Not taking advantage of the aspects of the law that are there to help you means you are stealing from yourself, your family, and your future.
The simple fact is that this woman didn’t understand Rule #1 when it comes to the tax law. And chances are, you may not either.
| RULE #1: | It’s your money, not the government’s. |
Unless you live in a dictatorship, the money you earn and the wealth that you build belongs to you. Yes, you may be required to give some of it to the government to help build roads, maintain the military, and sustain schools. But fundamentally, it’s your money.
| TAX TIP: | Learn how your LLC (limited liability company) can be whatever it wants to be. The LLC has become the entity of choice for asset protection purposes. But what about 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 the tax and asset protection worlds. In some countries without LLCs, the LLP (limited liability partnership) may give you similar flexibility. |
Judge Learned Hand, a former judge on the United States Court of Appeals for the Second Circuit and a judicial philosopher, was adamant about this principle. He went so far as to say this: “Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”
You may not realize this, but it’s true: The tax laws are written to reduce your taxes, not to increase them. In the United States, for example, there are over 5,800 pages of tax law. Only about 30 pages are devoted to raising taxes. One line, Section 61(a), says, “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived…” There are then several pages of tax rates and a few other miscellaneous tables. The remaining 5,770 pages are devoted entirely to reducing your taxes. In other words, 0.5 percent of the tax code is devoted to raising taxes, and the remaining 99.5 percent exists solely for the purpose of saving you money. So here is Rule #2.
You may not realize this, but it’s true: The tax laws are written to reduce your taxes, not to increase them.
| RULE #2: | The tax law is written primarily to reduce your taxes. |
You may not believe me about Rule #2. So go ahead and ask your own accountant how much of the tax law in your country is devoted to raising taxes. Your accountant will tell you the truth—very little. That the woman in Guy’s class felt it’s our patriotic duty to pay the most taxes is both ridiculous and completely wrong. In fact, as I’ll show you in the next few chapters, it’s actually your patriotic duty to reduce your taxes by all legal means.
| Beware of Tax Advisors Who Really Work for the Government | |
| 1. | Many tax advisors are afraid of the tax law so they won’t learn how to take advantage of the law for you. |
| 2. | Some tax advisors are more interested in protecting themselves than reducing your taxes. |
You may be wondering how I can really say that with a straight face. Well, think about it. If 99.5 percent of the tax law is written to help you reduce your taxes, then the government must really want you to do just that. If that weren’t true, why would they enact so much legislation aimed at helping you do so? All of the so-called complexity of the tax law is really just aimed at reducing your taxes, not increasing them.
All of the so-called complexity of the tax law is really just aimed at reducing your taxes, not increasing them.
Until you really believe and are committed to these two fundamental rules of tax law, there really is nothing you can do to limit your taxes—and this book will be worth very little to you. You will keep on unnecessarily paying 30 to 50 percent of your hard-earned income to the government. Maybe that’s what you want. But I have a hunch it isn’t.
Once you truly believe these two rules and have them firmly planted in your mind, you’ll realize that you have the right to reduce your taxes every minute of every day. All you have to do is learn the rules of the game. And that’s when this book becomes priceless.
The good news is that the tax rules are easy to understand. After all, you already understand the first two rules, right? From here on out, it’s just a matter of learning who the tax laws are written for and why, and learning how to change the way you think about your money and taxes.
So if you believe that your money is yours and not the government’s, and that the tax law exists to reduce your taxes, then you’re ready to read on and learn how to make the tax law work for you—and not the other way around. Let’s get to work.
| CHAPTER 3: KEY POINTS | |
| 1. | Some of us are trained to believe we owe the government OUR money (it’s just not true). |
| 2. | The tax code is set up to help us reduce our tax burden—and to do so legally. |
| 3. | Nearly all—99.5 percent—of the tax code exists solely for the purpose of saving you money. |
| 4. | All of the so-called complexity of the tax law is aimed at reducing your taxes, not increasing them. |
Tax Strategy # 3: Elect How Your Limited Liability Company will be Taxed
Your limited liability company (LLC) can be whatever you want it to be. The LLC has become the entity of choice for U.S. asset protection purposes. But what about for tax purposes? The good news is, 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 the tax and asset protection worlds. In some countries without LLCs, the limited liability partnership (LLP) may give you similar flexibility. The key here is that you can frequently have your cake and eat it too when it comes to the tax law. Simply by understanding that LLCs can be treated any way you want for tax purposes, you have asset protection and still get the tax advantages of the S corporation, C corporation or partnership rules. Garrett Sutton, Rich Dad Advisor for asset protection and legal services, talks in detail about the asset protection advantages of limited liability companies in his bestselling book, Start Your Own Corporation RDA Press, 2012. Once you decide which type of entity you want for tax purposes, be sure you make the proper entity tax election by checking the proper box on the IRS entity election form. If you don’t make the election, the IRS will choose for you which tax entity you will be—a sole proprietorship for single-member LLCs or a partnership for multi-member LLCs. You can make your entity election at any time during the year. This election gives you great flexibility in your tax planning. Suppose you are just starting a new business. You may want your entity to be treated as a sole proprietorship in the early years when there is a loss or not much income so you don’t have to file another tax return (corporations have to file a separate income tax return from their owners). When you’re ready to change to an S Corporation to reduce your employment taxes (see Chapter
