I want to share with you items to consider before investing in a 401k. Some of those items are the tax ramifications and the control over your money you will be forfeiting. Uncle Sam makes the decisions on when you can access your money without penalty, what the penalty is for early withdrawals, the taxes you pay, the required minimum distribution (RMD) amount, when you must begin to take the RMD and more… Watch my short presentation below for more information and view a full expo by both Frontline and 60 Minutes.
And You Don’t Even Know It
The first and biggest “wealth drain” is taxes.
Our tax system is designed to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on what they gross, while business owners pay taxes based on what they net. To that end, most people think Fortune 500 companies getting something over on little guys. Keep in mind, you don’t have to be a big business to get great tax advantages. Even startups get huge tax benefits. So rather than complain, maybe you should run a business from your kitchen table
To qualify for tax deductions in that business, the IRS says you must intend to make a profit. When that standard is met, you automatically qualify for dozens of tax deductions that you don’t get as an individual. Most losses and startup expenses can be written off against other income from your job (limits apply, so get a good business CPA to work with you). Realize that nobody else (not even your CPA or tax preparer) cares how much you pay in taxes, so it’s your job to understand how the system work and how to use it effectively.
Losing the Chance at Compound Growth
Another set of huge wealth drains are market losses on investment capital that you control. When a stock or a piece of real estate drops significantly in value, it could take years for you to get back to even. And, of course, there are no guarantees that it will come back during your investment lifetime. The less capital you have invested, the less you can benefit from the power of compounding growth.
If the compounding curve of your money is broken by market losses or premature withdrawals, it has a massive effect on your final pool of wealth. For example, if you were offered a job that lasted only 36 days and you had two choices on the pay plan, which one would you take? (A) You could be paid $5,000 per day at the end of every day, for a total of $180,000. (2) Your second option is to be paid one cent starting on Day One, but your pay would double each day — be compounded by 100 percent — and payable at the end of those 36 days.
If you jumped at the $180,000, you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny, he wouldn’t be a millionaire. After 36 days … he’d be a filthy rich multimillionaire with a final check of $343,597,384. Obviously, your investments won’t experience such rapid (or consistent) compound growth, but do the math —
the power of the compounding curve is strong over time — if you don’t break it with big losses (which you can’t always control) or withdrawals (which you can).
Money Lost in Fees and Interest to Banks and Financial Companies
The next massive wealth drains we face are interest and fees paid to banks or finance companies. Money-lending has been around for thousands of years, and any business model that’s lasted that long is a winner — for the business. But when you’re on the borrowing side of the transaction, it’s a wealth drain, especially if most of your borrowed money is spent on depreciating assets
Now, people will tell you that if you can borrow money cheap and invest it in something that has a higher rate of return than the interest rate you’re paying, then you’re using leverage properly. That can be true, but those attempting such a move should be aware of the caveats. Try this simple exercise: Add up all the money you’ve paid out over your lifetime in monthly payments. Then compare that total to the amount of money you have saved for retirement and see which one’s bigger. (If you’re willing, we’d love to hear about your results in the comments section below.) Then think about how to be a lender, and not a borrower.
Depreciation of Vehicles and Other Large Assets
Another massive wealth drain comes from the depreciation of cars, boats, equipment, appliances and most other large assets we buy. Most people will lose more money on cars during their lifetimes than they’ll ever save for retirement, let alone all the other depreciating assets they’ll buy. But there’s a way to make money on these items.
Think of your financial life as a big pie. Don’t fall for the old magic trick and focus only on what’s happening to your one slice of the pie (i.e., your investment gains or losses). Instead, pay attention to the whole pie and put a stop to your massive wealth drains.
This article is the last in a series of pieces on how to dramatically reduce your income taxes legally and ethically. If you missed the first two you can review them before moving on to this article; Giving Yourself a Pay Raise – Beating the Biggest Wealth Drain and Give Yourself A Raise. These other two articles discuss the hundreds of deductions you qualify for when you own a business as opposed to being an employee. First we show you how everyone can have a small business even if they’re a current employee working for someone else. Specifically we talked about 4 strategies out of those many hundred of deductions that you can start to use immediately to increase your net take home pay. Now let’s talk about the 5th and a special discussion on a superior business structure for successful businesses to lower their taxes by 50% or more.
