So what’s the first step to becoming a super taxpayer? Understanding rule #6.
| RULE #6: | You can deduct almost anything given the right circumstance. |
It’s true. Almost any expense can be deductible from your income given the right situation. How can that be possible? It’s how the law works. Remember when I said that the tax laws favor entrepreneurs and investors? That’s because entrepreneurs and investors generally put money into the economy to produce rather than consume. The key to making an expense deductible is to make it a business or investment expense. As long as the purpose of the expense is to produce more income, it can be deductible.
If the purpose of the expense is to produce more income, it can be deductible.
And yes, this principle applies worldwide. All income taxes in developed countries are based on net income, which is simply income after deductions. And deductions come from expenses. Business expenses are the best kind of deductions. Real estate expenses are the next best. Depending on your country, chances are that expenses relating to energy are good as well. Even expenses related to investing in the stock market may be partially deductible, though these are the least deductible because they aren’t active investments.
Your first step to increasing your deductible expenses is to become an entrepreneur or investor. Until you take this step, you’ll always be an average taxpayer and the tax laws will be stacked against you. The good news is that you don’t have to quit your job. You just have to start acting like an entrepreneur or an investor. That means the first thing you need to do is to increase your financial intelligence by investing in financial education. Starting a business or investing in a deal without financial education is the riskiest action you can take with respect to your money.
Become an Entrepreneur
Here’s my advice whenever starting out: Start small. Take a course in real estate or some other type of investing. Take a course in entrepreneurship. Start a home-based business—preferably dealing with something you know about.
That’s how I got started. Many years ago, after I’d left public accounting and became the in-house tax advisor for a Fortune 1000 company, I decided to go back into public accounting. I missed the clients, and I missed the challenge. But in that transition I made a bad decision and took the wrong job with the wrong company. Seven months later, I was fired. For the first time in my life, I’d failed at a job, and a job had failed me. It turned out to be one of the best days of my life.
I suddenly realized that not having a job freed me up to do what I’d always wanted to do—start my own business. I had a master’s degree and 13 years of experience as a tax advisor. It was time to start my own firm. With the encouragement of my wife and two young sons, I did just that, starting my firm out of my house. I worked 10 hours a day to make contacts and build my practice. It took me nine months just to get my first four clients. Since then, I’ve never looked back. I’ve never been happier in my work. And I’ve never paid less in taxes.
I’m not suggesting you get fired or quit your job. But I am suggesting that you probably have a set of marketable skills that you could use to start your own business. Start part-time. Set aside a room in your house for your business. Don’t spend money on a nice office and lots of advertising. Just start small and think big. Think about the freedom that will come when you can devote most, if not all, of your time to your business, your investments, and your family.
And it all starts with good tax planning. When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money. The U.S. tax law calls this having a business purpose for your expenses.
When you start a business, your options for deductible expenses skyrocket. And making most of your expenses deductible is easy—make sure that when you spend money your intention is to make even more money.
Then, be careful with your money. Don’t spend money on stupid stuff. Spend it on things that will likely grow your business. Spend it on things that other people in your business might buy. This is called making expenditures that are ordinary in your line of business. Make your expenses count. Make them work for you. When you do that, your expenses become necessary. And when your expenses are necessary, voilà, they’re deductible.
Become an Active Investor
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. Remember that the right side of the CASHFLOW Quadrant includes both business owners and investors. But there’s one catch; you can’t be a typical investor if you’re going to enjoy the tax benefits of investing. You have to become an active investor. 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. It’s taxed at a much lower rate than earned income, which comes from 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. A great book to read on this topic is the book Robert Kiyosaki and I wrote together, Why the Rich Are Getting Richer. (Plata Publishing, 2017)
Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education.
You might be thinking that becoming an active investor sounds hard. It’s not. Becoming an active investor is actually quite simple. Just as with becoming an entrepreneur, it all starts with your financial education. You don’t need a four-year degree in finance. You don’t even need a two-year degree, but you do need to take some courses in the type of investing you think you might enjoy. Don’t know what you might like? Take a variety of courses on a variety of investments. Take a course in real estate. Take a course in stock investing. And take a course in business investing. You never know what you’ll like until you learn about it. A great resource for becoming an active investor is educational programs offered by The Rich Dad Company. Learn more at www.WealthAbility.com.
Once you have an idea of what type of investing you want to do, find a mentor or coach to help you with your investing. Then simply start investing. Just as I advised with starting a business, start small. Do one small real estate deal, a couple of small stock market trades, or make a small investment in a private company. You don’t have to risk a lot of time and money. And along the way, so long as you keep track of all of your education and investment expenses, and your tax preparer reports them properly, you should be able to deduct some or all of these expenses on your tax return.
The Passive Investor
There is one other type of super taxpayer. That’s the passive investor. And no, I’m not talking about the typical investor who invests in the stock market through a mutual fund or an exchange-traded fund (ETF). I’m talking about someone who invests their money with an active investor who is working directly in a business, real estate, agriculture or energy—the tax-preferred types of investments. Passive investors also enjoy the benefit of deducting many of their expenses. With the right tax strategy, they can even deduct losses from the investment against income they earn from other sources.
The key to good passive investing is a good team.
The key to good passive investing is a good team. You need a great investment advisor and a stellar tax advisor, as well as a good lawyer and a knowledgeable banker. All of these team members need to work together to make sure your best interests are met. I’ve found the best way to get team members to work well