I used to think lowering taxes was for the rich and famous. It’s not. Over the past few years I’ve lowered my taxes using methods wealthy people know all too well. Now I use these same secrets to shave hundreds of thousands of dollars off of my yearly tax bill.
If you’ve always fantasized about lowering your taxes then today you’re in for a real treat. Today I’m going to share 5 secrets the ultra wealthy use to save money on their taxes.
1. Stop working for a paycheck
When you work for someone else you pay higher taxes. Billionaire Warren Buffett remarked that his secretary pays higher taxes than him. When you’re getting a paycheck you’re getting screwed the most by the IRS.
How can this be?
The tax code is for entrepreneurs. Page after page of the tax code incentives for business owners. The government wants us to hire employees, build buildings, and revitalize neighborhoods. The more you build the less you pay Uncle Sam. And guess what? The paycheck employee gets hit the hardest by the IRS. In fact under new the 2018 tax law things got even worse for the W-2 folks.
It’s time to shake things up and stop working for that paycheck if you can. If you can’t well now is time to plan your getaway.
Bonus Reading Assignment: Read Tom Wheelwright’s amazing book Tax Free Wealth.
2. Start Your Side Hustle
As you plan your escape from the 9-5 job you’ll need a revenue source. One of the most important things you can do to lower your taxes is to start a business. It doesn’t have to be scary. In fact it’s pretty darn easy. The first thing you want to do is set up your entity. Corporate Direct has a $100 discount already applied for our readers if you sign up here for your LLC. It’s cheap and easy to do. Come up with a unique name for your LLC, John’s Wealth Holdings LLC. It doesn’t have to be the actual name of your business. Remember this is the legal entity that will be filing taxes.
Now that you’re set up to make some money as a business let’s start building that business of your dreams. For some revenue ideas you can see our post on how to make $3,000 a month on the side.
We’re setting up the business to start funneling our expenses through the company. As a paycheck employee you’re taxed on your gross income, as a company you’re taxed on your net income.
Did I blow your mind?
Think about that for a second. If you don’t have a business and you buy a computer to earn some extra income the government doesn’t care. If you’re a company and you buy a computer the government cares. Now you can expense it. You can write that off as a business expense for your new company. That lowers your taxable burden.
Put another way. As an employee if you earn $1,000 and buy a $500 computer you’re still going to pay taxes on that $1,000. If you’re a business you’re only taxed on the net profit which is $500. Crazy right? Yes.
3. Reduce Taxes by Funneling Everything Through The Business
Start your business today and start running your legitimate expenses through your company. Legitimate expenses differ for every company. You can come up with 5 things right now that you need to run your company.
Here are a few off the top of my head:
- Internet costs
- paper for your printer
- new computer
- gas mileage you track
- printer ink.
See also how to write off your date nights.
Let your mind wander on this one. You love working on cars so you start a blog on old cars and a YouTube channel where you fix engines. Think about the expenses you would incur for starting this new business.
- Your iPhone for taking videos
- Your Blue Host account for hosting your new WordPress blog
- That subscription to your favorite car magazine for research
- The internet so you can upload videos to YouTube
- Tickets to that car show in Nashville where you promote your new website
- Travel and hotel to that same Nashville car show
- Travel to vintage car dealer where you interview him about his craft.
The list could on and on.
The IRS rewards entrepreneurship. Keep the receipts and document these expenses. Start that blog of your dreams like I did an earned over 1.8 million dollars in one year.
4. Incorporate Your Family
Now comes the great part. We pay our children as employees of our LLC. That’s right. Our three children, all under 10 years old, work for our company. And the IRS allows this on a variety of levels.
The IRS allows you to earn $12,000 without paying taxes. We pay each child an annual salary of $12,000, not a penny more.
First they have to do actual work and that can mean different things to different people. Every weekend our children go through piles of office paper and use the shredder. They love the job. They also have to clean up the offices and pick up trash.
Imagine you run a photography business where you need photos of children for the website. Bingo! That’s a job for your kids. And they should get compensated for their good looks.
We have three kids that means with each of them earning $12,000 per year we aren’t taxed on $36,000. That 36K comes right off of our taxable revenue. Great right? It gets even better.
5. Set up an IRA For The Kids
Once you’ve set up the LLC your kids can qualify for a retirement account. And that’s another fantastic way to lower your taxable burden. Start shoveling more money to your children. Set up a Self-Directed ROTH IRA for each of your children and max it out. We use a company called Sense Financial to set up our IRA’s for a very small fee.
At the time of this writing the contribution limit is $6,000 a year. Making a contribution to a retirement account lowers the amount you’ll pay on taxes. So for our three kids that’s $18,000 a year. That means we lower our taxable revenue by $18,000 per year on top of the $36,000 we pay them in salary.
To incorporate your family you need to set up an LLC or other legal entity. Again you can do so right here. In our family we have many LLC’s for different reasons. You might sell strawberries, start a blog, start a YouTube channel, write a book. It doesn’t matter what you do but you need a legal entity.
A woman worried about her future attended a speech with Jim Rickard’s, the genius author of Road to Ruin. She worked a job, had a 401(k) and little to show for it. She asked what she should do. He was blunt: “Quit your job. It’s the only way to protect yourself and build wealth.”
He wasn’t trying to be harsh. He was pointing out that a job isn’t a safety net. It’s a false sense of security.
I’m not saying to go out there an quit your job today. I’m saying to start thinking bigger. Want to lower your taxes? Start a business and make moves that the IRS rewards instead of penalizes.
