Tax Strategies of the Wealthy | Greg Vanderford | Skillshare

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Tax Strategies of the Wealthy

teacher avatar Greg Vanderford, Knowledge is Power!

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Taught by industry leaders & working professionals
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Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

12 Lessons (1h 56m)
    • 1. Lesson 1 Taxes Intro

    • 2. Lesson 2 Brief History of Taxes

    • 3. Lesson 3 Marginal Rates

    • 4. Lesson 4 Deductions

    • 5. Lesson 5 Tax Credits

    • 6. Lesson 6 Retirement Accounts

    • 7. Lesson 7 Foreign Income

    • 8. Lesson 8 CPAs and Tax Preparers

    • 9. Lesson 9 Tax Strategies of the Wealthy

    • 10. Lesson 10 How to Avoid an Audit

    • 11. Lesson 11 Bringing it all together

    • 12. Tax Cuts and Jobs Act Update

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About This Class

The American Tax Code is the longest and most complicated tax code of any country in the world. It currently stands at a mind boggling 20,000 pages and is growing every year. It's no wonder hardly anyone really understands how taxes work!

In this course you will learn EVERYTHING YOU NEED TO KNOW ABOUT TAXES including:

1. How to save money on your taxes

2. How to build wealth in a tax efficient way

3. How to retire without paying any taxes on your income

4. How to avoid an audit by the IRS

5. How to set up your finances to pay nothing in taxes at all!

After years of studying and teaching business, one thing is clear: most people pay too much in taxes.

If you implement what you learn in this course, you will not be one of those people!

Meet Your Teacher

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Greg Vanderford

Knowledge is Power!


My courses are designed based on my many years as a teacher and student of education and business. I hold a master's degree in curriculum and instruction and have been designing curricula for over a decade.

The business, language, and chess courses that I have built are a reflection of this experience and dedication to education. My goal is to reach as many people as possible with my courses, which is why I have chosen the internet as my ideal mode of delivery.

The following is a little more about my expertise and background. I was born and raised in Sandpoint, Idaho. I attended the University of Idaho where I earned a bachelor's degree in Business Administration in 2004. After a few years in the work force as an account manager I moved to Vietnam where I lived for over 5 ... See full profile

