11 Principles of Creating Wealth Through Tax Efficiency - Part 1

We always have a disclaimer, but I actually want to talk about the disclaimer for a moment. In this webinar today, I want you to just be clear that we are not licensed insurance specialists. I'm not a certified accountant, I'm not a tax attorney, I'm not an attorney of any kind. The material that I'm going to share with you does not take into account your particular situation and it is not intended to be a recommendation for you. This is purely educational. That's what this is, it's to stimulate thought, it is to make you think about taxes in a very different light. Now, from there, you are going to have to go make decisions on your own, you're going to have to know that your situation is unique and you're going to need to talk to somebody who is licensed, who is an expert, to help you with their situation. I'm merely here to open your mind, to get you to look at this from a different perspective and see how you have been limiting yourself, then you take it from there. 

Okay, so here are the 11 principles. 1, you have to own your tax efficiency plan and hire an expert tax advisor. Number 2, your tax plan will be one of the best investments that you'll ever make. Number 3, you want to deduct expenses against high income tax, and minimize expenses against low income tax. 4, most of your life expenses are deductible. 5, focus on reducing your taxes on the rest of your income. 6, your optimum tax rate is going to come, not from a single strategy, but from a blend of strategies put together. Number 7, seek to own nothing, but control everything. 8, maintain control in your tax structures. Number 9, be an expert at tax efficiency in your niche. 10, all tax planning must have a business purpose other than reducing taxes. 11, The better the tax benefits more often than not, the more complicated the rules. We're gonna go over these 11 and we're going to do this in two parts. Today, we'll cover points one through five principles 1 through 5 and then next week, we'll cover principles 6 through 11.

Number 1, own your tax efficiency plan and hire an expert tax advisor. This right here is going to be a big shift because 99.9% of the population either does their own taxes, or they use an accountant to do their taxes. I'm going to tell you something very different. You want to use a tax attorney to do your taxes and do your tax plan, not an accountant. Tax Attorneys are preferred for several reasons. When you talk with a tax attorney, all discussion that you have with them is protected by attorney client privilege. See, most people never think about this, but when you talk about your tax situation with the accountant. The problem with an accountant is that the accountant has to balance the interest of the client and the IRS. Because if they are not in alignment with IRS regulations, they can get in big trouble and not only that, if you end up in court, whatever you tell your accountant is admissible in court. So if you're having conversations with your accountant, about how to reduce your taxes, anything you say to him can be held and can be used in court against you. That is not the case with a tax attorney. You're protected by attorney client privilege. The other thing, as I said, the accountant has to balance the interests of the client and the IRS. The tax attorney works solely for the client. 

So the way you want to do this is you have a tax attorney put together your structures and then the tax attorney works with an accountant and oversees the account. You need the accountant to prepare the taxes but you do not want the accountant to do the tax strategy. As they said 99.9% of the population either doesn't themselves or they use an accountant and the accountant often does not know the best way to minimize your taxes. This is really important. So when we hire a tax attorney Ernie, and this is going to vary on your situation, some of you, you're not going to hire a tax attorney because you're not paying enough tax. Okay, but if you're a high income earner, you are going to want a tax attorney and you're going to want one that understands international structuring, and global tax strategies, because this is all going to be able to help you.

Now we move to number 2. Number 2 is your tax plan will be one of the best investments you ever make. Each deduction reduces your payed taxes. So every time you get a deduction, it reduces the amount of taxes you pay, which increases the amount of income you have and there's two ways this happens. There's a tax credit, tax credits are the best because a tax credit is deducted directly from the taxes that you owe. Then there's tax deductions, tax deductions, reduce the amount of taxable income. So a credit is dollar for dollar off the tax you owe. A deduction reduces your tax by your tax rate. So if you're in a 37% tax bracket, and you take $1,000 deduction, it's gonna save you $370 in taxes, that's what a deduction would do. So reducing taxes allows you to keep more of your investment or more of your income, which then allows the power of compounding to really work in your favor. A really quick story that I love is Sir John Templeton is considered to be one of the great investors of all time. Sir John Templeton renounced his citizenship in the 1960s and moved to Bermuda, where it was tax free. Now when Sir John Templeton died, he was worth about $2.2 billion. Now he didn't he had given away millions at this point, but he was worth about 2.2 billion and the New York Times did an article they went through and looked at how he had made his money and they estimated that had he stayed in the United States and not gone to Bermuda. That is he would his net worth would have been 280 million, instead of 2.2 billion. Everything else being the same just the impact of taxes over time, that shows you how big of a force this is.

So one of the things that we like to say too is that a reduction in your taxes is guaranteed income. A lot of you're out there looking for a trading strategy or a fund manager or something like this that makes 20% a year, 30% A year. Like man, if I could find a fund manager that makes 20% a year that would be amazing for my compounding. Yes, it would, but when you invest in the Fund Manager, he could lose money, he's gonna have up periods, it's gonna have down periods, even if he's the best. When your tax plan comes, you're not going to have down periods. It is guaranteed money that goes directly in your pocket with no drawdown. This is amazing. So saving in taxes is one of the most reliable ways to increase your income. Forget all the trading for now. Just get that first. Now, as your wealth grows, so should your use of structures and tax planning. So the more money you make, the more proactive you want to be in figuring out where you want to put it. 

