Highlighted Topic – Tax Savings Tips
Disclaimer: I’m not a CPA. I’m an accountant. I don’t have any certification and would not consider myself any type of tax professional, so always consult a professional before taking any steps towards altering your taxes!
With the above disclaimer out of the way, over the years, we’ve learned a lot about taxes and how to build a wealth and tax strategy that allows you to keep more money in your pockets, so I’ve listed out a few tips below in celebration of Tax Day!
There are two big obstacles most people run into when forming a tax strategy.
Obstacle #1: Defining a tax strategy? What is it?
Obstacle #2: Where/How do you start?
Defining a Tax Strategy?
A strategy is a careful plan or method for achieving a particular goal, usually over a long period of time. The specific goal or purpose is to permanently reduce your taxes. So, a tax strategy is a careful plan of action to permanently reduce your taxes.
Of course, most people are all for permanently reducing their taxes. What is typically missing in their quest to do that is the strategy piece. And it’s the strategy piece that produces the maximum results.
The strategy piece helps focus our actions and thoughts every single day on permanently reducing taxes.
It doesn’t have to take hours every day to get maximum results from your tax strategy. Instead, your strategy becomes a part of your daily routine.
Every transaction you do can have an impact on your taxes. Your tax strategy helps you think about your daily transactions in a way that gets you to your goal of permanently reducing your taxes.
Where Do You Start?
Think about planning a vacation. Let’s say you are going to Hawaii. When you go to book your ticket, you need to know where you are departing from, right? This is your starting point. It is impossible for you to get to Hawaii unless you know where you are starting.
The same applies to a tax strategy. You must know where you are starting. In your tax strategy, this means you must know your current financial position. We’re about to publish our free eBook, which outlines, in greater detail, understanding your financial position; however, minimally, your current financial position includes:
- Your Current Balance Sheet: current balance sheet tells you your current net worth. It’s calculated as follows:
- Your Assets (what you own) – Your Liabilities (what you owe) = Your Net Worth
- When you know your current net worth, you know the exact resources available to you to use in your tax strategy. Your specific assets and liabilities help create the best path for you in your tax strategy.
- Your Current Statement of Cash Flows: current statement of cash flows tells you your net cash flow. It’s calculated as follows:
- Your Income – Your Expenses = Your Net Cash Flow
- Identifying your sources of income is the starting point of identifying how to reduce the tax on that income.
- Identifying your expenses is the starting point of maximizing your deductions.
Your Tax Strategy and Your Wealth Strategy
If you are like most, the single biggest expense draining your cash flow is your taxes.
There are 3 types of taxation on investments:
- Taxed-Now: This is your basic investment whereby the taxes are taken out now.
- Tax-Deferred: Selecting an investment that allows you to wait to pay taxes until a later period of time. There are pro’s and con’s to this approach. The biggest thing to understand with tax-deferred is that it is beneficial if you are in a lower tax bracket in the future, when you capitalize on this investment. Unfortunately, no one knows what tax brackets will look like in the future, so there’s some gamble to having all investments fall into this bucket; however, it can be a well balanced addition, if used correctly.
- Tax-Exempt: These are investments that don’t have to pay taxes.
If I could leave you with one piece of advice, it would be to ensure you have all 3 types of taxations in your portfolio. There are benefits to each of them, but the combination of them can be what really helps you in your quest to build wealth!
I’ll leave you with this ironic video about taxes I saw online the other day. It may be meant to be satirical, but is actually fairly accurate.
When you reduce your taxes, you immediately increase your cash flow. Increased cash flow can be used to create wealth. Your taxes are a powerful way to feed your wealth strategy!
Remember to tell your friends and family what you have learned! Even better, have them sign up and have a great discussion over dinner!