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1. Lesson 1 Taxes Intro: welcome to the course. Everything you need to know about taxes, pay less and live more. I have over the last several months interviewed many, many people, dozens of people about taxes and what they know about them, their experience filing them. And one very common thing theme struck me very clearly over and over again. People do not know very much about our tax system, and it's understandable because it's one of the most complex, if not the most complex tax code in the world, and we're gonna discuss why that is in the course and what we can do about it. But people are paying, um, an extra hundreds or thousands of dollars in taxes every year that they shouldn't be. And, ah, research shows that an estimated $1 billion a year is overpaid to the IRS because people don't know about ways that they could be sheltering their income. The people who do know about this are the wealthy. One of the reasons that got that way is because they understood a lot of these tax rules and then had to be tax efficient, save more and invest more. Therefore, having exponential compound interest on their earnings and another ways. Maybe they became wealthy through their work and through the help of a professional legacy , p A. They learn how to shelter their money in taxes. Or perhaps they were taught it by their parents. But whatever the case may be, the wealthy know how to shelter their taxes. And, you know, I find it amazing that in our modern 21st century classroom we have no courses in school, in public education, about taxes, even though all of us are affected by them. We will all be filing them every year for the rest of our lives. And it's a very, very basic thing to be a citizen, and we don't teach it in school. It it boggles my mind. Of course. That's one of the reasons why I'm teaching this class to help fill that gap in education. But it really is amazing to me that we don't have more classes on money, finance and taxes. You may be lucky if you took one finance course, such as personal finance when you're in high school and probably didn't remember much from that by the time you got out. So this is one of the big gaps that we have in our educational system, not teaching things that affect literally every single citizen and to their detriment when we're over paying in taxes. But the wealthy, they they have learned these rules. They have learned how to not pay. They make more money, but they actually pay less in taxes, the middle class. They could pay a lot less in taxes if they understood the tax strategies that we're gonna be learning about in this course. There are a lot of different ways to shelter your income, right? We have capital gains strategies. We have, um, deductions. We have credits, and we need to look at the ones that most people could be taking that they don't even know about that they aren't claiming. There was a famous case a few years ago of the Republican presidential candidate, Mitt Romney, releasing his his taxes, and some people were appalled that his effective tax rate do you having a very effective tax strategy was lower than a lot of middle class and lower middle class people, despite the fact that he's a multi millionaire and he used a very simple strategy with his finances, which is that the income that he reported in that tax year when he released those tax returns came almost exclusively from capital gains from selling long term assets like stocks and real estate. In such right, if you have income from capital gains, the tax rate is much lower than regular income. Normally someone in his marginal tax bracket on regular income I would have paid 39.6% on the income, a very large amount, because, of course, we have a progressive tax system. But the wealthy have a lot of ways to get around that, and it's totally legal. It's not like they're doing anything tricky. These are the rules on the books for taxes, and, um, we need toe to learn the rules so we can also behave in such a way as Teoh pay less in taxes like the wealthy do So that year. Mitt Romney Hey paid only a 15% in taxes, and this is before they raise the capital gains tax recently and now it's 20% again. But it was only 15% of the time, whereas a lot of middle middle class middle income earners their tax rates might be 25 30 or 35% because they're paying taxes on their ordinary income from a salary. So this is a very simple basic thing to Dio. And of course, you know you can't have income from capital gains if you don't have investments and assets Teoh to sell and to earn your income in this way. But it's one of the things we're gonna discuss in this course is one of the strategies of the wealthy. And over time you can build up those type of assets. Well, then, not only will you be doing yourself a favor by building up your net worth and, um, and making yourself wealthier, but you're gonna be doing in a way that is tax efficient and through the savings that you're getting from those strategies also continues to increase your your wealth in a exponential way. So this is a really big theme we're gonna be discussing throughout the course. Saving money on taxes. Sheltering income is a huge important strategy of people who succeed financially. And if you're not thinking about it, if you think it's just about making ah, high salary, well, you don't understand finances. It's very important not only to make money but to save it, and therefore have mawr to invest and to invest in ways that are tax efficient. So not only saving money on your taxes, but you're going to be investing in such a way as as you're going to be paying even less on