Chapter 1 — Taxes Are Stealing Your Money, Your Time, and Your Future
People with lots of money have lots of time because they have stopped trading their time for money. They trade their money for time instead. The average person in a developed country spends between 25 and 35 percent of their life working to pay taxes—more than two hours of every workday handed over to the government, three to four months out of every year spent working purely to cover the tax bill. Over a working lifetime, that adds up to more than thirteen years. Over an entire lifetime, it comes to twenty years. That is a prison sentence.
And yet there are millions of people who legally pay little or no tax. Their secret is not loopholes hidden somewhere in the code. They simply understand how the tax law works. The tax law is not primarily a revenue-raising tool—it is a tool governments use to shape the economy and promote social, agricultural, and energy policy. Congress and Parliament do not write incentives into the code to trap you. They write them to reward the behavior they want.
Include tax planning in your wealth strategy. It is not just what you make that matters—it is what you keep. When you keep taxes in mind as you invest, you end up keeping more money and making better investment decisions. Consider how much faster a $10,000 investment grows without taxes: after thirty years at a ten percent return, a taxed investment grows to about $60,000, while the tax-free investment grows to nearly $200,000. That gap—more than three times the outcome—is your future.
All taxes are based on your facts and circumstances. Your facts include your business activities, your investment activities, and your personal activities, as well as how you track them. If you want to change your tax, change your facts. It is that simple. Beware of tax preparers who focus on postponing or deferring taxes to a later year—real tax planning is permanent, so you never have to repay the taxes.
Too many people look at return on investment as the return before taxes are taken out. Consider two investments: $100,000 in stocks returning ten percent, and a $500,000 rental property purchased with $100,000 of your own money and $400,000 borrowed from the bank, returning seven percent. The stock investment earns $10,000, but after roughly twenty percent capital gains tax, you net $8,000. The real estate investment earns $7,000—and thanks to depreciation, you pay no tax on it. But the story does not stop there. The depreciation deduction of about $27,000 creates a $20,000 write-off against your other income after offsetting the $7,000 of real estate income. In a thirty percent bracket, that additional deduction is worth roughly $6,000 in reduced taxes on your salary or business income. Your real return from real estate: $13,000—a full $5,000 more than the after-tax stock return.
Chapter 2 — Taxes Are Fun, Easy, and Understandable
The reality is that taxes can kill your hopes and dreams by stealing your wealth and diminishing your quality of life. That surprise family vacation? Gone come tax time. The home improvements you have been planning? Kiss them goodbye. Worldwide, the average person pays between 30 and 50 percent or more of their hard-earned income in taxes—through income, sales, value-added, payroll, estate, and property taxes combined. Almost a third to one-half of the world’s wealth is simply handed over to governments.
One practical insight that most people overlook: invest where you travel. If you have a favorite destination, consider investing in that area. It gives you a great reason to keep returning, and it converts travel expenses you already have into deductible expenses, keeping more money in your pocket. Any travel can be deductible when its primary purpose is business or investment. The IRS requires that you spend more time on business than recreation for the primary purpose test to be satisfied—and when that threshold is met, all travel expenses, including hotel, airfare, and meals, qualify as deductions.
Chapter 3 — The Two Most Important Rules
The LLC—the limited liability company—has become the entity of choice for asset protection purposes. But for tax purposes, your LLC can be whatever it wants to be: a sole proprietorship, a partnership, a C Corporation, or an S Corporation. This flexibility gives you the best of both worlds—the tax advantages of whichever structure suits your situation and the asset protection the LLC provides. In countries without LLCs, the LLP, the limited liability partnership, may offer similar flexibility.
Simply by understanding that your LLC can be treated any way you want for tax purposes, you get asset protection while still enjoying the tax advantages of an S corporation, C corporation, or partnership. If you are just starting a new business, you may want your entity treated as a sole proprietorship in the early years when there is a loss or not much income, so you do not have to file a separate tax return—corporations require their own returns. When you are ready to change to an S Corporation to reduce your employment taxes, you simply check the box on the form and file the election with the IRS. The flexibility is remarkable, entirely legal, and largely unknown by the people who would benefit most from it.
Chapter 4 — Put Money Back in Your Pocket — Now
In many countries, including the United States, you can file amended returns at any time to correct errors on returns for up to the previous three years if you discover you overpaid. You can even carry a loss from the current year back to a prior year, use that loss to offset the prior year’s income, and receive a refund right now.
But the most immediate way to put money in your pocket is simpler than most people think: change your personal expenses into business deductions. What if you could get a twenty to thirty percent discount on all of your purchases any time of the year? That is exactly what happens when a personal expense becomes a business deduction. The government essentially pays for twenty to thirty percent of your purchase in the form of a tax reduction.
For an expense to qualify, it must meet three tests. First, the expense must have a business purpose—the primary reason for spending the money must be for your business. For a meal, that means having a conversation about business with your dining partner before, during, or after the meal. Second, the expense must be ordinary—customary and usual within your industry, both in amount and frequency. Third, the expense must be necessary—meaning the purpose of the expense is to make more money for your business. It is not enough to have lunch with someone and talk business because you are friends. The conversation must be aimed at increasing profits.
These three rules are not difficult to meet. If your business partner is your spouse, you likely discuss business nearly every time you dine out together. Just do not be extravagant on a regular basis. One rule of thumb is worth remembering: pigs get fat and hogs get slaughtered. If you regularly expense elaborate restaurant meals, the IRS may not look kindly on your deductions. One of the most common mistakes is couples who are always talking business at dinner but are never paying for their meals with the business credit card.
