Tax-Free Wealth

Highlights

  • In many ways, utilizing the tax code to the fullest to save as much money in taxes as possible is one of the most patriotic things you can do. (Location 128)

Introduction

  • This book is about tax planning concepts. It’s about how to use your country’s tax laws to your benefit. In this book, I tell you how the tax laws work. And how they are designed to reduce your taxes, not to increase your taxes. (Location 233)

Part One How the Tax Law Can Be Your Best Friend

Chapter One Taxes are Stealing Your Money, Your Time, and Your Future

  • In the early years of the income tax, only the very rich were subject to the tax. It was believed that since the rich had more income than they needed in order to live comfortably, they could afford to pay some of this back to the government. (Location 262)
  • This all changed after World War II. The governments of the world found that (Location 265)
  • the income tax was a useful revenue-raising tool that could be used to rebuild an economy that was ravished by war. So the governments began taxing the middle class. At first, it was only the excess earned by employees over the average cost of living that was taxed. The government provided exemptions for the first income earned so that the average person could live on their regular earnings and only pay tax on the excess that would otherwise go to investments. (Location 266)
  • As they watched the behavior of the people who were now paying income tax, the government began to tinker with the tax law to see how it would affect the activities of the taxpayers. What they found was that a minor change to the tax law could have a profound effect on the behavior of the (Location 269)
  • people. If the government gave a tax incentive to invest in business, more people would invest in business. If they gave a tax benefit to those who invested in oil and gas, more people would invest in oil and gas. (Location 271)
  • understand that the tax law is not something the government uses only to raise taxes. The tax law is a tool the government uses to shape the economy and promote social, agricultural, and energy policy. (Location 277)
  • the tax law in every developed country is now a series of incentives for entrepreneurs and investors. (Location 279)
  • In the United States, over 95 percent of the tax code is intended not to raise taxes but rather to stimulate economic, agricultural and energy activities. (Location 280)
  • Beware of Tax Preparers who: 1. Promise they can lower your taxes and who are really tax cheats. 2. Focus on postponing or “deferring” taxes to a later year. Real tax planning is permanent so you never have to repay the taxes. (Location 345)
Tax Strategy #1: Include Tax Planning in Your Wealth Strategy
  • With taxes as your biggest expense, wouldn’t you want to look at every return on every investment after taxes? When you do, you may find that you are making a lot less on some investments than you thought and are making more on others in comparison. (Location 363)
  • Regularly, I hear on the news that real estate is only a moderately successful investment on average. And if you were to compare it directly to some other investment before tax and without leverage (i.e., debt), you would have to agree. (Location 366)
  • So your real return from your real estate is $7,000 plus an additional $6,000 of tax refund on taxes you normally would have paid on your salary and business income for a total return of $13,000, or $5,000 more than your after-tax return from the stock investment. (Location 378)

Chapter Two Taxes are Fun, Easy, and Understandable

  • TAX TIP: Invest where you travel. Do you have a favorite destination? Consider investing in the area. It gives you a great reason to keep returning, and you turn the travel expenses you already have into deductible expenses, keeping more money in your pocket. (Location 407)
  • Understanding Taxes Doesn’t Mean Doing It Yourself (Location 433)
  • You still need a good tax advisor who understands the details of the tax law. 2. A good tax advisor who follows a strong tax-reduction system can help you create and implement sound tax strategies besides doing your tax returns. (Location 435)
Tax Strategy #2 – Invest Where you Travel
  • Any travel can be deductible by making it a business or investment expense. (Location 461)
  • As long as your travel has its primary purpose as business, then all of the travel expenses, including hotel, airfare and meals, will be deductible. (Location 461)
  • In order for travel’s primary purpose to be business, the IRS says that you have to spend more time doing business than you do in recreation. (Location 462)
  • This simply means more than 4 hours of a regular 8-hour workday, meaning you need to spend four and a half hours working each day. But who wants to work while vacationing in Hawaii? (Location 464)

Chapter Three The Two Most Important Rules

  • RULE #1: It’s your money, not the government’s. (Location 491)
  • RULE #2: The tax law is written primarily to reduce your taxes. (Location 509)
  • it’s actually your patriotic duty to reduce your taxes by all legal means. (Location 513)
Tax Strategy # 3: Elect How Your Limited Liability Company will be Taxed
  • When you’re ready to change to an S Corporation to reduce your employment taxes (see Chapter 11), you can check the box on the form and file the election with the IRS. (Location 555)