those extra savings as well. So it's exponential in nature. It's like compound interest. And through some of the strategy, we talk about the course long term investment strategies. That is one way that you're going to get wealthier and pay less in taxes by saving money on taxes. Every year you have more money to save, spend and invest. That sounds like a really basic concept. But if that's the case, why do most people not put these things into practice? They don't know how. And luckily for you guys in this course, you will learn that it's really not that complicated. We can all do some of the things that that Mitt Romney does and that many other wealthy people do so that we can make more money and pay less in taxes. Okay, so, as I already said, the rich pay less in taxes by utilizing capital gains rules. As I just explained, they pay less in taxes by maximizing their deductions and credits. We're gonna learn the major differences between what deduction is and what a credit is and what are the most common deductions and credits that you can can take. And there's a lot of stuff that we need to know about about these deductions and credits that we want Teoh to use to be able Teoh, for example, avoid an audit. We're gonna learn how Teoh minimise your chances of being audited by the I. R s. How to go, Ah, go through an audit, many useful things that hopefully we'll put your mind at ease when you worry about doing taxes every year. Very, very, very useful information that wealthy people knowing utilize that makes their taxes ABRI's relative to a lot of us who are not trained to think about this stuff and don't really know how Teoh go about taking care of our taxes in a way that is not only not a hassle but is pleasant. I mean, I'm pretty happy when I do my taxes, and I see that I sheltered a lot of income and I'm even getting a big tax return. My rate is lower than what my marginal rate would be. It's a pretty enjoyable thing to basically make money by knowing some very basic rules that most people don't know. So hopefully you'll learn enough in this class that you'll be able to save some money this year on your taxes, Um, and behave like the rich pay less in taxes because they learned how and now you will have the knowledge at your disposal as well. So let's get to it. 2. Lesson 2 Brief History of Taxes: In order to maximize your tax efficiency, you need to understand some basic things that we're gonna learn in the course. 1st 1 is the system of marginal tax rates. What are the current marginal tax rates, and what does it mean? How are they calculated? A lot of people misunderstand marginal tax rates, and they don't actually understand why they pay the rate that they do. So we're going to learn about that very basic but important concept. We're gonna learn about deductions, the difference between deductions and credits. We're gonna learn about, um, the main deductions that you can usually take off of your mortgage off of student loans off business expenses. Which ones can you take? Which ones may trigger an audit and the way deductions? I work very, very important concept. One of the ways that the rich drastically did you reduce their reported income that they have to pay taxes on credits which are even more powerful than deductions. And we're gonna learn about why that is, which credits are in effect right now. There are new credits all the time. There is a really common ones, and this is one of the big ones that people don't know about one of the credits you can take, for example, for, um, university or continuing education expenses. For example, you can get $1000 credit, $2000 credits. If you didn't know about that, that's a straight up $1000 out of your pocket that you don't know about. You didn't claim that credit, okay? And some of those are relatively new. So we're gonna be learning about the very important subject credits. And we're gonna continue discuss the difference between capital gains and earned income and how powerful this idea is, how we can save money and start investing in a way that is tax efficient so that we have long term capital gains rates. That hopefully because we haven't sold these assets, we don't sell it for a long time. Our rate is going to be very, very low because we're not even gonna be paying on the capital gains every year like we do with earn income. Went to pay on that every year and knocks or income down, but through investing your assets compound and appreciate over time, and you don't pay any taxes at all until you sell those assets. And so it's a very, very powerful and important topic to understand when understanding taxes and wealth, building strategies, understanding how powerful that capital gains rules are for your wealth. But before we get to all of that, I want to go through a brief history of taxes in America so we can understand why the tax code is the way that it is and how it got to be this way. Why there are the rules in place that they are. It will help you to understand the way the system works. And it's a really sort of important background toe have hopefully you find interesting, but it's useful. So one of these famous quotes, of course, Benjamin Franklin said way back when during the revolutionary time there's nothing certain but death and taxes. So it's kind of a funny joke about taxes. Most people don't like paying taxes. We don't like the subject. You may be taking this course because, you know, you know it's important, but maybe you hate thinking about it. It's one of those things that you just can't escape from, so why not make the topic pleasurable? Learn about as much as you can, and instead of having to be this huge pain