Chapter 5 — Entrepreneurs and Investors Get All the Breaks
The Cashflow Quadrant separates income earners into four categories. On the left side are employees and the self-employed. On the right side are big business owners and investors. Those who earn their income from the left side pay much higher taxes than those on the right side—and that is exactly what Congress intended.
The reason is straightforward: governments want entrepreneurs to create jobs and investors to build affordable housing. The market does a better job at both than government-sponsored programs, and it costs governments far less to give tax benefits than to fund those initiatives directly. Governments get even more specific by offering targeted tax breaks for oil and gas investing, farming, agriculture, green energy, and low-income housing. Sometimes governments make the mistake of thinking they can create jobs or build housing better than the free market. Eventually, they realize the market does a better job—and it costs far less to give tax benefits to business owners and investors than to build programs from scratch.
Make your business a family business. When you travel for business, your family’s travel becomes deductible. You can shift income from your higher tax bracket to your family members’ lower brackets, creating permanent tax savings. The benefit of having your children work for you is that you get a tax deduction at your higher bracket while they report the income at their lower one. Consider a nine-year-old daughter doing bookkeeping for a parent’s real estate investments—intelligently, with proper supervision. She might earn $4,000 in a year. That $4,000 is a deduction at the parents’ forty percent tax bracket. If the child has no other income and the standard deduction plus exemptions exceed $4,000, she pays zero tax. The parents save $1,600. There are great tax benefits for the parents, genuine educational benefits for the child, and over time, a potential successor in place when the parents are ready to retire. What an incredible exit strategy.
Chapter 6 — You Can Deduct Almost Anything
Business expenses are the best kind of deductions. Real estate expenses are the next best. Depending on your country, energy-related expenses can be highly valuable as well. Even expenses related to stock market investing may be partially deductible, though these are the least deductible because they do not involve active investments.
Your first step toward increasing your deductible expenses is to become an entrepreneur or investor. Until you take that step, you will always be an average taxpayer and the tax laws will be stacked against you. The right side of the Cashflow Quadrant includes both business owners and investors—but there is one important condition. You cannot be a typical investor if you want to enjoy the tax benefits of investing. You have to become an active investor, one who invests specifically for passive income rather than earned income. Passive income—coming from dividends, rents, and business—is taxed at much lower rates than earned income from appreciation, capital gains, or your paycheck. With the right tax strategy, you can even deduct losses from investments against income earned from other sources.
The key to good passive investing is a good team: a great investment advisor, a stellar tax advisor, a good lawyer, and a knowledgeable banker. And one of the best business and investing practices available to you is simply this: keep good documentation of your income and expenses, and document them thoroughly. The IRS loves documentation. If you pretend to document a deduction, you will get a pretend deduction.
Chapter 7 — Depreciation: The King of All Deductions
When you buy an asset that produces income, you can deduct a portion of it each year you own it. For physical assets like real estate or equipment, this deduction is called depreciation. For intangible assets you cannot feel or touch—such as a customer list or computer software—it is called amortization. The benefit is the same either way: a non-cash expense that reduces your taxable income without reducing your cash flow.
In the United States, commercial buildings are depreciated over 39 years. But there is something even better about the depreciation deduction: you get it for the entire cost of the building, even if you borrowed all the cash to pay for it from someone else. The bank’s money counts toward your depreciation base just as much as your own.
Consider Pierre, a restaurant owner who buys a building for $780,000. A portion of that price tag does not apply to the building itself but to contents—floor coverings, window coverings, cabinetry, and more. These items can be depreciated faster than the building, putting more money into Pierre’s pocket sooner. With $680,000 of the purchase price allocated to the building structure and $100,000 to shorter-lived contents, Pierre’s total annual deduction comes to about $37,500—meaning that much of his restaurant income is shielded from tax entirely. The more deductions you can take today, the more money you have to reinvest into your business or into other investments. The tax benefits of long-term real estate investing can equal or even exceed the cash flow and appreciation from your properties.
The trick is to properly document the values of all items you depreciate through a cost segregation or chattel appraisal—or, even better, have a tax professional or engineer document them for you. Cost segregations are not just legal; they are specifically sanctioned by the IRS and technically required by law. When you do a cost segregation on a building you have already owned for several years, you must file Form 3115, “Change in Accounting Method,” to capture the full benefit. You must elect to deduct amortization as well, and some elections must be clearly stated on your tax return in the year you first begin using your intangible property.
Chapter 8 — Earn Better Income
Suppose Pierre earns $200,000 after normal expenses through his restaurant this year. If he takes all of that money out of the business, it is taxed at regular rates. Instead, suppose he puts $80,000 back into the business in additional supplies and equipment that will generate more income in the future, and another $20,000 into marketing. All of that reinvestment is deductible against his $200,000 of income, leaving only $100,000 taxable. Some real estate investments have built-in tax savings that do not require any extra effort—oil and gas, for example, where as much as one hundred percent of the investment can be written off in the first year.