Chapter Four Put Money Back in Your Pocket—Now

  • business isn’t always about doing something other people can’t do for themselves; it’s doing something they haven’t thought to do for themselves. (Location 568)
  • RULE #3: The fastest way to put money in your pocket is to reduce your taxes. (Location 579)
  • Your tax advisor cannot handle your taxes. They can prepare your tax returns. They can give you advice about what to do in a particular situation. Quite possibly they can even tell you some rules that will help you reduce your taxes. But they cannot take the actual steps to reduce your taxes. Only you can do that. (Location 589)
  • Don’t Wait for Year-End to Do Tax Planning 1. Every day you could be reducing your taxes. 2. Year-end tax planning is important but year-round tax planning is better. (Location 593)
  • Every dollar, pound, or euro you earn can increase your taxes, and every dollar, pound, or euro you spend can decrease your taxes. (Location 599)
  • TAX TIP: Eat while you work and save taxes. Business meals are (Location 609)
  • great way to spend time with employees, clients, and customers. You can discuss business and turn your meal expense into a deductible expense. (Location 610)
  • Let’s face it, the best part of having money is spending it. But when you can not only spend your money but also decrease your taxes while doing so—well, then you’re really cooking. (Location 611)
Tax Strategy #4 – Deduct your Meals
  • In the United States, the tax law requires each business deduction to meet three tests. (Location 637)
  • First, the expense must have a business purpose, which means the primary reason for spending money was for your business. (Location 638)
  • Second, the expense must be ordinary. An expense is ordinary if it is “customary and usual.” (Location 640)
  • This means that within your industry, the expense should be typical of what would be spent, both in the amount of the expense and how often a person in your position would have the expense. (Location 641)
  • Third, the expense must be necessary. Necessary means that the purpose of the expense is to make more money for your business. (Location 647)
  • Your conversation at lunch must have the intention of increasing the profits in your business. (Location 648)
  • Still, one of the most common mistakes I see is couples who are always talking about business when they go out to dinner but not paying for their meals with their business credit card. (Location 653)

Chapter Five Entrepreneurs and Investors Get All the Breaks

  • RULE #5: The tax law is a series of incentives for entrepreneurs and investors. (Location 693)
  • So what does the government want? First, they want to create more jobs. Who creates jobs? Entrepreneurs. Therefore, entrepreneurs get all sorts of tax breaks that act as subsidies to encourage job creation. What else does the government want? Affordable housing. Real estate investors get all sorts of tax breaks that act as subsidies to encourage building of affordable housing. Sometimes governments make the mistake (Location 695)
  • it costs the government a lot less to give tax benefits to business owners and investors than it does to add jobs or build housing through government-sponsored programs. (Location 698)
  • TAX TIP: Put your family to work. Make your business a family business. Then when you travel for business, your family’s travel is deductible. And you can shift income from your higher (Location 726)
  • tax bracket to their lower tax bracket. This creates permanent tax savings. (Location 727)
Tax Strategy #5 – Put Your Family to Work in Your Business and Investing
  • In a year, she might earn $4,000. That $4,000 will be a deduction to her parents. She doesn’t earn any other income and the standard deduction is more than $4,000. So, she doesn’t pay any tax. In my client’s 40 percent tax bracket, that $4,000 in pay to their daughter means a tax savings of $1,600. (Location 761)

Chapter Six You Can Deduct Almost Anything

  • as long as they’re living the life of an average taxpayer, there’s nothing much I can do for them. The solution is to stop being average. (Location 785)
  • RULE #6: You can deduct almost anything given the right facts. (Location 804)
  • As long as the purpose of the expense is to produce more income, it can be deductible. (Location 808)
  • Now let’s suppose that you don’t want to start a business but you still want to be a super taxpayer. What do you do? You become an investor. (Location 841)
  • That means you have to be an investor who actively invests for passive income, not earned income. Very simply, passive income is income that comes from dividends, rents, and business. (Location 844)
  • appreciation and capital gains, or from your paycheck. In order to become a super investor, you must find good, cash-flowing investments that produce passive income. (Location 846)
  • TAX TIP: Document. Document. Document. The IRS, Revenue Canada, the HMRC, ATO, and other tax collectors love documentation. Remember that if you pretend to document a deduction, you get a pretend deduction. (Location 893)
Tax Strategy #6 – Document, Document, Document