that we have to go through every year, have me something that you not only don't dread but you actually look forward to. I look forward to doing my taxes because I save a lot of money and get money back, and that means more money for investing, so I don't mind taxes at all. And hopefully you'll you'll feel that way a little bit more after this course. So the very first tax was to pay off debt after the Revolutionary War in 17 89 the issued attacks to, um to start raising money and pay off that debt. A lot of the times the reason that there have been new taxes in this country or tax increases has been because of war. There's almost always a big debt after wars over water one where were to were no exceptions . Taxes were at their highest rates in history after World War Two. But of course, as we're gonna learn, even though at one point the actually the highest tax regard to 90% in this country shortly after World War Two, most of the wealthy people that are under that highest marginal rate. Don't end up paying that much because they're like, Well, that's a lot of money, have it or find a way to legally shelter my income and not pay that much. And so, of course, there are those ways, and that's what this course is all about. Mostly, the early taxes were on things like liquor, salt and sugar, but later on, property and slaves started to be taxed in 17 89. So a lot of these things were taxes on what we might consider to be sin, sin, taxes, tobacco and gambling and stuff that we have now. Some of the first taxes were on these types of things and the formal income tax, which is our biggest form of tax. That raises most revenue now. That wasn't actually added until the 20th century, much later as well learn. So it's kind of interesting, and the first taxes were very low. They were not like 30 40% taxes that we have now on the on the highest rate. They're very small taxes. And of course, the government didn't spend as much money. Mostly, it was, as I already mentioned, Teoh pay back debts from wars and maybe raise a lot of money for this and that we didn't have a multi $1,000,000.1,000,000,000 dollar funds for roads and schools and everything. All of that came later. President Lincoln. He issued the very first income tax in 18 62. During the Civil War, it was less than 10% and only about 1% of population even earned enough to pay it. So it was really a tax on the wealthy. And ever since the inception of the country and the tax system, our tax code has been progressive or graduated, meaning, of course that the more money you make, the higher percentage you pay in taxes the top 1% of the country actually pays about 60% of the total tax revenue for the country's leading. A lot of wealthy people to say, Well, this is unfair. We pay way too much. And of course, a lot of the poor people say, Well, you're already super rich. It makes sense that you can pay Maurin taxes. Well, we're down here struggling, working our butts off. We shouldn't have to pay as much. All of our money is spent on necessities like food and this and that. And so there's the based on both sides about the proper tax policies. And one of the great things about our system is that every state has slightly different tax rules. So some states that want Teoh have a more pro lower income tax policy. For example, Oregon or Alaska. They don't have sales tax. And not having sales tax helps the poor because the poor spend, ah lot of their income most of their income on necessities like food and supplies and stuff , whereas the wealthy don't. So if you have a state where there's higher taxes on property and income and such well, that's going to be favorable to the poor, who probably can't afford to have a lot of real estate, for example. But any rate. Ever since the beginning of the system taxes, we've always been higher on the wealthy. This is not the case in other countries. Some countries have a flat tax where they just have the exact same rate, might have one or two rates for all income levels, which, of course, the wealthy favor because that means that no matter how much money they make their still only gonna pay some fixed amount on it, and that really helps them a lot. So we in America we bought it, always had a progressive code, and it seemed to work for us, and we'll talk a little bit more about that later. So the first modern income tax similar to the one we have now at a higher rate, um, that was, you know, affected a lot more people than just 1%. This was started in 1913 when the federal banking system was put in place under Woodrow Wilson. So Water one was just starting around this time, and the highest rate even then was only 7%. So the tax rates were still very low. This is about 100 years ago. Over time, the rates have gone up and up and up the last decade or two. They've actually gone down somewhat, especially when it comes to the capital gains rate. A lot of people don't realize that the capital gains rate, even as recently as the eighties, was up to 35% which is almost as high as the very highest marginal tax rate. So the current capital gains rate is 20% and it's a lot less than than the regular marginal rates. If you have, I'm not only a high income, but even a moderate income. You're probably paying around 25 or 30% in taxes. So, as I mentioned before, the highest rate reached 90% in the 19 forties. For a brief period after World War Two, the highest ever been. And that sounds kind of extreme. Say, wow, how could we tax 90% of somebody's income, The idea being that if you're in the very top rates and you're making millions of dollars, well, you're already well off and have plenty of money. And you know, the