The fastest way to put money in your pocket is to reduce taxes. In this episode, Tom offers five ways to legally reduce your taxes. Learn about the best ways to take tax deductions, the best available tax credits and why your 401(k) may be costing you money.
03:37 – Find Out The Best Way To Take Deductions.
09:04 – What is Conversion & How Can It Reduce Taxes?
12:01 – How Can Your Kids Cut Your Taxes?
17:07 – What Are The Best Tax Credits?
20:27 – Hear Why 401(k)s & IRAs May Be Costing You Money.
This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Welcome to The WealthAbility™ Show with Tom Wheelwright, where we talk about how you can have way more money and pay way less taxes. Today, what we're gonna talk about is what if, what if you could have more money in your pocket today? More money that you could use for your vacation, more money that you could use for your kids, more money that you could use for all the things that you'd love to do, you just don't have the money to do them. So the way we're gonna do that's were gonna talk about the five ways you can legally save taxes every day. The reality is that the fastest way to put money in your pocket is to reduce your taxes. It's also the easiest way.
I have been doing taxes and saving taxes for thousands of people for 35 years, starting with my work with one the very biggest CPA firms in the world, Ernst and Young, three years in their national office, 14 years as an adjunct professor at Arizona State University and 25 years with my own practice. And yes, that doesn't add up because I did several of those all at the same time. So, I love taxes. I love taxes not just because I think they're fascinating, but because they really are powerful. Okay, taxes will either, as we spoke about on our last program, they're either going to be your worst enemy or your best friend. So, practically, we need to know what to do about taxes. People tend to be scared to death of taxes, because all they see is that withholding that money coming out of their paycheck every single month, or every single week. And what happens is, they're going, “Well this isn't money that I get to use. This is money that the government is going to waste. This is money that the government is going to spend on things that I don't care about.”
Okay, what if the government actually said, “Look, we have ways that we'd like to reduce your taxes. You just have to do the things we want you to do.” There are certain ways that they do this. Okay, there's actually five ways they do it. There's only five ways they do it. And the only one we ever think about is actually the worst one we can do. Which is, we're gonna talk about at the very end. We call it deferral or postponing taxes. But let's start with some of the big ones, because what we'd really like to do is put money in our pocket that we never have to give back to the government.
The worst thing in my mind is the idea that we're gonna save taxes now, but when we really need those taxes, when we're retired, when we may have illness, or we may be sick. When we really need that money, we're paying the highest taxes. That's what Wall Street wants you to do. We're gonna talk about that in another show. That's what Wall Street wants you to do, they want to put your money into a 401(k) or an IRA, so that down the road, you're gonna pay those taxes back. What we wanna talk about is, four of the five ways that the government gives us tax incentives, four of the five ways, more than 80% of the ways that they give us tax incentives, is permanent tax savings. It's not temporary tax savings, it's permanent. In other words, we get this money forever. Once we get it, we never have to give it back.
So let's start with the very first one, because this is the one that everybody's most familiar with, and these are permanent tax savings. We call them deductions. We all know about deductions and actually in the US we all know that in 2018 a lot of deductions are going away for certain types of earners. Okay, particularly employees, are losing a lot of their deductions. So, we're gonna talk about right now, how to get deductions back. Actually the government only took away deductions for, certain types of deductions. But other deductions they actually increased. Okay, so how do you get those additional deductions? What we call it is the super tax payer.
The average taxpayer, if you think about your paycheck. Look at that paycheck, okay? I know it's painful. But look at that paycheck that you get, and what happens? The very first thing that comes out, before you get a dime, out comes your taxes. Before you get even one penny, your taxes come out. You get what's left over? And then you use that for your expenses and if there's anything left over after your expenses, what do you have? You have a little bit of money, maybe to go to McDonalds or save up for a family vacation or a road trip once a year, something like that. What if we could change the rules? What if we could actually take the expenses out first and then pay the government what's left over? As opposed to taking out what the government gets first.
