Loopholes of the Rich

How the Rich Legally Make More Money and Pay Less Tax

Diane Kennedy

• Publisher: Wiley
• Year: 2010
• ISBN:
  9781118040393
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Loopholes of the Rich helps Americans from all walks of life use the same tax loopholes that the wealthy use to lower their tax bill. With this handy guide, you won?t need an accountant to find quick and easy ways to pay less. And there?s nothing unethical about these tax loopholes. In fact, the government wants you to take advantage of them! These tax-reducing tactics and strategies can give you the freedom to save for your family?s future or for your own financial independence. Plus, you?ll find a handy checklist of more than 300 business deductions, real-life tax strategy examples, useful sample forms, explanations of IRS codes and rules, and much more.

PART I

The Five STEPS to Financial Freedom

Chapter 1

STARTING POINT—UNDERSTANDING YOUR FINANCIAL STORY

Five STEPS to Financial Freedom through Loopholes

Success leaves a trail. One of the easiest ways to have your own success is to follow where others have gone before. We all have different goals and come from different circumstances, but there are five basic steps that will ensure the best possible results for everyone, no matter where you are now. These five STEPS are:

S Starting point.
T Team.
E Evaluation strategy.
P Plan and path.
S Starting point (reevaluation).

S Is for Starting Point

First, you need to know where you are. It’s like having to get on the scales before you start a new diet—you might not want to really know what the numbers say, but you do need to know your starting point.

That’s just how it is for your financial plan. Your best results will come when you can take a realistic look at where you are financially—without excuses, blame, or justifications. Find out where you are, so you can plot an accurate course to where you want to be!

Remember: The members of your team will help you or harm you as you follow your own financial dream.

T Is for Team

After you have a good idea of where you are, you will need to start to think about the members you need for your financial team. Most likely, the main members of your team initially will be advisors, educators, and mentors. But your team can also include customers, clients, vendors, business alliances, and friends, among others. You can make conscious choices about the members of your team. You can learn how to evaluate what you need and how these people will fit into your plan. Finally, you can recognize the hidden influences they have on decisions you have made and will make in the future.

E Is for Evaluation/Strategy

After you know where you are and begin to assemble your team, it is time to call on your advisors to help you evaluate your situation and design a personalized strategy for you to achieve your goals. No one team member—your tax strategist, bookkeeper, legal counsel, or financial planner—will make all of the decisions. It is through the cooperative work of your whole team that you will receive the best advice and plan creation.

P Is for Plan and Path

After S, T, and E, you now need to move forward on the path and implement the strategy designed. This can be the hardest part as you move into previously unknown financial waters. You will want to make sure that the team you have in place has experience in the necessary areas and can give you good advice based on their own personal education, experience, and special skills.

Five Steps to Financial Freedom!

S is for starting point—Understand your financial story.

T is for team—Build a team that supports your goals.

E is for evaluation—With your team, construct a tax loopholes strategy.

P is for path—Create an action plan to implement your tax loopholes strategy.

S is for starting point—Look at your new financial statements. What worked? What didn’t work?

S Is for Starting Point (Reevaluation)

You’ve taken the first four steps and now you need to again evaluate where you are. Just like a rocket going to the moon needs continual calculations to keep it on its path, you must constantly evaluate where you are and where you are going to ensure that you reach your goals.

By taking the time to thoughtfully consider where you are and where you’ve come from, you put yourself in a position to achieve the optimum results.

These five STEPS to financial freedom can start you and your family on the path to financial freedom today.

Where Are You Now?

Why is it so hard for many people to look at their financial information?

In school, you received a report card to tell your parents and institutions of higher learning how well you did. In life, your financial statements are the report cards that tell investors and financiers how well you are doing. The financial statement, unlike the report cards of old, is something you volunteer to get. And, most people choose to just not look at the data. Sometimes the truth is just too painful.

Traditional education has a part to play here. People are taught more about the technical aspects of their chosen field than they are taught about the practical aspects of running a business in that field. Doctors are taught medical techniques, but are not taught how to run a business so they can grow wealthy without having to give up all their free time. An architect is taught design, but is never told how to set up a profitable architecture firm.

How to Find Out Where You Are

Your financial statements tell a story. And your financial statements are often the best crystal ball when it comes to predicting what your future is going to be.

First, understand what a financial statement is. No, we’re not going to turn you into an accountant, but there are basics of how financial statements work that you need to learn so you can immediately spot the financial story of every statement. Can you imagine being able to look at a financial statement and instantly know what the future of that company is going to be? Even better, imagine looking at your own monthly financial statements to identify what is working, so you can do more of it, and what isn’t working, so you can change it! How could that change your life?

Second, utilize the simplified forms in this book so you can start to see where your money is going and identify the cash flow patterns in your own life.