government has needs and you're a citizen. You should pay your fair share a little bit extreme. It seems like to have a 90% tax rate. But of course, they said the wealthy find ways around this. They say, Well, I'm not paying 90% in taxes. I'm gonna make sure that at least a large portion of my income, if not all of it, is going to come in the form of capital gains and you're gonna shelter. You can put money in um tax efficient investments, tax free bonds, retirement accounts. And there's ways to gift money to your kids to put money into trusts where technically no money is is being taxable. But you're you're sheltering the income. There's all kinds of strategies that the wealthy can use. That again, they're not. It's not secret. It's not like this is super complicated voodoo or anything. We just don't learn these basic rules in school. If we spend as much time setting taxes, finance and economics as you do in just regular algebra and math classes, the average person would be a financial wizard. But we don't do that, and I can attest that even in college I got a business degree in college. I took some finance classes. Even then, the knowledge that you're left with is pretty basic. We learn about the banking system and takes a Nikon classes, one about some theories. It still doesn't help you save money on your taxes, which is the most practical thing that those courses could be doing, and it's the last topic that they touch on it. So if I find that amazing at any rate, the capital gains tax used to be much lower are much higher on, and it is now about 50% lower than throughout much of the 20th century. Much of the 20th century was between 30 and 40%. So A said that the capital gains rate right now is 20%. That may go up again as lawmakers change it. It could even go down. It was only 15% under President George Bush. But in any case, the capital gains rate is usually lower than the regular rate. If you're in a moderate to high income back and lower by a great deal, imagine if you're saving an extra 15 or 20% of your income. That could be tens of thousands of dollars or more, depending on, of course, how much money you make, even if it's only a few $1000. That's money that could be invested and grown and continue to work for you. So it's a big deal. It's a big difference knowing how to shelter your income. And if you can get year, if you can save money and make investments that are going to become capital gains when you sell them in the future, right? The rule for capital gains anything over Ah year. Any investment that you've held for longer than one year. When you sell, you only pay the capital gains tax rate. So very basic, super important concept that you want to have in your mind. How can I have more income, comfort capital gains? Okay, Another funny joke here. What is the difference between a taxidermist and a tax collector? The taxidermist only takes your skin. That's Ah, Mark Twain quote again, underlying underlying the premise that most people really hate taxes and hate this subject . I do believe that if we study this in school and we were more familiar with everything, that it wouldn't be like pulling teeth. It wouldn't be this terrible subject that everybody hates. But we feel that we probably pay more than we want to in taxes. It's something we don't wanna have to do but were forced to by the government. Maybe we don't like what the government spends our tax dollars on right course. All the only influence most of us get is we get to vote for candidates for public office and maybe donate some money for them. But we may not agree with what they're using our money for There are ways around that two, such as giving charitable gifts, in which case those are deductible. And that diverts the income that you were paying in taxes to some charitable organization, which we will also discuss in a later lecture. So that's, Ah, very brief history of taxes in America. In a nutshell, that's kind of like the trajectory that we've had. If you're interested in that, there's lots of really good books about that. The Wall Street Journal puts out a special book on taxes every few years that encourage you to to look as very, very informative and short. It's, Ah, pamphlet of about 50 to 100 pages, with lots of illustrations and graphs and really interesting information. So with that will move back over to the MAWR or the heavy lifting of looking at the marginal rates and the meat of the course 3. Lesson 3 Marginal Rates: So one of the reasons why taxes are so confusing for many people is they don't understand marginal rates. It looks as if you are just paying whatever rate the tax bracket you fall under its So, for example, the one that you're looking here on your screen. This is the marginal tax rate for individuals, not for married couples with independent or with dependence or like that. This is just the rate for individuals. I don't want to get the course, get too complicated and have us go through too much information. This information will illustrate the system of marginal tax rates so you can understand your taxes. It doesn't really matter if you're paying a different rate than this because you're married or what not. These are the rates for individuals, and it will help us to understand, for the purposes of this course, how much you pay and taxes. So most people think that whatever tax rate you fall under, let's say, for example, you make, uh, uh $38,000 you can see if you make $30,000 a year that you would fall under this marginal tax rate of 25% so that means that 25% of your income gets taken out. That's not how taxes work, which makes the calculations difficult for most people to know how much they're going to pay in taxes. You're actually going to be paying the lower rate on that first block of your income in that bracket. So the 1st $9235 of your income, you're only paying 10% on that and the next 5000 you're paying that marginal rate is whether called marginal rates. And so you're paying 15% on the money you earn between $9200 and $37,600. So you're paying only 15% on that money. The money you make above that, you're paying 20%. 