjustmightgethitwitharockaimedat

yourpartner.

Whenitcomestoassetprotection,partnershipscanbeeitherverygoodorverybad.Generalpartnershipsareawful.

Generalpartnershipsoffernoprotectionfromplaintiffs.Youareresponsible(liable)foreverythingyoudo,everythingyourpartnerdoes,andeverythingyouremployeesdo.Whensomeonesuesageneralpartnership,theyalsosueallofthepartners.Thescarypartisthatyoumaybeinageneralpartnershipandnotevenknowit.Youmaybeinvestingwithsomeoneordoingalittlesidebusinesstogether.Thatmakesyouageneralpartnership.Youdon’thavetohaveawrittenagreementtobeconsideredageneralpartnership.Sobecareful.Irunintonewclientsallthetimewhohavegeneralpartnershipswithoutrealizingit.

Limitedpartnershipsaregoodforassetprotectionbecausethelimitedpartnersdon’thaveanyresponsibility(liability)forwhatgoesoninthepartnership.Theycanonlylosetheirinvestment—nomore.Limitedpartnershipscanbegoodforestateplanningandforbusinesseswhereonlyoneortwoofthepartnersarerunningthebusinessandtherestarepassiveinvestors.Insomecountries,suchasCanada,thegeneralpartnercanbeacorporationwithoutmanyassets.Thatway,eventhegeneralpartnerdoesn’thavealotofliabilitybecausetherearen’tanyassetstogoafterifthegeneralpartnerissued.

Corporations

Corporationsaregoodentitiesforprotectingyoufromanylawsuitsthataredirectedatthecompany.Asashareholder,youcannotpersonallybesuedunlessyoupersonallydidsomethingwrong.You’reabitlikealimitedpartner,becauseallyoucanloseistheamountyouhaveinvestedintothebusiness.IncountriesotherthantheUnitedStates,wheretherearen’talotofpersonalinjurylawsuits,corporationscanbegreat,solongastheyalsomeetyourtaxgoals.

LLCsLimitedliabilitycompanies(LLCs)canbetheabsolutebestwaytoprotect

yourbusinessandinvestmentassetsfromlawsuits.Theygiveyoutheprotectionofacorporation.Youcanonlylosewhatyouputintothecompany.Butthey

actuallygiveyoumoreprotectionthanacorporationifyou’repersonallysued.Limitedliabilitycompaniesgenerallyhavetheprotectionofachargingorder.Here’sanexampleofhowachargingorderworks.

Limitedliabilitycompanies(LLCs)canbetheabsolutebestwaytoprotectyourbusinessandinvestmentassetsfromlawsuits.

Afewyearsago,notlongaftermysonturned16yearsold,Iboughthimacar.ItwasasportylittleMazda.Hehadhisdriver’slicense,andI’dworkedwithhimonhisdrivingskillsandwasprettycomfortablewithhimoutontheroad.Aboutsixmonthslater,mywifeRosieandItookavacationinHawaii.We’dleftmy16-year-oldandhis22-year-oldbrotherathometofendforthemselves.

Itwasagreattrip.Thatis,itwasgreatuntilwegotfranticcallsonenightfrombothsons.We’dbeenattendingtheLDStempleinKonathatnight,andcellphonesaren’tallowedinthetemple.Whenwegotout,wehad10missedcallsfromeachoftheboys.Icalledtheolderone,Max,first.HesaidSam,ouryoungerson,hadbeeninacaraccident.Noonewasbadlyhurt,butthecarwasbadlydamaged.

WecalledSam,andheconfirmedthathewasokay.Hetoldusthedriveroftheothercarwasfine,too.Sam’scar,however,reallywasamess.Ittookmorethanamonthtogetitfixedandworkingagain.Thankfully,theotherdriverwasn’tinjured,butwhatifhehadbeen?Whatifhe’dbeenbadlyhurt?Hemightverywellhavesuedus,theparents,forSam’saccident.

MyCPAfirmisownedthroughalimitedliabilitycompany.Whatwouldhavehappenedtomybusinessifthedriveroftheothercarhadsuedusandwonalargejudgmentagainstus?Wouldmybusinesshavebeenprotected?IfI’downedmybusinessthroughacorporation,I’dhavebeenintrouble.Theplaintiffcould’vebeenawardedmysharesofthecompany.Hecould’vesteppedintomyshoes,votedmyshares,and,ifIownedamajorityofmycompany,hecould’vesoldit.

Butsincemycompanyisalimitedliabilitycompany,hecouldn’thavedoneanyofthosethings.Werehetosue,hewouldn’thavegottenmyshares,andhewouldn’thavegottenmyvote.Hecouldn’thaveliquidatedmycompany.Allhecould’vedonewasgetachargingorderagainstmyshareoftheLLCsdistributions.AchargingorderagainsttheincomeofanLLCisabitlikegarnishingwages.Yes,hemighthavereceivedanycashflowthatcameoutof

thecompany,butwasI,asthemanageroftheLLC,goingtoallowanycashflowtobedistributedtomewhenIknewhewasgoingtogetallofthemoney?No,ofcoursenot.

Iwouldneverhavedistributedanyincometome.Mypartnercouldstillgetherincome.Wesimplywouldn’tdistributeanytome.Sotheplaintiff,andtheplaintiff’slawyer,wouldhavereceivednothing.Thechargingorderrulevariesfromstatetostate.Somestates,suchasWyomingandNevada,havestrongchargingorderruleswhileothershavebeenweakenedasaresultofthedecisionsinrecentcourtcases.SeeGarrettSutton’sbook,StartYourOwnCorporation,foramorethoroughdiscussionofthechargingorderrules.

Plaintiffs’lawyersknowthisaboutLLCs.Sotheytendnottosuepeoplewhoseassetsareownedinthem.Lawyersliketogetpaid.TalktoyourattorneyandtaxadvisoraboutusingLLCstoownyourbusiness.Anddon’tforgetallofthegreattaxbenefitsofusinganLLCwetalkedaboutinthepreviouschapter.

Icouldgoonforeveraboutotherwaystoprotectyourassets,butIwon’t.Ijustwantyoutoknowthebasicssothatyoucanhaveanintelligentconversationwhenyoutalktoyourattorneyandyourtaxadvisor.Youdon’thavetolearnallthedetails.Butyoudohavetolearnthebasicrules.Thenyoucanhaveamuchbetterunderstandingofhowassetprotectioncanworkforyou.Andwhenyoudoyourtaxstrategy,youcankeeptheserulesinmindtoformanassetprotectionstrategyatthesametime.

We’regoingtotalknextaboutthesinglebiggestfearofalltaxpayers:thegovernmentaudit.Whatcanyoudotowinanaudit,andhowdoyoupreventonefromhappening?Mygoalistoeliminateyourfearofgovernmenttaxaudits.

CHAPTER16:KEYPOINTS1.Thebesttimetoputtogetheranassetprotectionstrategyisatthesametimeyouareputtingtogetheryourtaxstrategy.

2.Justasyouareprotectingyourassetsfromthegovernmentwithatax

strategy,youneedtoprotectyourassetsfromfinancialpredators—plaintiffs.

3.Oneofthesurestwaystoprotectyourassetsisbychoosingtherightentity.Ofalltheentities,anLLCmaybethebestforyou.

4.Alwaysseektheadviceandhelpofaqualifiedlawyerandtaxadvisorwhenputtingtogetheranassetprotectionstrategy.

TaxStrategy#16–IncludeAssetProtectionPlanningWhenYouCreateYourTaxStrategy

MyfriendandfellowRichDadAdvisor,GarrettSutton,likestosaythatCPAstandsfor“CannotProtectAssets.”Unfortunately,thisisthecasewithmanyofmyCPAcolleagues.Theyneverconsiderassetprotectionwhentheyadvisetheirclientsonwhichentitiestosetup.

Justtheotherday,oneofmystudentsattheRichDadEducationtaxandassetprotectioncoursecameuptomeandsaidthathisaccountanthadrecommendhesetuphisLLCinFlorida.Unfortunately,recentcaselawinFloridaweakenstheLLCprotectionwhentheLLChasasinglemember.ThisstudenthadreadGarrett’sbookandwasconcernedthatheshouldinsteadsetuptheLLCinastrongassetprotectionstatesuchasNevadaorWyoming.HisCPA,though,insistedthatthatwouldjustbeawasteofmoneyandthatheshouldsetupinFlorida.

Ihavetwoissueswiththisadvice,andtheygohandinhand.First,theCPAisnotunderstandingthatinhisclient’ssituation,forminginNevadaorWyomingandregisteringtodobusinessinFloridawouldprovidebetterassetprotectionthanformingdirectlyinFlorida.Second,theCPAdidnotrecommendthathisclientspeaktoanattorney.Instead,hetookitonhimselftogiveananswertoaquestionhewasnotfullyqualifiedtoanswer.

AtProVision,wealwaysrecommendthattheclientgoovertheirentitystructurewiththeirassetprotectionattorney.Infact,wedrawadiagramofhowtheentitystructureshouldworkfortaxpurposesandthen,withtheclient’spermission,wesendthisdiagramtotheirattorneyforreview.Oncetheattorneyhasreviewedtheentitystructure,wescheduleacallwiththeattorneytogooveranychangestheattorneymaywanttomakeinordertoensurethebestassetprotectionwhilenotinterruptingthetaxbenefitsfromourrecommendedstructure.

Ofcourse,wealsoseethemistakeofsomeonegettingentitiessetupbyanattorneywithoutconsultingataxadvisor.Then,whentheycometousandwesuggestdifferententities,theyoftenhavetomakecostlychanges.Assetprotectionattorneysrarelyhaveathoroughunderstandingofthetaxlaw.Theirexpertiseisassetprotection,nottax.

BesuretohavebothanattorneyandaCPAhelpyouwithyourentitystructure.Thebestwaytodothisistobeginwithagoodtaxadvisor.Youandyourtaxadvisorcancomeupwithasolidentitystructurethatwillgiveyouthebesttaxbenefits.Then,gooverthisentitystructurewithyourassetprotectionattorney.Doingyourplanninginthisorderwillbethemostefficientandeffective.

ChapterSeventeen

PlantoRetireRich,NotPoor

“Retirement:It’snicetogetoutoftheratrace,butyouhavetolearntogetalongwithlesscheese.”–GenePerret

Myfatherneverretired.Heusedtosaythatwhenyouretire,youdie.Heownedandranhisbusinessaslongashecould.Whenhewas88yearsold,andnolongerabletohandleit,heturnedthebusinessovertomysister.Ifeelthesamewayaboutretirementasmyfather.WhywouldIretirefrommyworkwhenIloveitsomuch?Whatcouldbebetterthanacareerdevelopingnewmethodstolearnaboutbuildingwealthandreducingtaxes,andthenteachingthosemethodstomillionsofpeople?Tome,retiringandgivinguptheworkthatIlovewouldbeasortofdeath.

Mostpeopledon’tthinkaboutretirementlikemyfatherandme.Instead,mostpeoplehavejobsorsituationsthatmakethemanxioustoretireassoonaspossible.Igetit.Onlyafewyearsago,Iwasworkingsomanyhours(AnnandIwerebothworkingover3,500hoursayearatonepoint),thatIwascompletelyburnedout.ItgottothepointthatAnnandIdecidedthatwewouldhavetodosomethingdifferent—orquitaltogether.

Fortunately,wefiguredouthowtochangethewaywedoourbusiness.Wedidonlythatpartofthebusinessthatweeachlovetodo.Annlovestocreatesystemsandprocessesandimplementthemintoourbusiness.Ilovetocreatenewwaystobuildwealthandteachthoseinnovationstoclientsandstaff.Plus,wehavetheadvantageofhavingabusinessthatdoesn’trequireourpersonalservices.Inreality,wehaveapassiveinvestmentthatwecanworkatifandwhenwechoose.Andwecouldretireanytimewewant.

Thechallengeofretirement

Ifyou’reachingtoretire,Ihavesomebadnewsforyou.Youhaveachallenge

aheadofyou—youmayneverbeabletoretire,atleastnotwiththeincomeyouenjoynowwhileyou’reworking.Andthisisespeciallytrueifyouareusingthesamemethodstoretirethatourparentsused—relyingonpension,profitsharing,RRSPs,and401(k)plans.Thesegovernmentqualifiedretirementplansprovidetemporarytaxbenefits,butthey’realsothereasonmostpeoplewillneverbeabletostopworkingformoney.

Hereishowthebasicgovernment-qualifiedretirementplanworks.Youand/oryouremployer(asallowedordirectedbythegovernment)decidehowmuchyouputintotheplaneachyear.Underatypicalplan,you’renottaxedontheincomeyouputintotheplan.Thishasthesameeffectasifyoureceivedtheincomeandthenreceivedadeductionforputtingitintotheplan.Infact,someplansworkjustthisway,likeastandardIRAintheUnitedStatesoranRRSPinCanada.

Themoneyinyourplanistheninvestedinsometypeofgovernmentapprovedasset.Mostgovernmentsrequireyoutodecidebetweenmutualfundsoranaccountthatearnsinterest,calledaguaranteedcontract.Ifyouhaveaself-managedorself-directedaccount,youhavemoreoptionsforyourinvestmentandyouhavemorecontroloverwherethemoneyisinvested.

Yourmoneystaysintheretirementaccountuntilyouretire.Atthatpoint,youareallowedtotakesomeorallofthemoneyout.Whenyoudotakethemoneyout,thegovernmenttaxesyouatordinaryincometaxrates.Theeffectofthisistopostponeordeferthetaxonthisincomeandtherelatedearningsuntilyouretire.Theargumentforthistypeofprogramisthatthisgivesyouawaytosaveforretirementwithouttheaddedburdenofpayingtaxesontheearningsofyourretirementinvestmentsuntilyouretire.Whenyouretire,astheargumentgoes,youwillbeinalowertaxbracketbecauseyouwon’tneedasmuchincome,asyourexpenseswillbelower.

Therearesomeimportantexceptionstothegeneralrulethatgovernment-qualifiedretirementplanspostponeyourtax.IntheUnitedStates,ifyouputyourmoneyintoaRothIRAorRoth401(k),youdon’tgetadeductionwhenyouputyourmoneyintotheplanandyoudon’tpaytaxwhenyoutakeitout.InAustralia,youdon’tpaytaxwhenyouoryouremployerputsmoneyintoyourSuperannuationaccount.Theaccountpaystaxontheearnings,andyoudon’tpaytaxwhenyoutakethemoneyoutoftheaccount.

MosttaxplanningintheUnitedStatesandaroundtherestoftheworldisfocusedonmaximizingtheamountyoucanputintothesetypesofaccounts.Theideabeingthatthemoreyouputinthelessyoupaynowandthemoremoney

youearntaxdeferred.Ifyou’relikemostpeople,you’vebeentoldyourentireworkinglifetomaximizeyour401(k)orRRSP.Youmayevenworkforanemployerthataddssomeofthecompany’smoneytothemoneyyouchoosetoputintotheplan.Thisiscommonlyreferredtoasamatchingcontributionfromyouremployer.

Theretirementplanlie

Thisallsoundsprettygood,doesn’tit?Don’tpaytaxuntillaterandgetataxdeductiontoday.Youmayevenbeexpectingmetoshowyouhowtoincreasetheamountyoucanputintoyourretirementaccount.

That’snotgoingtohappen—notinthisbookorinanyotherbookIauthorortowhichIcontribute.I’mnotgoingtotellyouhowtomaximizetheamountyouputintotheseso-calledretirementplansthatarethecreationofyourcountry’sgovernmentandarequalifiedbythatgovernment.Inmymind,thiswouldbeunconscionable.

Instead,I’mgoingtotellyoueverythingthat’swrongwiththeseplansandwhyyoushouldn’tusethem.Then,inthenextseveralchapters,I’mgoingtotellyouhowtopermanentlyreduceyourtaxesbyactivelyinvestinginanyofthefourassetclasses—business,realestate,stocks,andcommoditiesinsteadofinvestinginagovernment-qualifiedretirementplan.

Let’sbeginwiththeliecontainedwithintheirbasicpremiseoftheseretirementplans.Theypresumethatwhenyouretire,youwillbeinalowertaxbracketthanyouarewhenyouareworking.Theonlywaythiscouldpossiblybetrueisifyourgoalistoretirepoor.Ifyouplanonretiringwitheventhesameamountofincomeyouhavewhileyouareworking,youwillbeinahighertaxbracketwhenyouretire.

Retirement=highertaxbracket

Thereasonforthisisthatwhileyouareworking,youcantakeadvantageofawholehostoftaxbenefits.Let’sstartwiththedeductionyougetforyourchildren.Whenyouretire,yourchildrenarenolongerdependentonyou(ifyou’relucky),soyoudon’thavethattaxbenefit.Whileyouareworking,youprobablypayinterestonahomemortgage.Whenyouretire,youhopefullyhavepaidoffyourmortgage,soyounolongerhavethatdeduction.Whileyouare

working,youlikelyhavebusinessdeductionsoremployment-relateddeductions.Theseobviouslygoawaywhenyouretire.

Therearepeoplewhosaythatthefactthesedeductionsgoawayispreciselywhyyoudon’tneedasmuchincomewhenyouretireasyoudowhileyouareworking—thepointbeingthatyoudon’thavetopayforkids,amortgage,andbusinessexpenseswhenretired.Thatmaybetrueifyouplantojustsitaroundthehouseandwatchtelevisionwhenyouretire.Ifyou’relikemostpeople,however,you’veputoffalotoflife’spleasureswhileyouwereworkinginhopestoenjoytheminretirement.

Thesepleasuresmaysimplybemoreroundsofgolformoretravel.Or,youmayhavealwayswantedahouseinthemountainsoronthebeach.Theseareadditionalexpensesthatyoudidn’thavewhenyouwereworking.Plus,you’llprobablyhaveallofthosecutegrandchildrenthatneedtobespoiled.Andthesedays,youmayalsohavetocontributetotheincomeofyourchildrenwhoarestrugglingtomakeendsmeet.So,youreallydoneedatleastasmuchmoneywhenyouretireasyoudowhileyouareworking—ifyou’rehopingtohaveanyqualitystandardofliving.Youjustdon’tgetallofthetaxdeductionsyouhadwhileyouwereworking.

Thisdoesn’teventakeintoaccounttheeffectsofinflationonyourtaxbracket.Youmaybeearning$100,000nowasacoupleandbeinafairlylowtaxbracket.Butbythetimeyouretire,youmayneed$200,000ofincometomaintainyourcurrentlifestyle.Taxbracketsrarelykeeppacewithrealinflation,soyoucouldfindyourselfinamuchhighertaxbracketjustfrominflation.

EffectiveTaxRateIncreaseonIncomeof$100,000Usinga15%InflationRate

Year TaxableIncome EffectiveTaxRate1 $100,000 18%2 $115,000 20%3 $132,250 20%4 $152,088 22%5 $174,901 23%6 $201,136 23%

7 $231,305 25%8 $266,002 25%9 $305,902 27%10 $351,788 29%

Thisisn’ttheonlywayyouwillenduppayingmoretaxesbyusinggovernment-qualifiedretirementplans.ThinkaboutwhatinvestmentsareallowedinanRRSP,401(k),orpensionplan.Typically,youwillinvestinthestockmarket.Whattypesofincomedoyouearnfromstockmarketinvesting?Youearncapitalgainsanddividends.

Inmostcountries,capitalgainsaretaxedatalowerratethanordinaryincome.InNewZealand,forinstance,theyaretotallyexemptfromtax.Anddividendincomeisalsotaxedatalowerrateinmanypartsoftheworld.IntheUnitedStates,dividendsaretaxedatthelowcapitalgainsrate.Butwhenyouinvestinthestockmarketthroughyourgovernment-sponsoredretirementplan,theselowertaxratesgoaway.

Whenyouinvestinthestockmarketthroughaqualifiedretirementplan,likea401(k),alloftheincomeyouearniseventuallytaxedattheregulartaxrates.So,insteadofthepreferredcapitalgainsrate,thatsameincomeistaxedatordinaryincomerateswhenyouwithdrawitfromyourretirementplan.Thisalonecanmorethandoublethetaxrateonyourinvestmentearnings.

Taxpenaltiesandself-directedretirementplans

Supposeyouareinacountrythatallowssomeflexibilityinyourinvestments.Take,forexample,theself-directedIRAintheUnitedStatesortheself-managedSuperinAustralia.Youdecidethatyouwanttoinvestyourretirementsavingsintorentalrealestate.Thiscouldbeahugemistake.RememberfromChapter7thatrealestateisagreattaxshelterbecauseofdepreciation.Let’slookatRule#15.

RULE#15:Nevereverputataxshelterinvestmentinsideanothertaxshelter.

Isn’tthatexactlywhatyouaredoingwhenyouinvestinrentalrealestatethroughyourIRAorSuper?Youtakeaninvestmentthatcansavetaxesnotjustontheincomefromtherealestatebutcanactuallyreducetherestofyourtaxes,andinsteadyouconvertittoaninvestmentthatcancostyoualotofadditionaltaxes!

Rememberwhenyouwereingradeschoolandyoufirstlearnedthatnegative1(-1)multipliedbynegative1equalspositive1(-1x-1=1)?That’sexactlywhathappenswhenyouputataxshelterinsideanothertaxshelter.Youtakeataxshelter,multiplyitbyanothertaxshelter,andendupwithataxliability.Hereishowthisworks.

Let’ssayyouownrentalrealestatethatearns$10,000eachyearincashflow.Depreciationonthispropertyis$15,000,soyougettoreporta$5,000lossonyourtaxreturn($10,000positivecashflowless$15,000depreciationequals$5,000taxloss).Ina40percenttaxbracket,this$5,000lossisworth$2,000intaxsavingstoyou.

TaxBenefitsOutsideofanIRARentalrealestateannualearningsispositivecashflowof:$10,000Minuspropertydepreciationof:$15,000Equalslossof:$5,000Thelossof$5,000ina40%taxbracket=$2,000dollarsinTAXSAVINGS!

