The rich play the game of money very differently. The rich know that the real way to wealth is via cash flow, and if managed properly, cash flow can be both substantial and tax-free. -Robert Kiyosaki
We’re talking smart tax-planning this week. And it all starts with understanding the true nature of the US tax code.
Simply put, the tax code was designed to help entrepreneurs and investors minimize their tax liability. I know that’s not what we’re led to believe in school. But it’s clear as day.
Consider this – the federal tax code consists of over 70,000 pages. Yet, less than five percent of those pages are about paying taxes. The other 95 percent are all about how to avoid paying the taxes that the first five percent says we owe.
This is what Kiyosaki’s quote above speaks to. If we understand the tax code, there are countless ways to reduce our taxable income.
Yesterday we looked at a few ways we can use business entities to write off certain expenses that we would have incurred anyway. We talked about how to make going out to dinner a business meeting. And we discussed how we can make routine home maintenance expenses partially tax-deductible.
As neat as those examples are, they are only scratching the surface of what’s possible.
The US tax code is really about incentives. It provides tremendous tax advantages for those who engage in certain business activities and investments. And the secrets run deep…
This week we’ve looked at how to eliminate taxes on our business income. But what if I told you we could make investments in assets that produce monthly cash flow for us… and write off a material percentage of those assets’ value against all other income sources?
I’ll demonstrate with an example…
Suppose you work a job earning $100,000 a year and you have several investments producing another $50,000 a year for you. Using the methods we discussed yesterday, it’s very easy to reduce your tax liability on that $50,000 to zero. But that still leaves you on the hook for $17,400 in federal income taxes on your W2 income.
But what if you went out and made an investment that allowed you to write off another $60,300 against your W2 income? That would reduce your federal income tax liability to just $4,764. And here’s where the magic happens…
Depending on your withholding selections, you employer likely would have withheld at least $19,000 in federal income taxes… and maybe a fair amount more.
If so, you would be in line for an income tax refund of at least $14,000. Then you can take that money and make a similar investment next year to create a perpetual tax-reduction cycle.
That creates what I call “financial escape velocity”. Doing this automatically maximizes your after-tax income year after year after year. And this will allow you to attain financial independence far faster than most would think possible.
Of course, my example today is just hypothetical and oversimplified for demonstration purposes. And I should point out that it takes advanced tax planning to accomplish this. But the concept is there. People in the know have been using this strategy for a long time.
You know all those times somebody has run for president but didn’t want to release their tax returns? This is why. They are utilizing the deepest secrets of the US tax code—but they don’t want us to know about it.
Tax genius Tom Wheelwright has a saying I very much like. He says when you make more money, you pay more taxes. But when you build more wealth, you pay less taxes.
This speaks to the importance of using our income wisely.
Consumers are crushed by the tax code. Entrepreneurs and investors leverage it to build financial independence.
Tomorrow we’ll look at the big-picture vision…
-Joe Withrow
P.S. If you would like to learn about how to leverage the US tax code in much more detail, it’s all in my new book Beyond the Nest Egg. You can find it on Amazon right here.