“The hardest thing in the world to understand is the income tax.”
– Albert Einstein
Tax evasion and tax optimization are two very different things.
Tax evasion is when people don’t pay what they should.
That is objectively wrong and should never happen.
Tax optimization is finding ways to pay less in taxes through government incentives.
These incentives typically revolve around housing, energy, or agriculture.
The government wants people to use them.
People need cheaper energy.
They need a place to live.
They need food.
When you contribute to those areas, you can save on taxes.
I know a couple that sold a business in California and saved over $2 million on their tax bill. Wow!
They ended up paying $125,000 in taxes on a $5 million business.
Not bad, right?
Today we’re going to go over how you can use this to your advantage.
Let’s get into it!
1. Legal vs. Illegal
There are both legal and illegal ways you can pay less in taxes.
The illegal ways involve you not paying the amount you’re meant to pay.
You can incur penalties or even go to jail (tax evasion).
Legal ways involve finding strategies to save money (tax avoidance).
You might also hire a CPA or tax strategist to help you.
CPAs in particular are proven to bring value to companies in many ways.
They can and do make for very good long-term investments.1
2. Tax Optimization Strategies
There are two tax optimization strategies I’ll talk about today.
The first one is depreciation.
Depreciation is what we use against real estate.
The last couple of years, you could get up to 100% depreciation.
That means the total amount invested could be depreciated typically 70% to 100% deduction for year one.
If you invested in an apartment deal for example, you qualify for a lot of tax breaks.
Some of that has been phased out, but there’s a chance it could come back.
Keep informed!
You don’t need to have a loss necessarily, either.
The depreciation shows that things wear out over a certain amount of time.
You can use that on your tax forms to reduce your taxable consequences.
I used to make $200,000 a year and pay 25% in taxes.
After becoming a real estate professional, I got that down to about 1%.
It’s an exceptional tool.
The second strategy revolves around deductions.
If you have a business, you can deduct a lot of expenses on your taxes.
These can include anything related to your business: Education, travel, courses.
You can write off those costs and reduce those different expenses against your taxable income.
That’s pretty incredible!
3. The Consequences
There are big consequences to all of this.
Tax evasion, as we’ve talked about, can destroy your finances and your life.
But even when you do things legally, there is risk.
IRS audits are a big one.
People who aren’t wealthy, even the middle and upper middle classes, are afraid of audits.
The very wealthy are not afraid of being audited.
As long as they have good organization and good bookkeeping, the tax laws are on their side.
They’re written in a way that helps you take advantage of the breaks that are there.
In general, if you’re a goodhearted citizen, the government’s not out to get you.
They’re simply asking you to follow the rules.
According to CNBC, only 0.38% of tax returns were audited in 2022.2
The last thing I’ll say on this is to get a tax strategist if you make over $200,00 a year.
Having a good tax strategy can save you a lot of money in the back end.
We have a good referral if you want to reach out!
Now I want to hear from you.
What kind of tax strategies will you implement this year?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.
Works Cited
1. N. J. Mastracchio. “Value Proposition: While CPAs May Cost a Little More, They Bring Critical Skills to a Company’s Finance Team.” Journal of accountancy, 203 (2007): 82.
2. Dore, Kate. “Don’t Risk a Tax Audit. Here Are Four Reasons the IRS May Flag Your Return.” CNBC, February 3, 2023. https://www.cnbc.com/2023/02/03/dont-risk-an-audit-here-are-four-reasons-the-irs-may-flag-your-return.html.
