Tax-Free Wealth (2012) takes the mystery out of taxes. It offers priceless insights on taxes and tax planning that you can use to ultimately build your wealth. Drawing from professional experience and a deep understanding of tax law, it breaks down the principles and rules underlying the best financial planning, and shows you how the laws are there to help you save your money.
Introduction: Make taxes your friend, and start building your wealth today.
Table of Contents
The only two constants in life are death and taxes. We all know the old saying. And if you’re like most people, these things are equally scary – so you put all your effort into either delaying or ignoring them.
While you may have to come to terms with death in your own way, you’ll be happy to know that you don’t have to live in fear of tax season. Taxes can be understood by anyone, and the tax laws – while they can seem a bit complicated – actually exist to help you save money.
That’s right, taxes are your friend!
You see, taxes are the government’s way of encouraging people to do what’s best to keep the economy running. If you’re doing what the government wants, then you’ll be rewarded by paying less in taxes.
Everything you do either raises or lowers your taxes – it all comes down to your facts. These are the circumstances related to how you do business, how you invest, and your personal activities. If you change your facts to be in line with what the government is encouraging, then you will save money on taxes. It’s as simple as that.
In this summary, you’ll learn how to change your facts to greatly reduce your taxes and save money for yourself, your family, and your business. These tricks are all provided by the tax laws of most modern, first-world countries. Whether you’re from the US, Canada, Australia, or Europe, you can start getting these laws to work for you today!
Let’s find out how.
Make sure you’re earning the right type of income.
Did you use to earn pocket money as a kid? Maybe you got money from your parents for shoveling snow, or cleaning the windows. Chances are, you didn’t really care where the money came from – you were just happy to have it and spend it.
Well, you’re not a kid anymore, and you’re probably looking to earn a lot more than pocket change. There are different ways you can get money, and they are not taxed equally.
There are four types of earners: employees working for a salary, the self-employed, big business owners, and investors. It’s these last two – businesses and investors – that are taxed at the lowest rate.
Think about it. What does the government want? More jobs are good for the economy. New jobs are created by businesses and entrepreneurs, so the government rewards these people by lowering their taxes.
What else does the government want? Affordable housing. Once again, governments offer huge tax breaks to real estate investors, because they want to encourage that sort of behavior.
You may be thinking, That’s great, but what if you’re on the employee or self-employed side of the spectrum? It’s simple: if you want to get the tax benefits, you’re going to have to shift your income into one of the other areas. It’s not as hard as it seems – thousands of people all over the world take courses in business or investment and change the way they earn.
Now let’s look at the different ways you can receive income. Think of your income as if it were filling up one of five buckets – each with a different amount of holes through which money can be lost to tax.
The first bucket is earned income. This one has the most holes in it – you’re going to lose a lot of money to income and employment taxes. Try to stay away from this bucket.
Let’s call the next one your ordinary income bucket. This is income you might be getting from your pension or retirement plan, or whatever income won’t fit into the other buckets. This still receives the highest income tax, but it doesn’t get the employment tax like the first bucket.
The next bucket is for investment income – things like capital gains, interest, and dividends. This income is taxed at a much lower rate, and in some cases, not at all!
The fourth bucket is for gifts or inheritance. In most countries, the tax is paid on the side of the person giving the money, so nothing is lost when it lands in your bucket.
Finally, you have the passive income bucket. This is money that you receive from a business or investment which isn’t managed by you personally. This is taxed at a regular rate, but there are many ways to reduce this amount.
That brings us to the topic of the next section – how to patch the holes in those buckets using a miraculous little thing called deductions.
Almost anything can be deducted.
Life isn’t fair, and neither are taxes. Sure, you can complain about it, but what’s that going to do? A better method is to join the side that’s receiving the benefits. As you saw in the previous section, that means becoming an entrepreneur or investor. Once you start a business or make some smart investments, a whole world of money-saving options opens up in the form of deductions.
You see, in the right circumstances – with the right facts – almost anything can be deducted. The government wants to encourage individuals who put money into the economy with the goal of producing, not consuming. This means that if the purpose of the expense is to produce more income, you can deduct it in your taxes.
Like going out to dinner? Invite a business partner and discuss growth opportunities, and it suddenly becomes a deductible expense. Love traveling to New Mexico? Invest in property there, and claim all your travel expenses. Get your family involved in the bookkeeping for the investment, and they can travel for free as well.
But there’s one type of deduction which sits above all the others. It’s the queen of deductions, and it’s called depreciation.
