your taxes on your salary and/or business income, because while there is positive cash flow of $7,000, the depreciation deduction of about $27,000 gives you a tax deduction against your other income of $20,000 ($27,000 less $7,000 to offset real estate income). That $20,000 additional deduction against your other income is worth $6,000 of reduced taxes on your other income in a typical 30% ordinary income tax bracket.
So your real return from your real estate is $7,000 plus an additional $6,000 of tax refund on taxes you normally would have paid on your salary and business income for a total return of $13,000, or $5,000 more than your after-tax return from the stock investment.
This is just one example of how the tax law can have a dramatic impact on your cash flow and your wealth. If you computed your return just by looking at the cash flow before taxes, your return of $10,000 is way better ($3,000 better) than your return from your real estate. After taxes, though, it is the opposite. Your return from the real estate after tax benefits is $13,000 while your return from the stock market after tax is only $8,000. See why you should always consider taxes when you make your investment plans?
Taxes are Fun, Easy, and Understandable
“The hardest thing in the world to understand is income taxes.”
– Albert Einstein
Death and Taxes
“Death” and “taxes.” They’re the two most dreaded words in the English language—or any language, for that matter. And it’s totally understandable. You don’t want to die. And you’d probably rather die than pay taxes. Perhaps we link taxes with death because they represent the death of all for which we’ve worked. Or maybe it’s because we don’t understand taxes any more than we understand death.
Worldwide, the average person pays 30 to 50 percent or more of their hard-earned income in taxes, either through income, sales, value-added, payroll, estate, or property taxes.
The reality is that taxes can kill your hopes and dreams. How? By stealing your wealth and diminishing your quality of life. That surprise vacation for your family? Gone, thanks to Uncle Sam. The improvements you need to make to your house? Kiss them goodbye come tax time. I’m sure you can relate. You’re not the only one. Worldwide, the average person pays 30 to 50 percent or more of their hard-earned income in taxes, either through income, sales, value-added, payroll, estate, or property taxes. Think about that. Almost a third to one-half of the world’s wealth is handed over to governments. That’s bad news.
But here’s the good news. Taxes don’t have to kill your dreams. In fact, 90 percent of entrepreneurs and investors can reduce their taxes simply by learning the basics of tax law.
You might be saying, “Great—another book that helps entrepreneurs and investors. I’m just a regular Joe. What can I do to lower my taxes?”
To you I say, “What if you became part of this privileged class of taxpayers? What if you took the right steps and made the right preparations to not only make more money but to also pay less to the government in taxes?”
Sounds hard, right? Well, as you’ll learn, it’s not. And when you do take the step of becoming an entrepreneur or investor, you will easily pay 10 to 40 percent less in taxes by learning how the tax law can work for you—instead of you working for the government and paying high taxes.
| TAX TIP: | Invest where you travel. Do you have a favorite destination? Consider investing in the area. It gives you a great reason to keep returning, and you turn the travel expenses you already have into deductible expenses, keeping more money in your pocket. |
Anyone Can Understand Taxes
This might make you laugh, but I absolutely love taxes. Seriously. I have a passion for learning everything I can about the tax law and how it can be used to save money for my clients and me. I started learning about accounting and taxes at a young age.
In high school, I took a class on business law and loved it. And all through high school I worked in the accounting department of my father’s printing company. I enjoyed working with money, and I loved learning about the law. So I decided to major in accounting and specialize in tax law. That way, I reasoned, I would get to work with money, learn about the law, and not have to spend my life with lawyers.
My first tax professor was Dr. Haney. He was a lawyer who truly had a gift for teaching and who loved tax law. I was so excited to take tax classes that I took all three that were offered in my junior year, postponing my upper-division accounting classes until my senior year.
I couldn’t wait to get a job working in the tax area. During my first term of tax classes, I took out the Yellow Pages and called all of the local Certified Public Accountant (CPA) firms in town that had more than one name or had “and Associates” in the firm’s name. After several days of this, I landed an interview with a firm called Francis and Company. My long and thrilling journey as a tax accountant began.
I interviewed with the senior tax manager the next day. He asked me the usual questions about my experience, education, and interests. And then he asked a really odd question. “Tom,” he said. “How good is your printing?”
I was taken a bit off-guard by this question. It turns out that they prepared a lot of their tax returns by hand. They printed them in pencil and then photocopied them for their files. He wanted to make sure my handwriting was legible so that their clients and the IRS wouldn’t be frustrated by not being able to make out the numbers on the tax returns. Fortunately, my handwriting was legible, because I had worked hard to learn good printing. He hired me on the spot.
That was in 1980. Since then, I have devoted my life to learning (and loving) the tax law. What I’ve discovered over the years is that the basic principles of the tax law are actually simple. So simple, in fact, that anybody can learn them, even Albert Einstein. (I’m convinced that Dr. Einstein wouldn’t have been so frustrated with the tax system if he had just had someone to teach him the basic principles). The principles are so simple that by the time you finish reading this book you will know every basic principle needed to permanently lower your taxes. And once you know the rules, you can live a lower-tax life, which I promise is a richer life in every way. In fact, you might even be able to legally reduce your taxes to zero and enjoy tax-free wealth.
| Understanding Taxes Doesn’t Mean Doing It Yourself | |
| 1. | You still need a good tax advisor who understands the details of the tax law. |
| 2. | A good tax advisor can help you create and implement sound tax strategies besides doing your tax returns. |
Taxes Are Fun—Really
Anyone who knows me knows that for me, taxes are fun. Yes, I did just say “fun.” I know how warped that may sound, but I love the tax law. And I firmly believe that everyone can find out just how fun, easy, and understandable taxes are with just a little basic information. Don’t believe me? Well, think about this. Have you ever received a tax refund? Do you remember how happy you were when you opened that letter and saw a beautiful check? That was fun, wasn’t it? In fact, did you ever notice that the word “refund” has “fun” right in the middle of it? Okay, corny joke, but you get the point.
This book is dedicated to helping get you a bigger tax refund. And we’re not just talking about a one-time deal. When you apply the principles taught