Chapter Seven Depreciation: The King of All Deductions

  • And that really is the magic of depreciation. When you buy an asset that produces income, you can deduct a portion of it each year you own it. If it’s a physical asset, such as real estate or equipment, the deduction is called depreciation. If it’s an intangible asset (one you can’t feel or touch, such as a customer list or computer software), the deduction is called amortization. But in the end, the benefit is the same. (Location 947)
  • Types of Deductions For Income-Producing Assets Type Examples Depreciation = Tangible Assets: Such as real estate or equipment Amortization = Intangible Assets: Such as customer lists or computer software (Location 951)
  • Despite all this, Pierre still gets to take advantage of depreciation, a deduction that was created specifically to encourage people to buy and construct buildings and equipment. (Location 963)
  • One of the keys to taking full advantage of depreciation is to quickly get as much of your deduction as you can. The more deductions you can get today, the more money you can put in your pocket. (Location 983)
  • In total, Pierre gets a deduction each year of about $58,000 [($505,000 ÷ 39 years) + ($200,000 × 20%) + ($75,000 × 6.67%)], which means that $58,000 of his restaurant income won’t be taxable. And this can pay off in a big way. (Location 992)
  • TAX TIP: Avoid the tax collector’s traps. The trick is to properly document the values of all the items you depreciate in a cost segregation or chattel appraisal—even better, have a tax professional or engineer document them for you. Without it, the tax collector can make your tax savings from depreciation disappear. Protect your tax savings with good documentation. (Location 994)
  • The tax benefits of long-term real estate investing can be equal to or even greater than the cash flow and increase in value (appreciation) from your properties. (Location 1016)
  • Since his cash flow from the apartment is only $12,000, when he subtracts the depreciation expense, Pierre ends up with a loss for tax purposes of $38,000. So Pierre’s $12,000 of cash flow is entirely tax-free. In addition, Pierre has $38,000 of loss to use against other income. If Pierre is in a 40 percent tax bracket, this $38,000 of loss will create a tax refund for him of over $15,000. Again, Pierre can use that money to reinvest in his business or in real estate. (Location 1046)
  • In Pierre’s case, the government essentially paid him to invest in real estate. And they’ll do the same for you. (Location 1060)
The Magic of Amortization
  • Remember Your Tax Return Elections 1. You must elect to deduct amortization. 2. Some amortization elections have to be clearly stated on your tax return in the year you first start using your intangible property. (Location 1072)
  • Just like Pierre did when he purchased the building to house his restaurant or when he purchased his apartment building, every investor should break out the land improvements and the contents of the building from the portion of the cost that related to the land and the building. What’s inside of the building should be separated from the physical structure on the tax return. (Location 1095)
  • (Breaking out the component parts of a building is called a cost segregation or chattel appraisal.) (Location 1099)
Bonus Depreciation
  • For example, in the U.S., beginning in 2017, 100% of the cost of any asset with a useful life of 20 years or less could be depreciated 100% in the first year. (Location 1112)
  • The more depreciation you take, the more property you can buy which creates even more depreciation. (Location 1121)
Tax Strategy #7 – Cost Segregations of Business and Rental Properties

Chapter Eight Earn Better Income

  • In every country, there are different types of income, and they all have different associated tax rates, costs, and benefits. For example, in most countries, long-term capital gains (income made from the sale of property and other assets) are taxed at a lower rate than ordinary income (Location 1217)
  • Earned income is taxed at the highest rate possible. This includes income you earn as an employee, self-employed individual, or partner. (Location 1221)
  • The magic of like-kind exchanges is that if you replace a new property with yet another property and continue to do so until you die, you may never have to pay any taxes. (Location 1295)
  • Some people might be concerned that with like-kind exchanges they won’t be able to get any actual cash in their pockets from the sale of their property. This isn’t true, however, because you can always refinance the property and pull out tax-free appreciated value. (Location 1300)
Tax Strategy #8 – PIGS are your PALS

Chapter Nine Take Advantage of Your Tax Brackets

  • Believe it or not, children can be one of the best tax shelters around. And if you do it right, you can also reduce or get rid of your estate tax through good income tax planning with your children. Here’s how it works. (Location 1408)
  • RULE #7: It’s not how much you own that matters, it’s how much you control. (Location 1459)
  • RULE #8: Treat your business just as you would if it were a big public company. (Location 1476)
  • RULE #9: All tax planning must have a business purpose other than reducing taxes. (Location 1485)
  • All Transactions Must Have “Economic Substance” 1. There must be a business purpose for setting up your separate corporation. 2. Your corporation must have a purpose other than just tax savings. It must otherwise help your business to be more profitable. (Location 1509)
Tax Strategy #9 – Make Your Parents Your Business Partners and Reap the Tax Benefits

