Taxes can deplete wealth or help build wealth. In his debut podcast, WealthAbility™ founder Tom Wheelwright dispels many common myths of the tax code, and explains how anybody can start building wealth with a strategic tax plan.
01:06 – How Are Taxes A Series Of Incentives?
06:14 – What Are Super Incentives?
16:09 – How Is The Tax Law A Roadmap To Producing Wealth?
19:32 – What Is The Choice You Need To Make About Taxes?
This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Welcome to WealthAbility™ where we talk about how to make way more money and pay way less taxes. I'm very excited to be with you today. Just wanted you to know this is my very first podcast ever that I've done on my own. I'm very excited because we're going to talk about taxes in a very different way than people normally talk about them.
See, when I look at taxes over the years, and I've been doing this for 35 years, I've been in Big 4 national tax departments, I've been in Fortune 500 companies as their in-house tax advisor, I've taught at a major university, Arizona State, for 14 years, and I had my own practice for over 25 years now. Over that time, what I've learned is that taxes are really a series of incentives.
That's what we're going to talk about today, is how to take those incentives and instead of taxes being your worst enemy, which let's face if for most people, taxes are absolutely the worst enemy that we have to building wealth. That's why they call it a tax. It's taxing because it drags us down. What we're going to talk about today is how to make taxes your best friend, actually how to have taxes lift your wealth. Actually how to make taxes your best friend. How to make your partner in the government a good partner instead of a partner who is just constantly taking, taking, taking from you. What we're going to talk about today is the government as your partner can give, give, give to you.
All we have to do is understand that there's two purposes of the tax law. The first purpose everybody knows about, and that's to raise revenue. It's to raise revenue to pay for schools, to pay for infrastructure, to pay for military, to pay government salaries. There's a lot of reasons to raise money. Most of us think that is the primary reason, and in fact, it's not. It's a very small percentage of what the tax law is for.
Most of the tax law, 99% of the tax law, is nothing more or less than a series of incentives. You think about, the tax law is actually very simple. There's a couple of pages that tell you what your tax rates are and how much tax you should pay. Then there's thousands and thousands of pages that tell you how to reduce your taxes.
Let me give you an example. Everyone is familiar with mortgage deductions. We're particularly familiar with this with the change in the tax law because with the change in the tax law we saw that the government originally we have unlimited mortgage deductions. A few years ago, they reduced it and said, okay, a million dollars or a million one hundred thousand, that was the most you could have. Now they've restricted it even more to 750,000.
The government is saying we'd like you to buy a house. We're going to encourage you to buy a house. We're going to give you a tax incentive to buy a house, however, not too big of a house. The government is actually being very specific in their incentive there on the house. They're also saying, look, if the state taxes are too high we're not even going to give you all of that deduction because that's limited to $10,000 under the new law. So, the government is being very specific in its incentive.
Another one that almost everybody is familiar with, the government wants you to send your children to college. What do they do? They give you a tax credit for sending your kids to college. Those of us who have sent our kids to college are very excited about that tax credit. That's an incentive. That's the government saying, we'd like you to send your kids to college, we'll give you a small tax credit but enough to kind of take some of the bite out of that big expenses because we want you sending your kids to college.
One of the biggest ones ever is, we'd like you to send your money to Wall Street. Seriously. That's what’s called a 401(k). In other words, if you save through a 401(k), now if you save otherwise, if you save outside of a 401(k), we're going to tax you on all that income. We're going to tax you at your highest rate possible.
However, if instead you put it into a 401(k), which by the way has very deep restrictions on what you can invest in, primarily stocks and bonds, in other words, Wall Street. If you support the stock market, we will give you a tax deduction. That's your 401(k) tax deduction. On top of that, we'll actually encourage employers to give you a match so that you get a super encouragement.
We're going to talk about 401(k)s in subsequent programs here. Many of you know if you've listened to me before, 401(k)s are not my favorite way to save taxes. In fact they're probably my least favorite way to save taxes. Nevertheless, it's something that most of us have experienced. Most of us have had a 401(k) at one time because we've been an employee. If we've been an employee since around 1979, we've probably had a 401(k). We probably put money into 401(k). The government wants to prop up Wall Street, they want to prop up the stock market. How do you do that? Put more money into the system. That's what the 401(k) is all about.
What most people don't understand is that those are minor incentives. Those are really very small incentives. The home mortgage deduction, really a pretty small incentive. The 401(k) even, there's very strict limits. You can only put so much money in the first place. College tax credits, we all know that compared to the cost of college, the tax credits are minuscule.
What most people don't know, but some people do know, is that there are super incentives. The super incentives are actually restricted to those activities that benefit the government directly. Okay? They benefit the government directly.
Let's think about what the government wants. Most important, the government wants stability among the public. How do you create stability? Stability is created through employment. You want everybody to be employed. That's why the employment numbers that come out every month are so important. The government says, look, if we've got full employment, everybody is happy and they reelect us and they're productive and they're off the streets and they're not taking welfare. So they're not a cost, they're actually contributing because they pay a lot of taxes. Anybody who is employed pays taxes. So, employment is a big deal.