TAX DEDUCTION 5 $25,000 Vehicle Deduction
Per Section 179, you may be able to expense some or all of your business use of your vehicle. Basically, if your vehicle weighs more than 6,000 pounds, you can expense up to $25,000 the first year the vehicle is used in your business. You also must use the vehicle at least 50% for business in order to qualify. The $25,000 deduction assumes 100% business use. If you use your vehicle 75% for business, you would get 75% of the $25,000 or $18,750.
Car Used Less Than 50% for Business
If the business use of your car drops to 50% or less, there are certain rules that apply. These include:
- You cannot take a Section 179 deduction for your heavy vehicle.
- You must use the straight-line method of depreciating your vehicle. While the five-year period still applies, this will result in a lower depreciation deduction in the earlier years.These 5 strategies are just the tip of the iceberg that I mention here and in the other two articles.
These 5 strategies are just the tip of the iceberg that I mention here and in the other two articles.
If you are already a successful business owner and feel like you are implementing every legitimate tax deduction, but are still paying $150,000 or more in annual income taxes there is a different specific strategy for you. There is a little known company structure that may help you save 50% or more on your income taxes every year. We call this our income efficiency strategy and work in conjunction with a very high level attorney to structure these programs. It is very unlikely your current tax professional will be aware of this business structure but this attorney has been utilizing them for clients since 1998. However, the attorney who sets these up will be happy to have conference calls with your tax professionals to explain the program in depth. This attorney is not trying to replace your current professional but rather work with them to implement this plan for your business.
You will utilize structures that have been around for decades and most tax professionals mistakenly believe are only good for public corporations. These are structures that Lowes®, Southwest Airlines®, and Home Depot® use just to name a few. Now the successful small business owner can utilize the same structures as the big boys thereby dramatically lowering your tax liability.
I don’t want to bore you with details here but if you are in that small group who are paying those kinds of taxes we have a real solution that has been looked at by the IRS several times since 1998 and every time there were no changes required for the client. In other words this is not some kind of a scam or loophole but rather a very specific company structure that will fit into your existing business model to dramatically reduce your income taxes. Send us an email at firstname.lastname@example.org with the subject line “income efficiency strategy” and we will have one of our professional teammates reach back out to you to see if we can help.
I want to share with you items to consider before investing in a 401k. Some of those items are the tax ramifications and the control over your money you will be forfeiting. Uncle Sam makes the decisions on when you can access your money without penalty, what the penalty is for early withdrawals, the taxes you pay, the required minimum distribution (RMD) amount, when you must begin to take the RMD and more… Watch my short presentation for more information.
The way to get a substantial pay raise in 2015 is to focus on your net income — not your gross income — by reducing your income tax liability.
The first step is to understand how the tax system works. The current system is set up to benefit business owners at the expense of salaried or hourly employees. The only d eductions the average family receives are for having children and interest and other expenses incurred for home-ownership.
On the other hand, small business owners receives dozens of legal deductions, with many personal expenses recategorized as a business purpose. For example, automobiles used for personal use are not deductible in any way (except for moving, medical and charity miles) — but the part of the automobile use for your small business becomes a legitimate deduction. Say you drive 30,000 miles a way (yes, that’s a lot), and 15,000 were used for business. You could write off half of the expenses on the car. Most people use the government’s mileage calculation — in 2014, 56 cents per mile — meaning $8,400 of expenses deducted off of the business gross income.
What If I Don’t Have a Small Business?
Start one immediately and have the intent to make a profit. Many things then may be deductible, such as:
- Meals and entertainment.
- Business trips and travel.
- Salaries paid to qualifying children.
- Medical expenses.
- Small business equipment.
- Utilities used in conjunction with running a business even if using your home as place of business.
Be warned: If your intent is just to create tax deductions — and you have no real intent to transact business or try to make a profit — then you are creating fraud.
You don’t need to rent office space and incur thousands of dollars of expenses for your new venture. Your venture could be started at your kitchen table on a shoestring. Think of all the legendary businesses that started out this way.
Be Like Dell or Gates
Michael Dell started Dell computers out of his dorm room, and Bill Gates started Microsoft (MSFT) from his parents’ garage. Millions of other businesses started this way, creating billions of dollars in salaries and benefits for employees and profits for the business owners. This is why the tax system is set up to benefit small business — which can create jobs and wealth. Some sample businesses that could be launched on a shoestring:
- Consulting on an area where you have expertise.
- Internet sales and marketing. You can have an Internet store running in a few hours.
- Network marketing companies. Gone are the days of ordering loads of stuff and trying to resell to friends and family members. Most companies handle all the shipping and order taking themselves and ship directly (assuming there is a physical product for sale) to your customer.
