Tax Planning: Decoded
Notice, this article is called “tax planning”. Not tax tips. Not tax hacks. Not “corrective tax maneuvers due to lack of foresight and planning”. The wealthy PLAN their taxes.
A plan is defined as “a scheme or method of acting, doing, proceeding, making, etc. developed in advance.”
Why do I stress the word plan? Because most people do not consider the way they will reduce and avoid taxes ahead of time. They are reactive. I see it all the time. People don’t plan to make money. They don’t plan to keep money. They don’t keep track of what they did make and what they did keep and then at the end of the year they freak out because they realized they will have to pay taxes. And so in response they make really bad financial decisions in the name of avoiding taxes. That way of doing it will make you broke because you will never have assets. You will continue to buy stupid things and spend money you don’t need to spend at the end of the year because you were a dingus and didn’t think ahead.
I relate it to last minute Christmas shoppers who panic the week before Christmas because they didn’t buy any gifts and now it is an emergency. It didn’t change. It’s the same thing every year. Continually having a problem with it shows a lack of intelligence and a lack of foresight that should alarm you.
So here is what you should be doing.
First, you should know the tax code. Yes you should read articles about it. You should take courses. You should study. You should understand how it works and why. This is what wealthy people do and you aren’t going to skate by without doing it too. Besides, the tax code was written by the wealthy. They put the things in there that they wanted in there. So it is kind of a playbook to wealth when you look at it in that light.
Second, you should have every intention of making large quantities of money and keep as much of it as possible to reinvest or invest into other assets periodically throughout the year. Taxes only happen to people who made money. Tax reduction only matters to those who made enough of it to need taxes to be reduced. If you’re broke and figuring out how to pay less in taxes let me give you a hint: stop earning money and the IRS will leave you alone. But also so will your family, your house, and everything else you care about. Production always comes first and taxes are a byproduct of production. Therefore, produce! Then figure the taxes out.
Third, you need to track your expenses and your income in an organized, accurate fashion. A main mistake I see lots of people make is they hire a CPA and think that CPA is just magically going to be able to reduce their taxes. Well the truth is a CPA or Tax Planner is only going to be able to act on the data you give them. If you give them no data, inaccurate data, or unorganized data it will prevent them from saving you the most they can on your taxes. Track your income. Track your expenses. Track your deductions. If you have a business you need to produce a Profit & Loss statement for your CPA. This is key!
Fourth, you need a CPA. I can’t tell you how many people ask me tax questions. I’m not a CPA. I’m not an enrolled agent. I don’t give tax advice. Therefore, you either need to spend the time to figure it out for yourself by studying the tax code or you need to buck up and pay the money to a professional who can help you do it. As I mentioned, I myself am not a CPA or tax preparer, but I do offer a CPA service where you can hire my CPA if that’s what you’re looking for. On this note, I want to point out that those who are afraid to invest in a CPA will usually pay 20–30% more in taxes. If a CPA costs you $6000 and they save you $6000 in taxes, it means they are free. You didn’t actually pay anything because they made up for their cost with tax reduction.
Fifth, you need a plan. Is your goal to acquire assets this year? If so, you may need to bite the bullet and pay some taxes so that you can show income and have money to invest. Are you trying to get accredited? If so, you need to show enough income or net worth for that to happen which means you do need to keep some money and you will pay some taxes. Is your goal to avoid taxes altogether? If so, realize you probably aren’t going to be doing very much investing. The wealthy pay very little taxes, but it doesn’t mean they pay no taxes. They do keep money and they do pay taxes on that money so they have something to invest and build wealth with.
These are the 5 pillars that need to be in place first.
Second, you need to understand how you are taxed. Are you a corporation? Are you a sole proprietor? Are you an W2 employee? Your taxes are going to vary based on how you earn your income. You need to understand how your income is taxed and you need to understand what your deduction options are. I see a lot of people spending money to “write if off” on their taxes, but they don’t even know if they’re going to have more itemized deductions that the standard deduction allowance. Some people don’t even know what those terms mean.
Let me break this one down quickly. The IRS gives EVERYONE free deductions each year. This is called a standard deduction because it is a deduction everyone gets.