Ifyouweretomakethissameinvestmentinagovernment-regulatedretirementplanlikeanIRA,youlosethis$2,000oftaxsavingsbecausethedepreciationdeductiongetstrappedinsidetheIRA.ThisistrueevenwithanAustralianSuperoraRothIRA.Iloveself-managedSupersandRothIRAsforcertaintypesofinvestments,justnotforaninvestmentlikerentalrealestatethatcanbeagreattaxshelterwhenit’sownedoutsideofaretirementplan.

TAXTIP:RothIRAscanbeveryusefulforcertaintypesofinvestments.DevelopyourwealthstrategyfirstandthendecidewhetheraRothIRAworkswithinyour

wealthstrategy.

Consideralsothatinmanycountriestherearesignificantpenaltiesfortakingmoneyoutofyourretirementaccountbeforeyoureachacertainage.Thesepenaltiesareinadditiontothetaxyouwillpaywhenyoutakeitout.

Therealityisthatifyou’regoingtohaveasmuchmoneywhenyouretireasyoudonow,thenyouprobablywillbeinahighertaxbracketthanyouaretoday.Why?Becauseyoulikelywon’thavethedeductions,exemptions,orcreditsthatyoucurrentlyenjoyforyourchildren,foryourhouse,orevenforyourbusiness.Afterall,youwanttoberetired.

Therealityisthatifyou’regoingtohaveasmuchmoneywhenyouretireasyoudonow,thenyouprobablywillbeinahighertaxbracket

thanyouaretoday.

PlanningonRetiringPoor?

HighertaxbracketwithsameincomeShift15%capitalgainsto35%orhigherordinaryincometaxratesLosealltaxbenefitsofrealestateandbusinessInflationcreatesevenhighertaxbracketsPaypenaltieswhenyouwithdrawearly

Thepowerofleverage

I’llletmyfriend,AndyTanner,RichDadAdvisorforstocksandpaperassets,explainalloftheinvestmentreasonsnottousegovernment-regulatedretirementaccountsinhisbook,401(k)aos—exceptforoneinvestmentaspectIwanttotalkabout,leverage.

Leverageisthedifferencebetweenbuildingmassiveamountsofwealthandbarelygettingbyinretirement.Leverage,intheformofmortgages,iswhatmakesrealestatesuchagoodinvestment.Withoutdebt,realestateisamediocrewaytomakemoney.Thereturnsoninvestmentarenobetterthanbuyingandholdingstock.WewilldiscusshowtouseleveragetobuildmassiveamountsofwealthinChapter24.

Thesameistrueforbusiness.Withleverage,businesscanbeagreat

investment.Youcanborrowtoimproveyourreturnonyourequipment.Youcanborrowtopurchasethebusiness.And,ofcourse,thebestleverageinbusinesscomesfromleveragingyourtimebyhiringemployees.Likerealestate,withoutleverage,businessisjustamediocreinvestment.Justaskanyself-employedpersonwhodoesalloftheworkintheirbusinessbythemselves.Theymerelyowntheirjob.Theydon’tgetmuchmoreofareturnontheirinvestmentthanthetimetheyputintotheirbusiness.

Ina401(k),IRA,RRSP,oreveninaSuper,itcanbedifficulttogetmuchleverageforyourinvestments.Bankssimplydon’tliketolendmoneytoretirementaccounts.Theyprefertolendmoneytocorporationsandtoindividuals.Retirementaccountsaretrusts,andtheycanputalotofrestrictionsonbankloans.IntheUnitedStates,thepersonwhoownstheretirementaccountcannotguaranteealoanintheirIRA,andbankslikepersonalguaranteesbecausetheydon’twanttohavetorelyonjusttherealestatetopayforthemortgage.SoyoumayfindthatwhenyougotobuythatgreatpieceofrealestateinsideyourIRAthatyoucan’tgetmuchofabankloantofinanceit.

LeverageInsideaRetirementPlanCanMeanBigTaxes1.Somecountries,liketheUS,taxinvestmentearningsinaretirementplanthatcomefromborrowedfunds.

2.Besuretomeetwithyourtaxadvisorbeforeusingdebttobuyassetsinyourqualifiedretirementplan.

Governmentrestrictions

Theworstpartofanygovernment-qualifiedretirementplanistheamountofcontrolyouhavetogiveup.Theterm“qualified”impliesthatyouhavetomeetcertainrestrictionsfortheplantobequalifiedfortaxbenefitsfromthegovernment.Let’sstartwiththeinvestmentrestrictions.Onlycertaintypesof

investmentsareallowed.InanIRA,youcan’towncollectibles,suchaspaintings,musicalinstruments,orcollectiblegoldandsilvercoins.Ina401(k),youareseverelyrestrictedonthetypesofinvestmentsyoucanmake.

Wealreadytalkedabouttherestrictionsonleverage,butwewereonlytalkingaboutthebank’srestrictions.Whataboutthegovernmentrestrictions?Theprimarybenefitofagovernment-qualifiedretirementplanisthatnormallytheplandoesn’thavetopaytaxonitsearnings.Youdon’tpaytaxontheearningsuntilyoupullthemoneyoutoftheplan.However,intheUnitedStates,whenyouleverageyourinvestmentsinsideyourretirementplan,theincomeearnedinsidetheplanistaxedwhenit’searned.Youlosethetax-deferredbenefitofthequalifiedplan.Soevenifthestockbrokeragewillgiveyouleverage,yourretirementplanendsuppayingtaxontheearningsbecauseoftheleverage.

Thentherearetherestrictionsonhowmuchyoucanputintotheaccountandwhenyoucantakeitout.InCanadaandAustralia,theserestrictionsarefairlyliberal,andyoucanputinquiteabitandhavesomegoodflexibilityfortakingthemoneyout.NotsointheUnitedStates.

IntheUnitedStates,moneyyouputintoa401(k)plancannotbewithdrawnuntilyouleaveyourcompany.Thereisanexceptionthatallowsyoutoborrowout50percentofthemoneyyouhaveinyour401(k),buteventhisexceptionisonlyallowedononeloanatatime.Andmostemployersonlyallowyoutotakeoutaloanonceeveryfewyears.

Therearealsorestrictionsonwhenyoucanhavefullaccesstoyourmoney.AsImentionedbefore,inmostcountriesyouarerestrictedonwhenyoucantakethemoneyoutwithoutasubstantialpenalty.

Control,orlackofit,istheworstpartofgovernment-qualifiedretirementplans.EveninAustralia,wheretheself-managedSuperisprettyamazing,theregulationsabouthowtomanageyourSuperareinexcessof3,000pages.YouevenhavetogetyourSuperauditedbyaprofessionalaccountanteveryyear.That’sgreatforusaccountantswhogetpaidtodotheauditsandunderstandtheregulations,butit’sahugeadditionalcostforyou.

Soyouendupwithseveralchallengeswhenyouuseagovernment-qualifiedplanforretirement.First,youincreaseyourtaxrates.Second,youincreaseyourrisksinceyouareleavingyourmoneyinthehandsofsomeoneelse.Third,youreduceyouroverallreturnsbecauseyouarelimitedinusingleverage.Andfourth,youlosecontroloverwhatyoucandowithyourmoneyandwhenyoucanuseit.

Fortheentirechapter,I’vetoldyouwhatnottodotoprepareforretirement.Inthenextseveralchapters,I’mgoingtotellyouwhatyoucandowithoutbeingsubjecttomassivegovernmentcontroloveryourmoney.We’regoingtotalkabouthowtousebusiness,realestate,stocksandbonds,andcommoditiessuchasgoldandsilvertoprepareforretirementandtakeadvantageofthetaxincentivesprovidedforeachoftheseassetclasses.

CHAPTER17:KEYPOINTS1.Usingretirementmethodsyourparentsusedonlyprovidetemporarytaxbenefits.

2.Placingataxshelterinvestmentinsideanothertaxshelterinvestmentcreatesataxliability.

3.Youlosecontrolofyourmoneywheninvestingingovernmentqualifiedplansforretirement.

TaxStrategy#17–UseaRothIRAforCertainWealthStrategies

TheonlytypeoftaxplanningIlikeisplanningthatpermanentlyreducestaxes.Thisismybiggestchallengewithmostgovernment-qualifiedretirementplans.Whilemostgovernment-qualifiedplansarehorribleforpermanenttaxsavings,

therearecertaingovernment-qualifiedplansthatdowork.IntheUnitedStates,theseplansarecalledRothIRAsandRoth401(k)s.

Idon’tloveRoth401(k)sbecausetherearestilltoomanyrestrictionsonthemregardinginvestmentoptionsanddistributionsfromthem.ButRothIRAscanbeaverygoodpartofataxstrategy,providedthatthetypeofinvestmentsthatworkinaRotharealsothetypesofinvestmentsthatarepartofyourwealthstrategy.

Mostpeopleinvestwithoutanystrategyatall.AtProVision,wealwayssuggestyoubeginyourtaxplanningbyformingyourwealthstrategy.Andoneofthefirststepsinawealthstrategyisdeterminingwhichtypesofassetsyouaregoingtousetobuildyourwealth.

Werecommendthatyoufocusonasingletypeofasset.Beginwiththeassetclassyouaregoingtouse,whetherbusiness,realestate,paper,orcommodities.Onceyouhavetheassetclassfiguredout,choosewhichtypeofinvestmentyouwanttousewithinthatassetclass.Forexample,ifyouchoosepaperassets,thendecidewhichtypeofpaperassetsyouaregoingtousetobuildyourwealth.Areyougoingtousestocks,options,futurescontracts,ormaybehardmoneyloans?

Onceyouhavedecidedontheassetyouaregoingtouseforbuildingwealth,thenyoucandecidehowtogetthebesttaxbenefitsfromusingthatasset.Aswediscussedearlierinthischapter,ifyouchoosemultifamilyhousingasyourasset,thenyouwon’twanttouseagovernment-qualifiedretirementplantoholdyourwealth.Thatwouldbeputtingataxshelterinsideanothertaxshelter.

Thereareseveralassetsthatworkwellinagovernment-qualifiedplan,particularlyaRothIRAthatprovidespermanenttaxsavings.Theseassetsallhavecertainthingsincommon.First,theydon’tusedebtforleverage.Second,theirtaxratewheninvestedoutsideofagovernment-qualifiedplanisfairlyhigh.Andthird,theyproduceincomethatyouwillnotneedorwantuntilyoureach591/2yearsold.Finally,allyouhavetodotomanagetheseassetsistodirectthepurchaseandsaleoftheassets.Hereisatableshowingsomeoftheseassets.

AssetsthatworkwellinaGovernmentQualifiedPlan

1.TaxLiens

2.HardMoneyLoans

3.StockTrading

4.GoldandSilverBullion

NoticethateachoftheseassetsmeetsourfourqualificationsofassetsthatmakesenseinaRothIRA.(InTaxStrategy#20attheendofChapter20,wewilldiscussindetailhowtousestockoptionsinaRothIRA.)Sobesuretobuildyourwealthstrategybeforeyoudecideonyourtaxstrategy.Formoreonwealthstrategies,visitusonlineatTaxFreeWealthBook.com.

ChapterEighteen

BusinessCanBeYourBestTaxShelter

“Business,that’seasilydefined-it’sotherpeople’smoney.”PeterDrucker

AtProVision,muchofourtimeisspentwithourclientsdevelopingwealthstrategies.Oneofthefirstthingsweworkonisdeterminingwhichassetclasswillbeaclient’sprimaryfocus.Nobodygetsrichbyinvestinginseveralassetclassesatonce.Rather,it’simportanttodiscoverwhichassetclass,whetherbusiness,realestate,paper,orcommodities,shouldbetheprimaryfocus.Wehelpourclientsfigurethisout.

WebeginbyusingtheKolbe™personalassessmenttodeterminetheirnaturalinstincts.Whenyouknowyournaturalinstincts,youcanfocusyourattentiononthoseactivitiesthatwillbethemostproductiveforyou.

Next,weaskaseriesofquestionstodetermineaclient’spersonalpreferenceswhenworkingwithinvestments.Forexample,howimportantisittoworkwithpeople?Ifsomeonedoesn’twanttoworkwithpeople,thenmaybefocusingonstockinvestingandotherpaperassetswouldbeagoodfit.Ontheotherhand,ifworkingwithpeopleallthetimeisdesired,businessmightbeabetterfit.

Personally,Iloveworkingwithpeople.Infact,ifIgotoomanyhourswithoutpersonalcontactwithanotherperson,Istartgoingintowithdrawals.Mypartner,Ann,ontheotherhand,canworkforhoursonendwithoutevertalkingtoanyoneandishappyascanbe.Ironically,ofthetwoofus,sheismuchbetterinsocialsituationsthanIam.Weevenhaveourannualholidaypartyatherhouse.Becauseofherwillingnessanddesiretoworkonprojectsforhoursatatime,however,Anncoulddoextremelywelltradingstocksandoptions.Iwouldhateit.

Iwantasmuchpeopleinteractionaspossible.Somyfocusisentirelyonbusiness.Whenpeopleaskmeaboutmyinvesting,IexplaintothemthatI’maserialbusinessowner.Iownseveralbusinessesandcontinuallydevelopnew

businessesandnewwaystodobusiness.Fortunately,businessisalsooneofthebestwaystoreduceyourtaxes.EspeciallyifyoucanturnyourbusinessintoapassiveinvestmentlikeI’vedonewithmyaccountingfirm.

TAXTIP:Turnyourbusinessintoapassiveinvestment.Whenyoudo,youcanuseyour

realestatelossestooffsettheincomefromyourbusiness.

BusinessandreducingtaxesThereasonbusinessgetssomanytaxbreaksisbecausethegovernment

understandsthatthesinglemostimportanttaskfortheeconomyistocreatejobs—andbusinessescreatejobs.Sothereareliterallythousandsoftaxbreaksforbusinessesandbusinessowners.ThisisastrueinJapanasitisinGermany,France,ortheUS.

Thereasonbusinessgetssomanytaxbreaksisbecausethegovernmentunderstandsthatthesinglemostimportanttaskfortheeconomyistocreatejobs.

Wehavealreadydiscussedseveralofthebenefitsofabusinessintheearlierchaptersinthisbook.Toputthingsintocontext,let’slookatthelifeofabusinessfromstarttofinishandreviewthemajortaxbenefitsateachstage.Youmightthinkwewouldstartwiththeformationofthebusiness.Thegoodnewsisthatwecanstartevenearlierthanthat.Let’sstartwiththefirsttimewebeginthinkingaboutstartingabusiness.

Startupcosts

Youmayhavequiteafewexpenseswhenyoubegininvestigatinganewbusiness.Likelyyouwillhavesomeeducationalexpenses,andyoumayhavesometravel.Youprobablywillpaysometeammemberstohelpyougetthenewbusinessgoing.Andyoumayhavesomeprofessionalfeestoaccountantsandlawyers.Allofthesecoststogetherarecalledstartupcosts.

Sincethefirstrequirementforabusinessdeductionisthatyouareinbusiness,youdon’tgetto

deductstartupcostsuntilyouare“inbusiness.”

Sincethefirstrequirementforabusinessdeductionisthatyouareinbusiness,youdon’tgettodeductstartupcostsuntilyouare“inbusiness.”Youaren’tinbusinessuntilyouopenyourdoorsandarereadyforyourfirstcustomer.Onceyouopenyourdoors,youcanbegintakingaportionofthestartupcostsasadeductionoverseveralyears.Thisiscalledamortization,whichwediscussedinChapter7whenwealsodiscusseddepreciation.

Startupcostsareamortizedoveraperiodoftime,justlikerealestateorequipmentaredepreciatedovertime.

Thereasonyouhavetowaittobegindeductingyourstartupcostsisbecausethosecostscreateanassetthatwillgenerateincomeformanyyears(wehope).Anytimeyouhaveexpensesthatwillbenefitfutureyears,youdon’tgettotakeanimmediatedeductionforthem.Instead,youcapitalizethem,or,inotherwords,youtreatthemasanasset.

Startupcostsareamortizedoveraperiodoftime,justlikerealestateorequipmentaredepreciatedovertime.Somecountriesarespecificabouttheperiodoftimeforcertainassets.IntheUnitedStates,forinstance,theIRStellsyouexactlyhowmuchdepreciationoramortizationyougeteachyearforspecifictypesofassets.Forstartupcosts,thatamountis6.7percentperyear.Inothercountries,youlookathowlongyouexpecttheassettolast.Someassetsdon’twearoutoveraspecifictimeperiod,soyoumaynotgetadeductionuntilyougooutofbusiness.Besureyoucheckwithyoulocaltaxadvisortofindouthowstartupcostsaretreatedinyourcountry.

Youcanstartdeductingyouramortizationassoonasyouopenyourdoorsforbusiness.Andwhileyou’replanningtoopenyourbusiness,youmightwanttolookintowhereyouopenyourbusiness.Manycountries,states,andcitiesoffertaxbreaksforcompaniesthatlocateinareasthatthegovernmentistryingtoimprove.Thesearecalledenterprisezones.Youcouldreceiveataxcreditforleasingorbuyingabuildinginanenterprisezone.Oryoucouldreceiveemploymenttaxcreditsforhiringpeopletoworkinanenterprisezone.

BeSuretoStartDeductingStartUpCostsasSoonasPossible1.Ifyoudon’tbegindeductingstartupcostsintheyearyoubeginbusiness,youmaynevergettodeductthem.

2.Startdeductingyourstartupcostsinthefirstyearyoumayhavebegunbusiness.Ifthegovernmentsaysyoustartedtooearly,thenyoucanstilldeducttheminlateryears.

Businesstaxadvantages

BusinessexpensesOfcourse,assoonasyouopenyourdoorsforbusiness,youcanbegin

deductingallofyourbusinessexpensesasyoupayforthem.RememberthebasicpremisewediscussedinChapter6?Youcandeductalmostanythingaslongasitisordinaryandnecessaryinthecourseofoperatingyourbusiness.Onceyoucanshowthatyourexpenseisforyourbusinessandthatitisordinary(reasonable),theexpensebecomesfullydeductibleagainstyourbusinessincome.Thisistrueevenformanyexpensesthatyouwouldhaveevenifyoudidn’thaveabusiness,suchastravel,meals,entertainment,andautoexpense.Evenmedicalexpensesthatyoumightnotbeabletodeductpersonallycanbecomedeductionswiththerightbusinessstructure.

TaxbracketsOnceyouhaveabusiness,youcanalsotakeadvantageofdifferenttax

brackets.Youcanusemultiplecorporationstotakeadvantageoftheirlowerbrackets,justaswediscussedinChapter9.

Depreciationandtaxcredits

RememberthemagicofdepreciationwediscussedinChapter7?Inadditiontothedepreciationdeductionforequipment,manycountriesgivecreditsforinvestmentinbusinessequipment.IntheUS,thereisacreditforresearchanddevelopmentexpenses,includingequipment.Insomeothercountries,allnewequipmentpurchasesusedinbusinesscreateataxcreditforthebusinessowner.Thiscreditiscommonlycalledaninvestmenttaxcredit.

EmployeesBesidesequipment,everybusinessneedsemployees.Andsincethegoalof

thegovernmentistoincreaseemployment,itwouldbenaturalthattherewouldbetaxbenefitsspecificallyforhiringmoreemployees,right?Andthereare.

Employmentcreditsareafavoritetoolofgovernmentstoencouragecompaniestohiremorepeopleorcertaintypesofpeople.Manygovernmentsgivecreditsforhiringpeoplewhohavebeenunemployedforalongperiodoftime.InFrance,thereisanenormouscreditforhiringengineerswhodoresearchanddevelopmentwork.

Thereareothertaxincentivesforaddingemployees.Ofcourse,theobviousbenefitisthatyougettodeductsalariesandwagespaidtoemployees.Youmayalsodecideyouwanttogivecertainemployeesstockoptions(theoptiontobuystockatalowerpricethaniftheyboughtitinthestockmarket).Typically,youcandeductthevalueoftheseoptionsassoonastheemployeeshavetherighttoexercise(use)them.Or,youmaybeabletogivetheemployeesaspecialbenefitbyusingqualifiedstockoptions,sometimescalled“incentivestockoptions,”orISOs.Theseallowtheemployeestoreceivetheoptionswithoutpayingordinaryincometax.Solongastheyholdthemformorethanayear,theemployeesgettopaythelowerlong-termcapitalgainsrateswhentheysellthestock.

BusinessTaxStrategiesTaxCredits

Leasingorbuyingabuildinginanenterprisezone

Hiringpeopletoworkinanenterprisezone

Hiringspecifictypesofpeople

Increasingyouremployeeworkforce

Businessequipment

Researchanddevelopment

Deductions

Travel

Meals

Entertainment

Autoexpenses

Medicalexpenses

Depreciation

Salariesandwagespaidtoemployees

TaxBrackets

Usingmultiplecorporations

Note:Besuretocheckwithyourtaxadvisortodeterminehowthesebusinesstaxstrategiesapplytoyourpersonalbusinesssituation.

Choosingyouraccountingmethod

Asyoustartyourbusiness,youwillneedtomakecertaindecisionsabouthowtoaccount,orrecord,yourincomeandexpense.Mostbusinesseshavetheoptiontoeitherusethecashmethodofaccountingortheaccrualmethodofaccounting.Thecashmethodmeansthatyourecordyourincomeanddeductyourexpenseswhenyoupayforthem.Thisgivesthebesttaxbenefitsformostbusinessesbecauseoftenabusinesswillhavemanycustomerswhopayovertime,andbyusingthecashmethod,youdon’thavetopaytaxonthesesalesuntilyouactuallyreceivethemoneyfromthecustomer.

Theaccrualmethodmeansthatyourecordincomewhenit’searned,evenifthecustomerdoesn’tpayyouuntilseveralmonthslater.Italsomeansthatyougetadeductionwhenyoupurchaseanitem,evenifyoudon’tpayforituntilmonthslater.So,ifyouarepostponingpaymentforalotofpurchases,theaccrualmethodofaccountingcouldsaveyoualotoftaxes.Sobesuretositdownwithyourtaxadvisorwhenyoufirststartyourbusinesstomakethebestdecisionaboutwhichmethodofaccountingtouse.

RecordingYourIncomeandExpensesCashmethodofaccounting

Recordincomeanddeductexpenseswhenyoupayforthem.