- Being a referral agent for an existing business. Many businesses will be happy to pay you a referral commission if you send them business. Depending on the type of business, some licensing may be required.
Nobody will ever care more about your money than you so find a tax preparer/ accountant who understands these concepts who you can work with for years to come.
In last week’s article we gave you an introduction to the United States Tax code and why you need to take control of how much you pay to the government. This week we will give you the most powerful strategy to legally and dramatically reduce the amount you pay in taxes.
The #1 Tax Strategy in America – Do something with the INTENT to make a profit from your home!
The “Business” tax breaks were passed by Congress for 2 reasons:
1) To stimulate the economy by creating more businesses and more jobs.
2) Encourage people to have additional sources of income to pay off their debt and contribute to their retirement.
An activity with the INTENT to make a PROFIT, can be considered a “Business” and qualify for “Business” tax deductions. You can do this as a sole proprietor (in your own name) or as an entity (corporation, LLC, etc…) either way works. In order for a business to be able to deduct all ordinary and necessary business expenses it must be able to show that the business is being run with the reasonable intent of making a profit. You do not need to actually make a profit as long as you intend to make a profit.
So here are the requirements set forth by Congress
- Have the intent to make a profit
- Work your business on a regular & consistent basis
- Treat it like a business – Keep good records
Meet these 3 requirements and you can qualify for $1,000’s in new Tax Deductions.
So let me share with you just 4 of the many Tax Deductions you will qualify for when you take the time to meet the above 3 requirements.
TAX DEDUCTION 1 You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:
- The meeting is directly related to your trade or business, and
- It is reasonable to hold the meeting outside the North American area.
It is considered “REASONABLE” to have a business meeting in any of these countries! (See chapter 1 of IRS Publication 463)
TAX DEDUCTION 2 – Travel Rule Basics:
Basic Rule: For each business day of travel, you can deduct 100% of your lodging and 50 percent of your meals and entertainment.
Workdays: You can count a business day as any day during which your principal activity during normal business hours is the pursuit of business. You must work more than half of the workday.
Tried-to-work days: You count a business day as any day you intended to work but circumstances beyond your control prevented you from actively pursuing your business objective.
Weekends, holidays: If a weekend or holiday falls between two business days, the weekend or holiday is considered to be a business day and is tax deductible. This applies only when it is not be practical to return home for the weekend because of time required or expense involved.
Saturday night travel: Airlines sometimes charge you less if you stay over a Saturday night. If you can save money by staying over Saturday night, you count the stay-over as a business days.
Travel days: Travel days are business days.
TAX DEDUCTION 3 – Meals & Entertainment
The IRS considers “entertainment” to be any activity that provides “entertainment, amusement, or recreation, and includes meals provided to a customer or client.”
You are permitted to deduct 50% of all of your ordinary and necessary meals and entertainment costs for your business.
The 50% limitation applies to all meals (whether local or in travel status) and entertainment expenses.
In order to qualify for the deduction, you must discuss business during the entertainment (directly related entertainment) or immediately before or after the entertaining – within 24 hours (associated test for entertainment expenses).
You must be able to document Who, Where, When, What & Why. Most receipts have the Where & When printed on them – you just have to document the Who, What, & Why
- The Tax Code does not provide any guidance as to what constitutes a “substantial and bona fide” business discussion for purposes of meals and/or entertainment.
- There are no rules that specify how long the discussion must be before it will constitute a business discussion for deducting your meal or entertainment expenses.
- Your business discussion does not need to take a greater amount of time than your non-business discussions for the meal or entertainment expenses to become deductible.
- As long as a business discussion is the primary purpose of the entertaining, the expenses will qualify for a deduction.
TAX DEDUCTION 4 – Dutch Treat
DEDUCTING “DUTCH-TREAT” BUSINESS ENTERTAINMENT
Many business expenses do not involve paying the expenses of clients or prospects. They are Dutch-treat. Everyone pays for himself or herself.
But how do you handle Dutch-treat expenses? How do you know if they’re deductible?
General Dutch-Treat rule: IRS regulations state that the taxpayer may deduct entertainment “even though the expenditure relates to the taxpayer alone.” The IRS says its objective test precludes arguments that “entertainment” means only entertainment of others. Further, the IRS acknowledges that business entertainment may include an activity that satisfies a personal, family, or living expense. The IRS notes that an individual in business may deduct the entertainment cost, including his personal benefit, as a business expense.