Think about your income as if it must fall into one of five buckets. The first is earned income—this bucket has serious holes, leaking out in the form of high income taxes and high employment taxes. The second is ordinary income: pension plans, 401(k)s, registered retirement savings plans, and similar sources—taxed at the highest income tax rates, but at least without employment taxes. The third is investment income: capital gains, interest, dividends, and in most countries passive income from business and real estate, taxed at lower rates. It also includes tax-free interest from state and local bonds, life insurance proceeds, and proceeds from like-kind exchanges—also called 1031 exchanges in the United States after Section 1031 of the Internal Revenue Code. The fourth bucket is gifts and inheritance—in most countries, the person who receives this money pays no tax on it. The fifth, unique to the United States, is passive income: income from any business or real estate you do not personally manage.
These buckets matter not only because of different tax rates but because of the different deductions available within each. Passive Activity Losses—PALs—are losses from passive investments such as real estate depreciation. Passive Income Generators—PIGs—are investments that produce passive income. When you combine the two, your losses offset your income, sheltering it from tax entirely. Most accountants are afraid of passive activity losses. The better approach is to find ways to use them by pairing them with passive income generators.
Suppose you have $10,000 in passive losses from real estate and you invest $100,000 in a friend named Paul’s S corporation for five percent ownership. If Paul’s company earns $100,000 in the first year, your $5,000 share is fully offset by your real estate losses. The remaining $5,000 of losses carries over to the next year. If Paul’s company earns $300,000 the following year, your $15,000 share is offset by $10,000 in new real estate losses plus the $5,000 carryover. The business income is completely sheltered. That is tax-free money—the magic of combining PIGs with your PALs.
Chapter 9 — Take Advantage of Your Tax Brackets
By dividing ownership of a business among family members, you can achieve significant tax savings. Consider George, who has two married children and four unmarried children still in school, along with his wife Martha. By dividing ownership of the business between himself and his family, George found that the business could earn $387,000 and have every dollar taxed at only twelve percent or less—provided it was structured correctly. George and Martha were saving thousands of dollars every year because they were using their children’s lower tax brackets.
George maintained control at two levels: as the manager of the company and as the trustee of his children’s trusts. Parental control, he found, often turned out to be the best control of all. The key principle this illustrates is worth remembering for everything that follows: it is not how much you own that matters—it is how much you control. Beginning in 2018 in the United States, the corporate tax rate is a flat twenty-one percent, so all income you choose to keep in a corporation can now be taxed at that single rate.
Many large corporations outsource work to separate entities—marketing, accounting, human resources, payroll and employee benefits. You can do the same with your small company. A separate corporation can handle marketing, bookkeeping, administrative work, or billings. But all transactions between your companies must have economic substance: there must be a genuine business purpose for the arrangement beyond saving taxes, and payments must be well documented. Many good tax strategies have been lost because notes for intercompany loans and management fee agreements were never properly drawn up.
You can also give a part of your business or real estate to your parents and reap major income tax savings. Any income from their share flows through to their tax return at their lower rates. As long as you are careful about how much you give, you will not trigger gift tax, and with the current estate and gift tax exemption, there likely will not be estate tax when they pass away.
Beginning in 2018, there is also a new deduction for businesses that operate as pass-through entities—sole proprietorships, partnerships, and S corporations. The general rule is a deduction equal to twenty percent of net revenue, subject to several limitations. The deduction generally cannot exceed fifty percent of W-2 wages paid by the business, though if wages are low and assets are significant, an alternative asset-based limitation may be more favorable. If the owner’s taxable income is below $315,000—or $157,500 for single individuals—there is no wage or asset limitation at all. Professional service businesses in accounting, law, health, performing arts, consulting, and financial services do not qualify unless income falls below those same thresholds. The deduction phases out entirely for income above $415,000 for married filers, with a complete phase-out at $207,500 for single filers.
Chapter 10 — Credits: The Cream of the Tax-Saving Crop
A tax credit is the cream of the tax-savings crop because it offsets your taxes dollar for dollar. It is not like a deduction that only reduces your taxable income. It goes directly against your taxes. If you have a tax credit of $1,000, it reduces your taxes by $1,000 regardless of your tax bracket.
Many education savings vehicles permit earnings to grow tax-free and distributions to be taken tax-free. While this sounds appealing, look closer. These vehicles often severely limit your investment options and how funds can be used, which can limit overall earning potential and ultimately work against making your child’s education more affordable. There are also working-poor credits—the earned income credit in the United States and similar credits in other countries—which are usually refundable and intended for those at or just above the poverty level. Many governments and states give tax credits to incentivize charitable giving to schools, the poor, and other charities, often in addition to the deduction allowed for charitable donations. Investment tax credits are reserved for business owners and investors: credits for building low-income housing, buying equipment, and doing research and development for new products and processes.
Never invest in a project solely for the tax benefits. Always look at the profit opportunities first. You will make far more money—and lose a lot less—if you are knowledgeable about the industries and projects in which you invest. Beware of promoters who want to sell you tax credits. If you do not have a genuine profit motive beyond the tax credits, you will probably not get to use them.
When paying your children to work in your business, consider having them invest their earnings into an LLC, limited partnership, or S corporation rather than relying on Section 529 plans or other government-controlled savings vehicles. Like a 529 plan, you get a deduction when you pay your child a salary, and there is no tax to the child when received. With good planning—especially in real estate—there is no tax on the cash flow from the investment. But unlike a 529 plan, you retain full control over the investment. Unlike a 529 plan, you can use the money for any expense for your child except basic support like food and clothing, you can take it out any time, and there are no penalties for distributing the money or allowing it to accumulate over a lifetime. Stop using government plans and make your own plan. You will have much more control and get better tax benefits than anything the government offers.