AccrualmethodofaccountingRecordincomewhenit’searned,anddeductexpenseswhenyoupurchasethem,evenifyoudon’tpayforthemuntilmonthslater.

Youalsoneedtochooseyouryear-endforaccountingpurposes.Individualsarerequiredtousethecalendaryearastheirperiodforreportingincomeandexpensesontheirtaxreturn.Businesses,however,havemoreoptions.Corporationstypicallycanchoosetoendtheirbusinessyearinanymonththeydesire.Soyoucouldhaveyourbusinessyear-endonMarch31eventhoughyourpersonaltaxyearendsonDecember31.Thismightgiveyousomeflexibilityaboutwhenyoupaytaxesonyourincome.Forexample,youcouldpayyourselfabonusinMarch.YourcompanycoulddeductthebonusfortheiryearthatendsthatMarchwhileyoudon’thavetopersonallyreporttheincomeuntilyoufileyourtaxreturnforthefollowingyearthatendsonDecember31.

Incomefromoverseascustomersoftencanbeshelteredfromtaxesinyour

countryaswellasfromtaxesinthecountrywhereyourcustomerlives.

Offshoreplanning

Mostbusinessesthesedayssellalotoftheirproductstocustomerswholiveinothercountries.Incomefromoverseascustomersoftencanbeshelteredfromtaxesinyourcountry,aswellasfromtaxesinthecountrywhereyourcustomerlives.Thistypeoftaxplanningiscalled“offshore”taxplanning.Thereisanentireindustryoftaxplanningdedicatedtoit.

AtProVision,wehavesomanybusinessclientswhodobusinessaroundtheworld,thatwehaveateamoftaxadvisorswhospecializeinoffshoretaxplanning.Becarefulwithoffshoreplanning,however,asyourgovernmentdoesn’tliketoseetheirtaxrevenuesreducedthisway.Youneedataxadvisorwhospecializesinthistypeofplanning.Iknowalittlebitaboutit,butnot

enoughtodoanythingotherthangetmeintrouble.That’swhyIhiredateamoftaxadvisorswhospecializeinthisarea.

Sellingyourbusiness

Whataboutwhenyoudecidetosellyourbusiness?Therearelotsofwaystoreduceyourtaxeswhenyousellyourbusiness.

Let’ssupposeyoufindabuyerthatisapubliccompanywhosestocktradesonanexchange.Youmaybewillingto“sell”yourcompanyinexchangeforstockinthepubliccompany.Afterall,whenyoudo,youhaveanassetthatyoucouldeasilyturnintocashlateron.Whenyoudothis,youcouldenduppayingzerotaxeswhenyousellyourcompany.Later,whenyousellthestockofthenewcompany,youonlypaytaxatthelowercapitalgainsrates.

Orwhatifyou’resellingyourcompanytoaprivatebuyer—perhapsacompetitorinyourindustry?Ifyousellthestockofyourcompany,youonlyhavetopaytaxatcapitalgainsrates.Andevenifyouselltheassetsofyourcompany,mostofyourgainshouldbecapitalgain,solongasyourtaxadvisorhasdoneagoodjobnegotiatingtheagreement.

Yes,thisdoesmeanthatyoushouldhaveyourtaxadvisorheavilyinvolvedinthenegotiationswhenyousellyourbusiness.Ican’ttellyouhowmanytimesI’vehadsomeonecometomeaftertheyhadagreedonthewaytheywouldselltheirbusinessandaskifIcoulddosomethingtolowertheirtaxes.Bythen,itisusuallytoolate.Instead,involveyourtaxadvisorfromthebeginning,beforeyouevenstarttalkingtothepotentialbuyer.

Insomecases,yourbusinesswon’tsucceed.Eveninfailure,therearetaxbenefits.Manycountriesallowbusinessestodeducttheirentireinvestmentinthebusinessasanordinarydeductionintheyeartheyfail,ifcertainelectionsandplanningaredoneaheadoftime.Nobodywantstoplantofail.However,sincenineoutoftenbusinessesdofail,it’ssmarttoplanaheadoftimetogetthemaximumtaxbenefitsifyoudofail.

ThetaxbenefitsofowningabusinessarepartofwhyIlikebusinesssomuch.ThatandallofthegreatpeopleIgettomeet,likeRobertKiyosakiandalloftheRichDadAdvisors.

Notallpeoplewanttobeinbusiness.Inthenextchapter,wewillfocusonanotherassetclassthatprovidestremendoustaxbenefitstoinvestors—realestate.First,let’slookataverycreativetaxtipthatallowsyoutoseriouslyreducethetaxesyoupayonyourbusinessincome.

CHAPTER18:KEYPOINTS1.Businessesgettaxbreaksbecausetheycreatejobsthathelptheeconomygrow.

2.“Startup”costscanbedeductedoveraperiodoftimeonceabusinessopensitsdoors.

3.Thereareahostoftaxstrategiestohelpabusinessreduceitstaxliability–suchastaxcredits,variousdeductionsandusingtaxbrackets.

TaxStrategy#18–TurnYourBusinessIntoaPassiveInvestment

ManytimesovertheyearsIhaveheardpeopletalkabouthowit’spossibletoturnyourbusinessintoaninvestmentwhereyoudon’thavetogotowork.Foryears,Ididn’tunderstandhowthiswaspossible,andIcertainlydidn’tthinkitwouldeverbepossibleformyCPAfirm.Afterall,thereisnomorelabor-intensivebusinessthanaCPAfirm.WithAnn’samazingskillsincreatingsystemsandprocedures,however,wewereabletoturnourfirmintoapassiveinvestment.Wenowhaveabusinessthatrunswithoutus.

Turningabusinessintoapassiveinvestmentwhereyoudon’thavetogotoworktakessomeseriouseffort.IttookAnnandmefiveyearstofigureouthowtodoitwithourCPAfirm.Thegoodnewsisthatevenifyou’renottothepointwhereyourbusinessrunswithoutyouworking,it’seasytoturntheincomefromyourbusinessintopassiveincomefortaxpurposes.Hereiswhyyouwouldwanttodothisandafewsimplestepsforgettingitdone.

Turningordinaryincomeintopassiveincome

AswediscussedinChapter8,therearedifferenttypes,orbuckets,ofincome.Portfolioincome,orincomefrominvestments,isalwaysbetterthanordinaryincome.ThereasonWarrenBuffetpaysonly17percentonhisincomeisthatmostofhisincomeisinvestmentincome.

Anevenbettertypeofincomeispassiveincome.Whenyouhavepassiveincome,youcanoffsetyourincomewithlossesfromyourrealestateinvestments.AsweillustratedinChapter7,realestategetssuchhighdepreciationdeductionsthatyoucanhavelossesforyourtaxreturneventhoughyouhavepositivecashflowfromyourrealestate.Thechallengeisthatreal

estaterentallossesintheUnitedStatesareconsideredtobepassivelossesandcanonlyoffsetpassiveincome.

Sowewouldliketoconverttheordinaryincomefromourbusinessintopassiveincome.Hereishowwedoit.RememberRule#7–It’snothowmuchweownthatmatters;it’showmuchwecontrol?Thisistherulewe’regoingtousetoconvertatleastpartofyourbusinessincomeintopassiveincome.Allwehavetodoistogivepartofyourbusinesstoamemberofyourfamilywhodoesn’tworkinthebusiness.Whenwedothis,theirshareoftheincomefromthebusinessispassiveincome.Then,wealsogivethemapartoftherealestatethathaspassivelosses.Now,theirshareoftherealestatelosseswilloffsetthepassiveincomefromtheirshareofthebusiness.

Whilethisissimpleinconcept,don’tdothiswithoutyourtaxadvisor’shelp.Therearelotsofdetailsthatyourtaxadvisorwillneedtobeawareofsoyoucanmakethisgreattaxstrategyworkforyou.

ChapterNineteen

TheMagicofRealEstate

“It’stangible,it’ssolid,it’sbeautiful.It’sartistic,frommystandpoint,andIjustloverealestate.”–DonaldTrump

AslongasIcanremember,myparentsownedrentalproperties.Theyownedtwoduplexesandalargeplotoflandnottoofarfromourhouse.Iremembermybrother-in-lawplantedavegetablegardenonthelandandseemedtoloveworkinginthegarden.Mydadlikedworkingontherealestate.Anychancehegot,hewantedtobeoutsideworkingontheyardorimprovingtheproperty.Itwasaformofrecreationforhim.

IneverunderstoodworkasarecreationuntilIstarteddoingmyownbusinessandinvesting.NowIgetit.Thoughmyworkismuchdifferentthanmydad’s,Iunderstandhowenjoyableitcanbetodoproductiveworkthathelpsotherpeople.Myworkiseducationandadvice.Mydad’swasprintingandimprovinghisproperties.

WhenIwasyoung,Ididn’tunderstandallofthetaxbenefitsmyparentswerereceivingfromtheirrealestate.OnceIearnedmyMastersofProfessionalAccountingandstartedworkingwithclientswhoownrealestate,however,Iunderstood.

Realestateissuchagoodtaxshelterthataseriousrealestateinvestorshouldneverhavetopaytaxontheircashfloworonthegainfromthesaleoftheirrealestate.

Realestateissuchagoodtaxshelterthataseriousrealestateinvestorshouldneverhavetopaytaxontheir

cashfloworonthegainfromthesaleoftheirrealestate.

RULE#16:

Thesinglebesttaxshelterinmostcountries’taxlawisinvestinginrentalrealestate.

WewentthroughthemagicofdepreciationindetailinChapter7,soyouunderstandhowthecashflowfromrealestatecanbetotallyshelteredfromtaxesviathesephantomlosses.Plus,youunderstandthatrentalrealestateinvestmentsnotonlysheltercashflowfromtherealestatebutcanalsoshelterotherincomefromtaxes.Withproperplanning,rentalrealestatecancreatehugetaxreductionsforyourbusinessandsalaryincome.AperfectexampleofhowtodothisisinTaxStrategy#18attheendofthelastchapter.

TAXTIP:Sincethereisnotaxonthesaleofyourresidenceinmostcountries,youmay

wanttosellyourresidenceandbuyanewoneeveryfewyears.Whileapersonalresidenceisalwaysaliabilitysinceittakesmoneyoutofyourpocket,youcanstillmakemoneyonitifyoubuyandsellattherighttimes.Justdon’tgetcaughtinthespeculationtrapofbuyingahomefortheprimaryreasonofsellingitlater.

Buyyourhomebecauseyouwanttolivethere.Anygainisjustabonus.

Like-kindexchanges

Thekeytobuildingtax-freewealthinrealestate,ofcourse,istocontinuebuyingmoreandmorerealestate.Here’swhy.

InourexampleofcostsegregationsinChapter7,youlearnedhowtogetmoreofyourdepreciationinthefirstseveralyearsofowningtheproperty.Yourtaxbasis(thepurchasepriceofthepropertylessallofthedepreciationyouhavetakenonthepropertyovertheyears)inthepropertyisreduceddollarbydollarforthedepreciationyoutake.Andyourtaxbasisisimportantbothforcalculatingdepreciationandforcalculatingyourgainwhenyousellaproperty.

Onceyourtaxbasisinapropertygoestozero,youdon’tgetanymoredepreciation.Andwhenyouselltheproperty,yourgainiscalculatedasthedifferencebetweenyourtaxbasisandyoursalesprice.Thisisabasicaccountingprinciplethatappliesthroughouttheworld.

Inordertocontinueshelteringthecashflowfromyourrealestateaswellasthecashflowfromyourbusiness,youneedtocontinuebuyingmorerealestate

byrollingyourgainsintolike-kindpropertiesthroughtax-freeexchanges.Oneofthegreatthingsabouttaxbasisisthatitincludesdebt.Soyoucan

buyapropertywithnomoneydownthroughatax-freeexchangeandyougetallofthetaxbasisanddepreciation.Thebankdoesn’tgetanyofit.Let’slookatasimpleexample.

Supposeyoubuyahousefor$100,000.RememberfromChapter7thatyoureallypurchasedfourtypesofpropertywhenyoupurchasedthehouse.Youpurchasedland,abuilding,landimprovements,andthecontentsofthebuilding.Everythingexceptthelandcanbedepreciated.Forthisexample,let’sassumethatafteryoubreakoutallofthedifferentpartsoftheproperty,yourtaxpreparerdeterminesthatyourannualdepreciationis$8,000(thisisjustanestimateforpurposesofthisexample).

Eachyear,youtakean$8,000depreciationdeductiononyourtaxreturn.Andeachyear,yourtaxbasisinthepropertyalsogoesdownby$8,000.Afterthefirstfiveyears,whenyouhavefullydepreciatedthecontentsofthehouse,yourdepreciationdeductiondecreasesto$4,000peryear.

Let’ssaythataftersevenyearsyoudecidetosellthebuilding.Bythattime,youhavetakendepreciationdeductionstotaling$48,000($8,000x5+$4,000x2).Nowyourtaxbasisinthepropertyis$52,000($100,000-$48,000).So,ifyousellthebuildingfor$130,000,youwillhaveataxablegainof$78,000($130,000-$52,000).Essentially,youarepayingbackthedepreciationdeduction(calleddepreciationrecapture),pluspayingtaxontheincreaseinvalueoftheproperty.

Inmanycountries,however,youcancompletelyavoidthegainonthesaleofyourproperty,includingthedepreciationrecapture,simplybybuyinganotherinvestmentpropertyforthesamepriceormorethantheoneyousoldthroughatax-freeorlike-kindexchange—alsoreferredtoasaSection1031exchangein

theUnitedStatesafterthesectionoftheInternalRevenueCodethatallowsthistaxtreatment.Thismeansthatyoucansellpropertiesthatyoudon’twantanymorebecausetheyareoverpricedorbecauseyouwanttochangeyourinvestmentstrategyandnothavetopayanytax.

Whenyoudoalike-kindexchange,thetaxbasisinyournewpropertyequalsthepurchasepriceoftheproperty,lesstheamountofgainyoudidn’thavetorecognize.Inourexample,let’ssaywepurchasedanewpropertyforexactlythesameamountasthesalespriceoftheoldproperty,$130,000.Thenewpropertywouldhaveataxbasisof$52,000(thenewproperty’spurchasepriceof$130,000less$78,000,theamountofgainonwhichwedidn’tpaytax).Thenewpropertyisdepreciatedasifitweretheoldproperty.Yougetadepreciationdeductionforthenewpropertyasapercentageofitstaxbasisof$52,000.Thecalculationsgetalittlecomplicatedatthispoint,sobesurethatyourtaxadvisorkeepsreallygoodtrackofyourtaxbasisoneachofyourproperties.

Like-kindexchanges+depreciation=zerotaxes

Inchapter8,Itoldyouhowmyfriend,GuyZanti,usedthe1031exchangetoreducehistaxesby$20,000.Letmeshowyouhowyoucanuseacombinationof1031exchangesanddepreciationtoneveragainpaytaxonthecashfloworthegainfromthesaleofyourrealestate.

Supposeyoudecidetobeginyourrealestateinvestmentstrategybyinvestinginsingle-familyhomes.Youbuyseveralhomesoverthenextfewyearsandgetcomfortablebuyinghousesthathavepositivecashflowwhilealsoincreasinginvalue.Afterafewyears,youdecidethatyou’dlikealittlemorecashflowandafewlesspropertiestomanage.So,yousellallofyourhousesandbuyacoupleapartmentbuildings.Youdothisthrougha“qualifiedintermediary”andyoufollowallofthedetailedrulesofSection1031thatyourtaxadvisortellsyouaboutsothatyoursalesandpurchasesqualifyasalike-kindexchange.

Youenjoytheadditionalcashflowthatcomesfromyourapartmentbuildingsforseveralyears.Youalsoenjoythedepreciationdeductionsfromyourapartmentbuildings.Thesedeductions,aswediscussedinChapter7,completelyshelterthecashflowfromincometax.Eventually,though,youdecidethatyouwanttocashinyourapartmentbuildingsforanassetthatyoudon’thavetomanageatall.Younoticethatwhileapartmentbuildingsarefareasiertomanagethansingle-familyhomesandproducemorecashflowthansingle-familyhomes,

theystillrequirealotofwork.Youlookaroundforabuildingthatdoesn’trequireanyworkatall.WhatyoufindisaWalgreens.

Likemanyretailstores,Walgreenstypicallydoesn’townproperties.Instead,itfindstheland,buildsthebuilding,sellsthelandandbuildingtoaninvestor,andthenleasesthembackfor30years.Walgreensagreestotakecareofallofthemaintenanceandalloftheexpenses.Alltheinvestorhastodoispaythemortgage.YoulikethisbecauseWalgreenshasgreatcreditandthebankishappytolendyouthemoneytobuyapropertythathasaleaseguaranteedbyoneofthelargestretailstorechainsintheworld.

YousellallofyourapartmentbuildingsandbuyyourWalgreensproperty.Everymonth,Walgreenssendsyouacheckthatyoudepositintoyouraccount.Youcanevenhavethechecksenttoyourbankanddirectlydepositedintoyouraccountandhavethemortgagepaymentpaidautomaticallyfromyouraccount.Soyoudon’thavetodoanything.YoutravelallovertheworldwiththeinvestmentincomefromyourWalgreenspropertytillaripeoldage.

HereisthemagicoftheWalgreensstrategy.Overtheyears,youtookdepreciationdeductionsonyoursingle-familyhomes,thenonyourapartmentbuildings,andthenonyourWalgreens.Thisdepreciationshelteredyourcashflowfromincometaxes.Let’ssupposeyourtotaldepreciationdeductionsovertheyearswere$4million.Youhavetoreduceyourtaxbasisinyourpropertiesbyallofthatdepreciation.Rememberthattaxbasisisthenumberthatisusedtocalculatethecapitalgainwhenyouselltheproperty.So,ifyoupaid$5millionfortheWalgreens,andyouhadatotalof$4millionofdepreciation,thenyourbasiswouldbe$1million.Ifyousoldthepropertyfor$6million(it’svalue)onthedaybeforeyoudied,youwouldpaycapitalgainstaxon$5million($6millionsalespricelessyour$1millionbasis).Ifyourcapitalgainstaxrateis15percent,youwouldhavetopayataxof$750,000.

Youcaneliminatethiscapitalgainstaxsimplybyholdingontothepropertyuntilyoudie.Whenyoudie,yourbasisisautomaticallyincreasedtothevalueofthepropertyonyourdateofdeath.Ifthevalueis$6million,yourbasiswillbe$6million.SinceweknowthatyourkidsaregoingtoselltheWalgreenssoonafteryoudiesothattheycanhavethecash,thisisagreattaxplanningtool.Yougotthetaxbenefitfromallofthatdepreciationwhileyouwerealive,andyourchildrendon’thavetopaytaxonitwhenyoudie.

Don’tSellRealEstateRealAssetsBeforeYouDie1.Sellingassetscreatesunnecessarycapitalgainstaxesthatcouldbeavoidedsimplybyholdingontoyourassetsuntilafteryoudie.

2.Youcanalwaysgetcashfromyourrealestatebyborrowingagainstitanddebtistaxfree.

Whataboutestatetaxes?Thedayyoudie,justaswediscussedinChapter13,theestatetaxkicksin.Yougetanexemption,however,foracertainvalueofyourestate.WiththeWalgreensnowworth$6millionandassumingyouhaveamortgageonitof$1million,yournetestatevalueis$5million.TheUnitedStateshasa$5millionestatetaxexemption.Sotherewon’tbeanyestatetaxontheWalgreens.(EveniftheWalgreensplusyourotherassetstotalmorethan$5million,thereareplentyofwaystoreduceoreliminateyourestatetaxthatwediscussedinChapter13).

Ofcourse,depreciationandlike-kindexchangesaren’ttheonlytaxbenefitsfromrealestate.InChapter9,wetalkedaboutsomeofthetaxcreditsyoucangetfromrealestate.Therearelow-incomehousingcredits,historicstructureinvestmentcredits,andotherrealestatetaxcredits.Andinmostcountries,youdon’thavetopayanytaxonthegainsfromsellingyourfamilyhome.

Oneofthebiggestbenefitsinrealestateisthatloansaren’ttaxable.Soyoucanborrowmoneyfromthebankthrougharefinanceandyouwon’tpaytaxonthatmoney.OneoftheargumentsIhearallthetimefornotdoinglike-kindexchangesisthatthetaxpayermightneedcashfromthesaleofthebuilding.Insteadofcashingoutandpayingtaxonthatcash,whynotdoalike-kindexchangeandthenlaterrefinancethebuilding?Whenyourefinance,yougetyourcashintheformofatax-freeloanandgettokeepyourasset!

Oneofthebiggestbenefitsinrealestateisthatloans

aren’ttaxable.

Ifyourwealthstrategyincludesrealestate,besuretoworkwithyourtaxadvisortofigureouthowmuchdepreciationyouwillgeteachyearandhowyoucanuselike-kindexchangesandothertaxbenefitstoseriouslyreduceoreliminateyourincometaxes.

Nextwewillmovetothetaxbenefitsofactivelyinvestinginpaperassets,suchasstockandoptiontrading.

CHAPTER19:KEYPOINTS1.Realestateinvestmentisoneofthebesttaxshelters.

2.A1031exchange(orlike-kindexchange)anddepreciationarekeyinneverpayingtaxonthecashfloworthegainfromthesaleofrealestateinvestment.

TaxStrategy#19–ChangeYourResidenceEveryFewYears

Bynow,everyoneknowsthatrealestatedoesn’talwaysappreciate.Sobuyingahousewiththesolegoalofsellingitwhenitgoesupinvalueisnotasoundwealthstrategy.However,thisdoesn’tmeanthatyoucan’tstillhaveastrategyofbuildingwealthinpartbychangingyourresidenceeveryfewyears.

Mostpeopleprefertoowntheirownhomeforanynumberofreasons.Owningyourhomegivesyouasenseofsecurity.Itgivesyouafeelingofownership.Itmayprovideasenseofstabilitytoyouandyourfamily.Anditcanalsobeawaytobuildtax-freewealth.

Let’ssupposethatinsteadofbuyingyourdreamhome,youdecidetobuyahousethatneedssomefixingup.Therearelotsofhouseslikethis.Ihaveafriendwholovestofindhomesthatarearealbargaininpartbecausetheyneedalotofimprovement.Shehasbecomeanexpertatdecidingwhatneedstobedonetoahousetomaximizeitsvalue.Shealsohatespayingtaxes.

