I guarantee your path to tax-free wealth is easier, simpler, and more fun than you can imagine. Think of this book as a guide to a freer financial life, a life where you get to keep more of your hard-earned money right where it belongs—in your pocket, and not the government’s. Let’s get started.
| CHAPTER 2: KEY POINTS | |
| 1. | It’s time to take action on reducing your taxes. Don’t be the average person paying 30 to 50 percent or more of your hard-earned income through income, sales, value-added, payroll, estate, or property taxes—start by learning the basics of the tax law. |
| 2. | Become part of the privileged class of taxpayers by learning how the tax law can work for you and how you can easily pay 10 to 40 percent less in taxes. |
Tax Strategy #2 – Invest Where you Travel
As you will learn in Chapter 6, almost any expense can be deductible. It sounds funny to say, but one of my favorite expenses is travel. I love to travel and meet new people and experience new cultures. Sometimes, I just want to get away to relax and get some peace of mind.
One of my favorite places on earth is Hawaii. The people of Hawaii are so genuine and laid back. I go to Hawaii at least once a year for a couple of weeks. Of course, I also want my travel to Hawaii to be deductible—and, thankfully, it can be with proper planning.
Any travel can be deductible by making it a business or investment expense. 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. 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. So, if you are going to Hawaii for a week, then more than half your time there has to be spent doing business. 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? What if the work is fun, interesting, and makes you lots of money? Would you do it then? What if you made Hawaiian real estate a major part of your investment strategy? When you add up the tax benefits plus add in all of the money you could make investing for four and a half hours each day, you may decide that spending that time looking at real estate and meeting with property managers isn’t so bad after all. Just take a look in Chapter 5 at what this strategy did for my client who travels to New Mexico each year.
“Any one may so arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one’s taxes.”
– Judge Learned Hand
A while back, one of my good friends, Guy Zanti, taught a group of people how to play CASHFLOW 101, a financial-simulation board game invented by Robert and Kim Kiyosaki. Playing the game is an excellent way to not only learn but also put into practice the Rich Dad principles on money and investing. As Guy talked about some of the tax benefits of real estate, particularly tax-free exchanges, a woman in the audience raised her hand.
Playing CASHFLOW 101 is an excellent way to learn the Rich Dad principles on money and investing.
“Yes, ma’am,” Guy said.
“Don’t you think that it’s wrong to reduce your taxes like that?,” she asked. “Isn’t it our responsibility to pay the taxes that we owe instead of trying to find ways to steal from the government?”
Guy was stunned. He couldn’t believe what he’d just heard. He couldn’t comprehend why she would think that it was wrong to reduce her tax burden. After all, doesn’t everyone want to reduce taxes? But the reality is that we’re trained to believe that we somehow owe the government our money. The truth is that we don’t. In fact, the tax code is set up to help us reduce our tax burden—and to do so legally.
I’d say it’s just the opposite of what this woman and many others think; it’s wrong to not reduce your tax burden. Not taking advantage of the aspects of the law that are there to help you means you are stealing from yourself, your family, and your future.
Not taking advantage of the aspects of the law that are there to help you means you are stealing from yourself, your family, and your future.
The simple fact is that this woman didn’t understand Rule #1 when it comes to the tax law. And chances are, you may not either.
| RULE #1: | It’s your money, not the government’s. |
Unless you live in a dictatorship, the money you earn and the wealth that you build belongs to you. Yes, you may be required to give some of it to the government to help build roads, maintain the military, and sustain schools. But fundamentally, it’s your money.
| TAX TIP: | Learn how your LLC (limited liability company) can be whatever it wants to be. The LLC has become the entity of choice for asset protection purposes. But what about tax purposes? Your LLC can be whatever it wants to be—a sole proprietorship, a partnership, a C Corporation, or an S Corporation. This flexibility gives you the best of the tax and asset protection worlds. In some countries without LLCs, the LLP (limited liability partnership) may give you similar flexibility. |
Judge Learned Hand, a former judge on the United States Court of Appeals for the Second Circuit and a judicial philosopher, was adamant about this principle. He went so far as to say this: “Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”
You may not realize this, but it’s true: The tax laws are written to reduce your taxes, not to increase them. In the United States, for example, there are over 5,800 pages of tax law. Only about 30 pages are devoted to raising taxes. One line, Section 61(a), says, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived…” There are then several pages of tax rates and a few other miscellaneous tables. The remaining 5,770 pages are devoted entirely to reducing your taxes. In other words, 0.5 percent of the tax code is devoted to raising taxes, and the remaining 99.5 percent exists solely for the purpose of saving you money. So here is Rule #2.
You may not realize this, but it’s true: The tax laws are written to reduce your taxes, not to increase them.
| RULE #2: | The tax law is written primarily to reduce your taxes. |
You may not believe me about Rule #2. So go ahead and ask your own accountant how much of the tax law in your country is devoted to raising taxes. Your accountant will tell you the truth—very little. That the woman in Guy’s class felt it’s our patriotic duty to pay the most taxes is both ridiculous and completely wrong. In fact, as I’ll show you in the next few chapters, it’s actually your patriotic duty to reduce your taxes by all legal means.