Chapter 11 — Conquer Your Employment Tax Troll
Instead of being self-employed, you can become both an employee and an owner of your own company. Consider Michael, a physician who restructures his practice as a corporation. As an owner, Michael’s share of the income is paid as a distribution of the company’s earnings—and distributions are not subject to employment taxes. As an employee, his earnings for serving his patients are paid as salary. The goal is to keep the salary portion as low as reasonably possible and distributions as high as possible, minimizing employment taxes. The government understands this entirely, which is why tax collectors are always on the lookout for salaries that are much higher or much lower than normal for your industry. If you take too low a salary, the government may treat all of your company’s income as self-employment income subject to employment taxes. The salary must be reasonable for the services you actually render to the company.
In the United States, you probably want your primary business taxed as an S corporation. An S corporation is simple to operate and avoids the potential double taxation that comes from running your main business as a C corporation. The distinction matters enormously—not just in the current year, but compounded across every year of your business life.
Chapter 12 — Your Property, Sales, and Value-Added Taxes
There are as many exemptions and tax benefits in the sales and property tax rules as there are in the income tax law. These are taxes that business owners and their tax advisors tend simply to accept as normal, complaining about them far less than income taxes—yet the dollars involved are enormous.
As a business owner, you pay sales tax on two basic types of transactions: items you buy for your business and products your company sells. The bigger challenge is usually the tax on products you sell, because if you do not collect sales tax on a sale and a state later audits you and assesses tax, the burden shifts from your customers to your business. That is why you should always collect sales tax unless you have clear proof that no tax is due. Unpaid sales taxes can grow without your knowledge for many years. Every company should have a sales tax professional review its collection requirements every few years. Many U.S. states also exempt significant categories of purchases—manufacturing equipment, inventory, equipment used in research and development, and other supplies—from sales tax entirely.
Property tax is especially hard to accept in difficult economic times because it is charged whether or not you make a profit, and it does not necessarily go down when your property value decreases. Since property tax is usually calculated as a percentage of assessed value, the obvious path to reducing it is to challenge that value. There are two ways to make this argument: show that your property is worth less than what the assessor says—using an appraisal or, for rental property, evidence of reduced rents in the area—or show that your property is being valued at a higher figure than a comparable property of similar use, size, and location. Pay close attention to the deadline on your property tax bill. There is always a window within which you must protest or appeal, and missing it means accepting the assessment for another year.
Chapter 13 — Estate Planning Is Good Tax Planning
Estate planning allows you to ensure that your heirs have a painless financial experience and that your assets pass to your loved ones rather than the government. Three steps cover most of the ground: place assets in trusts, create a will, and structure your affairs to avoid the estate tax.
Probate—the legal process of transferring title to assets from the deceased to their heirs—is to be avoided at nearly any cost. It involves courts, judges, and lawyers. It is expensive. And it is public, meaning everyone can see what you owned and who received it. The easy solution in most countries is to ensure all of your major assets are titled to a trust. You can be the trustee and even the beneficiary while you are alive. The trust document controls what happens when you die, keeping your family matters private and sparing your loved ones from arguments over who gets what.
A will appoints a guardian for your children, specifies the distribution of your assets, and records any special requests. It is essential but not sufficient on its own. Every country with an estate tax also has a gift tax, specifically designed to prevent you from giving everything away before you die. The solution is to give away value without giving away control, and to give away portions of each asset at a time. During your lifetime, all that matters is controlling your business or real estate—not whether you technically own it.
Limited partnerships are a powerful tool here. As the general partner, you maintain complete control. As the limited partners, your children hold the economic interest. You can give away limited shares to them while retaining the authority to manage the assets and even pay yourself a salary from the partnership. And the value of those limited shares is not simply a proportional slice of the whole. A twenty percent share of a $500,000 business is not worth $100,000—because that share gives no control over what happens in the business, and the courts recognize this. It might be valued at only $60,000. This minority discount means you use far less of your lifetime gift tax exemption. A separate marketability discount applies because partial interests in closely held family businesses are simply difficult to sell—people do not want to buy into a family business when they are not part of the family, and shares often carry restrictions on who can buy them or at what price. These two discounts together allow you to transfer more value using less exemption than most people realize.
Real estate works the same way. Giving away small or minority shares early—while expecting those assets to rise in value—reduces your taxable estate on the growth you will never have to pay taxes on. In most cases, with proper planning, you can completely eliminate the estate tax.
For those with charitable intentions, two trust structures provide exceptional benefits. In a charitable remainder trust, you receive all the income during your lifetime, and the assets pass directly to the charity when you die—bypassing your estate entirely because you no longer own them. In a charitable lead trust, the charity receives the income while you are alive or for a fixed number of years, and the assets then pass to your family or anyone else you choose. Both structures provide an income tax deduction in the year the trust is established. A charitable remainder trust also provides an estate tax deduction for the full value of the assets at death. Do not set these up yourself—work with your tax advisor, and be sure to discuss your plans with your family so no one is surprised to find that some of your assets are in a charitable trust.
Chapter 14 — Reducing Your Taxes in Other Locations
When you do business in multiple locations, you need to understand four basic principles: you will be taxed where you have property, where you have an office, where you have employees, and possibly where you have contractors. The general U.S. rule is straightforward: if you receive benefits from a state, that state can tax you.