Depreciation is like magic. Say you own some sort of physical asset that produces income – this could be a building, or machinery, or even your car if you use it for work. You can actually deduct a portion of the cost of that building every year, for a certain number of years. It costs you nothing, so you’re making money appear from thin air. Magic!
To fully take advantage of the miracle of depreciation, make sure you’re deducting as much as you can. For example, when calculating the total cost of a building you own, don’t forget about any landscaping or improvement costs – car parks, fences, even the things inside it like floor coverings and cabinetry. These can be deducted separately, and because they depreciate faster, you will get a bigger deduction than if you treated the whole building as one cost.
There is one important trick to making sure that you get the most out of your depreciation and other deductions: document, document, document.
Every receipt or piece of evidence of a financial transaction should be carefully documented and filed. In the event of an audit, it’s invaluable to be able to quickly provide the required documentation to the IRS, or whatever government body is checking up on your deductions. Luckily, in the digital age it’s easier than ever to keep things properly documented. Just scan or take a picture of your receipt whenever you get one, and keep it stored on your computer or phone. Keep everything in order, and you can deduct and save on all your work expenses without a worry in the world.
Real estate is where it’s at.
Your options if you decide to go the investment route are extensive and varied. However, there is one area that can earn you a little bit extra in tax savings, in almost every country. In fact, if you invest properly and seriously in this area, you should never have to pay tax on your cash flow at all. What is this magical tax shelter? Real estate.
The trick is to always be buying more. Here’s how it works.
Say you begin your real estate investment by buying several single-family homes. You get a nice cash flow from these, you collect your depreciation deductions, and the houses increase in value.
However, as you take the depreciation, you reduce a thing called your tax basis – this is the purchase price of the property. When your tax basis reaches zero, you stop receiving depreciation.
When you sell the property, you pay tax on your gain – the difference between the tax basis and the sales price. The lower the tax basis, the greater this gain, and therefore the more you will be taxed. You essentially pay back your depreciation deductions in tax when you sell the property.
But you can avoid this tax entirely by simply buying another property for the same price as the one you sold. This process – called a like-kind exchange, or a Section 1031 exchange in the US – means you can continuously put off paying capital gains tax on a property. This gives you the freedom to sell a property that has become overpriced, or because you simply want to change your investment strategy, without getting stuck with the taxes.
Say those single-family homes you bought have now become a bit too much trouble – they’re lots of maintenance, and you’re getting less in depreciation. Using the like-kind exchange, you sell all the houses, and purchase an apartment building for an equal or greater price. You pay no tax for this sale, but now you’re enjoying a greater cash flow than you got from the family houses.
But apartments still require a lot of maintenance. Now you want an even greater cash flow, with none of the work. So, by the same like-kind exchange, you sell the apartments and purchase a retail store, which takes care of all the associated expenses itself. Once again, you’re not taxed for your gains on the apartments.
By this stage, all the depreciation you’ve been deducting has decreased your tax basis – and as you might remember from before, a low tax basis equals a higher gain, which means more tax. When you sell, you’re going to have to pay a lot in taxes.
So, don’t sell. If you hold on to the property until you die, your tax basis becomes the same as the value of the property. Pass that retail store on to your children, and they can sell it for its full, tax-free value. While you were alive, you received all the tax benefits from the depreciation; by holding it until your death, nobody has to spend a cent on taxes.
Through the combination of depreciation and like-kind exchanges, real estate investment really is the easiest path to tax-free wealth.
Choose the right tax advisor.
Tax law is a beautiful and exciting thing. You see, it has the capacity to be incredibly vague – and in the right hands, this vagueness can be twisted and interpreted into all sorts of fantastic wealth-amassing opportunities. On the other hand, those who are unwilling or unable to take advantage of its true potential will always miss out. This is why it’s of the utmost importance to choose the right tax advisor. You can’t do this alone, but you can learn what you need to look for when getting help.
First, a good tax advisor will be passionate about reducing your taxes – they will do everything in their power to find the interpretations that work in your favor.
It all comes down to how they look at the tax law. You’d be surprised how many tax accountants are actually afraid of the law. They will read the simple tax guides, and stay away from anything they don’t understand. This means they won’t be giving you the best advice, and you’ll miss all your tax-saving opportunities.
The appeal of these types of advisors is that they are probably cheaper. However, that’s the wrong way to look at it. It doesn’t matter how much they charge you – think of it in terms of how much they cost you in taxes. Sure, paying an extra $10,000 a year for a tax advisor might seem like a lot – but if they’re saving you an extra $70,000 a year in taxes, for example, then it’s definitely worth it.
