Episode #46 – The Other Side of the Tax Story - How You Can Legally Reduce Your Taxes Like the Rich

Listen here 

Subscribe To The Podcast Here

Watch here

Read here

Welcome back to the podcast! 

Although I am a CPA, I hate paying taxes and filing my tax returns just like everyone else. I didn’t become a CPA to prepare tax returns. In fact, I’ve spent more time in my career fighting with federal, state and local tax agencies to fix tax problems for my clients than I have actually preparing tax returns.

But, every tax season articles, blogs and videos creep into my news feeds that are what I consider to be inflammatory. Posts that are intended to provoke hatred against the “rich” and “Corporate America” and attempt to convince you that you are getting screwed by the government. I consider them to be inflammatory because they typically mention half-truths. Partial stories without context.

Taxes are Revenue

To start, please keep in mind that any government around the world of any size is a business. And like any business, it depends on revenue to operate. Taxes are the revenue for governments that allows them to pay their bills and provide benefits to its citizens and residents. 

With that being said, I do support the notion that taxes are necessary. Sorry, not sorry. However, I do personally and professionally take issue with how our tax dollars are frivolously wasted at all levels of government. That’s not what I’m talking about today.

Today, I would like to share the other half of these typical half-truths. Additional context so you can decide. Hey, I’m a Gen Xer. I grew up repeatedly hearing the phrase “the more you know” every Saturday morning and I think this is information you need to know.

I think we can all agree that the US tax system is really complicated. There are a lot of different rules and loopholes. This can make taxes confusing and frustrating for many people.

Expanding Perspectives

Let’s talk about common items routinely mentioned in a negative way about the rich and businesses but are only partially explained.

• Rich people use loopholes to lower how much they pay in taxes. This does happen sometimes. But the reasons are more complex than thinking they pay less because they have more money.  Warren Buffet famously said that he pays less in tax than his secretary. He did not mean in total dollars. What he meant was that he pays a lower percentage of his income in taxes than his secretary. This is because he makes most of his income each year from his investment portfolio and not from a paycheck.  The rich often earn money from investments instead of regular salaries. So, they pay a lower capital gains tax rate on investment activities. The idea is to encourage people who have the means to invest in businesses which helps the economy grow. I don’t know of many investments other than CDs and bonds that have no risk. So, shouldn’t there be some reward for investing additional money you have?

• Big companies like Amazon pay $0 in federal tax in certain years. Ok - this is true but there are years that many companies of all sizes do not pay federal taxes. Amazon specifically put profits back into growing the business, which gave them federal tax credits to reduce their federal tax bill. This is not a loophole only available to large corporations. Smaller companies are able to utilize these federal tax credits too. If you did not count how many times I just said “federal tax” in the last 30 seconds, it was 5 times. So, the additional information to know here is that while they did not pay federal taxes in specific years, they still paid a substantial amount of state and local taxes in addition to worldwide taxes. 

• The rich commonly divide their assets into different “tax buckets” – taxable, tax-deferred and tax-free. These strategies are available to all of us equally. If you have a 401k, IRA or retirement plan that allows you to save for your retirement, that is a tax-deferment strategy. Your 401k contributions will grow tax free, and you will not pay income tax until you retire and begin taking distributions. Investments such as stocks will be in the tax-deferred bucket for a different reason. You will owe tax only when a stock is sold if it is sold for a gain. And, you only pay tax on the gain part, not the amount you originally invested.

• What about tax breaks for owning real estate? Owning property like real estate does allow deductions for the rich. Again, the exact same tax deductions for real estate are available to anyone who has enough money to afford additional real estate: property tax deductions, mortgage interest and capital gains exemptions. Keep in mind that owning multiple homes also comes with expenses and risks for them. Even the wealthy use mortgages to purchase additional homes. Property taxes, maintenance and mortgage payments are the same on a 2nd or 3rd home as they are for one home.
  
  

Tax Avoidance is Not Tax Evasion

Something additional to mention. There’s an important difference between “tax avoidance” and “tax evasion.” Avoidance uses legal loopholes, even if some people don’t think it’s totally ethical. Evasion is illegally not paying taxes you owe. One of these is a punishable offense that can land you in jail. Being famous or rich won’t keep you out of jail either. Just ask:

• Wesley Snipes - The actor served a 3-year sentence for failing to file tax returns from 1999-2001. He argued taxes were unconstitutional but lost in court.
• Richard Hatch - The first winner of Survivor failed to pay taxes on his $1 million prize and served 51 months in prison.
• Mike "The Situation" Sorrentino - The Jersey Shore star went to prison for 8 months for tax evasion. He was accused of hiding income and filing false returns.
• Darryl Strawberry - The baseball star served 3 months in prison for tax evasion and false statements to the IRS about made income.
• Joe Francis - The Girls Gone Wild founder did time for underreporting over $20 million of income, served 300 hours community service, and paid millions in back taxes.
• Fat Joe - The rapper got 4 months in prison for failing to file taxes on over $3 million in income. He had to pay $718,000 in back taxes.
• Lauryn Hill - The singer served 3 months in prison for failing to pay taxes on about $1 million of income over several years.
• Heidi Fleiss - The Hollywood Madam famous for her prostitution ring did 37 months in prison for tax evasion and money laundering.
• Willie Nelson - The IRS seized the country singer’s assets in 1990 to collect $16.7 million in unpaid taxes. He made a deal to avoid prison by releasing an album to pay off the debt.