But here is the upside that most business owners miss entirely. Every location has different tax rules, and paying tax in several locations can result in paying less total tax than if you did business in only one place. In many cases, you can pay tax on as little as half of your income simply by working the rules of different tax jurisdictions against each other. When structured properly, some of your business income can become “nowhere” income—not taxable in any state at all.
Most countries allow a credit for taxes paid to a foreign country on income earned there—usually the smaller of the taxes actually paid abroad or the taxes you would have paid at home on that same income. To receive the foreign tax credit, the same entity that pays the tax in the foreign country must report that income in the home country.
All state tax formulas include a sales factor: how many sales you have in a state helps determine how much of your income is taxed there, and whether a sale belongs in a state depends on where the product is shipped. Suppose your main office is in Arizona and your warehouse operations are in Nevada. You only report sales shipped to Arizona on your Arizona return. Since Nevada has no income tax, all other sales become “nowhere” sales. The result: you are taxed on only a small portion of your income in Arizona and not subject to tax anywhere else. That structure requires nothing exotic—just an understanding of how the rules work.
Chapter 15 — Plan to Take Control of Your Taxes: Entities
Taxes are important, but not nearly as important as your personal and business goals. Make sure your tax planning never interferes with what you are actually trying to achieve. Each entity type has a specific role. You may want an LLC to own your real estate investment properties, a corporation or LLC taxed as a corporation to own your operating business, a limited partnership to own assets you want to transfer to your children, and trusts to protect assets set aside for children from creditors—particularly while they are young. Limited partnerships work well when one person runs the business and the others are passive investors, and as part of an estate plan in which the younger generation are limited partners and the older generation are general partners—keeping control in the hands of the people who built the wealth.
One of the most powerful tax strategies is to combine different entities into a single coordinated structure. Consider two partners who want to open a business selling widgets. Rather than choosing between a partnership and an S corporation, they can have both. Own the business in an LLC taxed as a partnership, then have each partner own their interest in that partnership through a separate LLC taxed as an S corporation. Because the business is structured as a partnership, income can be distributed differently from how it is allocated—creating flexibility unavailable in a straight corporate structure. Because each partner owns their interest through an S corporation, both benefit from reduced self-employment taxes. In one example, two business partners who moved from holding a partnership directly to owning through S corporations lowered their combined taxes by approximately $70,000 per year—in a thirty-five percent bracket, the $100,000 deduction from salary flowing through the S corporations alone was worth $35,000 each. That is the magic of a carefully designed entity strategy.
Chapter 16 — Protect Your Wealth from Pirates, Predators, and Other Plaintiffs
An asset is something that puts money in your pocket. Anything else is a liability because it takes money out of your pocket. By that definition, your home is not an asset—it takes money out of your pocket and does not put money into it. Your business or investments, on the other hand, can be assets if they produce cash flow.
The rules for protecting your assets are fairly simple and organize around three goals: prevent a lawsuit in the first place, stay under the radar so you are less likely to be targeted, and win any lawsuit that does come. The worst structure for asset protection is the general partnership—it offers no protection whatsoever. You are personally responsible for everything you do, everything your partner does, and everything your employees do. When someone sues a general partnership, they sue all the partners. Corporations are considerably better: as a shareholder, you cannot personally be sued unless you personally did something wrong. You are something like a limited partner, because all you can lose is the amount you have invested. Limited liability companies are the best of all. They give you corporate-level protection—you can only lose what you put into the company—but they actually provide even more protection than a corporation when you are personally sued.
Be sure to have both an attorney and a CPA help you with your entity structure. The two disciplines are not interchangeable, and the combination of their expertise is what produces a strategy that is legally sound and tax-efficient at the same time. Your asset protection strategy and your tax strategy should be developed together—the two go hand in hand.
Chapter 17 — Plan to Retire Rich, Not Poor
Government-qualified retirement plans contain a fundamental lie embedded in their basic premise: they presume that when you retire, you will be in a lower tax bracket than when you are working. The only way this could possibly be true is if your goal is to retire poor. If you plan on retiring with even the same income you had while working, you will be in a higher tax bracket—not a lower one.
The reason is that while you are working, you benefit from a host of deductions that disappear in retirement. Your dependent children are no longer dependents. Your mortgage, hopefully, is paid off—so no more interest deduction. Your business or employment-related deductions are gone. Some argue that losing these deductions means you need less income in retirement. But if you are like most people, you have deferred many of life’s pleasures while working, intending to enjoy them when you have more time: more rounds of golf, more travel, a house in the mountains or on the beach, grandchildren who need to be spoiled. These are additional expenses you did not have while working, and they require income.
When you invest in the stock market through a qualified retirement plan like a 401(k), all the income you earn is eventually taxed at regular rates—not the preferred capital gains rate. This alone can more than double your tax rate on investment earnings. If you invest in rental real estate inside an IRA, the depreciation deduction gets trapped inside the plan and you lose its benefit entirely. If you were to make the same investment outside a government-regulated retirement plan, you would capture that $2,000 or more of tax savings that the IRA traps and wastes. And in the United States, when you borrow inside your retirement plan—which is how real estate and business investments produce their best returns—the income earned becomes taxable even while inside the plan, eliminating the tax-deferred benefit. The result is four simultaneous problems: higher tax rates, increased risk by leaving your money in someone else’s hands, reduced returns because leverage is restricted, and lost control over when and how you can use your money.
Leverage is the difference between building massive wealth and barely getting by in retirement. With mortgages, real estate becomes a great investment. Without debt, real estate returns are no better than holding stock. The same is true for business—without leverage, business is just a mediocre investment.
