Congress understands that when people spend time, money, and effort on business, those people will make money. And they understand that money produces jobs, housing, and even more tax revenue for the government. Even with good planning, the $1 million that my client makes on his real estate deal will result in $300,000 in tax revenue for the U.S. government. That deal would never have happened without the $3,000 tax incentive given for the trip—and making $300,000 on $3,000 is a good deal in anyone’s book. Of course, the deal wouldn’t have happened if my client hadn’t understood how to turn the costs of that trip into a tax deduction.
You might be thinking, “That sounds great, but what about me? I’m on the E and S side of the CASHFLOW Quadrant.” The truth is that these business deductions aren’t available to you, but they can be. You just need to shift some of your income-earning activities to the B and I side of the quadrant. Thankfully, that’s not difficult to do. Thousands of individuals all over the world have home-based businesses or invest in real estate, energy, or agriculture—and they all enjoy the benefits that come from saving money through the tax code.
You might be thinking, “That sounds great, but what about me? I’m on the E and S side of the CASHFLOW Quadrant.” The truth is that these business deductions aren’t available to you, but they can be.
And you don’t have to spend all of your time and money in business or investing to enjoy those benefits. You just need to get started. But before you do, you’re going to want to do some planning. That’s what we’ll talk about next.
| CHAPTER 5: KEY POINTS | |
| 1. | The CASHFLOW Quadrant is a terrific diagram that shows the four ways people earn income, which has huge implications for your taxes. |
| 2. | Those on the E and S side of the quadrant don’t experience the tax benefits of those on the B and I side unless they behave like the B and the I side. |
| 3. | Governments steer economic behavior through the tax code. They reward desired behavior with tax breaks. That’s why reducing your taxes is actually patriotic. |
| 4. | You can easily shift the way you earn income to the B and I side of the CASHFLOW Quadrant and begin to enjoy the tax breaks. |
Tax Strategy #5 – Put Your Family to Work in Your Business and Investing
One of the great tax benefits of existing on the B and the I side of the CASHFLOW Quadrant is the ability to legally shift income to your children. Children are taxpayers too, and they have their own tax brackets when it comes to earned income, which is income they work for. When they earn income through an outside job, they pay tax at their own rates.
Kids can also earn income from working in the family business or from investments. The nice thing about having your children work for you is that you get a tax deduction at your higher tax bracket for the payroll and they report the income at their lower tax bracket.
My long-time friend and client did this with his 9-year-old daughter. He put her to work doing the bookkeeping for his real estate investments. She is a very intelligent 9-year old and has no problem understanding the bookkeeping. Her mother, who is in charge of their real estate, supervises her. She gets a reasonable wage for her work as compared to other bookkeepers. 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 plus her exemptions 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.
Now, for the best part. My client’s daughter is learning how to do bookkeeping and becoming part of their business. She is gaining a skill that will benefit her for her entire life, and she is beginning to understand real estate investing. No wonder Congress allows this type of planning.
In fact, Congress not only allows it but also encourages it. My friend gets a tax break on Social Security taxes as well for employing his daughter instead of employing someone else to do the bookkeeping. He doesn’t have to pay any Social Security taxes on her wages.
So don’t hesitate to put your children to work in your business. There are great tax benefits for you, huge educational benefits for them, and you have someone in place to take over when you are ready to retire. What an incredible exit strategy! It’s one that the rich have known about for years and years. That’s how they keep their money in the family, and keep the business going after they are gone.
You Can Deduct Almost Anything
“I would like to electrocute everyone who uses the word “fair” in connection with income tax policies.”
– William F. Buckley, Jr.
Stop Being Average
Taxes aren’t fair to the average taxpayer. Just who is the average taxpayer? The average taxpayer has a job, a family, and a mortgage or rent. The average taxpayer has little to no financial education. The average taxpayer gets his advice from CNN and H&R Block. The average taxpayer’s only available tax benefits are the standard deduction or a few itemized deductions, such as home mortgage interest and charitable contributions. Oh, and, of course, a 401(k) or IRA in the U.S. or RRSP in Canada to postpone a portion of their tax burden until retirement.
The reality is that average taxpayers have average tax benefits. Average taxpayers come to me from time to time asking for my advice. They ask how they can reduce their taxes. Should they put more into their 401(k)? Should they buy a bigger house? While they’re at it, should they have more children?
The reality is that average taxpayers have average tax benefits.
My answer to these folks is that 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. Instead, become an above-average or super taxpayer. Start doing what Congress or Parliament wants you to do by contributing more to the economy. The good news is that you’re on your way to becoming a far better than average taxpayer just by reading this book. You’re gaining financial intelligence with each page you read. When you apply the concepts you learn here, you’ll really take off.
My answer to these folks is that 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.
Like most professionals, I started advising people on what to do regarding their taxes long before I followed my own advice. Even before finishing graduate school, I gave people tax advice. I told business owners how to reduce their taxes even though I didn’t own a business. I told real estate investors how to increase their deductions long before I owned any real estate of my own. Was the advice good? Sure. I was a smart kid who’d applied himself at school and learned the law. Was the advice great? No.
How could I possibly give great advice to other people when I’d never applied what I’d learned in school to my own situation? It wasn’t until I started my own business and later began investing in real estate that I really began giving great advice to business owners and investors. Once I applied my knowledge in my own life, I finally understood my clients’ businesses and gave them top-notch advice. The more I personally applied my knowledge, the better I became at giving advice to others.
The same will be true for you. Once you start applying the concepts of this book in your own life, you’ll start to see how it all works. Once you begin reaping the rewards of lower taxes