We can do that, in fact, it's legal. In fact, the government wants you to do it. It's called the super taxpayer. It's called a business deduction. Okay, we've all heard in this last tax bill that we have all these great tax benefits, right, for businesses. Right? I mean this last tax bill, the Trump tax bill was very much about business. It was very much, who's paying for it, well, you know, the employee, as always, is paying for it.
But guess what? Anybody can own a business. You can own a business out of your house. You can be an Amazon reseller. You can do any kind of Internet marketing. You can do multi-level marketing. There's so many different home based businesses you can do. And guess what? Every one of them gives you the same benefits as if you were Walmart. Okay, if you were a big business. So you get the same tax benefits. It's called deductions. Think about this. What if when you went out to dinner with your spouse, what if that meal were deductible? All of a sudden the government's paying for part of your meal. It's like getting a 20-30% reduction in your bill. What if the waiter handed you the bill and said, by the way the government's gonna pay for 30% of this? How would you like that?
Well the government does that all the time, in fact, they're happy to have you do that. You only have to meet three tests. The three tests are very simple. It has to have a business purpose, that's pretty easy. The business purpose is you're gonna talk about business, right? It has to be ordinary, meaning it has to be typical that you're gonna talk about business with, who you gonna talk about it? You're gonna talk about it either with your business partner, who's your spouse, perhaps in this business. Or, you're gonna run it by somebody who has nothing to do with the business so that you can get some positive feedback. Right? Or some critical feedback.
And I know, I had a spouse for many many years, a musician, right? Wanted nothing to do with money, except to spend it, right? But really didn't want to know anything about taxes. We would go to dinner, of course as a business owner, we're always talking about business when we're at dinner, right? And no matter who we're with, and so I'm bouncing ideas off of this musician, right? Well, she's got a completely different viewpoint. Is that an ordinary expense? Absolutely. Does that qualify for the deduction? Yeah. And then it has to be necessary, meaning that it's actually gonna give me a benefit in my business. That's all it is. So every single day, any expense you've got, literally, your car, your house, your meals, your travel, even your vacations, okay, there are ways to make them deductible.
And in future programs, on this podcast, we will talk about specifics as to how to make your travel deductible. What kind of documentation you need for your meals. We're gonna talk about all of these great things. What we're doing is we're taking something that's not deductible and we're making it deductible. Well, if you're in a 30% tax bracket, and you have a $100 that you're spending. If you get a deduction for that $100, that's like the government's paying 30% of it, and you're paying 70% of it. That's immediate money in your pocket, because here's what you get to do. You get to reduce your withholding. So that money, you can go to your employer, the minute you start your business, you sit down with your tax advisor. You start your business. You get things ready. You know approximately how much you're going to save in taxes for the next year because a good tax advisor's gonna be able to tell you that. What are you gonna do? Immediately, you're gonna go to your employer and you're gonna say okay, I wanna change my withholding.
Well, what does that do? That means your very next paycheck, you get money in your pocket. Money in your pocket you can use any way you want. And guess what? You're never going to have to give it back. Because this is a permanent tax benefit. This is just one, okay so, I'm gonna go over the other four. Hang on. So, deductions are really important because we want the government to help pay for our expenses, right? So, that's a big deal.
The next one is one that, very few people ever think about this. I like to call it conversion, in other words, we all know that capital gains are taxed at a different rate. Dividends are taxed at a different rate, than our salary. Our salary is taxed as high as 37%, whereas the most we can pay on dividends or capital gains is 20%. So, anytime we can convert or change our income from a high taxed income, to a lower taxed income we just put money in our pocket. Let me give you one that's really easy. And it came out of this new law. Now some of you've heard this kind of, there's been a lot of discussion about it, this new thing called this 20% pass through deduction. And I know a lot of you are going, I don't know what that is, but I know it applies to business so it can't possible apply to me, right? What if it could apply to you?