Soeveryfewyearssheandherhusbandselltheirhouseandfindanewhousethatneedsrepairsandimprovements.Theyspendeveningsandweekendspainting,puttinginnewflooring,andaddingnewcabinets.DidIforgettosaythatmyfriendlovesinteriordesignaswell?Sothisiskindofafunhobbyforthem.Inaddition,herhusbandisahighimplementerinhisKolbescore.Thismeansthathereallylikesworkingwithhishandsbyusingtoolsandbuildingthings.Whynotusehishandstoimprovehisownhouse?

Beyondthepersonalsatisfactionofworkingtogetheronaproject,myfriendandherhusbandenjoytaxadvantagesfordoingthis.IntheUnitedStatesthereisnotaxonthesaleofapersonalresidencesolongasyouliveinittwooutofthepastfiveyears.Myfriendandherhusbandalwaysliveintheirhouseuntilit’sfullyimproved.Eveninabadrealestatemarket,theirimprovementsareenoughtoprovidethemwithatidylittlegainwhentheysellthehouse.Solongastheirgainisnotmorethan$500,000,theentiregainistax-free.Thentheyfindanotherhousetheycanimprove.

Whentheyfirststarteddoingthis,theirgoalwastoowntheirdreamhomefree-and-clearofanydebt.Theyreachedthatgoalyearsago.Nowtheykeepfindingnewhomesthattheycanturnintoadreamhomeandsellforatax-freegain.

Ofcourse,thisstrategyisn’tforeveryone.Youhavetoenjoylivinginahousethatneedsimprovement.Andithelpsifyouenjoydoingthework.Still,whatagreatstrategyforthoseofyouwhodon’tmindmovingeveryfewyearsandwouldliketomakemoneydoingit—tax-freemoneyatthat.

ChapterTwenty

StocksCanLowerYourTaxesToo

“Lookatmarketfluctuationsasyourfriendratherthanyourenemy;profitfromfollyratherthanparticipateinit.”–WarrenBuffett

Myfirsttryatstockinvestingwasadisaster.Mybrother,Steve,whowasaprofessorattheHarvardBusinessSchoolformanyyears,gavemeatipontwostocks.ThefirstwasacompanynobodyhadheardofatthetimecalledBerkshireHathaway,whichwasrunbythisguynamedWarrenBuffett.Ididn’tknowanythingaboutthecompanyexceptthatmybrotherthoughtthisWarrenBuffettwasaprettysmartguy.So,Iboughtthestock.

Steve’sotherrecommendationwasacompanyIknewsomethingaboutcalledFastTax™,whichprocessedtaxreturnsbycomputer.Thiswas25yearsago.WeusedFastTaxatwork,anditwasaprettygoodprogram.Ithoughtthiswouldbeafairlysafeinvestment.

Afewyearslater,IneededsomecashsoIsoldoneofmystocks.Imadetheobviouschoice.IkeptthestockinthecompanyIknew,FastTaxandsoldthestockinthecompanyIdidn’tknow,BerkshireHathaway.You’reprobablylaughingatmerightnow.IfI’dkepttheBerkshireHathawaystock,itwouldbeworthmillionsnow.Justlikemostbadinvesting,minewasaresultofalackofeducation.

Peoplewhomakealotofmoneyinthestockmarketarewelleducatedaboutthestockmarket.Theyunderstandhowtomakemoneywhetherthemarketgoesup,down,orsideways.Theydon’trelyonthestrategyIusedformyfirststockinvestments—buy,hold,andpraythestockgoesup.Instead,theyunderstandhowtouseoptions,futures,andotherhedgestoreducetheirriskandincreasetheirreward.

Thesesamepeople,however,tendtobelesseducatedwhenitcomestotaxes.Theyareespeciallyuneducatedwhenitcomestohowstocktradingcanproducemajortaxbenefitswiththerighteducation…orveryhightaxeswiththe

wrong—orno—education.Let’slookatsomeofthemajorbenefitsyoucanhaveasanactivestockinvestor,aswellassometrapstowatchoutfor.

Themutualfundtaxtrap

Mutualfundsarethemostcommonformofstockmarketinvesting.Theproblemisthatmutualfundscontainataxtrapthatmanypeopledon’tknowabout.Thinkofamutualfundasapass-throughentitylikeapartnership.Theincomeearnedinamutualfundisnottaxedtothemutualfund.Instead,it’staxedtotheinvestors.Thatmightbeokayifeveryoneenteredamutualfundatthesametime.Everyonewouldsimplyreporttheirshareofgainsandlossesonthestockssoldinthemutualfund,andthentheywouldseethevalueoftheirinvestmentgrowordecreasebythosesamegainsandlosses.

That,however,isnothowitworks.Ifyouinvestinmutualfunds,youwilllikelybuyintoafundthathasbeenaroundformanyyears.Overtheyears,investorshavecomeandgonewhilethefundhaspurchasedmanydifferentstocksoverthosesameyears.Thechallengecomeswhenthefundgoestosellaparticularstock.Let’ssayyoudecidedtoinvestinMutualFundAatthebeginningoftheyear.ThefundboughtStockBfor$10persharefifteenyearsago.Whenyoujoinedthefundatthebeginningoftheyear,StockBhadamarketvalueof$50pershare.Thedayafteryoujointhefund,thefundmanagersdecidedtosellthestock.Sothereisagaintothefundof$40pershareonthesaleofStockB.

Whopaysthetaxonthe$40gain?Youdo,eventhoughyoujustjoinedthefundthedaybefore.AllinvestorswhoownedsharesofMutualFundAonthedaythemutualfundsoldthestocksharethegain.Doesn’tseemfair,doesit?Itgetsworse.

Supposeyoupaid$100pershareforMutualFundAwhenyouboughtitinJanuary.Attheendoftheyear,thestockmarkettakesadipinvalueandnowyoursharesofMutualFundAareonlyworth$80pershare.Youstillhavetopaytaxonyourshareofthe$40gainfromthesaleofStockBinsidethemutualfund.

RULE#17:Mutualfundsareoneofthefewplaceswhereyoucanlosemoneyandstill

owetaxonyourinvestment.

Thetaxbenefitsofactivestockinvesting

Let’stakealookatwhathappenstomoreactiveinvestorsinthestockmarket.Unlikethepassivemutualfundinvestor,theactivestockinvestorcanreceivemanytaxbenefits.Themostobviousisthatgainsinactivestockinvestingarecapitalgains,andunlikemutualfundgains,youonlyhavetopaytaxonthemwhenyousellthem.

Manycountrieshavespecial,lowertaxratesoncapitalgains.Insomecountries,liketheUnitedStates,youonlygetthelowertaxratewhenyouhavealongtermcapitalgain.Longtermmeansthatyouheldtheassetforatimespecifiedbyyourcountry’staxlaw.Inseveralcountries,includingtheUnitedStates,Australia,andJapan,longtermisconsideredoneyearandaday.Somecountriesdon’tdistinguishbetweenlongtermandshort-termcapitalgains.InNewZealandandseveralothercountries,thereisnotaxatalloncapitalgains.

Inseveralcountries,includingtheUS,AustraliaandJapan,longterm

isoneyearandaday.

Ofcourse,ifyoucanhavegainsonanasset,youcanalsohavelosses.Lossesfromthesaleofstockarenormallyconsideredtobecapitallosses.Capitallossesinmostcountriescanonlyoffsetcapitalgains.Ifyoudon’thaveenoughcapitalgainstooffset,thenthecapitallossescarryforwardtofutureyears.IntheUS,however,youcanuse$3,000peryearincapitallossestooffsetotherincomewhenyoudon’thaveenoughcapitalgainstooffset.

Manycountries,includingtheUnitedStates,alsotaxdividendsfromstocksatthelowercapitalgainsrates.Thisisafairlynewphenomenonandonethatcouldchangeatanytime.Historically,dividendshavebeentreatedasordinaryincome.Interestincomeisalsotreatedasordinaryincomeinmostcountries.

Forthecasualinvestor,capitalgains,dividends,andinterestaretheonlyrulesyouhavetoknow.Onlywhenyoubecomeaseriousstockinvestordotherulesgetmorecomplicatedandthebenefitsincrease.ThisleadsustoRule#18.

RULE#18:Thebetterthetaxbenefits,themorecomplicatedtherules.

Thisruleisgenerallytrueforalltaxbenefitsandiswhywealthyindividuals

dependsoheavilyontaxadvisors.Thereasonforthisruleisthatthegovernmentwantstolimittaxbenefitstoveryspecificcircumstances.Inordertodefinethosecircumstances,therulescangetalittlecomplex.Don’tworryaboutunderstandingallofthedetailedrules.Justbesureyourtaxadvisorunderstandstherulesthatapplytoyou.

TAXTIP:Considertradingstocksandoptionsinyourself-directedIRAorpension

account.Thetaxbenefitscanbeenormous.

Taxbenefitsofoptiontrading

Thefirstcomplexareainpaperassetsisthestockandoptiontraderrules.RememberinChapter6whenyoulearnedthatalmostallexpensescanbedeductible?Thewaytomakethemdeductibleistomakethemanordinaryandnecessarybusinessexpense.Thisisdifficulttodowhenyouareastockinvestor,sinceyouprobablyaren’tinvestingforotherpeopleandsoarenottechnicallyinbusiness.

Thereisanexceptiontothebusinessrequirement,however,forpeoplewhoareinatrade.Atradeincludesdoingworkonlyforyourownbenefitsolongasitisamajorpartofyourtimeandwealthbuildingactivities.Whenyouareinatrade,yougettodeductyourexpensesjustlikeyouwouldifyouwereinbusiness.Forstocktraders,thisisevenbetterthanforthetypicalbusinessowner.Yougettodeductyourexpensesasordinarydeductions,andyourtradinggainsarecapitalgains—notordinaryincome,whichistaxedhigher.Ifyoudon’tmeetthetraderrules,thenyourexpensesareinvestmentexpenses.Investmentexpensescansometimesbededucted,dependingontheamountandtypeoftheexpenses.

NotAllTaxAdvisorsUnderstandStockTradingTaxRules1.Whetheryouqualifyasastocktraderisbasedonyourfactsandcircumstances.

2.Thecourtcasesareconstantlychangingtherulesforstocktraderqualificationsobesureyourtaxadvisorresearchesthesecaseseachyearyouwanttoqualifyasatrader.

Duetothecomplexityofthesespecialrules,pleasebesuretoworkwithaqualifiedtaxadvisorinyourcountrytodeterminewhetheryouqualify.HerearetherulesintheUnitedStatesfordeterminingtradestatus.

Therearethreeprimaryqualificationsyoumustmeettobeatrader.Theserulesarechallengingbecausetheyarenotspecifiedanywhereintheactualtaxcode.Instead,thecourtshavehandedthemdownovertheyears—andtheykeepchanging.Soyouwillhavetoworkwithyourtaxadvisorverycloselytodeterminewhetheryourfactsandcircumstancesmakeyouatraderortodeterminewhatchangesinyouractivitiesareneededtoqualifyforthetradertaxbenefits.

Thefirstgeneralrulefortradersrelatestothevolumeofyourtradingactivities.Volumemeansboththenumberoftradesyoumakeandthedollaramountofyourtrades.Ifyoutradeconstantlythroughouttheday,youhaveamuchbetterargumentthatyouqualifyasatraderthanifyoutradeonlyacoupleoftimesaweek.Evenacoupleoftradesadayaren’tenoughtomakeyouatrader.Likewise,yourtradeshavetobeasignificantdollaramount.Thereisnospecificdollaramountthatqualifies.It’sjustthemorethebetter.So$1millionintradesinaweekmayqualifybut$10,000clearlydoesn’t.

Thesecondgeneralrulefortradersrelatestotheamountoftimeyouspendtrading.Themoretimeyouspendtrading,themoreyourtradinglookslikeyourprimaryincomeactivity.Underthecurrentcourtcases,anhouradayprobablyisn’tenough.Even3-to-4hoursperdaymightnotbeenough.Whetheryouspendenoughtimetobeatraderisalsoimpactedbythethirdrule.

Thethirdgeneralrulefortradersrelatestotheimpactyourtradinghasonyourincome.Isyourincomefromtradingsignificantwhencomparedtoyourtotalincome?Ifyourtradingincomeonlyrepresents10percentofyourtotalincome,itprobablydoesn’tmatterhowmuchtimeyouspendtradingorhowmanytradesyoumake.Bydefinition,atraderissomeoneverygoodattradingandwhomakesasignificantportionoftheirincometrading.

ThreeRulestoQualifyasaStockTrader1.Thevolumeoftradingactivitiesmustbesignificantinbothnumberoftradesanddollaramountoftrades.

2.Thetimespentonyourtradingactivitymustbeasignificantpartoftheday.

3.Theincomeresultedfromyourtradingactivitymustbeasignificantportionofyourincome.

Lookatthegeneraldefinitionofatradeandyouwillprobablydookay.Youwouldn’tcallsomeoneaprofessionalbricklayerwhoonlydoestheoccasionalprojectinthebackyard.Norwouldyoucallsomeoneaprofessionalelectricianwhodoesoddjobsforalittleextramoney.Atruetradesmanissomeonewhoisarealprofessional,constantlyworkingatandhoningatrade.Soonceyoubecomeatrulyprofessionaltrader,consistentlymakingmoneyandspendingserioustimeandeffortontrading,thenyouwilllikelybeconsideredatraderfortaxpurposes.

Additionaltaxbenefitsfortraders

Therearemanyotherbenefitsforseriousstockandoptiontradersaswell.IntheUnitedStates,certainoptiontradersgettotreat60percentoftheirincomeaslongtermcapitalgainstaxedatthelowerratesevenifalloftheirtradeshappeninlessthanayear.Tradersinfuturesandforeignexchangemayalsoqualifyforthistaxbenefit.

Thoseofyouwhodecidetobecomeprofessionaltradersinthesecomplexareasoffinancewilldefinitelyneedtoworkwithahighlytrainedtaxadvisorwhoclearlyunderstandsthelaw.Ifyouareinterestedinlearningmoreaboutstockandoptiontrading,tradinginfutures,andforeignexchangetrading,talktomyfriendsatRichDadEducation.Theyhaveagreatprogramtoteachpeoplehowtobecomeprofessionaltraders.Gototaxfreewealthbook.comtofindoutmoreabouttheirprograms.

Nextwewilltakealookatthetaxbenefitsofinvestingincommodities,suchasoilandgas,agriculture,andpreciousmetals.

CHAPTER20:KEYPOINTS1.Understandingthetaximplicationsinstocktradingcanproducemajortaxbenefits.

2.Therulestoqualifyasatradercanbecomplex,workwithyourtaxadvisortodeterminewhetheryourfactsandcircumstancesqualifyforthetradertaxbenefits.

TaxStrategy#20–DoYourStockTradinginsideaSelf-directedRothIRA

InChapter17,wediscussedallthereasonswhyIdon’tlikegovernment-qualifiedretirementplans.Oneofthefewtimesthesetypesofplansmakesenseiswhenyoutradestocksoroptions.Andthey’reespeciallygoodifyoudon’tqualifyasatrader.

RememberwhenwetalkedaboutprohibitedtransactionsinanIRA?OneoftheprohibitedtransactionsisperformingservicesforyourIRA.AnexceptiontothisruleisdirectingtheinvestmentsoftheIRA.Youareallowed,inaself-directedIRA,todirectwhichassetstheIRAbuysandwhichassetsitsells.Youcanalsodirectwhentobuyandsellanasset.

Whenyoutradestocksandoptions,allyou’redoingisdirectingwhichassetsareboughtandsold,andthetimingofthosepurchasesandsales.YoucoulddothisbygoingintoyourIRAadministrator’swebsite.Butthereisamucheasierwaytodoit.

WhatifyouhavetheIRAsetupalimitedliabilitycompany(LLC)thathasabrokerageaccount?Aslongasyouonlydirecttheinvestmentsanddon’tputanymoneyinortakeanymoneyoutoftheaccount,youcanpersonallyrunthebrokerageaccount.Thisgivesyoutheaccessyouneedtobuyandsellstocksortradeoptionsonadailybasis.

Sincestockandoptiontradesaretreatedasshort-termcapitalgains,ifyouweretotradethemoutsideofyourIRA,theywouldbetaxedatordinaryincometaxrates.Soyoudon’tgiveanythingupbytradinginsideanIRA.Yousimplypostponepayingthetaxontheinvestmentgains.

Evenbetteristradingstocksandoptionsinsideaself-directedRothIRA.Whenyoudothis,noneofthegainsaretaxable—ever!Howcoolisthat?Ofcourse,rememberthatyouarelimitedonwhenyoucantakethemoneyout,sodon’tdependontheincomefromthestockandoptiontradinginsideyourIRA

whileyouareunder591/2yearsold.Thisisretirementincome,andyoushouldtradeaccordingly.

Ifyouhavemoneyinsidea401(k)oranIRA,andyourwealthstrategyincludesstockandoptiontrading,considerrollingyour401(k)orIRAintoaself-directedIRAanddoingsomeofyourtradinginsideyourself-directedIRA.AndconsiderconvertingyourregularIRAtoaRothIRAbeforeyoustarttradingsothatyoucanavoidtaxonallofthegainsfromtrading.

ChapterTwenty-One

CommoditiesCanBeYourTaxFriend

“Formulaforsuccess:riseearly,workhard,strikeoil.”–J.PaulGetty

IwasearningmyMastersofProfessionalAccountingdegreeattheUniversityofTexasduringtheheightofthe1980’soilandgasboom.TexasoilwasdoingsowellthattheMidland,TexasofficeoneoftheBig8(nowit’stheBig4)accountingfirmswashiringmyprogram’sgraduatessightunseen.Theywantedasmanynewlymintedaccountantsastheycouldget.

Naturally,Idecidedtolearnsomethingaboutoilandgas.Itookaclasscalled“OilandGasLaw.”Ilikedthatclassandalsotookthe“RealEstateLaw”class.ThiseducationturnedouttobeparticularlyhelpfulwhenIgraduatedandtookmyfirstjobatErnst&Whinney(nowErnst&Young)inSaltLakeCity,Utah.

SaltLakeCitywasexperiencingitsownlittlenaturalresourcesboom.Itboastedthelargestopen-pitcoppermineintheworldatthetime(Kennecott)andwasminingalotofsilver—andnearbyEasternUtah,Wyoming,andColoradowereexperiencingaboominnaturalgas.Therewasahugenaturalgasfindinthatpartofthecountry,andgaspriceswerehighenoughtomakealotoffarmersandranchersverywealthy,muchliketheranchersinTexasgotwealthy(andcontinuetogetwealthy)fromoil.

Aftergraduation,Ifoundthatalotofmytimewasspentdoingtaxworkforminingconcernsandoildevelopers.Oneofourindividualtaxclientsownedinterestsinover300oilandgaswells.Itwasmyjobtokeeptrackofalloftheincomeandexpensesforthesewells.Thiswasbeforepersonalcomputers,sowedidallofitonhugespreadsheetsbyhand.

SoonafterIwashired,thefirmboughttwoApplecomputers;onefortheauditsideofthepracticeandoneforthetaxside.IdiscoveredthegreatbenefitofusingVisiCalcTM,thefirstspreadsheetprogramforpersonalcomputers.Iputtheinformationfromalloftheclientswhohadoilandgasinvestmentsintoa

VisiCalcTMspreadsheetsothatwedidn’thavetodoitbyhandanylonger.Whatahugetimesaverthatwas.Thesedays,noonewouldeverconsiderdoingaprojectlikethatbyhand.

Therewasabenefit,however,tobeingsointimatelyinvolvedinthenumbersanddoingthembyhand.Icametoreallyunderstandthetaxbenefitsofinvestinginoilandgasandotherminerals.IntheUS,thebenefitsofinvestinginoilandgasdrillingprogramsareenormous.Letmeexplain.

Oilandgastaxbenefits

TheUnitedStateshaslongheldanenergypolicypromotingoilandgasdrillingoperationsinsidethebordersoftheUnitedStatestohelpreducedependenceonforeignoil.Thegovernmenthasputthisintoactionthroughthetaxlawbyprovidingsignificanttaxbenefitsforanyonewhoinvestsindomestic(U.S.-based)oilandgasdrillingoperations.

IntheUS,oilandgasisoneofthetrulygreattaxshelters.Rememberthediscussionaboutpassiveincomeandpassivelossesearlierinthebook?Oilandgasistheonlyinvestmentthatisnotsubjecttotheserules.That’sright—ifyouinvestright,youcandeductlossesfromoilandgasagainstordinaryincome,eventhoughyourinvestmentisentirelypassive.

IntheU.S.,oilandgasisoneofthetrulygreattaxshelters.

TAXTIP:Investinoilandgasandyoucanavoidpassivelossrules.Oilandgasisthe

onlyinvestmentwhereyouaren’tsubjecttotherulesthatlimitlossesfrompassiveinvestments.

Therearefourtypesofinvestmentinoilandgas.Thefirstistobuystockinanoilandgascompany.Thisistreatedlikeanyotherstockinvestmentandhasnospecialrulesorbenefits.Second,youcanbuyaninterestintheroyaltiesfromaproducingoilandgaswell.Thisincomeisportfolioincome,andotherthancreatinginvestmentincomesoyoucandeductinvestmentinterestexpense,there

arenogreattaxbenefitsfrominvestinginaroyaltyinterest.Theothertwotypesofinvestmentsinoilandgasarebothinvestmentsinthe

actualdrillingoperation—andtheyprovidegreattaxbenefits.Youcaneitherinvestinexploratoryoperations,alsocalled“wildcat”drilling,oryoucaninvestindevelopmentoperations.Exploratoryoperationscanbeveryrisky,asthereisnoassurancethatthereisoilinthegroundwhereyouaredrilling.Ofcourse,withbetterandbettertechnology,thisriskisalwaysdecreasingwiththebetteroperators.

