Successful tax planning doesn’t happen once a year. There are actions you can take every day to help reduce your taxes. In this episode, Tom offers strategies that can be used daily to plan, execute and reduce your taxes.
02:11 – Why Should Tax Planning Start On April 15?
07:00 – Find Out How Every Expense Can Be Deductible.
08:11 – How Can Conversion Reduce Taxes?
10:25 – How Can IC-DISCs Reduce Taxes?
11:04 – How Can Captive Insurance Reduce Taxes?
12:20 – How To Employ Your Children And Reduce Taxes.
15:57 – How Can Deferral Reduce Taxes?
Tom Wheelwright: Welcome to The WealthAbility™ Show, where we're always learning how to make way more money, and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility™. So, there are things we can do every single day to reduce taxes. So, today, we're going to discover how to do daily tax reduction. We talk a lot about tax strategy. We don't always talk about what we do on a daily basis. So, there are a lot of things we need to do throughout the year in order to reduce our taxes. I mean, after all, if we're going to change our tax, we have to change our facts, and our facts, basically life, happens on a daily basis. So, this becomes really a daily commitment.
Tom Wheelwright: So, we think about our tax strategy, and we spend months and months working with our tax advisor on our tax strategy, and then what do we do with it? I know so many people who, they spend a lot of money on a tax strategy, and then they actually don't implement anything. So, what we need to do, is we need to look at what do we do on a daily basis, and how do we improve that tax strategy? WealthAbility™, we look at a tax return as the final step of last year's tax planning process. I mean, it is the finally implementation step of last year's tax planning process, so it's a very important step. It's also the very first step of this year's tax planning process, okay.
Tom Wheelwright: So, one of the very first things we need to do, we think a lot about, oh, we got to get this tax return done, and oh, it's over, and oh thank goodness that's done with for another year. It's not done for another year. It's the beginning of another year. So, this is the time I would encourage everybody who's listening, please take the time to sit down with your tax advisor, and walk through your tax return soon after it was prepared, okay. It's fresh in your mind, right, you've been thinking about, I know the last thing you want to do is go, oh, okay, we're going to keep going on this, but that's what we need to do, because remember, the fastest way to put money in your pocket is to reduce your taxes, and this is something we do every single day. So, sit down with your tax advisor, walk through that tax return, and say, “Okay, what did we do great last year that we need to continue to do, and what could we do better?”
Tom Wheelwright: So, I have a couple of clients who are doctors, and doctors, from tax law standpoint, are some of the hardest people to help, because the tax law does not favor doctors, okay. It actually punishes doctors, like other service professionals, like accountants for example, and lawyers, okay. So, all right, lawyers we know why they want to punish. But no, seriously, I'm just kidding. But doctors are hard to work with from a standpoint of the tax law. But I have a couple of doctors, and they are fully engaged in their tax planning process. I've actually rarely seen people so engaged in their tax planning process. And so, we're talking all the time, and our goal is not to reduce taxes the first year. Our goal is to reduce taxes more and more every year. See, the goal is tax-free wealth. It's not tax reduced wealth, it's tax-free wealth, and we can get there.
Tom Wheelwright: Now, there are a couple of things we have to do. First of all, we have to look at this on a daily basis, all right. So, for example, take your deductions. Deductions are something that happen every day, right. This isn't something that happens once a year. This is something that happens every day. So, that means that includes documentation, right, of those deductions. It's actually thinking about every expense we have. As entrepreneurs and investors, we should be looking at every single dollar we spend, okay. Now, that doesn't mean you need to be a miser, okay. In French, there's a great word for [inaudible 00:05:05], which means that I'm holding tight to my pennies. Okay, we don't have to do that. What we do have to do, though, is pay attention to them, and so that we're conscious of every dollar we spend, and what happens to it from a tax standpoint.
Tom Wheelwright: It's a little like if you're trying to keep your weight down, you have to pay attention to the food you put in your body, right. You can't just eat whatever you want to eat. You have to pay attention to that, otherwise, you put on weight. I mean, I know, I'm famous for going up and down in my weight.