We talk about starting with simple LLCs, simple retirement accounts, making sure you're maximizing your IRAs, your Roth IRAs, your 401K's, this sort of thing. Then from there, when you have maxed all those out, and one of the things that we teach our students is that you can actually put way more money in those than you ever think you can and you have the ability to have much more flexibility at lower fees than what you are being told. So we actually think these accounts are amazing, but you have to understand all the details of it. So we start there. Once we have those once we're consistently maxing those out and we have additional income, then we start looking at more advanced strategies and there we can use international structures. We can use annuities, we can use insurance, we can use things like this, that help us take our tax planning to another level.

Then we move to number three, we want to deduct expenses against our highest tax income and minimize expenses against our lowest tax income. So where our tax rate is lowest, we want to minimize expenses. That way we avoid wasting our deductions on really good income. Where we pay the least amount of taxes, we want to accumulate as much as money as possible and not put expenses there. I often will get questions from traders, they'll say something like, can I deduct my trading expenses in my IRA? Well, there is ways to do it, but do you want to do that? Why would you want to take expenses in a tax free or tax deferred account, you don't want to do that? What you want to figure out is how you take expenses against your highest income places that you take ordinary income places that you're paying up to 37% a year in taxes. How do you do that? That's where you want to take your deductions. 

Number 4, most of your life expenses are deductible. Now, one of the things I want to say is everything we're talking about, everything we're discussing here is legal. It is within the tax code. One of the big distinctions that really helped me to understand is the tax code is actually written by a lot of special interests that are designed to protect their income. That was a big 180 for me, from what I learned about taxes originally. I originally looked at taxes, and I took taxes in college and I was going through, like, oh, my gosh, I have to pay taxes and all these different things, but I got a very different perspective on this. If we wanted things to be really simple, we'd get rid of all the tax code and everybody would just get taxed at a flat tax. It'd be really simple, but you eliminate all the deductions. Why do you have deductions? Deductions are there to protect rich people from having to pay taxes. So they lobby and when they pass these new tax laws, they always have loopholes, they always have carve outs, because there's people who have spent lots of money lobbying to get these put in place. So the moral of this is, is that you have a legal right, to minimize your taxes. You're not under any obligation to pay more than what you should, you should only pay what you should, and that is it. In doing that, you want to minimize your taxes legally and there's lots of things that you can do. We don't want to do anything illegal, that is not worth it at all. legal. 

Okay, so here's just some examples. We want to figure out how to pay our life expenses first and then pay taxes. A lot of things in our life that we've spent money on, if we just look at our biggest expenses, our biggest expenses are insurance, mortgages, rent. Those are the big three and there's some other things beyond that, travel, automobile payments, things of this nature. The big difference between the employee and the business owner is the employee pays taxes first. I mean, they don't get a choice. It's just taken right out of their check and then they get a W2 at the end of the year. They're not allowed to take deductions. So you pay taxes first, and then you have to live on what's left. Business owners pay their living expenses first and then pay taxes on what's left. It's a big difference. So you could take two people, you could take a high income employee, let's say makes $500,000 a year and then a business owner who makes $500,000 a year, you're gonna see that the business owner lives a much better lifestyle than the employee does. Or maybe say this another way, you could see, a business owner makes $250,000 a year, makes half what the employee makes, and lives the same lifestyle and that's because he gets to deduct many of his life expenses first, where the employee has to pay taxes first. 

Just some examples. When you own a business, your health insurance is deductible. You can give health insurance to your employees and you're an employee and you're an owner owners are grouped in that, your health insurance is deductible. You can have things like a home office, or you can have things like vacation homes and these things are deductible. Where you stay in your vacation home where you rent it from yourself. You don't own it, you rent it from yourself and then you put it like Airbnb, you can put it out you can rent it to other people and then it has a business use. You can own a vacation home way, way way cheaper than you think you can. So there's an example. Your car. You can often pay for a lot of your car if you're using it for work because you use it for appointments, you use it for picking up things, for errands, things like this. This is all deductible. It's all legal. Travel, you can set up your trips. You can set up business trips in conjunction with personal trips, and their deductible. We can go on and on about this, but there's lots of ways to get at deducting your major life expenses. 

Number 5, the last one we're going to cover today, which is focused on reducing taxes on the rest of your income by putting away as much as you can into low or no tax vehicles. So really 4, and 5 go together. So 4, we get most of our life expenses deductible, we pay for our life expenses first, then with the money that remains, we get as much of it as we can into low or no tax vehicles where a can grow and compound at low tax rates or tax free. So there's some famous examples of this, but like Peter Thiel, one of the founders of PayPal and Facebook, he was able to get take his founder stock and place it into his Roth IRA and his Roth IRA grew to be worth $1.5 billion. Because he put it in as a Roth, he paid taxes up front, and then it grew tax free and he can take it out tax free. Mitt Romney did something similar, Mitt Romney had a Roth IRA set up with $380 million in it. Because he put investments in there that exploded in value and then they were in there tax free, so they could just grow and grow and grow. If you can have high yield investments, and you can get them into, let's say, a Roth IRA or a Roth 401K, then they can compound at crazy rates. Also, if you have investments, like Peter Thiel and Mitt Romney, you know, Peter Thiel took a company that had a very low valuation, ie Facebook, put it in there, and then it grew. Well, the reward to risk on if it worked was really, really high. That's a perfect thing to put in a low tax, no tax vehicle, because when it explodes, it's all tax free.  There's a lot of things that you can do around this to get your investments and your income into low or no tax vehicles. 

Okay, so we're going to come back next week, and we are going to continue with part two, but hopefully today with these five principles, I really got you thinking, thinking that you could do things in a different way, in a better way than what you've done it in the past. So I will see you next week for the last six principles in part two. Bye.