Finally (my favorite step), design your ideal financial statement. How much cash do you want flowing into your pocket each month? How much money do you need in order to create the dreams of you and your family? Put your goals in writing with financial statements and they become a measurable tool that you can use to guide your investment and business decisions. But if you never write them down, they will never happen.

Jean’s Great Deal

I received a call some time ago from a client of mine. She was a highly educated medical doctor with a flourishing practice. But if she didn’t work, she didn’t get paid. She wanted to make her money work for her, instead of always having to work for her money.

That meant her goal was to build assets. I was happy to hear that she had bought her first piece of rental property. She was proud that she had found the ideal property and had diligently filled out the cash-on-cash analysis forms I had provided her. The cash-on-cash analysis form is an excellent way to evaluate a potential investment. (The cash-on-cash ratio tells you what the annual return is on the cash invested. It is one of the best tools for comparing real estate investments with other forms of investments.) You can see a copy of this form in Appendix D.

We set a time to meet the following day, and when I arrived Jean immediately showed me the sheet listing the projected rental income, with the property mortgage payment, property tax expense, insurance expense, and repairs and maintenance allowance deducted. She had left the cash-on-cash calculation blank, though. She had trouble with that calculation and, after looking at her numbers, I knew why.

The problem was that the cash-on-cash ratio tells you the rate of return for your investment, and in her case, there was no return! The property expenses exceeded the income. I gently pointed that out to her, and she responded, “That’s great! I can write the expenses off on my taxes!”

I then spent the rest of our appointment explaining that tax write-off schemes give you back only cents on the dollar. She was not getting return for her money. Plus, she was one of those higher-income taxpayers who couldn’t fully use real estate loopholes.

By the end of the appointment, Jean had decided to sell the property and take a capital loss that would hit her once, instead of the continued drain of a tax write-off.

Jean took that lesson to heart and learned from it. She analyzed a property before she bought it. She always knew her exit strategy in advance. Then, she found out how to take advantage of the real estate loopholes that she could not take before.

In Jean’s case, she worked 50+ hours a week in her medical practice when I first met her. Her new real estate investments created cash flow that helped her reduce the number of hours she spent in her practice. That meant that she could now put more hours into real estate investing. One of the benefits of real estate investments is that the real estate loopholes generally give you more deductions than you receive in cash flow. The best write-off of all is depreciation, which you can maximize to create paper losses. However, if your income is more than $150,000 per year, you cannot use those paper losses as deductions against your other income to reduce your taxes. That’s the spot Jean had been in.

Jean was now spending more time in real estate activities than she did as a medical doctor. That meant that she could now take advantage of the loopholes available to a real estate professional. If you spend more time in real estate activities than you do in your regular job and the number of hours in real estate exceeds 750 hours in a year, you can fully write off your real estate paper losses against other income—no matter how much money you make and no matter how much your paper losses are. Of course, Jean kept good records to document her real estate professional status, so she had no worries from an IRS audit.

Where is she now? Jean works one or two days per week in her medical practice and leases out the excess office space to another doctor who also pays a portion of the support staff expenses so she has passive income from her medical practice. The rest of her time is spent looking for more real estate deals. She has holdings in two states and even internationally. All of it puts money in her pocket each and every month. She pays less tax. . . and makes more money!

To paraphrase a popular saying:

If you think getting a financial education is expensive. . . try ignorance.

Know Where Your Money Goes

As can be seen in the story about Jean, I do not advise my clients to create additional expenses just for the tax write-off. Instead, I advise them to first look at where they already spend money. They usually will look at the past three months’ spending and take an average of their expenses to use as the monthly numbers. This can be a painful experience, as some of my clients have to come face-to-face for the first time with where their money really goes. Don’t cheat yourself! Do this exercise accurately and with as much detail as you can. The more care you take, the better the results.

Your business must track income and expenses so your CPA can accurately prepare your tax return. But what do you do about your personal expenses? Our clients find more tax deductions and have better financial planning tools when they track their personal expenses as well as their business expenses. You can do this by using a bookkeeper or through a personal money-management software program.

I have discovered that clients who do not accurately track their personal expenses always and without exception shortchange themselves. They can’t substantiate the deductions they can take and they simply don’t remember many of them.

Take advantage of every deduction by knowing where all your money goes. See Chapter 3 for a form you can use to determine where you spend your income.

Financial Statements Made Easy

There are three financial statements that e...

Table of contents

• Title Page
• Copyright Page
• Foreword
• Introduction
• PART I - The Five STEPS to Financial Freedom
• PART II - Jump Start! Your Wealth
• PART III - New Tax Strategies for C Corporations
• PART IV - Take Your Loopholes and Still Sleep at Night
• Appendix A - TAX LOOPHOLES STRATEGY SUCCESS STORIES
• Appendix B - 300+ BUSINESS DEDUCTIONS
• Appendix C - IRS PRINCIPAL BUSINESS AND PROFESSIONAL ACTIVITY CODES
• Appendix D - SAMPLE FORMS
• Index
• Meet Diane Kennedy