Tom Wheelwright: So, the same thing is true with taxes. We have to look at those deductions every day, and say, “Okay, is this dollar that I'm going to spend at the gas station, at the grocery store, at the restaurant, is there a way to make this deductible, and what do I have to document to show that it's deducted?” So, that means that we also have to stay up on our bookkeeping. Our bookkeeping must be in order all the time. This is why it's so much easier to have a professional bookkeeper doing your books than to do it yourself, because then you've got somebody who's, that's their job, okay.
Tom Wheelwright: Typically, that's not really high on our mind as our job. So, if we have a professional bookkeeper doing this, then that can be their job, and then they can remind us. They can hound us about this, okay, and then they can also help us with the documentation, make sure that we have the documentation. So, when we work with that bookkeeper, we ought to set out what they're expecting and what we need to give them to make sure that we're getting the maximum amount of deductions.
Tom Wheelwright: Remember, every expense can be deductible. Every expense can be deductible, even those that, under the code, aren't deductible, all right. If we look at a way to, for example, take the money we would spend on the expense, for example, let's say we have tickets, season tickets to our college basketball. We have season tickets to our college basketball team. Well, those season tickets, entertainment's not deductible. However, if we take that amount of money, and we invest it, and then we invest it in something that produces a tax reduction, that's the equivalent of getting a tax deduction for the tickets, plus we also get an asset. So, there are ways to supercharge. Again, this is way more money and way less taxes.
Tom Wheelwright: So, everything that produces more money, okay, not more income, more money, more cashflow, but especially passive cashflow, everything that produces more passive cashflow produces more tax benefits. So, that takes us really to the next one. So, we do deductions every single day. We don't think of conversion every single day, conversion meaning that we're going to shift it from a high tax to a lower tax type of income. Sometimes, though, we need to, because this is the dollars that are coming in. So, deduction are the dollars that are going out. Conversion is about the dollars that are coming in. How are they coming in? Are they coming into the right entity? Okay, are they coming into our S corporation, or are we just picking up miscellaneous income, and we got this miscellaneous income with huge self-employment tax on it?
Tom Wheelwright: We need to make sure that we document, so that we get the income into the right place, and get the lower tax amount, okay, the lower tax on it. Or we need to be looking at our investments, and go, okay, so when we look at our investments, and most people don't look at their investments every day, but when you do look at your investments, whether it's once a week or once a month, then look at, okay, so what do I need to do in order to take advantage of the tax benefits from those investments, and particularly, how can I invest best my money so that I'm getting income from it that is a lower taxed income?
Tom Wheelwright: So, for example, instead of flipping houses, maybe I should be thinking about buying and renting some of those houses. Now, we flip the houses to get the money, but maybe we take that money, then we invest it, so that we get a lower taxed income, because rental income is lower taxed income. In fact, it's tax-free income, right, so it's the lowest tax income.
Tom Wheelwright: And then, there are a couple of other things. We want to look at, from a conversion standpoint, we definitely want to look at not just changing it to say from earning income to ordinary income, but from ordinary income to capital gain. For example, there are a couple of things that we haven't talked about before, that if you have high income, or you have particular types of businesses, you ought to be asking your tax advisor about.
Tom Wheelwright: We have a client that uses an IC-DISC, and I'm not going into what an IC-DISC is, but basically what it does, it's a mechanism to convert business income from ordinary income to dividend income, which is capital gain tax rates, right. So, you can literally cut your tax rate in half by using an IC-DISC. So, ask your tax advisor about that, if you have a business, and see if you qualify. Particularly, if you have a manufacturing business. That's primarily who that's going to apply to.
Tom Wheelwright: Then look at a captive insurance company. We all have risks that we insure personally, we don't buy insurance for it, okay. And so, what we ought to look at, is if we have a high, really high taxable income, because a captive insurance company, you have to set it up. It's not cheap. It's certainly worthwhile, though, because you want to protect yourself, and the government says if you protect yourself, okay, if you protect yourself the way we tell you to protect yourself, then we're going to give you a tax benefit for it, and part of that tax benefit is converting income. It's postponing it, but it's also converting it from earned income, or ordinary income to capital gain income. So, there are some real benefits to that captive insurance company. I know we don't talk about it a lot, because it really does only apply to the top 1% earners. But if you're in that 1% category, which isn't that much money, you're earning four or five hundred thousand dollars a year, then maybe you ought to consider looking at a captive insurance company. That's something that we can do during the year, okay. We can't wait until the end of the year. We need to look at it during the year in order to get this done.