Translation: Business entertainment deductions aren’t limited to the costs of treating others; you’re also allowed to deduct your own costs if you “go Dutch.”
Tune in next week when we will give you more strategies to reduce your income taxes thereby giving yourself a raise!
These next couple of articles will show you the US Tax Code as you probably have never seen it before. The tax code is over 70,000 pages of boredom and confusion and is designed so badly that even all the authors of the tax code really don’t have much idea of how the system actually works. You can be sure that the code is designed to be difficult and keep you, as the tax payer, intimidated and paying the most money possible to your old Uncle Sam.
Income taxes are the single biggest expense most Americans will ever have and yet very few people have a real clue how the system works. It is my belief that since you are going to pay taxes for your entire working lifetime and probably even some taxes after your death that you should have a handle on how they actually work and how to legally pay the absolute lowest amount of taxes allowable. To pay the lowest amount of taxes possible is your responsibility and not your tax preparer or CPA. Nobody will ever care more about your money than you do so think of this as your spring board to saving a fortune in income taxes over your lifetime. You will be amazed at how relatively simple it is to legally and dramatically reduce the amount of taxes you pay every year.
Let me say upfront that I am not a CPA or a tax attorney. I am just a tax payer like you that wanted to understand how I could get the tax system to work in my favor as much as possible. I have read countless books and listened to many live presentations from many experts on the subject of taxes. In these next couple articles I will be sharing information from a tax expert who has been teaching taxes all over the country to thousands of people for 20 years. He blew my mind when I saw him speak with all the great information he shared. We have become friends and had many business dealings together over several years. His name is Pat and he will be a huge asset for these taxation articles.
I am going to try to simplify some of the 70,000 pages of the tax code and supporting documents to help you capture more deductions and ultimately saving you $1,000’s of dollars on your taxes every year. A leading tax expert has graciously agreed to make one of his books available for FREE. Just go to www.wealthwithoutstocks.com to obtain the book. This book will show you little known secrets such as:
- Why people over-pay their taxes
- Two tax systems in America
- #1 Tax Strategy in America
- Profit Motive
- Business Trips VS Vacations
- Travel Rule Basics
- Ski Trips
- Meals & Entertainment
- Golf & Other Activities
- Dutch Treat
- Automobiles – Your KEY to a HUGE Deduction
- Motor homes & Yachts
- Medical Expenses
- Tax Deductible Gifts
- Insurance Premiums
- Deducting your Spouse & Kids
- Work Clothes
- New Business Start-Up Deductions
- Deductions for Employees W-2 Wage Earners
Obviously I can’t cover all of these topics in a couple of articles so I will just pick a few (5 to be exact) to give you an idea of what’s possible.
First we need to understand why People Over-Pay Their Taxes…
Most people over-pay their taxes for 3 reasons:
1) Fear of the IRS and being Audited. As long as you are following the laws in the Internal Revenue Code there is no need to fear an audit. The IRS just wants to make sure you are doing things right and following the laws.
2) Not keeping good records therefore missing out on deductions – Would you be willing to spend just a few minutes a day, (about an hour a month) to put $6,000 of your hard earned money back into your pocket? That would be a great use of your time. You have the ability to make that a reality but you will need the “know how” along with the desire.
3) Not knowing the rules – What’s deductible and what’s not. The follow up articles and free book will open your eyes to available tax deductions most people don’t even know about. Remember, to consult with your tax professional to make sure you qualify and are documenting your deductions correctly.
The U.S. Tax Code is very complex and confusing. No one, including any of the 100,000 or so IRS employees really understands it in its entirety.
TAXES – THE LARGEST SINGLE EXPENSE:
The average American pays about 30% of their gross income in taxes (Federal, State and Local), representing their single largest family expense. Taxes cost the average family more than housing and medical care combined.
Yet, few families ever realize the great expense that taxes cost them. While many people budget for food, clothing and other necessary expenses, they typically do nothing when it comes to planning to legally reduce their biggest expense: taxes!
We have all heard that middle class Americans pay the bulk of the taxes – there could be some truth to that. Let me explain. You see, for the average American wage-earner, a W2 employee, there are about a dozen tax deductions they are entitled to however if you are doing something in your life with the intent to make a profit on a regular and consistent basis, you can be entitled to 100’s of tax deductions.
Tune in next week for our next article to find out how to dramatically and legally reduce your income taxes!