It's actually not that difficult. See, here's the thing. It applies to any business owner up to a certain amount of income. Okay, so let's say that you make $150.000 a year as an employee. Do you know that if you converted that income from employment income to self-employment income by being a contractor, by being a consultant to your company or a contract to your company, getting a 1099 instead of a W2, do know what you could do? Immediately you get 20% off. In other words, instead of paying tax on $150.000, you pay tax on $120.000. Now who wouldn't like to get 150 and pay tax on 120? That's tax on $30,000 that you didn't have to pay. Okay, let's say you're in a 30% bracket, that's $9000, I know I'm doing math quickly, okay you're gonna wanna listen to this show over and over again.
Okay, you're gonna go to wealthability.com/radio and you're gonna be able to get to this show again. But you're gonna wanna listen to this over and over again because I know I'm doing math right? And I do a lot of math in my head, so you're gonna wanna sit and listen to this. Discuss it with your spouse, discuss it with your kids, discuss it with your parents, because if your parents didn't teach you this it's not because they were bad. It's because they didn't know this. So everybody needs to learn these basic ideas of how to put money in my pocket today and have money for what I want today. Okay?
We're gonna talk later about how to take the money and invest it, but you may just want that well deserved vacation. Instead of the government getting this extra 20%, you get the extra 20%. It's a simple as saying, it takes some advice. Make sure you sit down with your tax advisor on this. Because you don't wanna lose your benefits like your health care etc. We can deal with that. Okay? We can deal with that. How about a 20% reduction in your taxes today? How about a 20% reduction? All we have to do, really, is convert from being an employee to being self-employed. That's all we have to do.
We're gonna reduce other taxes when we do that, so there's all sorts of other things we get. But that's just one example. So, number one was deductions. Number two was conversion. Number three, you know, 200 years ago we were what we'd call an agrarian society, right? We had farms, we had ranches, that's what we did. Okay? That's what our great great grandparents did. When we were an agrarian society everybody wanted to have as many kids as possible. Why? Because the boys, would grow up and they would work on the farm. Okay? So they were assets to the farm. The girls would grow up and marry boys, and they would have kids and they'd work on the farm. So, everybody wanted as many kids as possible, 'cause kids were assets.
Now we're in the information age. For many people kids have become liabilities. But there's one thing that kids have that we can make an asset. And that is that kids have their own tax brackets. Kids have their own tax brackets. Parents, elderly parents, we may be supporting elderly parents, they have their own tax brackets. Tax brackets start really, really low. Okay? You got 10, 12, 20% tax brackets. You've got these low tax brackets and you may be in this 30, 35, 37% tax bracket. And you're going, “Wow, if only I were in that 12% tax bracket.” Well, guess what? Your kids have those tax brackets. Your parents have those tax brackets.
Do you know, something as easy as this? Let's say you've started your home based business, and you pay your son or your daughter to do bookkeeping. Or to help marketing in your business, and you pay them $12,000 a year for this, okay? Now 12,000 is the magic number, because that 12,000 is not taxable to your kids. It gets zero tax folks, their tax bracket on $12,000 of salary from you is zero. So, if you're in a 30% bracket and you pay them $12,000, you just put 30% of $12,000, $3,600 into your pocket today. That's money that again, you can go to your employer, reduce your withholding. Or if you're making estimated payments because you have a business, you can reduce your estimated payments. This is money that goes in your pocket today to do whatever you want with right now. You don't have to wait until April 15th of next year, you can do it right now. It's something that you can take care of right this minute. It's not very difficult.
Sit down with your tax advisor. Figure out what could your kids do in your business. You started your business to get your deductions, now what can your kids do in your business in order to pay them? Because what are they gonna do with the money? Well you're gonna take that money, and what are you gonna do? You're gonna go on the family vacation. You're gonna put in for their college, you're gonna use it for their after school programs. You're not gonna use it for their food and their normal stuff because guess what? Obviously you have to pay for that, right? You're responsible. But there's all these other things you can do with that $12,000. They don't have to have control over that $12,000, okay? So, I know a lot of you are out there going, “Wait, wait, wait. The last thing I want is my kids to get $12,000.” If you're in control of it, though. If you get to use it the way you want to, and you're using the money anyway.