There are specific assets that work well inside government-qualified plans: assets that do not benefit from the leverage, depreciation, or other tax advantages that make them best held outside. Tax liens, hard money loans, stock and option trading, gold and silver bullion, and cryptocurrency all belong in this category. Roth IRAs can also be a genuinely powerful part of a tax strategy for the right types of investments. The critical rule: never put a tax shelter inside another tax shelter. Focus on a single asset class first, then decide how to get the best tax benefits from that asset. Choose your wealth strategy, then figure out the best structure—not the other way around.
Chapter 18 — Business Can Be Your Best Tax Shelter
Employment credits are a favorite government tool to encourage companies to hire more people or certain types of people. Many governments give credits for hiring people who have been unemployed for a long period, for hiring in enterprise zones, for increasing overall headcount, or for investing in business equipment and research and development. Beyond credits, you can deduct salaries and wages paid to employees. You may also decide to give employees stock options—the option to buy stock at a lower price than market value. Typically, you can deduct the value of these options as soon as the employees have the right to exercise them. Or you can use qualified incentive stock options—ISOs—allowing employees to receive the options without paying ordinary income tax.
One often-overlooked opportunity involves your business’s fiscal year. You could have your business year end on March 31 even though your personal tax year ends on December 31. A bonus paid in March is deductible to your company for the fiscal year ending that March—but you do not personally report the income until you file your return for the calendar year ending December 31. That time difference creates genuine flexibility in when you pay tax on your income.
The reason Warren Buffett famously pays only seventeen percent on his income is that most of his income is investment income—portfolio income taxed at lower rates. An even better type is passive income, because when you have passive income you can offset it with losses from real estate investments. All it takes is giving a part of your business to a family member who does not work in it. Their share of the business income becomes passive income. Then give them a portion of real estate that carries passive losses. The real estate losses offset the passive business income—simple in concept but requiring careful execution with the help of your tax advisor, since there are many details that must be handled correctly.
There is also a little-known provision in U.S. tax law called Section 1202 stock that allows the owners of a qualifying small business to completely avoid tax when the company is sold. The details are specific and the requirements precise, but for the right business in the right structure, it represents one of the most powerful tax benefits available to entrepreneurs.
Chapter 19 — The Magic of Real Estate
Real estate is such a good tax shelter that a serious investor should never have to pay tax on either their cash flow or the gain from selling property. The key is to keep buying more and more real estate. Cost segregations allow you to take more of your depreciation in the first several years of ownership. Your tax basis—the purchase price minus all depreciation taken to date—is reduced dollar by dollar as you claim that depreciation. Once your basis reaches zero, you get no more depreciation. And when you sell, your gain is the difference between your basis and your sale price. To continue sheltering cash flow from both your real estate and your business, you need to keep buying more real estate, rolling your gains into like-kind properties through tax-free exchanges under Section 1031. One powerful feature of tax basis is that it includes debt—you can buy a property with no money down and still receive the full basis and all associated depreciation.
Like-kind exchanges plus depreciation equal zero taxes. Consider a natural progression: you start with single-family homes, build equity and comfort, then sell through a 1031 exchange to buy apartment buildings that deliver more cash flow and require fewer properties to manage. You shelter that cash flow with depreciation. Later, you exchange again into a triple-net-lease property—say, a Walgreens. Many retail chains do not own their stores; they find the land, build the building, sell it to an investor, then lease it back for thirty years, handling all maintenance and expenses themselves. The investor simply pays the mortgage. Walgreens has excellent credit, the bank is happy to lend, and you collect a reliable check without any property management responsibilities.
Here is the magic of that progression. Suppose over the years your total depreciation across all your properties came to $4 million, and your final Walgreens property cost $5 million. Your tax basis would be $1 million. If you sold for $6 million the day before you died, you would owe capital gains tax on $5 million—at twenty percent, that is $1,000,000 in tax. But if you simply hold the property until death, your basis is automatically stepped up to the property’s fair market value on your date of death. Your heirs inherit at $6 million basis and pay zero tax when they sell. You received the full benefit of all that depreciation during your lifetime, and none of it is recaptured at death. You got the tax benefit from all that depreciation while alive, and your children do not have to pay tax on it when you die.
Selling assets creates unnecessary capital gains taxes that could be avoided simply by holding on. You can always access cash from real estate by borrowing against it—and debt is tax-free. A refinance puts money in your pocket without a tax bill. One of the biggest benefits in real estate is that loans are not taxable. In the United States, there is also no tax on the sale of a personal residence as long as you lived in it for two of the past five years.
Chapter 20 — Stocks Can Lower Your Taxes Too
People who make a lot of money in the stock market are well educated about it. They understand how to make money whether the market goes up, down, or sideways. They use options, futures, and other hedges to reduce risk and increase reward—they do not rely on the strategy of buy, hold, and pray the stock goes up.
Mutual funds carry a hidden tax trap most investors never see. Suppose you invest in Mutual Fund A at the beginning of the year. The fund bought Stock B for $10 per share fifteen years ago. When you joined, that stock was worth $50 per share. The day after you join, the fund managers decide to sell it. There is a gain to the fund of $40 per share. Who pays the tax? You do—even though you just bought in the day before. All investors who owned shares of Mutual Fund A on the day of the sale share the gain. And it gets worse: suppose by year-end the overall market declines and your shares are now worth only $80 per share, down from the $100 you paid. You still owe tax on your share of the $40 gain from the sale inside the fund. Mutual funds are one of the few places in the investment world where you can lose money and still owe tax.