Chapter Ten Credits: The Cream of the Tax-Saving Crop

  • A tax credit is the cream of the tax savings crop because it offsets your taxes dollar for dollar. It’s not like a deduction that only reduces your taxable income. It goes directly against your taxes. So if you have a tax credit of $1,000, it reduces your taxes by $1,000, no matter what your tax bracket is. (Location 1627)
  • If you want to give back some of that money, you can. And you’ll get a deduction for it. That’s what the deduction for charitable donations is for, to encourage you to give back. (Location 1676)
  • As you’ve probably already guessed, the biggest tax credits are reserved for business owners and investors. These are called investment tax credits. (Location 1684)
  • Don’t ever invest in a project solely for the tax benefits. Always look at the profit opportunities first. (Location 1721)
Tax Strategy #10 – Saving for Your Child’s Education with Maximum Tax Benefits
  • What if you could have all of the tax benefits of a 529 plan without giving the government any control over your money? Wouldn’t that be a lot better? In tax strategy #5 we talked about paying your children to work in your business. (Location 1750)
  • This is the perfect opportunity to have your children pay for their own education without having to rely on Section 529 plans or other tax-deferred, government controlled educational savings plans. Your children can contribute their money to an LLC, limited partnership, or S corporation that owns a business or investments. (Location 1752)
  • Like a 529 plan, you get a deduction when you pay your child a salary. Like a 529 plan, there is no tax to the child when received. Like the 529 plan, with good planning, especially in real estate, there is no tax on the cash flow from the investment. But unlike a 529 plan, you have full control over the investment. (Location 1754)
  • Unlike a 529 plan, you can take it out and use it for any expense for your child (except for support, like food and clothing), and you can take it out any time you like. Unlike a 529 plan, there are no penalties for distributing the money or accumulating a huge amount over a lifetime. (Location 1756)

Chapter Eleven Conquer Your Employment Tax Troll

Understanding Your Base
  • the United States, for example, wages and salaries in excess of about $160,000 are not subject to Social Security taxes. They are only subject to income and Medicare taxes. (Location 1830)
  • the key to reducing his employment taxes was to reduce his amount of “self-employment” income (see Rule #10). (Location 1839)
  • RULE #10: When you want to reduce a tax, reduce the base on which it’s measured. (Location 1841)
  • In the United States, dividends from corporations are not subject to all employment taxes. This is true in many other countries as well, since they are not “earned income.” We reduced the amount of Michael’s self-employment income by converting some of his income to dividend distributions. We did that by setting up a company to own Michael’s medical practice. (Location 1843)
  • Now, instead of being self-employed, Michael is an employee of his company, as well as an owner. As an owner, his share of the income is paid to him as a distribution of the company’s earnings. (Location 1845)
  • We want the salary portion of the money Michael makes from his company to be as low as possible and his distributions or dividends to be as high as possible so that he can pay the least amount of employment taxes. (Location 1848)
  • Unreasonably Low Salaries Can Cost You in an Audit (Location 1850)
  • Tax collectors are always on the lookout for salaries that are much higher or much lower than normal for your industry. 2. If you take too low of a salary, the government may treat ALL of the income from your company as self-employment income subject to employment taxes. (Location 1853)
  • What’s reasonable? Reasonable is what Michael would pay someone else to do the work that he does for the company. (Location 1857)
  • If you don’t know what a reasonable rate is to pay for your position at your company, there are many resources, such as www.salary.com, that will provide you with a good estimate. And if you still can’t find the information you’re looking for, just estimate. (Location 1859)
  • TAX TIP: Don’t pay yourself too much or too little. Too much salary may mean overpaying payroll taxes. But too little salary and your company could be a target for an audit. Reduce your chances of audit by paying a reasonable salary. It can save you over $4,500 in annual employment taxes and reduce your chances of audit. (Location 1864)
Choose Your Entity Wisely
  • You probably want to be taxed as an S corporation for your primary business. An S corporation is pretty simple to operate and avoids any potential double taxation that comes from operating your main business as a C corporation. (Location 1880)
Tax Strategy #11 – Reduce the Wages You Take from Your Business
  • You have to pay yourself what you would pay someone else if you hired someone to do your job. (Location 1907)

Chapter Twelve Lower Your Property, Sales, and Value-Added Taxes

  • TAX TIP: When in doubt, collect it. Not sure if your business needs to collect sales tax? When in doubt, collect it, remit it, and file a tax return. The cost is minimal but the result is substantial, because it significantly reduces your exposure. (Location 1979)
  • Unreported Sales Tax Could Put You Out of Business 1. Sales tax should always be collected unless you have clear proof that no tax is due. 2. Unpaid sales taxes can grow without your knowledge for many years. All companies should have a sales tax professional do a review of their collection requirements every few years. (Location 1998)
Property Taxes
  • There are two ways to argue that your property should be valued at a lower figure than what the tax assessor says. One is to show that the value of your property is a lot less than what they say. You could get an appraisal, (Location 2021)
Tax Strategy #12 – Reduce Your Sales Tax Burden
  • As a business owner, you pay sales tax on two basic types of transactions: items you buy for your business and products your company sells. (Location 2085)
  • The reality is that for most companies the bigger challenge is the tax on products you sell. (Location 2087)
  • The reason is that if you don’t collect tax on products that you sell, and the state later audits you and assesses tax, the tax burden shifts from your customers to your business. For this reason, you should always collect sales tax unless you are sure that no sales tax is due. Let me give you an example. (Location 2088)
  • It’s always cheaper to collect a tax and file a sales tax report than to find out too late that you should have been collecting tax in that state. (Location 2100)