Tax Loopholes

Tax loopholes refer to provisions in the tax code that allow individuals and corporations to reduce their tax liability, sometimes in ways that policymakers did not originally intend. 

For example, the carried interest loophole allows private equity fund managers to claim a lower capital gains rate on their income rather than the higher ordinary income rate. The corporate offshore loophole allows companies to shift profits to subsidiaries in lower-tax countries. 

These tax breaks enable people and businesses to pay less in taxes than the spirit of the tax code likely envisioned. Closing loopholes is difficult because the beneficiaries hire lobbyists to convince policymakers to maintain them. However, with enough public pressure, targeted loopholes can still be eliminated. This requires compromise and gradual change over time to reform the tax code in a balanced way.

Look For the Whole Story Before Deciding

Those who have followed me for a while know that I published my first book in July 2023. I have had it on my bucket list to publish a book for over a decade. And, the book I ended up publishing is not the one I always thought it would be.

My initial idea was to write a book called “Tax Advice My Buddy Gave Me That Landed Me In Trouble”. It would be a compilation of short stories about the many conversations I’ve personally had with clients and prospects over the years, all of them would remain anonymous, that I could use as a teaching example of why the tax code is so complicated and that everyone’s tax situation is unique to them.

For example, a common question was complaining that their refund was not big enough because their co-worker just filed their taxes on TurboTax and their refund was twice as big. This prompted me to ask some questions. Yes, they had the same job. They think they get paid the same because they do the same job at the same company. Then, the differences start to emerge. 

The co-worker is a single parent with 2 kids. My client is single without kids. The co-work qualifies for earned income credit and the child tax credit. My client does not.

The co-worker withholds extra tax from their paycheck each week because they once had a really large tax bill and it took years to pay it off. It freaked them out so much so that they always volunteer to withhold $25 extra from each pay to be safe.  My client does nothing special with their tax withholdings and accepts what their W4 calculates for them.

It's discussions like this that prompted me to install a whiteboard in my office. Writing the numbers between my client’s tax return beside what their co-worker told them easier to explain. Most understood right way what I was saying. It’s not knowing the whole story that makes you feel like you are getting screwed. And, there will always some I talk to that I will never be able to explain that they are not a victim of the tax man.

I have a lot of similar stories and maybe that will be my second book. Who knows?!

The bottom line is taxes involve many complex tradeoffs. I hope I persuaded you today to not accept tax discussions at face value. Many times the discussion, either intentionally or unintentionally, doesn’t tell the whole story. 

How To Hire A Tax Professional

Let’s talk about hiring a tax professional. As mentioned in an earlier podcast found HERE, when you do hire a tax preparer, ask what their fees include and what additional services they offer. Many tax preparers are focused on a huge volume of tax returns – they are caught in a cycle of only having enough time to accurately prepare and file tax returns. Some preparers include tax questions with their tax prep fee. Others focus on tax planning with their clients all year long and prepare tax returns as a courtesy service to their clients. What you need to know is that every tax firm is different.

Your tax situation is comparable to a personal investment portfolio. Some people are able to use Turbo Tax to prepare their tax return and Robinhood to manage their investment portfolio. Others seek out professional guidance for a variety of reasons – are they doing it “right”? What tax deductions are they missing out on? How can they structure an upcoming transaction for the best possible tax outcome? If you have asked yourself any of these questions, it is time for you to have a tax planning or tax strategy meeting with a tax preparer. Stop believing the hype that only the rich can avoid paying taxes. You have the ability to also take advantage of the tax code too! With a little bit of help and planning, you can legally lower your tax bill.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email at [email protected].

If you know someone who might need to hear this information, please share this episode with them or if you are on YouTube, tag them below! 

Be sure to follow and subscribe to get notifications for future episodes.

Did you enjoy this episode? Please consider leaving a review. 

And before I go – remember - profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

Let's talk about common tax myths and half-truths. I will explain the other side - how the rich legally avoid taxes through loopholes. I cover capital gains, tax deductions, corporate taxes, and more. This is the information you need to know! #taxmyths #taxloopholes #legaltaxavoidance

As mentioned in today’s podcast, the link to the earlier podcast is HERE about hiring a tax professional.

✉️ EMAIL: [email protected]
📞CALL: (234) 207-5772
💻 VISIT: ProfitScaleThrive.com

#entrepreneur #attorney #lawyer #profitscalethrive #moneymindset #howtomanageasmalllawfirm #business #profitfirst #profitfirstforlawyers #CPA #CFO #LawFirm #spotifypodcast #PodcastsOnAmazonMusic #applepodcasts #googlepodcasts #podcast