So what does the government do? The government says, look, if you're an employer then you're going to get certain tax benefits for employing these people. In fact, they'll even say, if you employ certain people, you get even more incentives. For example, if you employ veterans in the U.S., you get more incentives than if you employ somebody else. If you employ disadvantaged people, or if you have employment in what they call an enterprise zone, this is a disadvantaged area of a city or a disadvantaged area of a state, the government says, we're going to give you even more tax incentives for that.
In our next program we're going to talk about how they give these tax incentives. But, for now, I want to be really clear about what the super incentives really are. They focus around first business. You think about business, it's all about employment. The more people you employ, the better your incentives. That's why the big businesses get much greater incentives than the small businesses.
Some of you have heard me when I've been on stage or on a podcast with Robert Kiyosaki talking about the different tax rates based on Robert's Cashflow Quadrant. We talk about if you're in the E Quadrant, meaning you're an employee, typically you are paying about 40% if you make a really good salary. If you're in the S Quadrant, it goes up to 50 to 60% because you're paying both your share and the employer's share. When you get over to the B Quadrant, which is over 500 employees, all of a sudden it drops to about 20%.
Interestingly enough this is worldwide. Whether you're in the U.S., whether you're in Canada, whether you're in the UK, whether you're in Asia or Africa, it doesn't really matter. These tax incentives are fundamentally the same. Now, the specifics are different going from country to country, but the purpose, the way the government uses taxes, is essentially the same from country to country.
I've traveled all over the world with Robert and every time I go to a new country, like I'll be going to South Africa this summer and I'll go to Australia this summer, I'm going to Canada this spring. Every time we go to a new country, I'm always looking at the tax laws of that country. It's just remarkable how similar they are.
Every single country, if you're a business and you have lots of employees, you get lots of tax benefits and you pay a lower tax rate if that's how you make your money. You are partnering with the government.
Now, the reality is, I keep saying partner with the government. You're a partner with the government whether you like it or not. Let's face it folks, you are a partner with the government whether you like it or not. You can be a silent partner with the government and just let them take whatever they want. That's when their taxes are your worst enemy because you're not taking advantage of the incentives; you're not doing what the government wants you to do; you're not being a good partner.
When we're a good partner with the government, we do what the government wants us to do. These incentives, you know, a lot of people talk about loopholes. Drives me crazy. Why? Loopholes are inadvertent tax benefits. They're a loophole, right? They're a way around something or a way through something. They're not intentional.
What we're talking about and what we're going to talk about on this show is the intentional incentives. These are all legal incentives. Last thing I want you to do is lose sleep at night because you're going, oh, my accountant says I can't do that because it's illegal. No, everything we talk about on this program, everything we talk about, will be absolutely legal within the four corners of the law.
Understand, I sign a lot of tax returns during the year. I have to sign under penalty of perjury that the tax return is accurate to the best of my knowledge. I'm not going to do anything that puts me in prison because let's face it folks, I will admit that my number one goal in life, or one of my number goals, is to never be anybody's girlfriend. The way to do that I think is stay out of prison.
I'm going to do everything by the books. What most people don't understand is they don't understand what the books say. So, go back to employment. Big business. Why do they get all the tax incentives? Because of all the employment.
Now let's go to the investors. You know, if you're familiar again with the Cashflow Quadrant, you know that the I Quadrant, which is the professional investor quadrant, actually has the lowest tax rate of all. You can get to zero.
I wrote a book a while back called Tax-Free Wealth. It's done really well and get lots of nice feedback on it. I encourage you to go to Tax-Free Wealth. Absolutely. It's a terrific, very simplified book on the tax incentives. Basically, when I was coming up with a title, I'm going, what should I call it? Should I call it about tax reductions or how to reduce your taxes? No. What I want to talk about is how to make your wealth tax-free, completely tax-free. The way to do that is to get to that I Quadrant. We'll talk about that in future shows.
One of the big incentives if you think about it, if you produce housing for other people, not for yourself. If you produce it for yourself you get a little tax benefit, that's the mortgage deduction. If you produce it for a lot of people, in other words you're generous, you build a lot of housing for a lot of people, you get huge tax deductions. We're going to talk about depreciation on a future program. We'll talk about the tax incentives, the 1031 exchanges we're going to talk about. All these great things, cost segregation, things like that. We'll talk about these in future programs.
Understand the basic concept here. The basic concept is the government wants you to create housing. The way they encourage the private industry to do that, the private investor to do that, is to give a tax incentive. Housing has tremendous tax incentives. If you go to low income housing, even more tax incentives. On top of the depreciation, you get tax credits for low income housing.
What else does the government want us to do? Okay, they want us to create energy. Actually in the U.S., one of the few countries where natural resources are owned privately, they want to encourage us to drill for oil, they want to encourage us to produce clean coal, they want to encourage use of the natural resources. So, they give us tax incentives for them. We'll talk about those more specifically later.
They also give us tax incentives for clean energy. Some of you have purchased an electric car, and you've gotten a tax credit for buying that electric car. Some of you might have invested in windmills or in other types of clean energy, wind energy, solar energy, any type of energy that's clean has some tax benefit to it if the government wants to encourage you to do that.