Let’s say your standard deduction is $24,000. This means you get to deduct $24,000 off your income for the year regardless of what you wrote off.
Now let’s say you are spending money to “write if off” on your taxes. Unless you were to spend more than $24,000 in deductible purchases, your write offs will literally have zero impact on your taxes. This is called an itemized deduction. Which is where you count up all of the money you spent on your taxes and if it is MORE THAN your standard deduction would have been, you may write those items off on your taxes. If it is not, then you basically wasted money. So unless you needed those things anyways, they have zero financial impact for you. So the bottom line is understand your deduction strategy going into the year.
Assuming you have followed the above points and you are intending on using the itemized deduction method, let’s talk about some great ways to reduce your taxes!
- Filing as an S-Corp. If you have business income or self employed income, this means that you will pay income tax and self employment tax on any of your AGI (adjusted gross income). Let’s say your income tax is 20%. Well your self employment tax is an additional 15% on top of that. Which means you’ll pay 35% in taxes. That’s a lot of money right? The way around this is to file as an S Corp and pay yourself a reasonable minimum salary. You will pay income tax and self employment tax on that salary. The rest of your profits, you will pay to yourself as a bonus, dividend or draw. This will incur income tax, but not self employment tax. This is an easy way to reduce taxes right off the bat.
- Track your deductible expenses and be extremely accurate. This is another simple one that most people don’t do. Have a business credit card that is only for deductible expenses. That’s a built in tracking system. Each month, convert that into a Profit & Loss statement or hire a bookkeeper to do it for you so you can then turn those deductions in to your CPA.
- Take advantage of vehicle deductions. You’re gonna drive right? So take advantage of the Section 179 and Section 168k vehicle deductions. If you purchase, lease, or finance a qualified vehicle you can write off up to 100% of the purchase price with these deduction methods. Imagine financing a vehicle at $900/mo, but writing off $60,000. Not bad right? This is an area where you do need a CPA in your corner to make sure you do it right and you take advantage of all of the benefits at play here. Leasing is another great way to be able to write off your car payment. Notice financing and leasing are things the poor and middle class are told are bad ideas, but if you look at the wealthy they do it and leverage massive tax advantages as a byproduct.
- Home office deductions. Whether you own or rent, you need a home office. You can deduct square footage for your professional office space to lower your taxes. It is kind of like the vehicle benefits. You are going to pay to live somewhere anyways so why not take initiative to write part of it off? Once again, use a CPA to dial this strategy in for you.
- Oil and gas investing. Let’s say you do want to invest in assets, but you also want to reduce your taxes. But you don’t want to get screwed over by putting your money in a 401k. If you are an accredited investor you can invest in oil and gas deals where most of if not all of your principal investment is tax deductible. Not only that, but usually you will earn cash flow in year two as well. So you have your principal at work for you, massive tax benefits on your principal, plus cash flow and capital gains throughout the deal and on the back end. Again, you must be accredited to learn more about these.
- Spend extra money on marketing. Deposit money to your ad agency for marketing services. You can write it off and that money can go on deposit with the agency to be spent to increase the revenue of your business. This is one of my favorites. Too many people will blow money on equipment they don’t need, but won’t advertise and market their businesses. You should and this is a great way to do it.
Now, these are not all the taxes benefits in existence, but they are some of my favorites.
If you read this and realized you’re not taking advantage of your tax benefits don’t worry. I was there before too.
If you’re like me though, you might not be the expert on it right now and you might feel a little overwhelmed. No worries! That’s why we created our CPA Service. If you’d like to schedule a call to talk about hiring our CPA team or if it makes sense for you to do so click here and we can make that happen!
To Purpose, Wealth & Freedom,
Jerry Fetta is the CEO and Founder of Wealth DynamX. He is a nationally recognized financial expert featured in Forbes, Fox, Chicago Weekly News, and other publications with dozens of features on popular podcasts and has earned endorsements and affiliations with names like Grant Cardone and Dave Ramsey. Jerry’s mission in life is to help create millions of financially educated and wealthy families navigating their economic futures with certainty and building more prosperous communities around them. Learn more at www.WealthDynamX.com