Chapter Thirteen Estate Planning is Good Tax Planning

  • My mother felt that work was a good thing, something that should be started as early as possible and continued throughout life. (Location 2113)
  • While I was fine with my parents’ decision to spend most of their wealth while they were alive, there are a few things I want to provide my children and grandchildren. For example, I’d like to have plenty of money for my grandchildren to attend the best schools throughout their lives and for me to be able to travel with them. And, of course, I want to own my dream homes free and clear of any mortgages so that my family can enjoy them even after I’m gone. (Location 2124)
  • Estate planning comes down to two things: making the financial aspects of your death as easy as possible for your family to handle and making sure all, or at least most, of your assets go to your family, your charities, and others you choose—and not to the government. (Location 2138)
  • Three Steps to Successful Estate Planning 1. Placing assets in trusts 2. Creating a will 3. Avoiding the estate tax (Location 2155)
Placing Assets in Trusts
  • Probate is bad for a few reasons. It’s bad because it’s a painful process that includes the court, a judge, and lawyers. It’s bad because it can be expensive. And it’s bad because it’s public. That means that all the financial pirates out there can (and will) pounce on your spouse and your children trying to convince them to invest or spend their inheritance on scams. (Location 2166)
  • There is an easy way out of probate in most countries. Make sure all of your assets are titled to a trust. You can be the trustee (owner) of the trust, and you can even be the beneficiary (the recipient) of the trust assets while you’re alive. The trust document says what will happen to the assets when you die. It’s basically your ticket to control your assets after death. (Location 2175)
  • Remember the Following When Using Trusts 1. Only those assets that have been retitled to the trust will be considered part of the trust. 2. Don’t forget to change the title of the assets you want in the trust into the trust’s name. (Location 2182)
  • TIP: Give and take with your charitable giving. If you have charitable intentions with your estate, then consider a charitable trust. With a charitable trust, you can give your assets to the charity now but still take the income stream from the assets for the rest of your life. You still get the income, but the value of the assets in the trust will avoid estate tax. (Location 2188)
  • One other document you need in order to make life easier for those who survive you is a will. (Location 2192)
  • This is particularly true if you have small children. A will allows you to appoint the person who is going to be the guardian of your children. In a will you can also be very specific about who gets which of your assets, and you can share your funeral requests and any other special requests. Between a will and a trust, you should have most bases covered. (Location 2193)
Avoiding the Estate Tax
  • The key is to get as many assets as you can out of your estate (i.e., your ownership) during your lifetime while still maintaining control of those assets. (Location 2218)
  • ESTATE TAX RULE #1: The lower your assets’ value, the lower your estate tax. (Location 2221)
  • ESTATE TAX RULE #2: There is a portion of your assets that are not taxable (this is called an exemption). (Location 2230)
  • Since you want to reduce the value of your estate, one of the tricks to lowering your estate tax is to give away assets such as real estate and businesses that you think will go up in value. There are two reasons these assets are good ones to give away during your lifetime. First, you can give away the value without giving away the control by using a limited partnership or similar entity. (Location 2232)
  • In your estate planning, give away assets where: 1. You give away value without giving away control 2. You can minimize the gift tax by giving away portions of each asset (Location 2235)
Giving Away Value without Giving Away Control – Limited Partnerships
  • A limited partnership is an entity that has two types of owners. One owner is a general partner and one is a limited partner. A general partner is in charge of the partnership even if he only owns a small portion of the partnership. A limited partner has no say in the day-to-day operations of the partnership. This means that you can be the general partner, owning as little as one percent of the partnership and still be in control. (Location 2242)
  • As the general partner, I can even pay myself a salary from the partnership. (Location 2247)
  • You might think that 20 percent of a $500,000 business is worth $100,000, right? Wrong. Because 20 percent won’t let someone have any say in what happens in the business, it’s worth a lot less than $100,000. It could be worth as little as $60,000. This is called a minority discount. (Location 2274)
  • This means that you could give away 20 percent of your business and you might only use up $60,000 of your exemption. That’s like getting an extra $40,000 exemption. (Location 2276)
  • the marketability discount is allowed because it’s difficult to market and sell a partial interest in a closely held business. The minority discount is simply because you don’t control the business (you may not have any say at all). You could even own a majority of a business without controlling it. (Location 2289)
  • Be Sure to Use a Qualified Appraiser When Gifting Assets 1. Determining the value of the assets and discounts allowed requires the services of a valuation expert. 2. Make sure your valuation expert is experienced in gift and estate tax valuations and discounts. In the end, all that really matters is that the value of your gift is discounted if the asset is a small (less than controlling) share of a business that isn’t publicly traded. (Location 2298)
  • since his children now own 80 percent of his business only 20 percent is taxed when he dies. That will add up to some big savings for his loved ones. (Location 2309)
  • In most cases, you can completely eliminate the estate tax. (Location 2313)
Tax Strategy #13 – Reducing Your Estate Taxes through Charitable Trusts
  • The first question to ask yourself is what you want to do with the assets during your lifetime and where you want them to go when you die. If you want the income from the assets for your lifetime and then want a charity to have the assets when you die, you should use a charitable remainder trust (CRT). In a CRT, you get all of the income during your lifetime. Once you die, the assets go directly to the charity. They don’t go through your will, since you (Location 2335)
  • If you want the charity to get the income while you are alive and then you want the assets to go to your family when you die, you want a charitable lead trust (CLT). In a CLT, the charity gets the income while you are alive or for a specific number of years. When you die, your assets go to your family or anyone else you choose. (Location 2338)
  • These valuable tools require detailed set up and assistance from your tax advisor. Do not set them up by yourself. And be sure you talk to your family about what you are doing so that they aren’t surprised to find out that some of your assets are in a charitable trust. (Location 2343)