Tom Wheelwright: Next, tax brackets, okay. So, tax brackets, of course, we talk a lot about employing your children. This is something that we can't wait until the end of the year to do this, okay. Please do not wait. please do not wait until the end of the year to start thinking about employing your kids. Keep your kids employed. This is a daily activity. This is a family activity.
Tom Wheelwright: I was at a Mastermind group, I was teaching a Mastermind group the other day, and one of the participants was asking about family business. The other instructor said he hated family businesses, he'd never had any success with family businesses. Well, I grew up in a family business, and I know that my siblings and I all have fun memories of growing up in that family business. It brought us closer together as a family, and we learned how to work, we learned about our father's business, and our mother's business, because they did it together. It brought them together, my mom and dad. It brought them together, I know it did. It's really a terrific opportunity to teach your kids about money, and about work, and about your business. And who knows, one or more of your children might decide that this is the business they want to go into.
Tom Wheelwright: I was talking to somebody just yesterday, and I was asking them about their business, and they said that his father had had this business, it was a publishing business, and obviously, he'd known about it, but he didn't really want to be involved in it, because he didn't want to be involved in physical books. But he wanted to be involved in what he called the next generation of the business, which included the software programing side of it, and that's what he did. He took his father's business, and took it to the next level. I am just speculating here. I'm guessing he had involvement in his father's business. There are some great tax benefits along the way, of course, because your children have their own tax brackets when it comes to earned income.
Tom Wheelwright: So, this is something that you want to be looking at on a daily basis. How do I pay them? Do I give them a W2, or do I give them a 1099? By the way, a W2 is better. In most cases, W2 is better. So, how do I do this, right, and you need to set it up, and then you need to sit down with your bookkeeper, and walk through this. This is daily tax planning. This is daily tax reduction. Now, every dollar you pay your child is a deduction to you, and depending on their tax bracket, it may be not even taxable to them. So, this is a huge thing, but again, we have to do it on a daily basis.
Tom Wheelwright: Think about, then, elimination. Think about tax-free income. What can you do to generate tax-free income? We don't think about all the time our life insurance. We don't think about real estate being tax-free. There are a lot of ways to generate tax-free income, or tax credits. I was just looking at a deal the other day with solar credits, and in fact, I'm doing some solar on my house, and I'm going to get this big solar tax credit. So, we look at what are we doing every day in our normal lives. What can we do to be reducing our taxes, eliminating our taxes on a daily basis?
Tom Wheelwright: And then, of course, when it comes down to the very bottom, and we're done with all of those other tax, daily tax activities, we do have to look at deferral. Deferral meaning postponing our taxes to a later year. And when I talk about deferral, this is an opportunity now with the 20% pass through deduction, okay, if you're in a specified service trader business like I am, you're an accountant, lawyer, doctor, any healthcare professional, or a consultant, and you have income that is above the threshold, right, that 157,500 or 315,000, and you're going, well, look, I want to maximize that 20% deduction, then we think about deferral in order to do that. We might think about a pension plan, or a retirement plan. That might require structuring our business differently, okay.
Tom Wheelwright: So, as we think about these things, we can't just wait until the end of the year. This is what I don't like about year end tax planning. I love the idea of doing year end tax projections. I love the idea of getting a handle on things at the end of the year. But the year end is the worst time in the world to be doing tax planning. It's absolutely the worst time.
Tom Wheelwright: The best time, really, starts at the beginning of the year, but as you're gathering your information for your tax returns, as you're gathering your information for your tax returns, think about, okay, well, now what could be deductible? If you find that, wow, I wish I'd done such and such, okay, and it could've been deductible, then let's write that down for the next year. And then, when you sit down with your tax advisor to go through your tax return, then you can walk through, okay, what can I do to not just make sure that my taxes are as low as they were last year, but how do I make them even lower this year? Because when we have a daily tax reduction routine, we are going to make way more money, and pay way less taxes.
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