You may be wondering how I can really say that with a straight face. Well, think about it. If 99.5 percent of the tax law is written to help you reduce your taxes, then the government must really want you to do just that. If that weren’t true, why would they enact so much legislation aimed at helping you do so? All of the so-called complexity of the tax law is really just aimed at reducing your taxes, not increasing them.
All of the so-called complexity of the tax law is really just aimed at reducing your taxes, not increasing them.
Until you really believe and are committed to these two fundamental rules of tax law, there really is nothing you can do to limit your taxes—and this book will be worth very little to you. You will keep on unnecessarily paying 30 to 50 percent of your hard-earned income to the government. Maybe that’s what you want. But I have a hunch it isn’t.
Once you truly believe these two rules and have them firmly planted in your mind, you’ll realize that you have the right to reduce your taxes every minute of every day. All you have to do is learn the rules of the game. And that’s when this book becomes priceless.
The good news is that the tax rules are easy to understand. After all, you already understand the first two rules, right? From here on out, it’s just a matter of learning who the tax laws are written for and why, and learning how to change the way you think about your money and taxes.
So if you believe that your money is yours and not the government’s, and that the tax law exists to reduce your taxes, then you’re ready to read on and learn how to make the tax law work for you—and not the other way around. Let’s get to work.
| CHAPTER 3: KEY POINTS | |
| 1. | Some of us are trained to believe we owe the government OUR money (it’s just not true). |
| 2. | The tax code is set up to help us reduce our tax burden—and to do so legally. |
| 3. | Nearly all—99.5 percent—of the tax code exists solely for the purpose of saving you money. |
| 4. | All of the so-called complexity of the tax law is aimed at reducing your taxes, not increasing them. |
Tax Strategy # 3: Elect How Your Limited Liability Company will be Taxed
Your limited liability company (LLC) can be whatever you want it to be. The LLC has become the entity of choice for U.S. asset protection purposes. But what about for tax purposes? The good news is, 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 limited liability partnership (LLP) may give you similar flexibility. The key here is that you can frequently have your cake and eat it too when it comes to the tax law. Simply by understanding that LLCs can be treated any way you want for tax purposes, you have asset protection and still get the tax advantages of the S corporation, C corporation or partnership rules. Garrett Sutton, Rich Dad Advisor for asset protection and legal services, talks in detail about the asset protection advantages of limited liability companies in his bestselling book, Start Your Own Corporation RDA Press, 2012. Once you decide which type of entity you want for tax purposes, be sure you make the proper entity tax election by checking the proper box on the IRS entity election form. If you don’t make the election, the IRS will choose for you which tax entity you will be—a sole proprietorship for single-member LLCs or a partnership for multi-member LLCs. You can make your entity election at any time during the year. This election gives you great flexibility in your tax planning. Suppose you are just starting a new business. You may want your entity to be treated as a sole proprietorship in the early years when there is a loss or not much income so you don’t have to file another tax return (corporations have to file a separate income tax return from their owners). 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.
Put Money Back in Your Pocket—Now
“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.”
– Mark Twain
As a child, I was always looking for ways to make money. I started my first business venture with a buddy of mine when we were nine years old. We noticed that the marigold flowers had died and gone to seed. Those of you who aren’t green thumbs may not know this, but marigold seeds are some of the easiest things in the world to harvest. All you have to do is rip the top of the flower off and dump a whole slew of seeds into your hand. My buddy and I thought it was pretty cool how easy it was, and we came up with the brilliant idea of collecting all the seeds in the neighborhood, packaging them, and selling the seeds back to our neighbors. It worked like a charm. The same neighbors who allowed us to take the seeds from their garden in the fall bought them back from us in the spring, which proves that 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.
…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.
And then there was the neighborhood carnival we decided to hold when we were 11 years old. We created a cupcake walk, a “fish” pond where people fished for prizes, and some other games of skill and chance. We let all of our friends know about the carnival, and we worked hard to get ready for it. In fact, looking back, it was a lot of work. When the carnival was over, we sat down to count our money. We’d made $20. Back then, that was pretty good for a couple of 11-year-olds.
Today, people come to me professionally all the time asking how they can make money. Many of them need cash right away. I’m not a believer in get-rich-quick schemes, and I steer my clients away from those types of folks. My clients are hardworking people who are looking for a better way to increase their cash flow and their wealth. I’m sure you’re looking to do the same thing. And there’s good news. There’s one way to put cash in your pocket almost immediately, as shown in Rule #3: reducing your taxes.
| RULE #3: | The fastest way to put money in your pocket is to reduce your taxes. |
Think about it. By reducing your taxes, you can immediately reduce how much money comes out of your paycheck. Or, if you’re an entrepreneur or investor, you can reduce your quarterly tax payments.
By reducing your taxes, you can immediately reduce how much money comes out of your paycheck.
And you don’t have to wait until tax time to enjoy the benefit of lower taxes. In many countries, including the United States, you can file amended returns anytime, which correct errors on returns for up to the previous three years if you learn that you paid too much in a prior year. Or you can even carry back a loss from the current year to a prior year, use the loss to offset the prior year’s income, and get a refund now.
Notice what I said: you can