To make stock-related expenses deductible, you need to qualify as a stock trader, which makes your activity a “trade” and allows you to deduct expenses as ordinary deductions while your trading gains remain capital gains. Three rules determine whether you qualify. First, the volume of trading must be significant in both number of trades and dollar amounts. Second, the time spent on trading must be a significant part of the day. Third, the income from trading must be a significant portion of your overall income. Court cases constantly refine these rules, so your tax advisor should research the current standards each year you want to qualify.
Since stock and option trades are treated as short-term capital gains taxed at ordinary income rates, trading them inside an IRA means you give nothing up—you simply postpone the tax on gains. Even better, trading inside a self-directed Roth IRA means none of the gains are taxable, ever. If you have money inside a 401(k) or traditional IRA and your wealth strategy includes stock and option trading, consider rolling it into a self-directed IRA and converting to a Roth before you begin. Just remember the restriction on withdrawals before age 59½—treat this as retirement income and plan accordingly.
Chapter 21 — Commodities Can Be Your Tax Friend
In the United States, oil and gas is one of the truly great tax shelters—but not all oil and gas investments qualify. Buying stock in an oil and gas company provides no special tax benefits. Neither does buying royalties from a producing well. But investing in exploratory or development drilling operations opens a remarkable set of advantages.
When a development company drills for oil and gas, it has two main categories of expense: the equipment, which typically runs about thirty percent of drilling cost, and intangible drilling costs—IDC—which cover everything else: labor, survey work, ground clearing, drainage, fuel, and repairs. Congress made a specific decision to allow investors to deduct both IDC and equipment costs in the year the money is spent, usually the first year of investment. Beyond that first-year write-off, investors also get to deduct fifteen percent of the well’s gross income every year as a depletion allowance—similar to depreciation, but ongoing even after all IDC and equipment costs have been fully deducted. To claim all of these deductions, however, you must own your investment through a general partnership or sole proprietorship. You cannot own it through a corporation, LLC, or limited partnership.
Mining operations carry similar benefits. Renewable energy—wind turbines, solar panels, and electric vehicles—attracts substantial tax credits in most countries, including investment tax credits for wind installations, credits for solar panels and electric cars, and in some U.S. states significant additional state-level incentives. When renewable energy equipment is used in business, one hundred percent of the cost is immediately deductible in the year of purchase.
Farms, orchards, and ranches benefit from the immediate deduction of all operating expenses—feed for livestock, seeds, labor—without any requirement to add them to inventory. You deduct them as you spend them. Farms also receive special estate tax treatment: you may be able to reduce the estate tax on an inherited farm or pay it in installments over several years, preserving the farm as a going concern. When investing in agriculture, look for benefits specific to certain crops—citrus groves in the United States, for example, receive particular tax breaks. United States tax policy takes precisely the opposite approach to gold and silver. Investment in precious metals is actively discouraged through a special, higher capital gains tax rate that exceeds the rate applied to other long-term capital gains.
Chapter 22 — Don’t Fear the Audit
The best way to approach a tax audit is to never be surprised by one. Preparation has three components. The first is organized bookkeeping records: good accounting software, income and expense records, timely income statements and balance sheets, personal financial records, budgets, and year-over-year comparisons. The second is organized receipts: keep receipts for every deduction you intend to claim, scan them into organized computer files or maintain separate paper folders by category, and retain everything for at least seven years. The third is comprehensive documentation: legal contracts and agreements, copies of prior tax returns, and complete corporate books—articles of incorporation or organization, operating or partnership agreements, by-laws, and minutes.
The language you use to describe deductions on your tax return also matters. Instead of listing an expense as “seminar,” consider describing it as “continuing education.” If you attended primarily to network and market yourself, call it a “sales or marketing expense.” You are still reporting accurately—but without raising a flag that invites closer examination. Similarly, avoid round-number estimates. If you paid cash and are not certain of the exact cost, choose a number that looks precise rather than approximate. Round numbers signal guessing; precise numbers signal records. The best way to avoid an audit entirely is to have your returns prepared by a tax professional who understands how to eliminate possible red flags before they are filed.
Chapter 23 — Choose the Right Tax Advisor and Preparer
Being passionate about reducing your taxes is only one trait to look for in a good tax advisor. The other essential question is how the advisor views the tax law—with fear, or as an opportunity? The reality is that you have all of the answers. Your advisor should have all of the questions. If you find yourself having to ask the questions, you simply have the wrong advisor.
A great tax advisor is fully educated about the tax law, passionate about reducing your taxes, and embraces the law as an opportunity rather than an obstacle. They focus on permanent tax savings rather than deferrals, use creativity in applying the law in your favor, consider the entire body of tax law rather than a single rule, care more about your situation than about their own fees, ask you detailed questions about your specific circumstances, and are willing to teach you the tax rules as they go. The more passionate you and your advisor are about reducing your taxes, the lower your taxes will be. It is not how much your tax preparer charges you that matters—it is how much they ultimately cost you. Never use a tax preparer who is not also your tax advisor: you may otherwise receive great advice that is never implemented, and lose out on thousands of dollars of savings that were always within reach.
Chapter 24 — What Are You Going to Do with All Your Extra Money?