Developmentwellsaredrilledinestablishedoilfieldswherethereservesofoilareproven.Thedevelopermayneedmoremoneytodrilladditionalwellstogetmoreoiloutoftheground.Thistendstobelessriskythantheexploratorydrilling,thoughyoucanstillloseyourmoney.Ionceinvestedinadevelopmentwellwherethedeveloperhadabsoluteproofofhugereserves.Theonlyproblemwasthatwecouldn’tgettotheoil.So,welostourinvestment.

FourTypesofOilandGasInvestmentsType TaxBenefits

1. Buystockinanoilandgascompany No2. Buyaninterestintheroyaltiesfroma

producingoilandgaswell.No

3. Investinexploratoryoperations,alsocalled“wildcat”drilling.

Yes

4. Investindevelopmentoperations. Yes

Whenadevelopmentcompanydrillsforoilandgas,ithastwomaincategoriesofexpense.Thefirstistheequipmentitpurchasestodrill.Thisisusuallyabout30percentofthecostofdrillingawell.Thesecondisintangibledrillingcosts(IDC).IDCincludesalloftheotherdrillingexpenses,includinglabor,surveywork,groundclearing,drainage,fuel,andrepairs.

Theseexpensesnormallywouldbeacostofthewellandwouldbedepreciatedoramortizedoverthelifeofthewell.However,CongressdecidedtoallowpeopletodeducttheirIDCintheyeartheyspendthemoney,whichisusuallythefirstyearofinvestmentinthedrillingoperation.Thatmeansthat70percentofyourinvestmentistypicallyallowedasadeductionintheyearthat

youmakeyourinvestmentinthedrillingoperation.Ifyouinvest$100,000,yougetadeductionfor$70,000thefirstyear.Ata40percenttaxrate,that’sequivalentofthegovernmentimmediatelygivingyou$28,000($70,000x40%)forinvestingintheoilandgasoperation.Plus,yougettotakedepreciationontheequipmentoverthenextseveralyears.

Thisisn’ttheonlytaxbenefitforinvestinginoilandgas.Youalsogettodeduct15percentofthewell’sgrossincomeeachyear.Thisiscalleddepletion.It’slikedepreciation,onlyyougetiteveryyear,evenafteryouhavedeductedalloftheIDCandthedepreciation.Basically,it’sagiftfromthegovernment.Grossincomeincludesallofthesalesproceedsfromtheoilandgas,andisn’treducedbyanyexpenses.So,youcouldhave$1,000ofgrossincome,andexpensesof$400,fornetincomeof$600.Youwouldthengetadepletiondeductionof$150($1,000x15%)andonlypaytaxon$450ofincome($600less$150depletion).

TaxBenefitsforInvestinginOilandGas1.Deductionofintangibledrillingcosts,usuallythefirstyearofinvestmentofdrillingoperations.

2.Deduct15%ofthegrossincomefromthewelleachyear(calleddepletion).

InordertoqualifyforIDCanddepletiondeductions,youhavetoownadirectinterestinthedrillingoperations.Owningstockinthedrillingcompanyorowningaroyaltyinterestintheoilandgasdoesn’tqualify.Besuretomeetwithyourtaxadvisoraboutthisbeforeyouinvestinoilandgas.Andoneotherthing,inordertogetalloftheIDCdeductionstowhichyouareentitled,youhavetoownyourinvestmentthroughageneralpartnershiporsoleproprietorship.Youcan’townitthroughacorporation,LLC,orlimitedpartnership.IfyouliveoutsidetheUS,besuretocheckonyourcountry’staxlawstofindoutwhattaxbenefitstheyallow.

BeCarefulWhichEntityYouUseforOilandGasInvestments1.Youcanloseyourtaxbenefitsfromoilandgassimplybyusingthewrongentity.

2.Theremaybeatradeoffbetweenassetprotectionandtaxbenefitswheninvestinginoilandgas.

Miningandtaxbenefits

Miningoperationshavesimilartaxbenefitstooilandgasdevelopment.Yougetdepletiononthegrossincomefromsellingtheminerals,andthereisspecialtreatmentfortheminingoperationdevelopmentexpenses,muchlikeIDC.Besuretoaskyourtaxadvisoraboutwhichminingindustriesinyourcountrygetspecialtaxbenefits.Onecountrymaygivetaxbenefitstocoal,whileothersgivespecialtreatmenttooilandgas,gypsum,orotherminerals.

Renewableenergytaxbenefits

Anothertypeofenergythatgetsspecialtaxbenefitsinmostcountriesisrenewableenergy.Renewableenergyincludeswindturbines,solarenergy,andelectriccars.Governmentslovetoencourageinvestmentinnewsourcesofenergy.Taxbenefitsincludeinvestmenttaxcreditsforinvestinginwindturbines(windmills),creditsforbuyingsolarpanels,andcreditsforbuyingelectriccarsorevenforbuyinghybridgas/electriccars.SomeU.S.statesalsoprovidehugetaxcreditsforinvestinginsolarenergy.

Agriculturaltaxbenefits

Everycountryhasaspecialinterestinproducingasmuchlocalfoodaspossible.Thegovernmentdoesn’twanttorelyonimportingfoodfromothercountries.And,likeoilandgas,agricultureisaveryriskybusiness.Toencourageinvestmentinagriculture,thegovernmentgivesspecialtaxbreaks.TherearesomanytaxbreaksforagriculturethatIcouldwriteanentirebookaboutthem.Instead,let’sjustfocusonafewofthemoreimportanttaxbenefitsforinvestinginagriculture.

Themostimportanttaxbenefitisthetaxdeductionforalloftheexpensesof

runningafarm,orchard,orranch.Thisincludesfeedforlivestock,seeds,andlabor.So,youdon’thavetoaddanyofthesecoststoyourinventory(cropsorlivestock).Yougettodeductthemwheneveryouspendthemoneyonthem.

Anothergreattaxbenefitforranchesisthe1031orlike-kindexchangerules.Youcantradelivestockwithoutpayingtax.Becarefulwiththisone,though.Youhavetotradeforthesametypeandsexoftheanimals—cowsforcows,bullsforbulls,andsteersforsteers.Anybullcantellyouthatasteerisnotoflikekindwithabull.

Thedepreciationrulesalsofavoragriculture.Dependingonthecountry,youmaygettotakeafasterdeductionforfarmequipmentthanyoudoforothertypesofequipment.Andsomeoftheincomefromyourfarmingoperationsmaynotbetaxableorcanbetaxableinalateryearifearnedthroughcooperatives.

Farmsusuallygetspecialtreatmentforestatetaxpurposes,aswell.Youmaygettoreducetheamountofestatetaxyoupaywhenyouinheritafarmormaygettopaytheestatetaxoverseveralyears.Thegovernmentwantstokeepfarmsandranchesinbusiness,sotheygiveyoutaxbreakssothatyoudon’thavetosellthefarmtopaytaxes.

Whenyoudecidetoinvestinagriculture,besuretolookforspecialtaxbreaksforcertaincrops.IntheUnitedStates,forexample,pistachiogrovesgetspecifictaxbreaks.Everycountryhasitsspecialinterestgroupsinagriculturethatgetthegovernmenttoprovidetaxbreaksforavarietyoffarming,orchards,andranches.

TaxBenefitsforInvestinginAgriculture

1.Deductionofexpensesforrunningthefarm,orchard,orranch.

2.Usingthe1031orlike-kindexchangerules.

3.Depreciation.

4.Specialtreatmentforestatetax.

5.Specialtaxbreaksforcertaincrops.

Preciousmetaltaxbenefits

Anothercommoditythathasspecialtaxbreaksinsomecountriesisprecious

metals,suchasgoldandsilver.Whenyouowngoldandsilver,youprobablyownitasinsuranceagainstinflation.So,you’regoingtoownitforseveralyears.Whenyousellyourinvestmentingoldandsilver,thegainshouldbetreatedascapitalgain.Somecountries,aswementioned,don’ttaxcapitalgains,whileothershavespecial,lowerratesforlong-termcapitalgains.

UnitedStatestaxpolicydoesn’tpromoteownershipofgoldandsilver.Instead,investmentinpreciousmetalsarediscouragedbyprovidingaspecial,highertaxratethanotherlong-termcapitalgainstaxrates.Atthewritingofthisbook,thecapitalgainsrateforgoldandsilverintheUnitedStatesis28percent—almostdoubletherateforothercapitalgains.So,youmaywanttoownyourgoldandsilverinsideyourIRAorpensionplan.Sinceyouwillownthemetalforalongtimeandthetaxisprettyclosetoordinarytaxrates,youmightaswellpostponethetaxthroughagovernment-qualifiedretirementplan.AndifyouownitthroughaRothIRA,youwillneverpaytaxontheincreaseinvalueofyourgoldandsilver.

Inthenextchapter,I’mgoingtoshowyouhowtoproperlyprepareforandhandleataxauditsothatyouneveragainhavetobeafraidofbeingaudited.

CHAPTER21:KEYPOINTS1.TherearesignificanttaxbenefitsintheUnitedStatesforinvestinginoilandgasdrillingoperationstoencouragethereductionanddependenceofforeignoil.

2.Younotonlygettodeducttheintangibledrillingcostthefirstyearinanoilandgasdrillingoperation,yougettodeduct15%ofthegrossincomefromthewelleachyear.

3.Agriculturehasspecialtaxbenefitsthatinclude1031exchanges,depreciation,estatetaxrulesandspecialrulesforcertaincrops.

TaxStrategy#21–AvoidthePassiveLossRulesonOilandGasInvestments

RememberfromChapter8thatwhenyoudon’tactivelyparticipateinabusiness,theincomeandlossesfromthatbusinessaretreatedaspassiveincomeandpassivelosses.Whenyouinvestinoilandgasdevelopment,youprobablywon’tactivelyparticipate.Andinthefirstyear,you’llshareinataxlossof70-to-80

percentofyouroriginalinvestment.Theselosseswillbepassiveandcanonlyoffsetpassiveincome,right?Wrong.

Thereisanexceptiontothepassivelossrulesforoilandgas.Eventhoughyoudon’tactivelyparticipateinthebusiness,lossesfromoilandgasaretreatedasordinarylossesandyoucantake100percentofyourlossesagainstanykindofincome.Butinorderforyourlossestobeordinary,youhavetobeverycarefulabouthowyouownyouroilandgasinvestment.

Youhavetoownyourinterestintheoilandgasdevelopmentoutright.YoucannotownitthroughanLLC,LP(limitedpartnership),oranyotherentitythatlimitsyourliability.Instead,youhavetorelyonthedeveloper’sinsurancetoprotectyoufromanylawsuitsordisasters.Usually,thedeveloperwillformapartnershipfortheinvestorsandeveryonewillbeageneralpartnerforthefirstyearortwo.

Inthesecondorthirdyearthatyouowntheinvestment,whenthewellbeginstoproducetaxableincome,youcanchangeyourownershiptoalimitedpartnershiporLLCtoprotectyoufromfutureliability.Goodoilandgasdeveloperswillautomaticallychangeyourownershipfromageneralpartnertoalimitedpartnerassoonastheinvestmentbeginsearningincome.So,yourliabilityisonlyfortheyearortwothatthedeveloperisactuallydrillingthewell.

ChapterTwenty-Two

Don’tFeartheReaperAudit

“Themoreyouearn,thelessyoukeep,AndnowIlaymedowntosleep.IpraytheLordmysoultotake,

Ifthetaxcollectorhasn’tgotitbeforeIwake.”–OgdenNash

WhenIwasgrowingup,mydadwastheScoutmasterforourlocalBoyScouttroopfor12years.Hewasverybusyrunninghisprintingbusiness,andbecauseofthatheonlytookaone-weekvacationeachyear—andthatone-weekvacationwastakenwiththeBoyScoutsatsummercamp.

SincethiswastheonlyvacationthefamilygotwithDad,we’dpackupthetrailerandheadofftosummercampwithhimeveryyear.He’dtakecareoftheBoyScoutswhilewedidprettymuchwhateverwewantedtodo.Ihavealotoffondmemoriesofourweeksatthatcamp.

ButIhaveonememorythatisn’tsofond.ItwasduringaweekthatwewereatNewForkScoutCamp.Iwasaboutfiveyearsoldatthetime,andonenight,whilewewereoutwalking,abigblackbearwanderedthroughcamp.Hewashuge,especiallytoafive-year-old.IranasfastasIcouldbacktothetrailer,myheartpoundingandmyeyeswide.I’veneverbeenasscaredofanythinginmylifeasIwasofthatbear.IthoughtforsureIwasgoingtodie.

Asadults,wetendtobeafraidofmanythingsthatseemevenworsethanthatbigblackbear.Formanypeople,theworstoftheseisthetaxcollector.IntheUnitedStates,it’sthedreadedInternalRevenueService(IRS).InCanada,it’stheCanadaRevenueAgency(CRA).InAustralia,it’stheAustralianTaxationOffice(ATO).AndinGreatBritain,it’sHerMajesty’sRevenue&Customs(HMRC).Whatevercountryyou’reinandwhateverthenameofthetaxcollector,it’sdownrightscaryformostpeopletothinkabouthavingtheirtaxreturnsaudited.

Whatmakesussoafraidofataxaudit?Likemewiththebear,we’reafraid

ofbeingattacked.Whatcouldbeworsethananattackbyataxauditor?Theycertainlycanseembigandscary.

Inreality,taxauditorsarejustnormalpeopledoingtheirjob.Likebears,theywon’tattackunlessprovoked.Andifyou’rewellpreparedbeforeyourunintothem,eventhetoughestauditorwon’tscareyouintheleast.

RULE#19:Youcaneliminateyourfearofataxauditsimplybybeingprepared.

Let’stakealookatthestepsyoucantaketoprepareforataxaudit,thebestwaystohandleanauditifonehappens,andafewsimplestepsyoucantaketoreduceyourchancesofanaudit.Thisway,you’llbepreparedand,unlikemewiththebear,you’llhaveagoodideaofwhattodoifyouhappentorunintoabigbadauditor.

PreparingforaTaxAudit

Beingpreparedforataxauditbeginsbydecidinghowyouaregoingtohandletheauditbeforeitevencomes.MychallengewiththebearwasthatIwastotallyunpreparedforit.Somyonlyalternativewastorunaway,hopethebeardidn’tchasemeandhopethebearcouldn’tgetintoourtrailer.Buthopealoneisneverthebestoption.Beingpreparedonallsidesisbest.

TAXTIP:Purchaseanauditdefenseplaneveryyear.Sometaxpreparersofferanauditdefenseplan.Thisisapowerfulwaytokeepastronghandleonyourout-of-pocketcostsandtaketheworryoutofthecostofprofessionalfeesduringan

audit.

YourTaxTeam

Thefirstandmostimportantdefenseagainstataxauditistohavetherightteaminplace.Thisbeginswithyourtaxadvisor,whoshouldalsobeyourtaxpreparer.Yourtaxadvisoristhepersonwhoshouldbeonthefrontlinesconfrontingtheauditor.ImagineifIhadhadabiggamehunterbymysidewhen

thatblackbearcamebyinthecamp.Iwouldhavebeenalotlessfrightenedandinalotlessdangerofattack.Myhunterwouldhaveknowwhattodotoscareoffthebearandwouldhavebeenpreparedwiththerightammunitionincasethebearattacked.Icouldhavecalmlywalkedawaywhilethehunterwasdealingwiththebear.

Thesameistruewithataxaudit.Havingabiggamehunterofataxadvisorbyyourside,onewhohasseenalotofauditorsandbeensuccessfulinhandlingmanyaudits,isapowerfultoolforreducingyourstressandincreasingyoursuccessonanaudit.Infact,yourtaxadvisorshouldbetheonlypersondirectlydealingwiththeauditor.Wewilltalkabouthowyouradvisorshouldhandletheauditlateroninthischapterandhowtochooseagreattaxadvisorinthenextchapter.

HandlinganAuditIsAboutHandlingtheAuditor1.Howyourtaxadvisorworkswithyourtaxauditorwillhaveahugeimpactontheoutcomeoftheaudit.

2.Besureyourtaxadvisorhasgoodpersonalskillsandtreatsallpeoplewithrespect,especiallygovernmentauditors.

Anotherteammemberyouneedonyoursideisagoodbookkeeperoraccountant.Thispersondoesnothavetobeyourtaxadvisor/preparer.Infact,ifyourtaxadvisorisalsodoingyourbookkeeping,thenthereisagoodchancethatyouhaveasquirrelhunteronyourteam,notabiggamehunter.Yourbookkeeperisgoingtohelpyoukeepallofyourrecordsanddocumentationsoyoucanbewellpreparedfortheauditwithaccurateinformation.Let’stalkaboutwhatdocumentationyouaregoingtoneedforanaudit.

Documentation

ThereareonlytwologicalwaystoprepareyourdocumentationforanIRSorothertaxaudit.Youcaneitherbeextremelypreparedwithallofthematerialsanddocumentsthatyouneed,oryoucanhavenoinformationwhatsoever.Havingnoinformationisonewaytogo,becauseitwillfrustratethetaxauditorandgivehimorhernothingtolookat.Idon’trecommendit.Bynothavingthematerialstosupportwhatyoureportedonyourtaxreturn,you’retellingtheauditorthatyou’resloppy,unorganized,andpossiblylying.

Thebettersolutionistobewellprepared.Andthat’sreallynotthatdifficulttodo.It’sparticularlyeasyifyouknowwhatthingsyouneedtokeeprecordsofandhowtokeepthoserecordsorganized.Itallbeginswithwheneveryouspendorearnmoney.Mostofthetime,ataxauditisgoingtofocusonwhetheryoureportedallofyourincomeandwhetheryoutookonlythosedeductionsthatyouwereallowedunderthelaw.

AccountingSoftware

Steponeinpreparingforanauditistorecordallofyourincomeandexpensesingoodaccountingsoftwareonyourcomputer.Therearelotsofgoodchoices.Besureyouchoosesoftwarethatwillgiveyoubothanincomestatementandabalancesheet.Somesoftwareonlygivesyouanincomestatement.Anincomestatementonlyshowsyourincomeandyourexpenses.Thebalancesheetiswhathelpsyoubesurethatyournumbersareaccurate.Balancesheetsshowyourassets(whatyouown),yourliabilities(whatyouowe),andyourequity(thedifferencebetweenyourassetsandyourliabilities).

Steponeinpreparingforanauditistorecordallofyourincomeandexpensesingoodaccountingsoftware

onyourcomputer.

Ifthegovernmentisauditingyourbusiness,oneofthefirstthingstheauditorwillaskforisyourincomestatementandbalancesheet.Havingthesereadilyavailabletellstheauditorthatyou’reseriousaboutkeepinggoodrecordsandthatyoutreatyourbusinesslikearealbusiness,notlikeahobby.

Ialsoadvisemyclientstorecordtheirpersonalincomeandexpensesinthesametypeofaccountingsoftware.Itisnotonlyhelpfulforanauditbutalso

givesyoulotsofgoodinformationaboutyourincomeandyourspendinghabits.Mostsoftwareofthisnaturewillalsoallowyoutocreateabudgetorforecast,cangiveyoureportsonwhereyourincomecamefrom,andcancompareincomeandexpensesbetweenyearssothatyouknowhowyou’redoing.It’slikeafinancialreportcard.

Receipts

OneofthequestionsIgetmostoftenisaboutkeepingreceipts.Thegeneralruleisthatyouneedreceiptsforanydeductionyoutakeonyourreturn.Certaintypesofdeductionsrequireevenmoreinformationthanjustareceipt.Deductionsformeals,entertainment,andtravel,forexample,requireanoteonthereceiptaboutwhoyouwerewith,thebusinessnatureofyourrelationship,whereyouwere,andwhatyoudiscussed.Isuggestyousimplynotethatinformationonthereceiptrightwhenyougetit.

Thereareacoupleofdifferentwaystostoreyourreceipts.Myfavoriteisscanningthereceiptsintoyourcomputer.Thisway,youalwayshavethematyourfingertipsifyouneedthem,andtheydon’ttakeupspaceinyouroffice.Ifyouwanttokeepthepaperreceipts,thenjustmakefilefoldersforeachtypeofexpense.Everytimeyouspendmoney,youputthereceiptsintotheproperfolder.Then,whenyougotoprepareyourtaxreturns,youknowjustwheretheyare.Youalsoknowwheretheyareifyou’reaudited.

AnotherquestionI’moftenaskedaboutishowlongtokeepthereceiptsandothertaxrecords.IntheUnitedStates,theruleofthumbissevenyears.InCanada,theruleissixyears.GreatBritainandAustraliasuggestyoukeepthemforfiveyears.Ihaven’tfoundanycountrythatsuggestsyoukeepthemlongerthansevenyears.Ifindoubt,checkwithyourtaxadvisor.

CorporateBooks

Thereareotherdocumentsyouneedtohaveavailablebesidesreceiptsandyourbookkeepingrecords.Youshouldalwayskeepanycontractsorotherlegaldocumentsinasafeandsecureplacethat’seasilyaccessed.Ofcourse,youneedtokeepyourcopyofyourtaxreturns.Andforyourbusiness,youshouldkeepacorporatebook.

Corporatebooksarealittlelikehavingamagicwandinanaudit.Youwave

themagicwandandtheauditordisappears.Acorporatebookissimplyabinderthathasallofthecorporaterecords.Includedinthecorporatebookareyourarticlesofincorporationororganization,yourby-laws,operatingorpartnershipagreement,andminutesforanyshareholderordirectormeetingsthatyouhold.Youshouldhaveacorporatebooknomatterwhattypeofentityyouown,evenifit’snotacorporation.

Corporatebooksarealittlelikehavingamagicwandinanaudit.Youwavethemagicwandandthe

auditordisappears.

Minutesaresimplynotesfromameeting.Youcanwritetheminpenorrecordthemonyourcomputer.Thenotesshouldreportanymajordecisionsthatyoumakeinyourcompany,includingtheamountofdividendsorotherdistributionsyoudecidetopayouttoyourshareholders.Anybigtaxdecisionsshouldalsogoinyourminutes.Atmyaccountingfirm,wesendoutitemstobeincludedinourclients’corporateminuteswiththeircompletedtaxreturns.

