2 Key Ways To Reduce Taxes
You now have until July 15th to file your taxes. With that said I wanted to tell you about the two key ways you can reduce your taxes…
To understand how to reduce your taxes, you first must understand the three types of income. Most people are not aware that there is good income and bad income, and most people do not become rich because they work hard for bad income. When you ask for a raise, you ask for an increase in bad income. If you want to retire rich, you need to work hard for the right kind of income.
The three types of income are:
- Ordinary income: Ordinary earned income is you working for money. This income comes in the form of a paycheck. When you ask for a raise, bonus, overtime, commissions, or tips, you’re asking for more of this type of income.
- Portfolio income: Portfolio income is generally income from paper assets such as stocks, bonds, and mutual funds. A vast majority of all retirement accounts are based on future portfolio income.
- Passive income: Passive income is generally income from real estate. It can also be royalty income from patents or for use of your intellectual property such as songs, books, or other objects of intellectual value.
Ordinary income is the worst kind of income. It is the highest taxed income and it is the income with the fewest controls over how much you pay in taxes and when you pay your taxes.
To explain this further, depending on which quadrant you earn your money, determines what kind of taxes you pay. The CASHFLOW Quadrant separates income earners into four quadrants. On the left side are the employees (E) and the self-employed individuals (S). On the right side are big business (B) and investors (I). You’ll notice each quadrant is taxed at a different rate represented by the number in each quadrant.
Those who earn their money in the I quadrant understand there are special rules for those on the right side of the quadrant and use them to their advantage. All you have to know is the rules and how to play by them.
If you do the activities that the government wants you to do, you will not only permanently reduce your taxes by 10 to 40 percent or more, you will also begin building more wealth and cash flow than you had ever imagined possible.
When you study and understand the CASHFLOW® Quadrant, you soon begin to realize that the tax laws are the worst for employees. In fact, it is the lower-paid employees who pay the highest percentage of taxes. The best quadrant is the B quadrant simply because the B quadrant allows you to take advantage of the different tax laws in the different quadrants. For example, as a B-quadrant person, I can utilize the tax advantages of the E quadrant, the S quadrant, and the I quadrant. This is not necessarily the case for people in the E or S quadrant.
In other words, if you are an employee or a self-employed professional such as a lawyer or doctor, you are not allowed to utilize the same loopholes the B-quadrant person enjoys. Yet the B quadrant person can utilize the laws of the E, S, and I quadrants when convenient. Again, competent financial and tax advice and planning are important if you want to use these laws to your advantage.
The question is: What kind of money are you working for?
Most people who earn money by working for a paycheck, pay taxes through withholding, and spend what little is left over. The rich do it differently. They earn money, spend it, and then pay taxes. The government gets less that way, and it’s legal.
From my rich dad’s point of view, it was not very smart to work hard and have the government take at least 50 percent of what you work hard for. By simply starting a small home-based business, buying a franchise, or joining a network marketing company, you are moving into more tax-advantaged income. If you can reduce the cost of some of your expenses, just by utilizing tax-advantaged dollars, you are getting ahead financially. But always remember that your intent must be to make more money and not just avoid paying taxes.
What is the secret of the rich? They take advantage of tax loopholes that allow individuals to choose different entities for their businesses. Loopholes, though they may have a negative connotation for some, are intended to help businesses grow and prosper. The tax law allows a corporation, for example, to earn, spend everything it can on legitimate business expenses, and then be taxed only on what remains. How can you get in on this secret? First by learning what business entities are available to you and what the advantages and disadvantages are of each. These entities include sole proprietorships, partnerships, corporations, and limited liability companies (LLCs)—a hybrid partnership/corporation.
Whenever I say, “I make millions and pay very little taxes—legally,” most people’s hearts go into cardiac arrest and their minds slam shut. I doubt there are many people more feared than the taxman. Few things are more painful than a government tax audit. Yet it does not have to be that way, if—as Buffett states—“you know what you are doing.”
Don’t Rely On Your Advisor
The second thing you can do to reduce your taxes is understanding that you, and only you, have the power and control over your money and your taxes. Nobody else. This includes your tax preparer and your tax advisor. They cannot reduce your taxes. They can only help equip you to do so.
You may say, “My tax advisor handles my taxes,” but that is a myth about income taxes. Your tax advisor cannot handle your taxes. They can prepare your tax returns. They can give you advice about what to do in a particular situation. Quite possibly they can even tell you some rules that will help you reduce your taxes. But they cannot take the actual steps to reduce your taxes. Only you can do that.
I’m not saying your tax advisor isn’t an important member of your team, but he or she can’t do things for you. They can only advise. So if you want to take steps to reducing your taxes, it starts with you.
Editor, Rich Dad Poor Dad Daily