| As everyone in the U.S. knows, we have just passed | | | | taxes and increase your wealth. Start with the most |
| one of our most "favorite" times of the year: income | | | | experienced person you can afford and plan to pay |
| tax season. If you are going to create and sustain | | | | for even more expert advice as your wealth |
| wealth, it is inevitable that you will have to address | | | | increases. Ultimately, it will probably be less expensive |
| your personal tax situation. | | | | to pay for outstanding advice than to over pay on |
| By "address," what I really mean is take control. This | | | | your taxes. If you wait until tax time to come up |
| is true whether you live in the U.S. or just about any | | | | with your plan, you have waited too long. |
| other country. Agree or disagree with the "fairness" | | | | 4) If you haven't already, start keeping detailed |
| of taxes, this is a subject that you must obtain some | | | | financial records. This is a good habit to get into even |
| basic understanding if you want to significantly | | | | if you don't yet have a business. If you keep detailed |
| increase your wealth. | | | | records (using a computer program!) as you go |
| Before I start, let me say that I am certainly not a | | | | through the year, it makes it much easier to turn |
| tax expert. And space does not permit going into | | | | over your records to your tax preparer when tax |
| detailed tax strategy. The purpose of this article is to | | | | time comes. |
| explain why it is so important for you to take up the | | | | 5) When you record your income from your |
| study of basic tax law and strategies, and even | | | | paycheck, be certain to record all deductions taken |
| more important seek out the advice of a true tax | | | | from your check. Don't just record the net. If you |
| expert. | | | | actively track your tax expenses deducted from the |
| Why is it important to understand taxes? | | | | top of your wages, you will be more motivated to |
| In most cases, taxes are your largest expense. This | | | | do everything possible to legitimately reduce that |
| is probably the key reason that wealthy people | | | | expense. If you simply record the net wages, you |
| spend so much time, effort, and money doing their | | | | have probably fallen prey to the tax trap without a |
| best to minimize their tax expense. Depending on | | | | fight. |
| your tax bracket, your federal taxes may be as high | | | | 6) If you are an employee, make certain you are |
| as 28%-35% of your income! And then there are | | | | taking full advantage of your 401k and medical flex |
| social security, state income taxes, property taxes, | | | | spending plan if available. Money set aside for your |
| sales taxes, etc., etc. If you are generating all of your | | | | 401k (usually matched by your employer) helps |
| income from your wages (earned income), you may | | | | reduce your taxable income. You have to pay taxes |
| be lucky to actually keep 50% of what you really | | | | eventually, but hopefully by the time that happens |
| earn. | | | | you will be in a lower tax bracket. Medical flex |
| That is a staggering figure when you think about it. | | | | spending plans help you pay for medical costs |
| That means that if you have a salary of $50,000, | | | | (including over-the-counter medicines, dental work, |
| you may be only keeping $25,000 of your earnings | | | | glasses, etc.) using pre-tax dollars. Flex spending plans |
| for your own purposes. | | | | are also available for child day care. |
| If you think I am exaggerating, pull out your last | | | | 7) As soon as possible, replace your income from |
| paycheck and look at the tax withholdings for taxes | | | | wages with income from your own business and |
| that have been taken off the top of your earnings. | | | | unearned income from investments. Of course, this is |
| If you take your net earnings and divide them by the | | | | easier said than done, but the benefits are huge. If |
| gross earnings, what is that percentage? Don't be | | | | your income comes from a business that you own, |
| shocked if it isn't about 40%. Then take a look at | | | | it's much easier to pay for expenses with pre-tax |
| your sales taxes. In California, the sale tax is around | | | | dollars. Obviously, you have to have a real business |
| 8.25%. So just doing a quick estimate, I'm already at | | | | (not just a hobby) and the expenses must be |
| about 48% in tax expense (assuming most of the | | | | legitimate business expenses, but this allows you to |
| money is spent on taxable items). | | | | have a lot more flexibility in your tax planning. Realize |
| The cost of ignoring your tax expense and not doing | | | | that you can (I would say must) still start a business |
| everything legally possible to minimize it is huge. Of | | | | even if you have a full-time job. If you want to |
| course, tax law can be exceedingly complex, and the | | | | create great wealth (and minimize your tax expense), |
| penalties of making a mistake are high. So a large | | | | don't let fear, unbelief, or lack of knowledge prevent |
| number of people, simply accept this large tax | | | | you from starting your own business. You must take |
| expense as inevitable. They concede defeat without | | | | action to overcome those obstacles. |
| really even trying to take any type of action to | | | | Eventually, you need to target making the ultimate |
| minimize the impact. | | | | shift to getting your income from unearned income |
| What are some actions that you can take? | | | | rather than wages. Unearned income is taxed at a |
| 1) Recognize that you can take action to reduce | | | | lower rate than earned income. That's one of the |
| your tax expense. Too many people blindly assume | | | | ironies of our tax law: the more income that is |
| that it is impossible to significantly reduce their tax | | | | "unearned" the lower your tax expense. |
| expense. Either they think it is too complicated, too | | | | Some Power Affirmations Related to Helping you |
| much trouble, or they are afraid that if they take | | | | Take Control of Your Tax Expense |
| deductions that are legitimate, that the government | | | | 1) I am now in confident control of my tax expenses. |
| will come after them. If you assume there is nothing | | | | 2) I have a clear understanding of basic tax law and |
| you can do (learned helplessness), you are right. If | | | | strategies. |
| you assume you can improve your tax position, | | | | 3) I regularly seek out sound tax advice from |
| you're right. The fact is that while you must pay your | | | | seasoned professionals. |
| legal share of taxes, the government actually wants | | | | 4) My unearned income from investments is |
| you to take advantage of tax deductions and credits. | | | | increasing everyday. |
| That's why the laws were passed to allow for them. | | | | 5) I record all financial transactions regularly and take |
| 2) Make a commitment to study basic tax law so | | | | advantage of every legitimate tax deduction. |
| that you have at least enough knowledge to speak | | | | 6) I now take maximum advantage of my employee |
| with a tax advisor with a certain degree of | | | | benefits including my 401k and flexible spending |
| intelligence. You can't take deductions that you are | | | | accounts. |
| not aware of. Because of the potential savings, the | | | | 7) I pay as many expenses as possible with pre-tax |
| study of tax law needs to be a fundamental part of | | | | dollars. |
| your financial literacy education. Your two highest | | | | 8) I enjoy studying basic tax law, because I enjoy |
| priorities must be to create wealth in the most | | | | the savings my knowledge brings. |
| efficient manner and protect it. And any protection | | | | 9) I am absolutely committed to increasing my |
| strategy must include protecting it from over | | | | financial intelligence everyday. |
| taxation. Don't just limit your study to books. Also | | | | 10) I now take full advantage of every legal tax |
| seek out college classes, night-school, and seminars. | | | | deduction available to me. |
| But be careful of seminars as they can be a lot more | | | | 11) I track my tax expenses and take every action |
| expensive and not as thorough as a class from a | | | | possible to minimize that expense. |
| community college. | | | | 12) By studying books, taking college-level classes, |
| 3) Seek out a CPA and/or Certified Financial Planner | | | | and attending seminars, my financial intelligence is |
| to come up with a long range plan to minimize your | | | | increasing everyday. |