Taxauditorsalwaysaskforacorporatebook.They’reamazedwhenweactuallygivethemoneandit’singoodorder.Apparently,lotsofbusinessownersdon’tkeeptheircorporatebooksingoodorder.Acompletecorporatebooktellstheauditorthatyoucareaboutyourbusinessandthatyourrecordsareprobablycomplete.Therealbenefitofthisandothergoodrecordsisthattheauditorwilltendtobelieveyourtaxreturnandwon’taskforasmuchothersupportforyourtaxes.Ittakesalotlesstimetofinishtheaudit,andbecausetheauditorisn’tlookingashard,theylikelywon’tquestionmuch.Thatmeansthattheauditorislikelytogoawaythatmuchsooner.

PreparingforanAuditStep1Maintainorganizedbookkeepingrecords.

a.Usegoodaccountingsoftware.b.Recordyourbusinessincomeandexpenses.c.Prepareincomestatements(timelyupdates).d.Preparebalancesheets(timelyupdates).e.Recordyourpersonalincomeandexpenses.f.Createbudgetsandforecasts.

g.Createreports.h.Compareincomeandexpensesbetweenyears.

Step2Maintainandorganizereceipts.a.Keepreceiptsfordeductionsyouintendtotakeonyourtaxreturn.

b.Scanreceiptsintoorganizedfilesinyourcomputer.c.Orcreateseparatepaperfilefoldersforeachtypeofreceipt.d.Maintainreceiptsfor7years(UnitedStates),6years(Canada),5years(GreatBritainandAustralia).

Step3Bepreparedwithotherdocuments.a.Legalcontractsoragreementsb.Copiesoftaxreturnsc.Corporatebooks(foryourbusiness)thatinclude:i.ArticlesofIncorporationorOrganizationii.OperatingorPartnershipAgreementiii.By-Lawsiv.Minutes

HandlinganAudit

Handlinganactualtaxauditiseasierthanyoumightthinkwhenyouhavetherighttaxadvisoronyourteam.Thereasonforthisisthatyouaren’tgoingtobetheonehandlingyouraudit.That’sajobforyourtaxadvisor.

RULE#20:Nevertrytohandleataxaudityourself.Alwaysenlisttheassistanceofyour

taxadvisor.

Therearemanygoodreasonsforyoutoturnoveranaudittoyourtaxadvisor.First,anauditcanbeaprettyemotionalexperienceifhandledbyyou.Turninganauditovertoyourtaxadvisorwillsaveyoutimeandenergybecauseyouwon’thavetodealwiththeauditor.You’llstillbeinvolved,butonlytogatherinformationforyouradvisor.

Experiencedtaxadvisorsarecomfortableworkingwithauditors.Sinceit’s

notourmoney,we’relessemotionallytiedtoit.Justlikeabiggamehunterisnotafraidofabear,anexperiencedtaxadvisorhasnofearofanauditor.That’sagoodthing,becausehandlingtheauditoristhemostimportantpartofanaudit.Andyoucan’thandleanauditorwellwhenyou’reemotionallyinvolvedintheaudit.Thisdoesn’tmeanthatyouradvisordoesn’tcareabouttheoutcome.Hejustcaresonamoreprofessionallevelandlessonanemotionallevel.

…handlingtheauditoristhemostimportantpartofanaudit.Andyoucan’thandleanauditorwellwhenyou’re

emotionallyinvolvedintheaudit.

Imakeitapracticenevertoallowaclienttomeettheauditor.Thisway,iftheauditorasksmeaquestion,Icansay,“Idon’tknow.”Ifaclientisinthemeetingwiththeauditor,itbecomesalittlesuspiciousfortheclienttosaytheydon’tknowtheanswertothequestion.WhenI’mtheonlypersoninterfacingwithanauditor,Icanaskhimtoclarifywhatinformationhereallyneedsandthengivehimonlytheinformationthatanswershisquestions.Ifindthattaxpayerswhodon’tturnovertheaudittotheiradvisorwillgivetheauditormuchmoreinformationthanisnecessary.Thisextendsthelengthoftheauditandgivestheauditormoretodiginto—andtocomeupwithmoredeductionstodisallow.

It’scriticalthatyourtaxadvisorcontrolstheauditinsteadoftheauditor.Thismeanscontrollingwhatinformationisgiventotheauditoraswellasthepaceoftheaudit.Ifindthatsomeauditorsliketodragoutauditsformonthsandmonths.Someauditscanevengoonforyears.WhenI’mincontroloftheaudit,Icanusuallyspeedthingsup,andIcannarrowthescopeofwhattheauditorislookingat.

OneofthemostimportantthingsIdoinauditsistomaketheauditorsfeelcomfortable.Iwantthemtoseethatwe’rewillingtoworkwiththemandtreatthemwell.AcoupleofyearsagoIrepresentedaclientinanIRSaudit.Theauditorhadfirstauditedtheclient’sbusiness.Theclientownedonlyasmallpartofthebusiness,sohispartners’advisorhandledthebusinessaudit.

Inourfirstmeeting,Itriedtoputtheauditorateasebecauseshewasverytensewhenshefirstwalkedin.Igreetedherandaskedhowlongshe’dbeenanauditor.Ithenaskedherhowthingswentwiththeauditofthebusiness,andsheopeneduptome.Shesaidtheaccountantwho’dhandledthatauditwasverymean.Infact,sheconfidedthathe’dmadehercry,andshewasaprettytough

cookie.Hemusthavebeenreallyharshtomakehercry.Clearly,thataccountanttooktheapproachthattheauditorwastheenemy.I

tookadifferentapproach.Ilookedattheauditorassomeonewithatoughjobtodo,andIwasgoingtohelphergetitdone.Theresultwasthattheauditorwasveryopenandhonestwithmeaboutthethingsforwhichshewaslooking.Sheeventoldmewhatweneededtodoinorderfortheaudittosucceed.

Inturn,Ihelpedher.IexplainedthelawveryclearlyasIunderstooditandshowedherhowitworkedinthetaxpayer’sfavor.Shewasveryappreciativeofthisexplanation.Ihadmuchmoreexperienceandeducationthanshedid,andmywillingnesstosharethiswithhermadeabigimpressiononher.Intheend,sheaskedmetowriteupherreportforherexplainingwhytheclientshouldwintheaudit.Ofcourse,Iwasveryhappytodothis.

In30years,I’veonlyfoundtwoauditorswhoreallywereimpossibletoworkwith.Onewasnotverybright,andtheotherwasjustbelligerent.Still,Iworkedwiththemasarespectedadversary,andtheresultsbothturnedintheclient’sfavor.

YourTaxReturnPreparation

Thelasttopicweneedtodiscussaboutgettingreadyforanauditisyourtaxreturn.Yourtaxreturnisthereasonyou’rebeingauditedinthefirstplace.Soyoushouldmakesureit’spreparedwellsothattheauditgoesmoresmoothly.Ideally,yourtaxreturnshouldn’traiseanyredflags.

Acoupleofmonthsago,Ididsometrainingwithmytaxstaff.Iaskedthemtolistallofthethingstheydoonataxreturntoeitherreducetaxesorreducethelikelihoodofanaudit.Ithoughttheymightcomeupwithfiveorsixitems.Instead,theycameupwithover60specificitems.

Yourtaxreturnisthereasonyouarebeingaudited.Soyoushould

makesureit’spreparedwellsothattheauditgoesmoresmoothly.

I’llsharejustafewofthewaystoreducethechanceofanauditonyourtaxreturn.Onewayistolookathowyounameyourdeductions.Let’ssayyoupaid$10,000lastyeartoattendseminars.Seminarsmayormaynotbedeductible,dependingonyourbusinessandwhyyoutooktheseminar.TheIRSpaysclose

attentiontothisdeduction.Sowhatyoucallthedeductiononyourtaxreturnisimportant.Insteadoflistingtheexpenseasaseminar,whynotlistitascontinuingeducation?Or,ifyouwentprimarilytonetworkandmarketyourselftotheotherparticipants,whynotcallitasalesormarketingexpense?

You’restilltellingthetruthandreportingyourseminarexpenseaccurately.Onlynowyouaren’traisingaredflagandinvitingthegovernmenttocomeaudityou.Youalsohavetobecarefulwhenyouareestimatingexpenses.Supposeyoupaidcashforsomeofyourexpensesandyoudon’tknowtheexactcost.Mostpeoplewillchoosearoundnumbertoreportontheirtaxreturn.Thisisamistake.Chooseanumberthatisclosertobeing,oratleastlooking,precise.Whenyoudothatthereislessofachanceofsomeonelookingatyourreturnthinkingyouguessedatyournumber.

I’mnotsuggestingthatyoushouldbeguessingattheamountofyourtaxdeductions.It’smuchbettertowritechecksortouseacreditordebitcardsoyouknowtheexactamount.Butinthecasewhereyoudon’thavetheexactamountandhavetoestimate,estimateanumberthatislesslikelytoraiseanauditor’seyebrows.

Agoodtaxpreparerknowsallofthesetricksandmore.Andhe’lltakeadditionaltimetomakesuredeductionsandincomearelistedonyourtaxreturninsuchawaythattheywon’traisearedflagtothegovernmentauthoritiesandmayactuallyreduceyourtaxes.

SoIhopeyounowseethattaxauditsdon’thavetobethatscary.Youjusthavetoremembertodothreethings:

1.Preparefortheaudit.

2.Letyourtaxadvisorhandletheaudit.

3.Useataxpreparerwhoknowshowtoreducetheriskofanaudit.

Anotherquestionpeopleaskmeallthetimeishowtofindagoodtaxadvisorandtaxpreparer.We’lltalkaboutthisinthenextchapter,becauseitmaybethesinglemostimportantthingyoucandotoreduceyourtaxesandlimityourriskofanaudit.

CHAPTER22:KEYPOINTS1.Oneofthebiggestfearspeoplehaveistheirtaxauthorityauditingthem.Thereisnothingtofearifyouarewellprepared.

2.Tobewellpreparedit’simportanttokeeporganizedandaccuraterecordsofyourspendingandincomeaswellastoutilizecomprehensiveaccountingsoftware.

3.Becausepeoplearegenerallyemotionallyattachedtotheirmoney,it’simperativethattheyallowataxprofessionaltohandletheirauditinordertoeliminatethepossibilityofgivingtheauditortoomuchinformation.

4.Thebestwaytoavoidanauditistomakesureyourtaxreturnsarepreparedbyataxprofessionalwhoknowshowtoeliminatepossibleredflagsforanauditor.

TaxStrategy#22–PurchasinganAuditDefensePlan

AtProVision,ifweprepareyourtaxreturn,youcanpurchaseanauditdefenseplanforthatspecifictaxreturn.Thecostisapercentageofthetaxreturnpreparationfeeandcoversthecostofrepresentingyouinanauditforthatspecifictaxreturn.Ifyou’reaudited,youdon’thavetopayforthetimeittakesustodefendyouraudit.

Mostpeopledon’trealizethatthemostexpensivepartofanIRSauditcanbetheprofessionalfeesyoupaytodefendtheaudit.Atypicalauditcanrun$10,000to$15,000inprofessionalfees.Youmaynotpayanytaxatall,andyetyoustilllosebecauseofthecostoftheprofessionalfees.

Itmakessensetobeinsuredagainstthecostoftheaudit.Youwouldn’tgowithoutcarinsurance.Andyet,it’sprettyunlikelythatyouwillbeinanautomobileaccidentthatcostsmorethan$5,000.Sowhywouldn’tyouinsureyourselfagainstthecostofanauditthatismorelikelythananautoaccident—andmorecostly?

Anauditdefenseplanwon’tinsureyouagainstthetaxesandinterestyoumightowe,butitwillprotectyouagainstthecostofdefendingyourselfagainsttheIRS.ThisisespeciallyimportantbecauseinanIRSaudit,youareguiltyuntilproveninnocent.Soyouneedtohavethebesttaxadvisorpossibletodefendyou,andthatmeanshighprofessionalfeesifyoudon’thaveinsuranceintheformofanauditdefenseplan.

ChapterTwenty-Three

ChoosetheRightTaxAdvisorandPreparer

“Dayinanddayout,yourtaxaccountantcanmakeorloseyoumoremoneythananysinglepersoninyourlife,withthepossibleexceptionofyourkids.”

–HarveyMackay

ThefirsttimeIlearnedaboutthelawwasinmybusinesslawcourseincollege.Oneofthelocalbankruptcyjudgestaughtthecourse.Hewasaterrificinstructor,andIlovedtheclass.Iespeciallylovedlearningabouthowvaguethelawcanbe.I’dlearnedmanyyearsearlierthatsomethingvagueallowedformuchmoreflexibilitythansomethingspecificandcertain.AndIlikedknowingthatthelawwasflexible.

Likemostchildren,Idiscoveredearlyonhowtomanipulatemyparents.Sometimesthatmeantusingmymothertopersuademyfathertoletmegosomewherehemightnototherwisehaveallowed.Othertimesthatmeantpretendingnottohearwhentheywantedmetodosomething.MostofthetimeitsimplymeanttwistingthemeaningofwhattheytoldmeintowhatIwantedtohear.Then,afterIdidsomethingtheydidn’tlike,Iusedtheirwordstoconvincethemthey’dreallyallowedmetodoit.

PerhapsIwasalwaysmeanttostudythelawsothatIcoulduseittomyclient’sadvantage.Thatfirstbusinesslawclassreallysetmeonmypathtostudyingthetaxlaw.IwassoexcitedtolearnthelawthatmyjunioryearIsigneduptotakeallofthetaxclassesavailableattheUniversityofUtahSchoolofBusiness.Mostofmyclassmateswerewaitingtotaketheirtaxclassesuntiltheirsenioryear,butthoseclassesweresointerestingtomethatIcouldn’twait.Todothis,Ihadtopushallofmyotherupper-divisionaccountingclassestomysenioryear.IevenremembertakingbothintermediateaccountingcoursesthesamesemestersothatIcouldfitallthoseupper-levelclassesinasasenior.Allthatworkwasworthittome.

The“U”businessschoolhadaterrifictaxprofessor,ProfessorHaney.He

wasataxattorneywhopracticedlawfulltimeandtaughttaxclassesontheside.Hewasdemanding,butheunderstoodthelawwellandwasenthusiasticaboutthesubject.WhenIwasthinkingaboutgraduateschool,thefirstpersonItalkedtootherthanmywifewasProfessorHaney.

IaskedhimwhetherIshouldgotolawschoolorgetamaster’sdegreeintaxaccounting.HetoldmethatifIwantedtospendmostofmytimeworkingintaxlaw,IwouldbebetteroffpracticingasaCertifiedPublicAccountant.Inhisexperience,CPAsspentmoretimedoingtaxworkthanlawyers.SoonProfessorHaney’sadviceIappliedtotheUniversityofTexasMaster’sofProfessionalAccountingProgram.

Sincethen,Ihavedevotedmylifetostudyingthetaxlaw,teachingthetaxlaw,andusingthetaxlawtohelpmyclientsreducetheirtaxburdens.Andtaxesreallyareaburden.AsBenjaminFranklinoncesaid,“Itwouldbeahardgovernmentthatshouldtaxitspeopleone-tenthpartoftheirincome.”Andyetgovernmentsthroughouttheworldnowroutinelytake40to50percentofaperson’sincome.

Ifyouhaven’tnoticedyet,I’mprettypassionateaboutreducingtaxes.Andpassionisthemostimportantelementinreducingyourtaxes.

RULE#21:Themorepassionateyouandyouradvisorareaboutreducingyourtaxes,

theloweryourtaxeswillbe.

EverytimeIspeakataseminar,I’maskedthesamequestionoverandoveragain,“HowdoIfindagoodtaxadvisor?”Thisisoneofthemostimportantquestionsyoucaneverask.Agoodtaxadvisorwillnotonlyhelpyoureduceyourtaxesbuthe’lltakethefearoutoftaxesaswell.Andmostimportantly,he’lltakethefearoutofataxaudit.

I’maskedthesamequestionoverandoveragain,“HowdoIfindagoodtaxadvisor?”Thisisoneofthemostimportantquestions

youcaneverask.

Butbeingpassionateaboutreducingyourtaxesisonlyoneofthetraitstolookforinagoodtaxadvisor.Anotherishowtheadvisorlooksatthetaxlaw.Istheadvisorafraidofthelawordoeshelookatitasanopportunity?Mosttax

accountantsareafraidofthelaw.Theywon’tevenreadit.Instead,theyreadanabbreviatedversionofthelaw,suchasasimpletaxguide.Theseaccountantsshyawayfromanythingtheydon’tunderstand,andtheydon’tunderstandmuch.

Theyshyawayfromthelawbecausetheyhavenevertakenthetimetolearnthelaw.Thereisaswideavarietyofeducationamongtaxadvisorsandtaxpreparersasthereisamongdoctors,lawyers,andotherprofessionals.Sometaxpreparershaveonlytakenafewhoursorafewweeksofcoursestolearnhowtopreparetaxreturns.Othershavesomeschooling,thoughnotverymuch.It’sonlythebestadvisorswhohavegraduatedatthetopoftheirclassesfromthebestuniversitieswhoreallyunderstandthetaxlaw.Thereasontheyattendedthetopschoolsandgraduatedatthetopoftheirclassesisthattheywantedtolearnthetaxlawandallofitsintricacies.Likeme,theycravelearningaboutthelaw.Thehierarchyoftaxpreparersisprettysimple—it’sbasedontheirlevelofeducation,bothformalandpractical.

Asaresult,mostaccountants,thosewithlesseducationandunderstanding,willonlytakethemostobviousdeductionsandtaxbenefitswhentheyprepareyourreturns.Andlikelyyou’llonlytalktothemonceortwiceayearbecausetheydon’thavemuchtotellyou.They’relikelytomakesuggestionslikemaximizingyourIRA,RRSP,or401(k)contribution.They’lltellyoutoprepayexpensesattheendoftheyear.Orthey’llsuggestwaitinguntilalateryeartoreceivesomeincomethatyou’reowed.

Whatterribleadvice.Didyounoticehowallofthisadviceisaboutsavingtaxesnowatthecostofhavingtopaythemlater?Theseaccountantsareallabouttaxsavingsnowatthecostofyourfuture.Once,duringatrainingmeeting,Iaskedourstafftoexplainwhat’sdifferentaboutProVisionfromother

CPAfirms.Ouryoungeststaffmember,rightoutofcollege,gavethemostinsightfulanswer.Shesaidthatsheneverexpectedtobeworkingforafirmthatfocusesonitsclients’futureratherthandwellingontheirpast.Oneofthereasonsmosttaxpreparersdon’tfocusonpermanenttaxsavingsisbecausetheyareonlyfocusedonthepastandthepresent.Theyaren’ttakingintoaccountyourfuture.

Whydopeoplehireaccountantsandadvisorswithsuchlittleunderstanding?Maybeit’sbecausetheydon’tknowwhattolookforinataxadvisor.Ormaybeit’sjustbecausethesepreparersandadvisorstendtochargelessmoneyfortheirwork.Whatamistaketohiresomeonebecausetheychargelessthansomebodyelse.Therealtestofanadvisorisnothowmuchtheychargeyou,buthowmuchtheycostyou.

RULE#22:It’snothowmuchyourtaxpreparerchargesyouthatmatters;it’show

muchyourtaxpreparercostsyou.

Letmegiveyouanexample.Oneofourclients,let’scallherJill,recentlyremindedmeabouttheamountoftaxeswesavehereachyear.Becauseofourunderstandingofthelaw,we’vebeenabletosaveher$70,000eachyear.Investedat10percentover20years,thatamountstoabout$4millioninmoneythatshewouldn’thavehadifshe’dstayedwithherprevioustaxadvisor.Inotherwords,herpreviousadvisorcosther$4millionovertheprevious20years.Yes,hechargedlessthanmyfirm,ProVision.Wechargedabout$20,000todothetaxplanningforJill.Butthat$20,000wasthebestinvestmentJillhasevermade.Herreturnoninvestment(ROI)amountsto350percentperyear.And,sincetheseareincometaxessheisgettingback,theyaren’teventaxable.Howwouldyoulikea350percenttax-freereturnona$20,000investment?

Adding$70,000EachYear

Noteveryclientisgoingtosave$70,000eachyearintaxes.Somewillsavemoreandsomewillsaveless.Andfeesvaryfromclienttoclientaswell.ThekeyhereistoaskwhichaccountantcostJillmoremoney?Theonewhomshepaidlessandwhocosther$4million,ortheonewhomshepaidmoreandsaved$70,000peryear?Prettyobvious,isn’tit?Yetmostpeoplecontinuetolookathowmuchtheirpreparerchargesratherthanhowmuchtheirtaxpreparercoststheminexcesstaxes.

Anothertendencyfortaxaccountantsistolookatthelawasifitrunsinastraightline.Wecallthesetypesoffolkslinearorleft-brainedthinkers.Mostaccountantsarelikethis.Theydecidedtobeaccountantsbecausetheylikethecertaintyandclarityoffigures.Theygenerallydon’tbecomeaccountantsbecausetheylikethevaguenessofthelaw.Thesetaxaccountantsdookaywithroutineworksuchaspreparinganaccuratetaxreturn.Whattheywon’tdoisfigureoutcreativewaystousethelawinyourfavor.Thechallengeisthataccountantsdon’twritethetaxlaw.GoodtaxlawyershiredbycongressmenandMPs(MembersofParliament)writethelawtocarryoutthosepoliticians’desirestoimprovetheeconomy,encouragecertainindustries,andmaintaingovernmentrevenues.Theselawyerstendtonotthinkinastraightline.They’rewhatwewouldcallnonlinearorright-brainedthinkers.

Thetaxlawsaren’twritteninastraightline.Therulesofonesectionofthelawwillimpacttherulesofanothersectionofthelaw,andtheconnectionisn’talwaysobvious.Ontopofthis,therearemanyinterpretationsofthelawthatcomefromjudgesincourtcases.It’scriticalthatyourtaxadvisorlooksatallofthelawwhenfiguringouthowtobestreduceyourtaxes.Ifheorsheonlylooksatasinglerule,heorshecouldeasilymissoutonfourorfiveotherrulesthatcouldsaveyoumoney.

NotAllTaxAdvisorsAreCreatedEqual1.Taxadvisorsvaryinknowledgeandexperienceevenmorethanhealthcareprofessionals.

