The ONE Thing YOU Need To Know About Taxes
It’s tax season so I wanted to share with you my number one lesson about taxes…
Billionaire investor Warren Buffett said last week that the wealthy, including himself, are not paying enough taxes.
“The wealthy are definitely undertaxed relative to the general population,” Buffett, the chairman of Berkshire Hathaway Inc, told CNBC television on Monday.
“As we get more specialized, the rich will get richer,” he continued. “The question is: ‘How do you take care of a guy who is a wonderful citizen whose father died in Normandy and just doesn’t have market skills?’ I think the income tax credit is the best way to address that.”
The reality is that the rich are easy to pick on right now because we’re halfway through President Trump’s first term and the other party is building its campaigns. But it’s important to define what you mean when you say rich—because there are many different types of rich people in the world.
I disagree with Warren Buffett on his statements. The rich are taxed, but also are given breaks because those that are creating a thriving economy are doing exactly what the government wants us to do.
My First Lesson about Taxes
One of the very first lessons I learned from my rich dad was the CASHFLOW® Quadrant.
E stands for employees. Whether they are a janitor or a CEO, they are an employee of a business.
S stands for small business or self-employed. These are small business owners and specialists. Many highly educated professionals such as doctors and lawyers fall into this category.
B stands for big business. These are companies with 500 or more employees.
I stands for investor. These people are always looking for other people’s money to fund their business projects.
In each category of the CASHFLOW® Quadrant, there are many people who would be considered rich because they make a lot of money.
However, the real dividing line between the true rich and those who simply make a lot of money is how much money they actually keep in their pockets. Those with high financial intelligence can make a lot of money but also keep that money come tax time.
As my tax advisor, and author of Tax-Free Wealth, Tom Wheelwright, teaches, the tax code is simply a tool for governments to get you to do what they want you to do. If the government wants cheap housing, they’ll give you a tax break to build it.
If they want oil discovery, they’ll give you a tax break to do oil exploration. If they want to encourage debt, they’ll give you a tax break for debt. In this election year, there will be a lot of talk about taxing the rich.
This is funny and depressing because the only rich who pay lower taxes are those who do what the government wants—stimulate the economy by creating housing, industry, jobs, and more.
Those with a high financial IQ—those on the B and I side of the CASHFLOW Quadrant—have a lower tax rate because they’re rewarded for doing activities that the government needs to help the economy. There are many rich who already pay extremely high taxes—in fact, for those on the E and S side of the CASHFLOW Quadrant, the more they make the higher their percentage in taxes paid—sometimes up to 40 percent of their income.
Again, it’s only the rich who build the economy and provide jobs who are rewarded with tax breaks. But that’s an inconvenient truth in an election year when rhetoric gets you further than facts.
Tax Planning 101
Congress NEEDS professional investors and entrepreneurs. They want to reward business owners because they know that by doing so, they will create jobs, and housing. After all, that’s what creates a better economy.
The tax law passed in December 2017 was intentional. The corporate rate was deliberately reduced to 21%. This not only leads to a direct cash windfall, it opens up more funds for large corporations as they have less incentive to hire massive teams of accountants to find creative ways to hide money.
For C-Corporations, the corporate tax rate will drop from 35% to 21% starting this year. Certain S-Corporations and LLCs might qualify for the 20% deduction on the income attributable to that entity as long as the business or service isn’t listed on the exclusions.
There’s the accelerated depreciation of equipment that allows 1 million dollars in equipment to be fully deducted in the year it is purchased. If you have substantial fixed asset cost and current tax liabilities, this benefit provides significant tax savings. And these things were all intentional.
Buy, Borrow, Die
However, beware that there are still many complicated caveats limiting the maximum amount a pass-through owner can deduct (some of which surprisingly have to do with limiting how business owners benefit from using investment income like capital gains as a tax shield, which no one seems to be mentioning).
If you pay taxes the way you’re supposed to and are a good partner with the government by doing what they want you to, you get to sleep well at night and pay less taxes.
To simplify how you can do what the rich do, I call it buy, borrow, die. That first step, buy, means you buy assets. The second step, borrow, means borrow the money to pay for that asset.
Let’s say you want to invest in real estate. Buy, borrow, die works like this: you buy a property mostly with the bank’s money and get a tenant to pay enough in rent to not only make your payments to the bank but also pad your pockets a little.
In a nutshell, when you do this you:
- Receive a tax benefit
- Provide housing
- Use OPM to purchase real estate
- Create cash flow!
The key thing to understand is that paying less taxes is 100% legal because you, as an entrepreneur or investor, are doing exactly what the tax code allows you to do.
You are getting rewarded in a sense for helping to grow the economy.
Editor, Rich Dad Poor Dad Daily