3 Elements For Picking The Right Tax Advisor
Most people do their own taxes and hire a financial advisor to make their investment decisions. As a result, they are often given poor financial advice and miss out on a lot of tax benefits.
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. 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 purposes of saving you money.
Many years ago, a newspaper reporter asked me how much I’d made during the year prior. I replied, “I made about a million dollars.”
“And how much did you pay in taxes?” he asked.
“Nothing,” I said. “That money was made by selling three pieces of property, and I was able to defer paying those taxes by using a Section 1031 exchange. I never touched the money. I just reinvested it into larger pieces of property.”
A few days later, the newspaper ran the story with the following headline: “Rich Man Makes $1 Million and Admits to Paying Nothing in Taxes.”
This is why choosing your tax advisor carefully is very important.
It starts with your team. My rich said, “business and investing are team sports.” The reason why most people struggle financially today is that they go onto the financial playing field as individuals, not as a team. This couldn’t be truer when it comes to hiring the right tax advisor.
Why the Rich Pay the Least in Taxes
Most people dread tax time-especially employees and self-employed.
Because they know they have no control over what they’ll pay in taxes. They just have to suck it up and take it.
But what if there was a better way?
What if you could actually look forward to tax season?
I do. And so can you. It starts with thinking and acting as the rich do. The rich pay very little in income taxes because they don’t earn their money as employees do. They know that the best way to legally avoid taxes is by generating passive income out of the right side of the CASHFLOW Quadrant—the Business (B) and Investing (I) side.
If you earn your income on the left side of the quadrant, the only tax break you have is to buy a bigger house and go into greater debt. But the rich have scores of tax breaks offered to them by the government to encourage investment and business development, which generates more jobs. The rich can make millions of dollars and pay virtually nothing in taxes.
One example of this is the government’s desire to have more affordable housing available to the general public. Because of this, rental income is treated as passive income, the lowest-taxed income. Additionally, you are allowed to write off all expenses for your investment property, and you can depreciate your property each year. Depreciation is a phantom income because it is a loss you can take against your taxable income, even though you didn’t actually lose any money. This allows you to pay less in taxes. If you invest in certain types of multi-family properties, you can even qualify for more tax breaks depending on the zones you’re developing in and the type of affordable property you’re investing in or building.
These incentives are well above the general interest deduction that a homeowner has. Why? Because the government doesn’t need to incentivize people to own a home. They do need to incentivize investors to purchase or build apartment buildings.
If you want to make more money, keep more money, have more time, and pay less in taxes, the first step is knowing how money works and how to make it work for you. But more importantly, you need a tax advisor who can help you make this happen.
Here are three elements to hiring the right tax advisor, according to my advisor, Tom Wheelwright:
1.Your Tax Advisor Should Care More About You Than Himself
How can you know this? It’s simply a matter of whether he or she spends most of the time in your interview answering your questions and talking about himself or herself and his or her services, or whether he or she is more focused on what you need.
If the tax advisor’s routine is for you to ask all the questions, he will (and can) only respond to your questions. He can’t find out anything you don’t volunteer. If, instead, his routine is to ask you questions about your situation, you can be pretty sure that he’ll be looking out for you and what you really want.
Not only that, but the tax you pay depends entirely on your facts and circumstances. Remember my saying that any expense can be a deductible in the right situation? If your situation changes, then your tax will change. If your tax advisor is not asking you questions about your situation, how can he or she possibly know what the tax consequences will be to you? He or she certainly won’t be able to show you how to change your situation so that you receive better tax results.
The reality is that you have all of the answers. Your advisor should have all of the questions. Don’t worry about what questions you should ask your tax advisor. If you have to ask the questions, then you simply have the wrong advisor.
2. Find A Tax Advisor Who Will Also Prepare Your Taxes
Don’t use a tax preparer who isn’t your tax advisor. If you do, it can be a huge mistake. You could get great advice, and then the preparer might not know how to use this advice in preparing your tax return.
You want to be sure that your preparer isn’t just accurate. He or she should also be working to reduce your taxes as he or she prepares your return, and he or she should be reducing your chances of being audited. At my firm, we look at tax return preparation as both the final step in last year’s tax planning and the first step in next year’s tax planning. Take the time to look for a good tax advisor who can also prepare your tax returns.
3. Find a Tax Advisor Who Will Teach You the Rules
Also, remember that only you can reduce your taxes. You have to learn enough about how the tax law applies to you so that you can use it to your benefit every minute of every day. Be sure to find a tax advisor who is willing and able to teach you the rules you need to know in order to reduce your taxes.
Many advisors don’t actually want you to know the rules. They’re afraid that if you know the rules, you won’t need their advice. We both know that’s not right. If you know the rules, you’ll be more successful at reducing your taxes. When you reduce your taxes, you’ll increase your cash flow. When you increase your cash flow, you’ll increase your wealth. And when you increase your wealth, you’re likely to need your tax advisor even more than you do now. So it’s really in your advisor’s best interest to take the time to teach you the rules you need to know. It’s certainly in your best interest.
Editor, Rich Dad Poor Dad Daily