2.Yourtaxbillwillhavemoretodowithchoosingyourtaxadvisorthananythingelseyoudo.

Ofcourse,themostimportanttraitforyourtaxadvisoristhatheorshecaresmoreaboutyouthanheorshedoesabouthimselforherself.Howcanyouknowthis?It’ssimplyamatterofwhetherheorshespendsmostofthetimeinyourinterviewansweringyourquestionsandtalkingabouthimselforherselfandhisorherservices,orwhetherheorsheismorefocusedonwhatyouneed.Letmeshareastorytoillustratethisprinciple.

Awhileback,Iwashavinglunchwithoneofmycolleaguesataneighborhoodcafé.Ilookedatthemenuandfoundasandwichthatlookedtasty.Ialsonoticedonthemenuthatapicklecamewiththesandwich.Forthoseofyouwhoenjoyeatingpickles,youprobablylikegettingonewithyoursandwich.Butforthoseofuswhodon’tlikepickles,gettingonewithoursandwichcanbedevastating.

Picklesareverysocial.Theydon’tstayinoneplace.Instead,thejuicerunsallover,infectingthesandwichandanythingelseontheplate.I’msurethisisgreatifyouenjoythepickleflavor.Butifyoudon’t,justhavingapickleontheplatecanruintheentiremeal.

Naturally,whenourservertookourorder,Iaskedifshecouldpleasemakesuretheydidn’tputapickleonmyplate.“Ofcourse,”shesaid.“Noworries.”Still,Iwasworried.SoIaskedheraboutitagainwhenshebroughtourdrinks.Sheassuredmethatshe’dmakesureIdidn’tgetapickleonmyplate.

Afewminuteslater,shebroughtusourorders.Ilookedatmine.Therewasasandwich,someFrenchfries,andapickle!Iwasconfused.WhydidIgetapickleonmyplateafteraskingtwicenottogetone?WasInotniceenough?(I

thoughtIwasniceenough).Didsheforget?Didthecookjustignoreher?AsmycolleagueandIsatthere,wewonderedwhatwecouldlearnfromthis

situation.WhydidIendupwithapickleonmyplate?Ourconclusionwasthatthecookortheservermusthavebeentoobusywiththeirnormalroutinetodosomethingoutsideofit.

Howcouldthistragedyhavebeenavoided?(OK,soitwasn’tthatmuchofatragedy).Wethoughtandthought,andthenitcametous.WhatifourserverhadaskedmeifIwantedapickle?WouldIhavegottenone?Ofcoursenot.Becausethatwouldhavemeantthatitwasintheirroutinetofindoutexactlywhatthecustomerwanted.

Thesameistruewhenyouareinterviewingataxadvisor.Ifthetaxadvisor’sroutineisforyoutoaskallthequestions,hewill(andcan)onlyrespondtoyourquestions.Hecan’tfindoutanythingyoudon’tvolunteer.If,instead,hisroutineistoaskyouquestionsaboutyoursituation,youcanbeprettysurethathe’llbelookingoutforyouandwhatyoureallywant.

Notonlythat,butthetaxyoupaydependsentirelyonyourfactsandcircumstances.Remembermysayingthatanyexpensecanbedeductibleintherightsituation?Ifyoursituationchanges,thenyourtaxwillchange.Ifyourtaxadvisorisnotaskingyouquestionsaboutyoursituation,howcanheorshepossiblyknowwhatthetaxconsequenceswillbetoyou?Heorshecertainlywon’tbeabletoshowyouhowtochangeyoursituationsothatyoureceivebettertaxresults.

Therealityisthatyouhavealloftheanswers.Youradvisorshouldhaveallofthequestions.Don’tworryaboutwhatquestionsyoushouldaskyourtaxadvisor.Ifyouhavetoaskthequestions,thenyousimplyhavethewrongadvisor.

Don’tworryaboutwhatquestionsyoushouldaskyourtaxadvisor.Ifyouhavetoaskthequestions,thenyousimplyhavethe

wrongadvisor.

TAXTIP:HiretherightTaxAdvisor.Thisdoesn’tjustrequireknowingtherightquestionstoaskapotentialtaxadvisor.Itmeansknowingwhatquestionsyourtaxadvisor

shouldbeaskingyou.

Also,rememberthatonlyyoucanreduceyourtaxes.Youhavetolearnenoughabouthowthetaxlawappliestoyousothatyoucanuseittoyourbenefiteveryminuteofeveryday.Besuretofindataxadvisorwhoiswillingandabletoteachyoutherulesyouneedtoknowinordertoreduceyourtaxes.

Manyadvisorsdon’tactuallywantyoutoknowtherules.They’reafraidthatifyouknowtherules,youwon’tneedtheiradvice.Webothknowthat’snotright.Ifyouknowtherules,you’llbemoresuccessfulatreducingyourtaxes.Whenyoureduceyourtaxes,you’llincreaseyourcashflow.Whenyouincreaseyourcashflow,you’llincreaseyourwealth.Andwhenyouincreaseyourwealth,you’relikelytoneedyourtaxadvisorevenmorethanyoudonow.Soit’sreallyinyouradvisor’sbestinteresttotakethetimetoteachyoutherulesyouneedtoknow.It’scertainlyinyourbestinterest.

CharacteristicsofaGoodTaxAdvisor

1.Fullyeducatedaboutthetaxlaw2.Passionateaboutreducingyourtaxes3.Embracesthelawasanopportunity4.Focusesonpermanenttaxsavings5.Usescreativityinapplyingthelawinyourfavor6.Considerstheentirelawwhenreducingtaxes,notjustasingleruleoflaw7.Caresmoreaboutyouthanhimselforherself8.Asksyouquestionsaboutyourspecificsituation9.WillingtoteachyouthetaxrulesThelastpieceofadviceIwouldgiveyouhereistofindataxadvisorwhowillalsoprepareyourtaxes.Don’tuseataxpreparerwhoisn’talsoyourtaxadvisor.Ifyoudo,itcanbeahugemistake.Youcouldgetgreatadvice,andthenthepreparermightnotknowhowtousethisadviceinpreparingyourtaxreturn.

Youwanttobesurethatyourpreparerisn’tjustaccurate.Heorsheshouldalsobeworkingtoreduceyourtaxesasheorshepreparesyourreturn,andheorsheshouldbereducingyourchancesofbeingaudited.Atmyfirm,welookattaxreturnpreparationasboththefinalstepinlastyear’staxplanningandthefirststepinnextyear’staxplanning.

Takethetimetolookforagoodtaxadvisorwhocanalsoprepareyourtaxreturns.Prepareforyourinterviewwithaprospectiveadvisorbynotingthemajorpointswe’vediscussedinthischapter.

TechnicalCharacteristicsofaGoodTaxAdvisor

1.Mustbeaccurate2.Preparesyourtaxreturnsaswellasadvisesyouonyourtaxstrategy3.Reducesyourtaxesasheorshepreparesyourreturn4.ReducesyourchancesofbeingauditedNowthatyouhaveallofthisknowledgeabouthowtoreduceyourtaxes,whatareyougoingtodonext?Youshouldworkwithyourtaxadvisortoputallofthisadvicetogooduseandreduceyourtaxesrightaway.Thiswillimmediatelyincreaseyourcashflow.Justthinkaboutwhatyoucandowithallthatextramoney!

Inthenextchapter,we’lltalkabouthowyoucanusethatextracashflowtomassivelyincreaseyourwealth.

CHAPTER23:KEYPOINTS1.Thetaxlawisintentionallyvagueandallowsforgreatflexibility—ifyouknowwhatitsaysandhowtobendit.

2.Oneofthemostimportantthingsyou’lleverdotoprotectyourwealthisfindnotjustagoodbutagreattaxadvisorandpreparer.

3.Thebesttaxadvisorshaveavastunderstandingofthetaxlaw,canthinknonlinearly,andarepassionatelyconcernedaboutyourneeds.

4.Neveruseataxpreparerthatisn’talsoyourtaxadvisor.Youmayotherwisegetgreatadvicethatisneverusedandloseoutongreattaxsavings.

TaxStrategy#23–HiringtheRightTaxAdvisor

Herearethetop10thingstotalkaboutwheninterviewingataxadvisor:1.Whatisyourviewofthetaxlaw?

2.Whogetsthemostadvantagesofthetaxlaw?

3.Whatmadeyouwanttobecomeataxadvisor?

4.Whatwouldyouliketoknowaboutme?

5.Tellmeaboutyourteamofadvisors.

6.Describeyourpersonalbusinessexperience.

7.Tellmeaboutyourpersonalinvestmentstrategy.

8.WheredidyouearnyourMastersofTaxdegree?

9.GivemethreeexamplesofhowtoreducetheriskofanIRSaudit.

10.Tellmeyourthoughtsaboutassetprotection.

Herearethetop10thingsyourprospectivetaxadvisorshoulddiscusswithyou:1.Tellmeaboutyourdreamsandgoals.

2.Describeyourcurrentandprojectedfamilysituation.

3.Describeyourrelationshipwithyourspouseandyourchildren.

4.Describeyourcurrentandprojectedinvestments.

5.Describeyourcurrentandprojectedbusinesssituation.

6.Explainyourphilosophyoftaxreduction.

7.Whatwouldyouliketolearnaboutthetaxlaws?

8.Howdoyoulearnbest?Auditory,visual,tactile,orkinesthetic?

9.Inaperfectworld,howwouldyouliketoworkwithyourCPA?

10.Whoaretheothermembersofyourteam?

ChapterTwenty-Four

WhatAreYouGoingtodoWithAllYourExtraMoney?

“NoonewouldremembertheGoodSamaritanifhe’donlyhadgoodintentions—hehadmoney,too.”–FormerBritishPrimeMinisterMargaretThatcher

Congratulations!Younowknowhowthetaxlawworksandhowyoucanuseittoreduceyourtaxes.Thinkaboutthegreattaxrefundyou’llgetthisyearafteryou’veimplementedsomeofthestrategiesfromthisbookintoyoureverydaylife.

Now,whatareyougoingtodowithallthatextramoney?Youmaybehappyenoughjusthavingitinyourpocket.Let’sfaceit,refundsfromthegovernmentjustfeelbetterthanmoneythatcomesanyotherway.That’swhatmakestaxrefundssomuchfun.It’smoneythatyoucanuseanywayyouwant—allofit.Thegovernmentdoesn’tgetanyofit.

YearsagoIworkedwithaclientwhowassointentonthegovernmentnotgettinghismoneythatIwassurehe’dgladlyspendtwodollarstokeepthegovernmentfromgettingonedollar.He’ddoanythingtosavetaxesbecausehebelievedthegovernmentwastedourtaxdollarsonneedlessprojects.Isuspecthe’snottheonlyoneouttherewhofeelsthisway.

I’mnotrecommendingyouspendtwodollarsinordertosaveonedollaroftaxes.Infact,I’msuggestingjusttheopposite.I’msuggestingthatyoucansavethousandsofdollarsintaxessimplybyunderstandingthebasicprinciplesI’veoutlinedinthisbookandbyimplementingtheminyourdailylife,withalittlehelpfromagoodtaxadvisor.

Sowhatareyougoingtodowithallthatextracashflow?Areyougoingtotakeavacation,spenditonimprovingyourhome,ordonateittocharity?Thoseareallworthwhileendeavors.Still,thinkabouthowmuchbetterthatvacationcouldbe,howmuchbiggeryourhomecouldbe,orhowmuchmoreyoucoulddonatetocharityifyoutookthatextracashflowandcreatedsomeserious

wealth.Igetit.Youwanttospendalittleofitonyourselfrightaway.Youworkhard

anddeserveavacation.Andifyouworkitright,youcandeductmostorallofthatvacationonthisyear’staxreturn.Butwhatifyoufocusinsteadonbuildingasubstantialamountofwealthsothatyoucanhavebettervacations,abiggerhome,anddomoreforyourfavoritecharityinthefuture?Wouldn’titbegreatifyoudidn’thavetowait20yearsbeforeyoucouldhaveeverythingyouwant?

Let’slookathowyoucanapplytheextracashflowfromyourtaxsavingstospeeduptherateatwhichyoubuildyourwealth.Thelastthingyouwanttodoafterlearninganentirelynewwaytoincreaseyourcashflowthroughpermanentreductionsofyourtaxesistotheninvestallthatmoneytheold-fashionedway—bygivingittoamutualfundcompanyoratraditionalfinancialplanner.

Thelastthingyouwanttodoafterlearninganentirelynewwaytoincreaseyour

cashflowthroughpermanentreductionsofyourtaxesistotheninvestallthatmoneytheold-fashionedway—bygivingittoamutualfundcompanyoratraditional

financialplanner.

Therearethreeconceptsthatyoumustunderstandinordertoproducemassiveamountsofwealth:1.CompoundInterest

2.Leverage

3.Velocity

Thesearethethreebasicprinciplesonwhichallgreatwealthisfounded.

CompoundInterest

WhenIwasgrowingup,I’dalwaysheardaboutthemagicofcompoundinterest.WhenIaskedwhatitmeant,Iwastoldthatcompoundinterestislikemagicbecauseitincreasesevenwhileyousleep,anditconstantlygetsbiggerandbigger.Here’showitworks.

Let’ssayyoudeposit$10,000intoacertificateofdeposit(CD)atthebank.Supposetheinterestrateyouearnis5percent.Afterthefirstyear,you’llhaveearned$500.Now,let’ssaythatyouleavethe$500inthebank.Nowyouhave$10,500inthebank.Theinterestrateof5percentisappliedbothtotheoriginal

$10,000andtothe$500ofinterestyouearnedoverthepreviousyear.Sointhesecondyear,you’llearn$525ofinterest.Theextra$25inthesecondyearisinterestyouearnedontheinterestfromthefirstyear—compoundinterest.

After10yearsofthis,you’llhaveearned$6,288ininterest.Ifyou’dtakentheinterestouteveryyearinstead,you’donlyhaveearned$5,000.Theextra$1,288isaresultofcompounding.Andthat’stheso-called“magic”ofcompoundinterest.

It’sclearthatcompoundingyourinterestisimportant.Itshouldalsobejustasclearthatit’saprettyslowwaytobuildwealth.Allyou’veeffectivelydoneisincreaseyourearningratefrom5percenttoabout6.3percent.Andchancesarethatyou’renotevenkeepingupwithinflation.Butwhatifyoucouldincreaseyourwealthmuchquickerandmoresubstantially,allwithoutincreasingyourrisk?Well,youcanwiththereal“magic”ofleverage.

It’sclearthatcompoundingyourinterestisimportant.Itshouldalsobejustasclear

thatit’saprettyslowwaytobuildwealth.

Leverage

Leverageiswhathappenswhenyouearninterestonnotjustyourmoneybutalsoonsomeoneelse’smoney.Thisispreciselywhatthebankdoeswhenitborrowsyourmoney.Whenwouldabankborrowyourmoney?Everytimeyouputyourmoneyinthebank,it’sborrowingyourmoney.

That’sright.Banksareinthebusinessofborrowingandlendingmoney.Whensomeonemakesadepositatthebank,thebanknowowesthatpersontheamountofmoneydeposited.Thebankalsohastherighttousethatmoneysolongasit’seventuallypaidbacktoyou.That’swhywhenyoudepositmoneyintothebankit’s“credited”toyouraccount.Fromthebank’spointofview,ithasjustborrowedthatmuchmoneyfromyou,andthebankisliabletoyou.Thebank’sliabilitiestoitsdepositorsarerecordedascreditsonitsbalancesheet.

Nowwhatdoesthebankdowithyourmoney?Itlendsitouttosomeoneelseatahigherinterestratethanwhatitpaysyou.Thisiscalledleverage.Let’slookatthe$10,000youloanedthebankbyputtingitintotheCD.Thebankpaysyou5percent.Let’ssaythebanklendsthatmoneytoabusinessownerat8percent.Thebanknowisearning8percentonyourmoneyandispayingyou5percent.Sothebankmakesanetof3percentonmoneythatdoesn’tevenbelongtoit.

*Forsimplicity’ssake,requiredfederalreservesarenotincludedintheexample.

*Inthisexample,assumethatoncetheborrower(businessowner)receiveshisloanhethendepositstheborrowedmoneyintohisbusinessaccountthathehas

withthissamebank.

SometimesIhearpeopletalkingaboutdebtasthoughit’ssomethingextremelyrisky.Thisisn’tnecessarilythecase.Nobodywouldthinkofabankbeinginaparticularlyriskybusinesssolongasitkeepstoitsprimarystrategyoflendingtolow-riskborrowers.Thebankdoesalotofinvestigationofsomeonewhowantstoborrowmoneyfromitbeforemakingaloan.Thatinvestigationreducestheirrisk.Anothertermforaninvestigationissimplygatheringinformationoreducation.Educationreducesrisk.

DebtisDangerousfortheUneducated1.Debtisleverageandcanspeedupyourdownfalljustasfastasitcanspeedupyourwealth.

2.Beforeusingdebttobuildwealth,geteducated.Oneofthebestwaysisby

playingRichDad’sCASHFLOW101gameandtakingRichDadEducationclasses.

Bylendingoutyour$10,000,thebankwillmake$300peryear.Nowonderit’swillingtopayyouinterestonyourdeposit.Thisiswhybanksdosomuchadvertisingtoenticedepositorsintotheirbank.Themoremoneytheyhaveindeposits,themoretheycanlendoutathigherinterestrates.

Sohowcanyouusethisprincipleofleveragetoincreaseyourwealth?Youjustdowhatthebankdoes.Yousimplyenticesomeoneelsetolendyouthemoneythatyoutheninvestinsomethingthatpaysyouabetterratethanwhatyouarepayingonyourloan.

Whoisgoingtowanttolendyoumoney?Banks.That’sright.Thesamebankwhereyoumightotherwisedeposit(orlend)

yourmoneyisalsowillingtolendyoumoneyfortherightinvestment.Bankswilllendyoumoneytoinvestinabusinessorrealestate.(Ofcourse,they’llalsolendyoumoneyforpersonalreasons,suchasavacation,butthey’llchargeveryhighratesofinterestforthis.It’scalledacreditcard.)NoticethatbanksliketolendmoneytopeopleontherightsideoftheCASHFLOWQuadrant—businessownersandinvestors.That’sbecausethere’slessriskontherightsideoftheCASHFLOWQuadrant.Andbankswillonlylendtobusinessownersandinvestorswhohavetheknowledgetobesuccessfulsothattheywilllikelypaybacktheloan.

Let’ssayyouborrow$100,000fromthebankforyourbusiness.Thebank

maychargeyou8percentinterestonthisloan.Youtakethis$100,000andbuyequipmentandinventorythatwillcreateincomeof$12,000peryear.Youpaythebank8percent,or$8,000,andyournetincomefromborrowingthismoneyis$4,000.Youhavejustusedleverageinmuchthesamewayasthebank.

LeveragingMoneyStep1

Borrow$100,000xInterestRate8%EqualsCosttoYou$8,000

Step2PurchaseEquipmentandInventory$100,000xReturn12%EqualsIncomeof$12,000$12,000income-$8,000interestpaid=$4,000netincometoyou.

Gobacktothe$10,000youdepositedinthebank.Insteadofputtingitintothebank,supposeyouputitintoyourbusinessalongwiththe$100,000thebankloanedyou.Youendupearning12percentonyour$10,000plus4percentonthebank’smoney.Intotal,afterthefirstyear,youhaveearned$5,200($10,000x12%plus$100,000x4%).Comparethattothe$500thatyouwould’veearnedifyou’donlyputyourmoneyintothebank’sCD.That’sthemagicofleverage!

Velocity

WhenIthinkofvelocityIalwaysthinkofaracecar.HowfastcanIgo?Afewyearsago,mypartner,Ann,gavemeagiftcertificateforChristmastoraceaFormula-1-styleracecaratPhoenixInternationalRaceway.IwasveryexcitedtodothisbecauseIlovetodrivefast.Whodoesn’t?AndthistimeIcoulddoitlegally.

WhenIgottothetrack,IfoundoutIwasn’ttheonlypersonwholikedgoingfast.Therewereabout20otherpeopleatthetrackwiththesameidea.Thefirstthingtheinstructorsdidwasputusallinasmallroomtoteachusaboutthecarswe’dbedrivingandtheraceway.Thentheygaveuscoveralls,ahelmet,andgogglessothatwe’dbesomewhatprotectedincaseofacrash.Fromthere,wewentouttothetrack,andtheywalkedusthroughhowtodrivetheracecars.

Theythenputusallinavananddrovearoundthetrack.Thiswastoshowuswheretogoonthetrackinordertomaximizeourspeedandreducethechance

ofanaccident.Iwasamazedathowfastthevandriverswereabletotaketheirbigvansaroundtheracetrack.Theywereclearlypracticedandexcellentdrivers.Finally,wewereallowedintoourcars.Thefirsttimearoundthetrack,theyhadusgoprettyslow.Theywantedustogetafeelforthecarandforthetrack.Atlast,afterthatfirstlap,theyletusripandgoasfastaswewanted.

Atfirst,Iwasalittletentative.IsloweddownasItookthecurvesandthenspeduponthestraight-aways.ButafterIwentaroundthetrackafewtimes,Istartedtousemybrakeslessandtoholdmyspeedthroughthecurves.Afterafewmoretimes,IdiscoveredthatIcouldholdmygaspedaltothefloorthroughouttheentiretrackwithoutbeingindangeroflosingcontrol.Itfeltgreattomaintainmyvelocitythroughouttheentirerace.

Theseexactsameprinciplesapplytothevelocityofmoney.Justaswithacar,thekeytogoingasfastaspossiblewithoutlosingcontrolistogainknowledgeandexperiencequicklyandapplythatknowledgeandexperiencetotherace.Inthecaseofmoney,theraceistoreachyourdream.Thefasteryoucangainknowledgeandexperience,thesooneryou’llreachyourdream.

Thekeytofinancialvelocityistokeepyourmoneymoving.Thinkaboutyourcompoundinterestwiththebank.Allyoudidwasleaveyourmoneysittinginthebank.Itwasn’tmoving.Sowhileitearnedasmallamountofinterest,ittook10yearsjusttoearn$6,288.Thenthinkaboutwhathappenedwhenyouaddedleverage.Youearnedalmostthesameamountinthefirstyearthatitwouldhavetaken10yearstoearnrelyingsolelyoncompoundinterest.