You need a tax advisor who can think creatively. The law isn’t a straight line, and an accountant who got into the business because they like the certainty and clarity of numbers isn’t always going to be able to see this.
So, how can you know if a tax advisor is going to be doing the best for you? It’s all in the interview. Remember that your tax is based entirely on your facts and circumstances. When talking to a potential advisor, where’s the focus? Do they talk about themselves and their business, or do they focus on you and your needs? This is a good way to tell if they care enough about you to go the extra mile.
If you think that they’ll put you first, there are some other questions you can ask to make sure they’re the real deal – things like, “What’s your view of tax law?” or “What’s your personal investment strategy?”
You can also tell a lot from what questions they choose to ask you. If they want to know about your dreams and goals, your relationship with your spouse and children, and your experiences and expectations regarding taxes, then they’re likely thinking in the right way.
Find a tax advisor who knows the law, knows you, and knows the tricks, and you will never have to be scared of taxes or audits again.
Imagine a world where you don’t need to be scared of taxes, but instead find yourself approaching them with confidence and enthusiasm. That world is entirely possible – with the right attitude, a little education, and some careful planning.
If you adjust the sources of your incoming cash flow to business and investments, then a whole world of tax breaks, deductions, and depreciation opens up. While you have many options, the fastest and safest way is almost certainly through real estate.
But you can’t do it alone! Find a tax advisor who knows their stuff, and before you know it, your wealth will be building in ways you never imagined. Tax-free wealth is a real possibility, and it’s within your grasp.
What’s stopping you?
“Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes” by Tom Wheelwright is a thought-provoking book that provides a unique perspective on tax planning and wealth creation. I have thoroughly analyzed the book, and in this review, I will delve into its key takeaways, strengths, and weaknesses.
- Tax planning is crucial for wealth creation: Wheelwright emphasizes the importance of tax planning in the book. He argues that by structuring your finances and investments in a tax-efficient manner, you can significantly reduce your tax liability and optimize your wealth growth.
- Legal tax avoidance is not illegal tax evasion: Wheelwright clarifies that tax avoidance strategies are legal and ethical ways to minimize taxes, whereas tax evasion is illegal and can result in severe penalties. He provides numerous examples of legal tax avoidance techniques that individuals and businesses can use to lower their tax bills.
- The Tax-Free Wealth strategy: Wheelwright introduces the Tax-Free Wealth strategy, which involves converting taxable income into tax-free income through various means, such as real estate investments, business ownership, and retirement accounts. He provides step-by-step guidance on how to implement this strategy and achieve long-term financial freedom.
- The power of tax-deferred growth: Wheelwright explains the concept of tax-deferred growth, which allows investments to grow tax-free until they are withdrawn. He highlights the benefits of this strategy and provides examples of tax-deferred investments, including 401(k)s, IRAs, and annuities.
- The importance of tax planning for business owners: Wheelwright emphasizes the need for business owners to plan their taxes carefully to minimize their tax liability and maximize their profits. He provides practical advice on how to structure businesses, manage income, and take advantage of tax deductions.
- Practical and actionable advice: Wheelwright’s book is filled with practical and actionable advice that readers can apply to their personal and business finances. His strategies are easy to understand and implement, making the book accessible to a wide range of readers.
- Comprehensive coverage: Wheelwright covers a wide range of tax planning strategies, including real estate investments, business ownership, retirement accounts, and more. He provides detailed explanations of each strategy and their potential benefits.
- Insights from a tax expert: As a tax expert, Wheelwright offers valuable insights into the tax code and how it can be used to reduce tax liabilities. His expertise adds credibility to the book and makes it a valuable resource for anyone looking to optimize their tax strategy.
- Dense and complex content: The book’s content can be dense and complex, which may make it challenging for some readers to follow. Wheelwright’s use of technical tax terms and legal jargon may also be off-putting for those who are not familiar with tax planning.
- Limited examples: While Wheelwright provides several examples of tax planning strategies, the book could benefit from more case studies and real-world examples. This would help readers better understand how to apply the strategies in their own lives.
- Focus on U.S. tax laws: The book primarily focuses on U.S. tax laws, which may limit its relevance for readers outside of the United States. While Wheelwright does touch on some international tax planning strategies, more comprehensive coverage of global tax laws could be beneficial.
“Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes” by Tom Wheelwright is an informative and practical guide to tax planning and wealth creation. While the book’s content can be dense and complex, it provides valuable insights into the tax code and how it can be used to reduce tax liabilities. Wheelwright’s expertise and practical advice make the book a valuable resource for anyone looking to optimize their tax strategy and build wealth over the long term.