Why not get a tax benefit for it? ‘Cause guess what? The government wants you to do this. Do you know that if you pay your kids from your own company, you don't even have to pay Social Security taxes on that salary. If your kids are under the age of 18. That means that the government's saying to you, “Look, we want you to employ your children. We want you to do it. Okay, we want you to involve them in the business. We want you to teach them how to work, to teach them how to be self-reliant. We want these things, okay? And in order to encourage you to do this, we're gonna give you a $12,000 deduction and not tax them and we're not even gonna charge Social Security taxes on it.” I mean, this is like magic that we can do this.
Now you go, “Okay, but I don't have kids, and I don't have elderly parents.” Well, guess what? We have things called entities. One that most people are aware of is corporations, right? What did we all hear about in this last tax bill? Corporations, their tax rates went down. They went from 35% to 21%. Well, guess what? If a big company like Walmart or Walgreens can be a C Corporation, so can your small company. So, you can always get money into a C Corporation, get it taxed at 21% if you're in higher bracket than that. So there's all sorts of ways to use tax brackets. And I know I'm just going on and on and on. But man, if I could go from 30% to zero by paying my kids, or 30% to zero by paying my parents. OK? ‘Cause they also get the $12,000, right? Tax-free.
If I could do that, why wouldn't I? Why wouldn't I put that money in my pocket today and use it now, rather than wait and just give it to the government? The government's gonna take it one way or another. Either we can do what the government wants and they give it to us, or we can not do what the government wants and they'll just take it and spend it the way they want to spend it. They don't care one way or the other. But they really would love it if you would take advantage of this.
One more thing. One more thing this is permanent. Remember those tax brackets, once you save those taxes you never pay that back. This isn't like a 401(k) where you pay it back when you turn 65, right?
The fourth way is we actually have a way to eliminate taxes. We call them tax credits, or non-taxable income. If you're going, “Well, tax credits, yeah, I know a little bit about that.” Sure, I mean for example, in some states, now New York just enacted a new bill. And in New York what they enacted was they're trying to get around this non-deductible state taxes, right? And so they put in some charities, where if you gave to the charity you got a credit on your state taxes. Well Arizona's been doing this for years, okay? Sorry New York, you're a little behind. Arizona's been doing this for years and years and years. You get a credit for taxes for a charitable contribution to certain charities, for example private school tuition is one of those charities.
Alright? You get a deduction. Okay, sorry not a deduction, but a credit. You get a credit, meaning dollar for dollar. Credits are dollar for dollar. It's not like 30% when you're in a 30% tax bracket you get 30%. No, no, no. You donate a dollar you get a dollar back. You pay a dollar less in state taxes. Well, guess what? Your state taxes are less deductible anyway. So, now what you've done is, you get a deduction for charity purposes in the federal government, right? ‘Cause that's a charity. So you get a deduction, you're also getting a reduction in your state taxes. So it actually makes you money to be generous. We're gonna talk about that more when we talk about building wealth because being generous is pretty much the best way to make money.
But the government's saying, “Look, if you do these generous things, we're going to give you this huge tax benefit.” The federal government gives you one tax benefit, the state government gives you another tax benefit. So you actually get to double dip. I mean, we've all heard about double dipping. This is a way to double dip that the government wants us to do it. There are hundreds of ways, hundreds of tax credits. There's adoption credits, we all know the college credits, right?
Then there's things that aren't taxable at all like municipal bonds, like income from municipal bonds. Like life insurance proceeds. I mean there's all sorts of things. And we'll get into these as we get further into The WealthAbility™ Show down the road. We're gonna get into some more specifics. But right now I just want you to get in your head, look there's five ways, and think about there's thousands and thousands of specific tax benefits here. And we're just talking about the basic ways to do it.
We've talked about deductions, conversions, tax brackets, elimination. These are all permanent tax benefits. We never, ever have to pay this money back. I think Wall Street has a mind that if you can get your money to them, that's Nirvana. For them it is. I actually had a conversation with a buddy of mine a number of years ago. And he'd been working for one of the big brokerage houses. And he said in our sales meetings, we used to talk about there's three types of benefits. Three people that could benefit from an investment. There's the client, there's the advisor, the financial advisor and then there's the brokerage house. And by the way, two out of three ain't bad.