Chapter Fourteen Reducing Your Taxes in Other Locations “I am proud to be paying

  • The U.S. Supreme Court has said that if you make enough sales in a state, then you are financially benefiting from the state enough to allow the state to tax you. (Location 2392)
  • There are some basic principles you can use to seriously reduce these taxes. The most important principle to remember is that it is better to be taxed in two states than in just (Location 2408)
  • you are taxed in two or more states, then sales to states in which you don’t have any connection (employees, property or contractors), could escape tax altogether. (Location 2409)
  • When structured properly, some of your business income can become “nowhere” income and escape state tax altogether. (Location 2416)
  • Unless you have to be in a specific state, choose a state that has good tax laws. For instance, there are four states in the United States that don’t have a corporate income tax: Nevada, Washington, South Dakota, and Wyoming. These states, plus Florida, don’t have individual income taxes either. (Location 2481)
Tax Strategy #14 – Being Taxed in Multiple States or Countries Can Seriously Reduce Your Taxes

Part Two Your Tax Strategy for Tax-Free Wealth

Chapter Fifteen Plan to Take Control of Your Taxes: Entities

  • there are several reasons not to put your money into a 401(k), IRA, RRSP or Pension. (Location 2570)
  • The reality is that if you’re going to have as much money when you retire as you do now, then you probably will be in a higher tax bracket than you are today. Why? Because you likely won’t have the deductions, exemptions, or credits you currently enjoy for your children, for your house, or even for your business. (Location 2577)
  • In my firm, we focus almost entirely on permanent tax savings. By permanent, I mean tax savings that we never have to give back to the government. (Location 2593)
  • What investments do I have now? What business entities (e.g., corporations and partnerships) do I own now? (Location 2605)
  • What are my plans for my businesses and investments? How sure am I that my tax returns are being prepared in the best way possible? How often do I hear from my tax advisor? (You should hear a minimum of four times a year from your tax advisor.) How old are my children? Do I plan to have more children? (Location 2606)
  • Are my children interested in working in my business (or do I want them to be, if they are too young right now)? Do I need to set aside money to help my parents in their old age? How secure is my job? (Location 2610)
  • There are four primary entity types. (Location 2639)
  • These entities are trusts, partnerships, corporations, and limited liability companies. (Location 2640)
Trusts
  • Three primary people are involved in a trust. First is the settlor or grantor. This is the person who forms the trust and puts the assets into the trust. The second is the trustee. This is the person or company in charge of taking care of the trust. (Location 2642)
  • Technically, the trustee is the owner of the trust. The third person is the beneficiary. This is the person who will reap the rewards of the trust assets. (Location 2644)
Corporations
  • TAX TIP: Have a business partner? Form your own entity taxed as an S Corporation and have that entity be the partner in your business rather than you personally. This structure will reduce your self-employment taxes and provide maximum flexibility to you and your partner. (Location 2670)
Limited Liability Companies
  • the United States, they’re taxed as partnerships unless you choose to have them taxed as corporations. (Location 2678)
  • Each of these entities has a place in your tax strategy. For example, you may want to use an LLC to own your real estate investment properties, a corporation (or LLC taxed as a corporation) to own your business, and a limited partnership to own assets you want to transfer to your children. (Location 2681)
  • And you likely will want to use trusts to protect assets you set aside for your children from creditors and others, particularly while they’re young. (Location 2683)
Tax Strategy #15 – Use a Combination of Entity Types to Reduce your Taxes
  • Why not own the business in an LLC taxed as a partnership and then own your interest in the partnership through an LLC taxed as an S corporation. (Location 2722)
Maximizing the 20% Pass-through Deduction

Chapter Sixteen Protect Your Wealth from Pirates, Predators, and Other Plaintiffs