To produce massive amounts of wealth, there are three concepts you must understand: compound interest, leverage, and velocity. These are the three foundations on which all great wealth is built.
Compounding interest is important—but it is a slow way to build wealth on its own. Leverage is what happens when you earn interest not just on your money but on someone else’s money as well. That is exactly what a bank does: it borrows your deposits at a low rate and lends them out at a higher one. You can do the same. Borrow $100,000 at eight percent, invest it in equipment and inventory generating $12,000 per year, pay the bank $8,000, and net $4,000. Compare that to the $500 you would have earned from a bank certificate of deposit. That is the magic of leverage.
Velocity takes leverage further. Suppose you invest $10,000 of your own money alongside a $100,000 bank loan, earning twelve percent—$13,200 in the first year. After paying the bank $8,000, you have about $5,000 in retained earnings. Because the bank agreed to lend when you had $10,000 of your own money in the deal, it will now lend an additional $50,000 because you have added another $5,000 of retained earnings. In year two, you earn twelve percent on $165,000—$19,800—and pay eight percent interest on $150,000 of total debt—$12,000—netting roughly $8,000. That is $3,000 more than you earned in year one, simply by redeploying the earnings quickly. The more you leverage and the faster you re-employ your money, the faster your wealth compounds. It is all about momentum.
Appendix — Tax Strategies, Tips, and Rules
Twenty-four tax strategies form the backbone of this book. The first is to include tax planning in your wealth strategy from the beginning, because it is not just what you make that matters—it is what you keep. The second is to invest where you travel, turning existing trips into deductible expenses. The third is to elect how your LLC will be taxed, exploiting the extraordinary flexibility the entity offers. The fourth is to deduct your business meals whenever the three tests of business purpose, ordinary expense, and necessity are met. The fifth is to put your family to work in your business and investing, shifting income to lower brackets and creating permanent tax savings. The sixth is to document everything—the IRS, Revenue Canada, the HMRC, the ATO, and every other tax authority love documentation, and if you pretend to document a deduction you will get a pretend deduction. The seventh is to do cost segregations on business and rental properties to accelerate your depreciation. The eighth is to pair passive income generators with passive activity losses—PIGs with PALs. The ninth is to make your parents your business partners and benefit from their lower tax rates. The tenth is to save for your children’s education through your own investment vehicles rather than government-controlled plans.
The eleventh strategy is to reduce the wages you take from your business, minimizing employment taxes while paying a reasonable salary—a salary that is reasonable enough to avoid audit but low enough to save over $4,500 annually in employment taxes. The twelfth is to reduce your sales tax burden by understanding exactly when to collect and what qualifies for exemption: when in doubt, collect it, remit it, and file a return, because the cost is minimal and the exposure from not collecting is substantial. The thirteenth is to reduce estate taxes through charitable trusts. The fourteenth is to use multiple states or countries to your advantage, finding “nowhere” income and low-tax jurisdictions. The fifteenth is to combine entity types—partnerships, S corporations, LLCs, and trusts—for the maximum combined benefit. The sixteenth is to align your asset protection strategy with your tax strategy from the start. The seventeenth is to use a Roth IRA selectively, developing your wealth strategy first and then deciding whether a Roth works within it. The eighteenth is to turn your business into a passive investment by giving a portion to a family member, then pairing it with real estate losses. The nineteenth is to change your personal residence every few years to take advantage of the tax-free gain available in most countries—buy your home because you want to live there, not as speculation, and treat any gain as a bonus. The twentieth is to trade stocks and options inside a self-directed Roth IRA, where gains are never taxed.
The twenty-first strategy is to invest in oil and gas development operations to avoid the passive loss rules that constrain other investments—oil and gas is the only investment where you are not subject to rules that limit losses from passive activities. The twenty-second is to purchase an audit defense plan annually so that professional fees during an audit do not become an additional financial burden. The twenty-third is to hire the right tax advisor—one who asks you questions rather than waiting for you to ask them. The twenty-fourth is to build massive passive income through the accumulation of tax savings, using compound interest, leverage, and velocity to multiply every dollar you keep: start with earned income, invest in growth assets, build capital, and then invest in assets that generate passive income. With a substantial amount of capital, even investments with modest returns result in massive passive income.
Twenty-two rules anchor the entire framework. It is your money, not the government’s. The tax law is written primarily to reduce your taxes. The fastest way to put money in your pocket is to reduce your taxes. Everything you do either increases or lowers your taxes. The tax law is a series of incentives for entrepreneurs and investors. You can deduct almost anything given the right circumstances. It is not how much you own that matters—it is how much you control. Treat your business as you would a major public company. All tax planning must have a business purpose beyond tax savings alone. When you want to reduce a tax, reduce the base on which it is measured. Paying tax in several locations can result in paying less total tax than paying in only one. To receive the foreign tax credit, the same entity must both pay the foreign tax and report the income at home. Taxpayers with long-term, flexible strategies always pay less tax than those without strategies. You must maintain control of your assets at all times and in all circumstances. Never put a tax shelter inside another tax shelter. The single best tax shelter in most countries is investing in rental real estate. Mutual funds are one of the few places where you can lose money and still owe tax on your investment. The better the tax benefits, the more complicated the rules. You can eliminate your fear of a tax audit simply by being prepared. Never handle a tax audit yourself—always enlist your tax advisor. The more passionate you and your advisor are about reducing your taxes, the lower your taxes will be. And finally, it is not how much your preparer charges you—it is how much they ultimately cost you.