So, all they cared about was how do we make money for us? Right? And the reality is that's what Wall Street's about. In our next program we're gonna talk about how you can not give your money over to Wall Street and make a lot more money on your own. That's called your WealthAbility™.
Okay, now, number five, deferral. This is the one, I'm gonna talk about it. We all know about it. It's IRAs, 401(k)s, pension plans, profit sharing plans. If you go to a financial planner or if you go to most tax preparers, they're gonna tell you that the way to save taxes is to defer it to a later year. I'm telling you that is the way to save taxes once you've done everything else you can do.
In other words, you've gone through and you've gotten all your deductions. You've gone through and you've converted income to a lower taxable income. You've used your tax brackets for your kids, your parents, your corporations. You've gone through and gotten all your credits. You've gotten your non-taxable income. And after that you still have taxes and you don't want to pay that many taxes. So your going, “Look. All else fails, I'm gonna postpone it to a later year.”
It's a little bit like when you were a kid and you go, “Okay, I've got this broccoli and cauliflower on my plate. I don't really wanna eat it. However, maybe if I wait and eat it till the end of my meal, it may be cold. It may not be as good, but if I wait there could be a hurricane and I won't have to eat it.” That's pretty much the idea behind deferral. You can wait until later to pay your taxes. Here's what Wall Street's telling you. Wall Street's always saying, “Well, okay, wait until later to pay your taxes. That's a good thing because, guess what? You're gonna be in a lower tax bracket.” Well, why are you gonna be in a lower tax bracket? Well, the only way you're gonna be in a lower tax bracket is if you retire poor. I mean, think about it.
You're not gonna have your business deductions 'cause you've sold your business. Conversion is a little tougher. You're not gonna have your tax brackets, again because you sold your business. Right? So, you're not gonna have a lot of these regular tax benefits. You've paid off your house. You're not gonna have your interest deduction. Your kids have all finished college. You're not gonna have that. So, what are you gonna be in? If you had the same amount of money when you retire as you did when you were working, you're gonna be in a higher tax bracket.
But what that means is that we're deferring income to a higher tax bracket year. When we need it the most. People go, “Well I'm not gonna need as much when we retire.” Really? You're not gonna have medical bills? That's great, because you are different from everybody else. I'm going, I'm getting there okay? I'm past the point where I would pay a penalty if I took my IRA out. Okay? So I'm over 59 1/2, right? So, what I know is, is that medical expenses are starting to creep up on me. Okay? And this is what happens. A lot of you are 20, 30, you go, “Ah, no medical expense. Not a big deal.” Right? They're not when you're young. When you think about retiring though, guess what? They are going to be a big deal. You're gonna have medical expenses for you. What about medical expenses for your elderly parents? They're gonna be very elderly when you retire, right? Probably.
The point is, is that why would you want to retire in a lower tax bracket? That means you're making less money. Who wants to make less money when they retire? So, part of WealthAbility™ is about retiring with more money not less money, while paying fewer taxes. The way to do this is to reduce our taxes permanently. Then we have all this money we can start building non-taxable, non-taxable income, non-taxable passive income. We're gonna talk about all these things on future programs.
What I want you to understand right now is these are five ways you can legally save taxes every single day. You can put your money in your pocket now. As soon as you sit down with your tax advisor, and you come up with that tax strategy, as soon as you do that and you decide, I've started my business. I've got all this conversion, tax brackets, elimination and maybe even some deferral going. I've got all this going, I now can go to my employer. I can reduce my withholding. I can go to my accountant and say reduce my estimated payments. I can put that money in my pocket right now. I don't have to wait till April 15th. I don't have to wait for a big refund. Why would I wait for a big refund? I want that money now because I have needs right now. I have medical expenses right now. I have children to take care of right now. I have vacations I wanna take right now. I have investments I wanna make right now. So, let's do it right now, let's take advantage.
What happens is when we do that, is we end up with way more money.
You've been listening to The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes. To learn more go to wealthability.com.