  • RULE #14: You must maintain control of your assets at all times and in all circumstances. (Location 2787)
  • Goal #1 Prevent a lawsuit. Goal #2 Stay under the radar so that you are less likely to be sued. Goal #3 Win any lawsuit. (Location 2801)
  • The key to protecting your assets from both plaintiffs and their attorneys is to set up your business and investments so that if they do sue you, they likely won’t get any money. (Location 2824)
  • Let’s start with trusts. I mentioned in the previous chapter that trusts are particularly good for moving assets from one generation to another. They are also particularly good for asset protection. (Location 2850)
  • The general rule is that if the beneficiary of the trust (the person who eventually gets the income or the assets) is different than the grantor (the person putting the money or assets into the trust), then creditors (people to whom you owe money, including plaintiffs) cannot get at the assets of the trust. (Location 2852)
  • General partnerships offer no protection from plaintiffs. (Location 2870)
  • You don’t have to have a written agreement to be considered a general partnership. (Location 2874)
  • Limited partnerships can be good for estate planning and for businesses where only one or two of the partners are running the business and the rest are passive investors. (Location 2877)
  • Corporations are good entities for protecting you from any lawsuits that are directed at the company. As a shareholder, you cannot personally be sued unless you personally did something wrong. (Location 2881)
  • Limited liability companies (LLCs) can be the absolute best way to protect your business and investment assets from lawsuits. (Location 2885)
  • But they actually give you more protection than a corporation if you’re personally sued. (Location 2886)
Tax Strategy #16 – Include Asset Protection Planning When You Create Your Tax Strategy

Chapter Seventeen Plan to Retire Rich, Not Poor

The retirement plan lie
  • When you retire, your children are no longer dependent on you (if you’re lucky), so you don’t have that tax benefit. While you are working, you probably pay interest on a home mortgage. When you retire, you hopefully have paid off your mortgage, so you no longer have that deduction. While you are working, you likely have business deductions or employment-related deductions. These obviously go away when you retire. (Location 3021)
  • Tax brackets rarely keep pace with real inflation, so you could find yourself in a much higher tax bracket just from inflation. (Location 3035)
  • When you invest in the stock market through a qualified retirement plan, like a 401(k), all of the income you earn is eventually taxed at the regular tax rates. So, instead of the preferred capital gains rate, that same income is taxed at ordinary income rates when you withdraw it from your retirement plan. This alone can more than double the tax rate on your investment earnings. (Location 3057)
  • RULE #15: Never put a tax sheltered investment inside another tax shelter. (Location 3065)
  • TAX TIP: Roth IRAs can be very useful for certain types of investments. Develop your wealth strategy first and then decide whether a Roth IRA works within your wealth strategy. (Location 3084)
  • I’ll let my friend, Andy Tanner, my favorite educator in the area of stocks and paper assets, explain all of the investment reasons not to use government-regulated retirement accounts in his book, 401(k)aos—except for one investment aspect I want to talk about, leverage. (Location 3101)
  • Leverage is the difference between building massive amounts of wealth and barely getting by in retirement. Leverage, in the form of debt, is what makes real estate such a good investment. Without debt, real estate is a mediocre way to make money. The returns on investment are no better than buying and holding stock. We will discuss how to use debt to build massive amounts of wealth in Chapter 24. (Location 3103)
  • of course, the best leverage in business comes from leveraging your time by hiring employees. (Location 3107)
  • Just ask any self-employed person who does all of the work in their business by themselves. They merely own their job. They don’t get much more of a return on their investment than the time they put into their business. (Location 3108)
Tax Strategy #17 – Use a Roth IRA for Certain Wealth Strategies
  • Assets that work well in a Government Qualified Plan 1. Tax Liens 2. Hard Money Loans 3. Stock Trading 4. Gold and Silver Bullion 5. Cryptocurrency (Location 3175)