Youcould’veearnedstillmorebyusingtheprincipleofvelocity.Thinkaboutitthisway.Leverageisreallyjustcompoundinterestusingsomeoneelse’smoney.Velocityisawaytoincreaseyourleverage.Here’showitworks.

Thekeytofinancialvelocityistokeepyour

moneymoving.

Let’ssayyouborrowthe$100,000fromthebanktoaddtoyour$10,000toinvestinyourbusiness.Oneofthereasonsthebankhasagreedtolendtoyouisthatyouhaveputsomeofyourownmoneyintothebusiness.Thisiscalledhavingskininthegame.

Afterthefirstyear,youhaveearnedatotalof$13,200onthatmoneyat12percent.Youhavetopaythebankitsinterestof$8,000,soyouareleftwithjustover$5,000.Nowifthebankwaswillingtolendyou$100,000solongasyou

putin$10,000,thenthebankshouldbewillingtolendyouanother$50,000becauseyounowhaveanother$5,000investedofyourownmoneyinthebusiness.Thisistrueeventhoughthat$5,000camefrombusinessearnings.Banksliketoseeyouleaveearningsinthebusiness.Thesearecalled“retained”earningsbecauseyouretaintheminthebusiness.

CompoundInterest,Leverage,andVelocityCreatingRetainedEarnings

Year1

BorrowedMoney($100,000)plusyourmoney($10,000)=$110,000Multipliedbyinvestmentearnings($110,000X12%)=$13,200

Minuscostofborrowing($100,000X8%)-$8,000Equalsretainedearningsof=$5,200

Withtheadditional$50,000,plusthe$5,000youhavefromyourfirstyearearnings,youcanearnanother12percent.Youstillhavetheoriginal$110,000,soyouearn12percentonthatmoney,too.Inthesecondyear,youwillnowearn$19,800($165,000x12%).Youhavetopaythebankitsinterestof8percentonthetotalloanof$150,000,or$12,000.Thisleavesyouwithnetearningsinthesecondyearofalmost$8,000.That’s$3,000morethanyouearnedthefirstyear.

CompoundInterest,Leverage,andVelocityCreatingRetainedEarnings

Year2

BorrowedMoney($150,000)+youroriginal$10,000+retainedearnings$5,200=$165,200

Multipliedbyinvestmentearnings($165,200X12%)=$19,824Minuscostofborrowing($150,000X8%)-$12,000

Equalsretainedearningsof=$7,824

Theadditionalearningsaretheresultofusingallthreeofourcorewealthprinciples:compoundinterest,leverage,andvelocity.Youearnedcompoundinterestonallofthemoney.Youleveragedyourinitial$10,000investmentbyborrowing$100,000fromthebank.Insteadofbeingcontentwiththeearnings

onthe$110,000,youdecidedtoleverageagainwiththeearningsfromthefirstyear.Thisiswhereyouborrowedtheadditional$50,000.Leveragingyourfirstyear’searnedinterestiscalledvelocity.You’resimplymovingyourmoneyintoadditionalleveragesothatyoucancontinuegainingspeedinbuildingyourwealth.Bydoingthisyouwouldearnatotal$14,000afterjusttwoyears.

Comparethistothe$1,025youwould’veearnedhadyoujustputyour$10,000intoabankCDearning5percentorthe$12,000youwouldhaveearnedifyouhadn’tre-leveragedyourfirst-yearinterestbyborrowingtheadditional$50,000.Andthelongeryougoandthemorevelocityyougain,thefasterandfasteryoubuildyourwealth.

It’sallaboutmomentum.Themoreyouleverageandthefasteryoureemployyourmoney,thefasteryouwillbuildyourwealth.Justrememberthelessonsatthespeedway:•Startbygettingapropereducationfromexpertswhoknowwhatthey’redoing.

•Thentakesomepracticerunswiththeexperts.Whenyoudostartinvestingorbuildingyourbusinessonyourown,startslowlyandgetusedtothefeelofthetrack(theinvestingorthebusiness).

•Afterafewturnsaroundthetrack,youcanpickupspeedandmovefasterandfasteruntil,beforeyouknowit,you’llbemovingataveryfastspeedandwon’tevenhavetoslowdownforthecurvesintheroad.

$$WEALTHTIP$$Usemysimpleformulatocreatemassivepassiveincome.Startwithearnedincome,investingrowthassets,createahugeamountofcapitalfromyourgrowthassets,andtheninvestinassetsthatgeneratepassiveincome.Withasubstantialamountofcapital,eveninvestmentswithmodestreturnsresultin

massivepassiveincome.

Andthat’swhenitreallygetsfun.It’swhereIamnowwithmybusiness.Istartedbylearningfromtheexpertsasanemployee.Ilookedatitasmyinternship.Eventually,Iwentoutonmyown,startingslowatfirst,withoutanyemployees.ThenIaddedafewemployees,andIeventuallyaddedpartners.

NowI’mmovingatbreakneckspeed.Inolongerspendhoursandhoursattheofficedoingthework.Itrainotherstodotheworkandemploytriedandtruesystemstomakesuretheydowhatthey’vebeentrainedtodo.Icannowreemploymypersonalcapitalandleveragewithotherpeople.It’snotjustmoney

Icanleverage.Icanleverageotherpeople’stime,talents,andeventheirpersonalcontacts.

Themoreyouleverageandthefasteryoureemployyourmoney,thefasteryouwillbuildyourwealth.

Thisistheonlywaytosafelybuildlong-termwealthveryquickly.Getrich-quickschemesneverworkinthelongrun.Theyarelikewinningthelottery—veryrisky,andevenwhenyoudowinyoudon’tknowwhattodowithyourwinningsandsoonlosethem.

Usingcompoundinterest,leverage,andvelocitywillworkeverytimewhenyoufollowtherulesI’veoutlinedhere.Andyoudon’tevenhavetouseyoursavings.Justusethemoneyyousavedbypermanentlyreducingyourtaxes.

CHAPTER24:KEYPOINTS1.Taxsavingsareexciting,butthemostexcitingpartoftaxsavingsisusingthatmoneytoincreaseyourwealth.

2.Thethreefoundationsofwealthbuildingarecompoundinterest,leverage,andvelocity.

3.Compoundinterestbyitselfisaveryslowwaytobuildwealth,butcombinedwithleverageandvelocity,it’sapowerfulwealth-buildingtool.

4.Theonlywaytoactuallysavemoneyintaxesistofirststartimplementingthestrategiesfoundinthisbook.Findagreattaxadvisorandgetstartedtoday!

TaxStrategy#24–BuildMassivePassiveIncomethroughYourTaxSavings

ThroughoutChapter24,weusedtheexampleofinvesting$10,000togeneratewealththroughcompounding,leverage,andvelocity.Now,let’slookatwhathappenswhenyouaddthetaxbenefitsfromallofthelessonsintheprevioustwentythreechapters.Inourexampleinthischapter,withleverageandvelocity,youincreasedyourearningson$100,000investmentfromjustover$1,000toover$13,000intwoyears.Whathappenswhenyouaddyourtax

benefits?Let’ssupposethatyourtaxstrategyproducestaxsavingsof$20,000per

year.Youcantakethat$20,000,addleverage(say$80,000)andbuyanadditionalinvestmentfor$100,000.That$100,000producesincomeat12percent,or$12,000.Youpay8percenttothebankonyour$80,000loanor$7,200,leavingyouwithadditionalearningsof$4,800.Thesecondyear,youearn12percenton$104,800($100,000plus$4,800earnedinthefirstyear)foratotalearningsof$12,576.Youpayinterestonyour$80,000loanof$7,200,leavingyouwithadditionalearningsof$5,376.Plus,youhaveanother$20,000oftaxsavings,sinceyourtaxstrategyproduces$20,000oftaxsavingseveryyear.So,youinvestthisalongwithanother$80,000bankloan,producingnetincomeof$4,800fromthisinvestment.Now,aftertwoyears,youhaveadded$10,176ofinvestmentearningstoyouroriginal$13,024foratotalof$23,200ofinvestmentearningsoverjusttwoyearsonasingleinvestmentof$100,000,plusinvestingyourtaxsavingsfromyourtaxstrategy.Comparethistoyour$1,025ofearningsfromputting$100,000inthebankwithoutanyleverage,velocity,ortaxplanning.Youincreasedyourearningsbyover23timesinjusttwoyearsbychanginghowyouthinkaboutmoney.Andthisdoesn’tevenincludethe$40,000youhaveinadditionalequitybecauseofyourtwoyearsofsaving$20,000intaxes.

CompoundInterestEarningsYear1and2

Year1Interest=$500Year2Interest=$525

Total=$1,025

LeverageandVelocityEarningsYear1and2

Year1InvestmentEarnings=$5,200Year2InvestmentEarnings=$7,824

Total=$13,024

Leverage,VelocityandTaxBenefits

InvestmentEarningsYear1

TaxStrategyproduces$20,000intaxsavings+use$80,000inLeverage(borrow)topurchaseaninvestment=$100,000

Multipliedbyinvestmentearnings($100,000X12%)$12,000Minuscostofborrowing($80,000X8%)-$7,200

Equalsinvestmentearningsof=$4,800

,VelocityandTaxBenefitsInvestmentEarnings

Year2

Investment($100,000)plusyear1earnings($4,800)=$104,800Multipliedbyinvestmentearnings($104,800X12%)$12,576

Minuscostofborrowing($80,000X8%)-$7,200Equalsinvestmentearningsof=$5,376

InvestTaxBenefitsfrom$20,000TaxSavingsYear1and2

Year1InvestmentEarnings=$4,800Year2InvestmentEarnings=$5,376

Total=$10,176

TotalEarningsfromaSingleInvestmentPlusTaxSavingsLeverage,VelocityandTaxBenefits

LeverageandVelocityInvestmentEarnings=$13,024

TaxInvestmentEarnings=$10,176Total=$23,200

Areyoubeginningtoseetheamazingbenefitsofaddingtaxsavingstoyourwealthstrategy?Youalmostdoubledyourinvestmentearningsinjusttwoyearssimplybyinvestingyourtaxsavingsfromyourtaxstrategy.Ofcourse,thisis

justanexample.Yourtaxsavingscouldbemoreorlessthan$20,000peryear,dependingonthelevelofyourincomeandthequalityofyourtaxadvisor.Nomatterwhat,youarebetteroffusingacombinationofcompounding,leverage,velocity,andtaxsavingstobuildyourwealth.

TaxFreeWealth:

AFewFinalThoughts

You’velearnedalotaboutpermanentlyreducingyourtaxesandbuildingwealthinthisbook.Don’tstophere.Besuretotakethetimetositdownwithyourteamtobuildyourowntaxandwealthstrategy.YounowhavelotsofammunitionforcreatingataxstrategyandChapter24gaveyouafewinsightsintobuildingawealthstrategy.Therealkeytoyourwealthistocombineyourtaxstrategywithyourwealthstrategy.Beginbylookingatyourkeyteammembers—yourtaxstrategist(taxadvisor)andyourwealthstrategist.AttheendofChapter23,Igaveyouafewhintsonhowtofindyourtaxstrategist.

Butwhataboutyourwealthstrategist?Wouldn’tateammemberwhounderstandsallofyoursituation,understandshowtobuildmassivepassiveincome,andunderstandshowtobuildateambecrucialtoyourwealth?Ofcourse.Wheredoyoufindthisperson?Theanswerissimple.Yourwealthstrategistshouldbeyourtaxstrategist.Buildingwealthisafairlysimpleformula.Compoundinterestplusleverageplusvelocityplustaxreduction.Themostcomplexpartofthisformulaisyourtaxreduction.Sowhynothaveawealthstrategistwhounderstandsthiscomplexareaandalreadyknowsyourentiresituation—yourtaxadvisor?

Nowyouhaveadditionalammunitiontoattackyourwealth.Youhavesomeoneonyourteamwhounderstandsyou,howtobuildwealth,andhowtoreduceyourtaxes.Thenmaketheefforttoimplementeverythingyouhavelearned,usingalloftheconceptswe’vediscussedsothatyoucanenjoytax-freewealth.Neverforgetthatagoodstrategystartswithadream,adreamtoreduceyourtaxesandthenusingthosetaxsavingstobuildpermanentwealth.

Yes,it’sgoingtotaketimeandeffort.Beginbymakingaconsciousdecisiontoreduceyourtaxesandincreaseyourwealthnow.Thelongeryoupostponedoingit,themoretaxesyou’llpayandthelongeritwilltaketoreachyourdream.Thegreatthingaboutreducingyourtaxesisthatyoureallycanstartdoingsotodaysimplybyapplyingtheconceptsyou’velearnedinthisbook.

Andthinkabouthowmuchfunyou’regoingtohavebuildingyourwealth

whenyoustoprelyingsolelyoncompoundinterestandstartusingleverageandvelocityinstead.Afterall,it’smuchmorefundrivingafastracecarthanitiswalkingaroundtheblock.Andyou’llgettoyourdestinationmuchquicker.

Myfavoritepartofthebusinessishelpingothersreachtheirdreams.Pleasebesuretovisitwww.TaxFreeWealthBook.comforadditionalresourcestoachieveyourtax-freewealthgoals.It’sbeenapleasuresharingthisinformationwithyou.IhopetomeetyouinpersonsometimesoonataRichDadseminarorinourofficesinTempe,Arizona.

AbouttheAuthor

TomWheelwright,CPA

TomWheelwright,CPA,isthecreativeforcebehindProVision,theworld’spremierstrategicCPAfirm.AsthefounderandCEO,Tomhasbeenresponsibleforinnovatingnewtax,businessandwealthconsultingandstrategyservicesforProVision’spremiumclienteleforthepast16years.

Tomisaleadingexpertandpublishedauthoronpartnershipsandcorporationtaxstrategies,awell-knownplatformspeakerandawealtheducationinnovator.DonaldTrumpselectedTomtocontributetohisWealthBuildersProgram,callingTom“thebestofthebest.”RobertKiyosaki,bestsellingauthorofRichDadPoorDad,callsTom“ateamplayerthatanyonewhowantstoberichneedstoaddtohisteam.”InRobertKiyosaki’sbook,“TheRealBookofRealEstate,”Tom,himself,authoredChapters1and21ofthisbook.TomalsocontributedtoRobertKiyosaki’sRichDad’sSuccessStories,WhoTookMyMoney?andUnfairAdvantage.

TomhaswrittenseveralarticlesforpublicationinmajorprofessionaljournalsandonlineresourcesandhasspokentothousandsthroughouttheU.S.,Canada,EuropeandAustralia.TomhasalsousedhissuperiorrelationshipandteambuildingskillstoadvisetheCanadianmarketintheartofinvestingintheU.S.,bycontributingtoPhilipMcKernan’s“Southof49”andcontributedheavilytohisnewestbook,“FireSale.”

Formorethan30years,Tomhasdevisedinnovativetax,businessandwealthstrategiesforsophisticatedinvestorsandbusinessownersinthemanufacturing,realestateandhightechfields.Hispassionisteachingtheseinnovativestrategiestothethousandswhocometohearhimspeak.Hehasparticipatedasakeynotespeakerandpanelistinmultipleroundtables,andledground-breakingtaxdiscussionschallengingthestatusquointermsoftaxstrategies.

Tomhasawidevarietyofprofessionalexperience,rangingfromBig4accounting,wherehemanagedandledprofessionaltrainingforthousandsofCPAsatErnst&Young’sNationalTaxDepartmentinWashington,D.C.,toin-housetaxadvisorforPinnacleWestCapitalCorporation,atthetimeaFortune

1000company.TomalsoservedasanadjunctprofessorintheMastersofTaxprogramatArizonaStateUniversityfor14yearswherehecreatedthecourseforteachingmulti-statetaxplanningtechniquesandtaughthundredsofgraduatestudents.HecurrentlyteachestheRichDadEducationAdvancedTaxandAssetProtectionclass.

TomhashisMaster’sofProfessionalAccountingdegreefromtheUniversityofTexasatAustinandhisBachelorofArtsdegreefromtheUniversityofUtah.

Findoutmoreathttp://www.TaxFreeWealthBook.com.

ReferencesandResources

Foradditionalinformation,thefollowingwebsitesaresuggested:

BooksandInformationforInvestorsandEntrepreneurs

www.BZKPress.com

RealEstate

www.Ken.Mcelroy.comwww.mccompanies.com

AssetProtectionandLLCFormation

www.sutlaw.comwww.corporatedirect.com

TaxPlanning

www.TaxFreeWealthBook.com

SalesStrategies

www.salesdogs.com

TheRichDadCompany

www.RichDad.com

RecommendedReading

•UnfairAdvantagebyRobertKiyosaki

•TheRealBookofRealEstatebyRobertKiyosakiwith22ofHisTrustedRealEstateExperts•SalesDogsbyBlairSinger

•TeamCodeofHonorbyBlairSinger

•StartYourOwnCorporationbyGarrettSutton,Esq.

•WritingWinningBusinessPlansbyGarrettSutton,Esq.

•TheABCsofRealEstateInvestingbyKenMcElroy

•401(k)aosbyAndyTanner

•TheCorruptionofCapitalismbyRichardDuncan

•CreaturefromJekyllIslandbyG.EdwardGriffin

TeamPlayers•TheRichDadCompany:richdad.com

•RichDadEducation:richdadeducation.com

•RichDadCoaching:richdadcoaching.com

•BlairSinger:blairsinger.com

•AndyTanner:401kaos.com

•GarrettSutton,Esq.:sutlaw.com

•KenMcElroy:kenmcelroy.com

Websites•RichDadAdvisors.com

•TaxFreeWealthBook.com

•ProVisionWealth.com

•TomWheelwright.com

•TomWheelwrightSpeaks.com

•WealthStrategyUProducts.com

•facebook.com/Tom.Wheelwright.CPA

•facebook.com/TaxFreeWealthBook

•richdad.com

ContactUs

•WealthStrategyUProducts.com/contact-us

TheRichDadAdvisorsSeries

TheRichDadAdvisorsseriesofbookswascreatedtodeliverthehow-tocontenttosupportRobertKiyosaki’sseriesofinternationalbestsellers:RichDadPoorDadandtheRichDadseriesofbooks.InRichDadPoorDad—the#1PersonalFinanceBookofallTime—RobertpresentedthefoundationfortheRichDadprinciplesandphilosophiesandsetthestageforhiscontext-changingmessagesthathavechangedthewaytheworldthinksaboutmoney,businessandinvesting.

TheRichDadAdvisorsseriesofbookshassoldmorethan2millioncopiesworldwideandBKZPress,exclusivepublisheroftheRichDadAdvisorseriesandthelicensorofInternationalRightsfortheseries,willbereleasingseveralnewtitlesthatwillexpandboththescopeanddepthoftheseries.

RichDadPoorDadrepresentsthemostsuccessfulbookonpersonalfinanceinourgeneration.Overthelast15years,itsmessageshaveinspiredmillionsofpeopleandimpactedtensofmillionsoflivesinover100countriesaroundtheworld.TheRichDadbookshavecontinuedtointernationalbestsellerlistsbecausetheirmessagescontinuetoresonatewithreadersofallages.RichDadPoorDadhassucceededinliftingtheveilofconfusion,fear,andfrustrationaroundmoneyandreplacingitwithclarity,truth,andhopeforeverypersonwhoiswillingtocommittotheprocessofbecomingfinanciallyeducated.

Inordertomakegoodonthepromiseoffinancialliteracyandultimatefreedom,RobertKiyosakiassembledhisownteamofpersonalandtrustedadvisors,provenexpertsintheirrespectivefields,todelivertheonlycomplete‘how-to’seriesofbooksandprogramsthattakesthemessagesofRichDadtothestreetsoftheworldandgiveseachreaderthestep-by-stepprocessestoachievewealthandincomeinbusiness,investing,andentrepreneurship.

RDAPressisdrivenbyseveralofKiyosaki’sactualAdvisorswhohavecommittedtotakethemessagesofRichDad,convertthemtopracticalapplicationsandmakesurethoseprocessesareputinthehandsofthosewhoseekfinancialliteracyandfinancialfreedomaroundtheworld.Theseriesgivespractical,provenprocessestosucceedintheareasoffinance,tax,entrepreneurship,investing,property,debt,sales,wealthmanagementandbothbusinessandpersonaldevelopment.ThreeofthesetrustedandaccomplishedAdvisors—BlairSinger,GarrettSutton,andKenMcElroy—arethedrivingforcesbehindRDAPress.

RDAPressisproudtoassumetheroleofpublisheroftheRichDadAdvisorseriesandperpetuateaseriesofbooksthathassoldmillionsofcopiesworldwideand,moreimportantly,supportedtensofmillionsintheirjourneytowardfinancialfreedom.

Best-SellingBooksintheRichDadAdvisorsSeries

byBlairSinger

SalesDogs

YouDon’tHavetoBeanAttackDogtoExplodeYourIncome

TeamCodeofHonor

TheSecretsofChampionsinBusinessandinLife

byGarrettSutton,Esq.

StartYourOwnCorporation

WhytheRichOwntheirOwnCompaniesandEveryoneElseWorksforThem

WritingWinningBusinessPlans

HowtoPrepareaBusinessPlanthatInvestorswillWanttoRead–andInvestIn

BuyingandSellingaBusiness

HowYouCanWinintheBusinessQuadrant

TheABCsofGettingOutofDebtTurnBadDebtintoGoodDebtandBadCreditintoGoodCredit

RunYourOwnCorporation

HowtoLegallyOperateandProperlyMaintainYourCompanyintotheFuture

byKenMcElroy

TheABCsofRealEstateInvestingTheSecretsofFindingHiddenProfitsMostInvestorsMiss

TheABCsofPropertyManagement

WhatYouNeedtoKnowtoMaximizeYourMoneyNow

TheAdvancedGuidetoRealEstateInvestingHowtoIdentifytheHottestMarketsandSecuretheBestDeals

byTomWheelwright

Tax-FreeWealth

HowtoBuildMassiveWealthbyPermanentlyLoweringYourTaxes