Anything that the government wants you to do, they're going to do it through a tax incentive. Let's give one more. How about agriculture? They want better agriculture. They want to encourage farming. They want to encourage ranching. Why? Because they want to feed the people, because they want people to have enough food in their bellies. They want them to be productive, eating. They don't want them to be sick.
So, what do they do? They create tax incentives so that farmers don't have to pay as much tax so that they will continue farming. Right? Everybody knows farming is a very risky business. The best gamblers I've ever met, actually the best poker players I've ever met, are all farmers. They're gambling every single year with the weather. They're gambling with the pests. They're gambling with the prices. They're constantly gambling. It's a tough business to be in, so the government gives incentives to do that.
Just like, you know, drilling for oil. You're drilling for something that you don't even know is there. You may think it's there. You've done all your testing. You want it to be there. Not only do you not know if it's there, you don't know if you can get it out. Then, once you get it out, you don't know what the price is going to be.
Some of us, like I was, investing in oil and gas back in the early 2000s and oil prices were up in the $100 and $140 range, then all of a sudden they dropped to $30 to $40. That's the risk. So, the government is saying, look, if you'll take that risk, we'll take it with you.
Think about this. Every deduction they give you, they get back. If you are successful, they actually get it back in taxes. Now, here's the thing. If you keep reinvesting, then you keep getting the deductions. This is a key point. It's called tax-free wealth. It's called WealthAbility. It's your ability to create wealth. Why? Because taxes, actually the tax law is a tool, it's actually a road map. Not just for reducing your taxes. The tax law is a road map to producing wealth.
Like I was saying at the beginning, you know, taxes are either your worst enemy or your best friend when it comes to building wealth. I was doing this show the other day, I was a guest on a television news show. Before we started the interview, before we were on the air, the host was talking about the IRS, saying I think the IRS is just a scam. I just went, what? What do you mean the IRS is a scam? She couldn't explain it.
I'm going, this is what people think. People are thinking taxes are just a way for the government to steal from me. You can take that approach. Oh, woe is me, the government is out to get me. That's frankly the approach most people take.
But, as we've been talking about incentives, understand that the part where the government takes your money, it's like 30 pages. There's one line that says, all income is taxable unless we say it isn't. Another line that says, nothing is deductible unless we say it is. And, about 27, 28 pages of charts and tables to tell us how much tax to pay on that. The tax law is 6,000 pages in the U.S. It's 12,000 pages in the UK. Now, Canada is slightly less, about 3,000 pages. I think the Canadians have got this right, fewer pages in the tax law.
Everywhere I go though, what I see is that the tax law of those 3,000; 6,000; 12,000 pages, there's like 30 pages that are the government saying give me your money. And there's like 5,970 pages saying, here, take some money. Here, be a partner, do those things we want you to do. We will give you those tax incentives.
That's why this program is about way more money, way less taxes. Understand that if you don't have to pay those taxes legally. If you don't have to pay those taxes, what can you do with that money? You can super charge your investing. You've got all this extra money. I've actually calculated that the government is willing to give you a new house every year if you will do what they want you to do. You can take those taxes you saved, borrow from the bank, and buy another house that you can rent out.
They're willing to do this for you, only if you get the financial education. That's what WealthAbility™ is all about. Everything in wealthability.com is about how to make more money in part by paying less taxes legally. There are reasons the rich are rich. People can say, well, the rich are rich because they're evil. That's fine, they may be evil and they do actually create the tax laws for themselves. Let's be honest. The tax laws are created by the rich for the rich. No question.
So, we have a choice. Do we complain about it? Do we so, oh the IRS is a scam? Do we argue with it? Do we say, oh no, we need to be afraid of it because the IRS, they're evil, they're just bad, they're going to come get me. Or, do we embrace it? That's the choice. That's the decision you can make. You have to make that decision up front.
Once you make that decision, that the tax law is my friend, the whole world changes. The whole world changes because now we're looking at how do I become a better partner with the government? How do I work with the government to create housing, employment, energy? How do I work with the government to … there are adoption credits. The government wants us to adopt children. I think that's a noble cause. I have an adopted son. I find that to be a very noble cause. That's very personal to me. So, that the government gives a tax credit for adoption, I think is a wonderful thing.
You're going, okay, well, that money has to come from somewhere. That's right. It comes from those people who spend their money. So, all the incentives are paid for by those who really consume. It's paid for the consumers so that the producers can produce more. Now, if you just want to consume, that's fine. Pay your taxes. Do your 401(k). No problem. The government is fine with that. They're happy to take your money.
On the other hand, if you're willing to do some things that are actually productive, really productive the way the government wants you to be productive. There's a lot of things to be productive at that the government doesn't care, but there are a lot of things like charitable donations, charitable causes, creating employment, creating housing, creating energy, creating research and development, there's a lot of things the government does want you to do, and when you do it, just remember it's your ability to create your wealth. You can make way more money when you pay way less taxes.
You've been listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more go to wealthability.com.