Chapter Eighteen Business Can Be Your Best Tax Shelter

  • Nobody gets rich by investing in several asset classes at once. Rather, it’s important to discover which asset class, whether business, real estate, paper, or commodities, should be the primary focus. We help our clients figure this out. (Location 3192)
  • We begin by using the Kolbe™ personal assessment to determine their natural instincts. When you know your natural instincts, you can focus your attention on those activities that will be the most productive for you. (Location 3194)
  • TAX TIP: Turn your business into a passive investment. When you do, you can use your real estate losses to offset the income from your business. Business and reducing taxes (Location 3206)
  • What about when you decide to sell your business? There are lots of ways to reduce your taxes when you sell your business. (Location 3320)
  • Let’s suppose you find a buyer that is a public company whose stock trades on an exchange. You may be willing to “sell” your company in exchange for stock in the public company. After all, when you do, you have an asset that you could easily turn into cash later on. When you do this, you could end up paying zero taxes when you sell your company. Later, when you sell the stock of the new company, you only pay tax at the lower capital gains rates. (Location 3321)
  • Or what if you’re selling your company to a private buyer—perhaps a competitor in your industry? If you sell the stock of your company, you only have to pay tax at capital gains rates. And even if you sell the assets of your company, most of your gain should be capital gain, so long as your tax advisor has done a good job negotiating the agreement. (Location 3324)
Tax Strategy #18 – Turn Your Business Into a Passive Investment
  • As we discussed in Chapter 8, there are different types, or buckets, of income. Portfolio income, or income from investments, is always better than ordinary income. The reason Warren Buffett pays only 17 percent on his income is that most of his income is investment income. (Location 3356)
  • An even better type of income is passive income. When you have passive income, you can offset your income with losses from your real estate investments. (Location 3358)
  • In the U.S. tax law, there is a little-known provision that allows the owners of a business to completely avoid tax when the company is sold. The rule is called Section 1202 stock. Here is how it works. (Location 3369)
  • First, start by forming your company as a C corporation. This can either be an LLC taxed as a C corporation or an actual corporation. (Location 3371)
  • Then, if the business is owned and operated for more than five years, it can be sold and there is no tax on the gain. It’s actually pretty simple. (Location 3372)
  • So why haven’t companies used this in the past? The reason is the high corporate tax rate. Until 2018, the U.S. corporate tax rate was one of the highest in the world at 35%. (Location 3373)
  • All of this changes with the corporate tax rate reduced to 21%. Now, a business owner can form a company as a C corporation, only pay 21% on the income, and then sell the company and pay no tax on the gain. Even with a 15% tax on distributions, a successful business will pay less than 33% total tax while owning the company and avoid tax completely when the company is sold. (Location 3376)

Chapter Nineteen The Magic of Real Estate

  • Real estate is such a good tax shelter that a serious real estate investor should NEVER have to pay tax on their cash flow or on the gain from the sale of their real estate. (Location 3391)
  • You look around for a building that doesn’t require any work at all. What you find is a Walgreens. Like many retail stores, Walgreens typically doesn’t own properties. Instead, it finds the land, builds the building, sells the land and building to an investor, and then leases them back for 30 years. Walgreens agrees to take care of all of the maintenance and all of the expenses. All the investor has to do is pay the mortgage. (Location 3465)
  • Don’t Sell Real Estate Real Assets Before You Die 1. Selling assets creates unnecessary capital gains taxes that could be avoided simply by holding onto your assets until after you die. 2. You can always get cash from your real estate by borrowing against it and debt is tax free. (Location 3484)
  • One of the biggest benefits in real estate is that loans aren’t taxable. So you can borrow money from the bank through a refinance and you won’t pay tax on that money. One of the arguments I hear all the time for not doing like-kind exchanges is that the taxpayer might need cash from the sale of the building. Instead of cashing out and paying tax on that cash, why not do a like-kind exchange and then later refinance the building? When you refinance, you get your cash in the form of a tax-free loan and get to keep your asset! (Location 3498)
Tax Strategy #19 – Change Your Residence Every Few Years
  • addition, her husband is a high implementer in his Kolbe score. This means that he really likes working with his hands by using tools and building things. Why not use his hands to improve his own house? (Location 3523)

Chapter Twenty Stocks Can Lower Your Taxes Too

Tax Strategy #20 – Do Your Stock Trading inside a Self-directed Roth IRA

  • What if you have the IRA set up a limited liability company (LLC) that has a brokerage account? As long as you only direct the investments and don’t put any money in or take any money out of the account, you can personally run the brokerage account. This gives you the access you need to buy and sell stocks or trade options on a daily basis. (Location 3659)

Chapter Twenty-One Commodities Can Be Your Tax Friend

Chapter Twenty-Two Don’t Fear the Reaper Audit

Chapter Twenty-Three Choose the Right Tax Advisor and Preparer

Chapter Twenty-Four What Are You Going to Do with All Your Extra Money?

  • The key to financial velocity is to keep your money moving. Think about your compound interest with the bank. All you did was leave your money sitting in the bank. It wasn’t moving. So while it earned a small amount of interest, it took 10 years just to earn $6,288. Then think about what happened when you added leverage. You earned almost the same amount in the first year that it would have taken 10 years to earn relying solely on compound interest. (Location 4363)
  • Leverage is really just compound interest using someone else’s money. Velocity is a way to increase your leverage. Here’s how it works. (Location 4367)
  • Leveraging your first year’s earned interest is called velocity. You’re simply moving your money into additional leverage so that you can continue gaining speed in building your wealth. By doing this you would earn a total $13,000 after just two years. (Location 4396)
  • Use my simple formula to create massive passive income. Start with earned income, invest in growth assets, create a huge amount of capital from your growth assets, and then invest in assets that generate passive income. With a substantial amount of capital, even investments with modest returns result in massive passive income. (Location 4407)

Tax Strategy #24 – Build Massive Passive Income through Your Tax Savings