25%. Excuse me on it. Up until 91,000 most people on households are in this 25% tax bracket in America. And so you're not actually going to end up paying 25%? You're probably gonna be paying a bit less than that if you especially if you're on the lower edge of the bracket. If you're making $90,000 well, then most of your income is actually going to be at the 25% rates. You're gonna be paying more and and up it goes right. 28% if you make between 91,000 and 190,000. And so, of course, if you're in the very highest tax brackets and make a lot of money, you're gonna pay a lot of money on your marginal rates because that's all gonna be at the higher higher levels. So you pay the rate for each part of income up to the next bracket. That's what makes the rates marginal. So I hope that makes sense to you. It's not like you just pay that one rate for your whole entire income. Okay, um, going up to the next three higher higher rates you make you If you make between 190,000 and 413,000 as an individual, you are in the 33% tax bracket, and then this next one is kind of funny because it's only $2000 apart. 413,000 to 415,000. You pay 35%. But the reason it looks like that. It has to do with the rates for married couples and people with independence. It just worked out that due to the way they worked it for married couples, everything this particular tax bracket for individuals, it is almost like a non bracket. And if you're if you're married then and you're in this higher tax bracket, the spread is much bigger. So it's kind of a funny looking thing right there. But you probably won't fall in the 35% tax bracket. If you're a single individual and you have a high income like this will either be paying 33% or your highest rate will be 39.6%. So the highest rate right now is 39.6 percent, and it was just recently raised back up to that by President Obama. President George Bush had lowered it to 35% which was what it had been in the past. I'm These rates are always changing with the new administration's, but right now that's what the highest rate is. It's a far cry from the 90,000 that we learned about that. Taxes hit after World War Two in the sixties and seventies, the highest rates also had gone upto 70% or so. So the top rate really is a lot lower than it has been in the past. Of course, if you're a millionaire and you're you're making millions of dollars a year and you're paying 39.6% on all of that income above 415,000 you're gonna feel like that's a really high rate. I mean, who wants to give 40% of your income to Uncle Sam, right? Pretty much nobody does. But as we know, the wealthy generally never pay this highest rate on all of their income. There are many, many ways to shelter that income. They end up paying in many cases, a much lower rate than, ah, lot of less well to do people. At any rate, this is called a progressive taxes. Um, as we already mentioned, um, and the wealthy, they pay more than 60% of all taxes because of this progressive system, even though the shelter a lot of their well, now they didn't shelter a lot of this income, then they probably paying 70 80 or even 90% of all of the the taxes. So the way I approach this is not that the wealthy are lucky or evil or or they have secrets. It's that they're educated when it comes to the tax system. And, you know, we should educate ourselves as well so that we can behave like that. We want to increase our incomes but use deductions, credits and our investments or tax efficient investments to lower our tax wealth, our tax bill, and to build wealth faster. Pretty simple thing to understand pretty simple concept, but we need to know how to do it. And when you take action to start arranging our financial affairs so that they are maximizing our tax efficiency, that's what the wealthy do. That's what we want to learn how to dio another quote. I haven't hear from Albert Einstein no less because you said the hardest thing in the world is understand that income tax. That's that's quite a big statement from one of the most intelligent scientist in history who put out the general theory of relativity and his work led Teoh atomic energy and such. But for him, um, some of the things in finances such as the income tax compound interest where some of the most interesting and amazing problems to think about. And that tells you a lot when the one of the smartest people in history thinks the income taxes incomprehensible. Luckily for us, we don't need to understand the 20,000 pages of income tax code that are on the books. We just need to know the rules that affect us the most and how to apply those rules how to work with them every year when we do our income taxes in order to save money and to build well, faster. And so for the rest of the course, we're gonna look at how to do that. 4. Lesson 4 Deductions: one of the primary ways of the wealthy protect their income and shelter from taxes is through deductions, especially if you are a small business owner. You have a lot of deductions that you can take. All of your business expenses can be deductions, and there's a lot of stuff that you can use to subtract, you know from your reported income and pay less in taxes. There are generally more deductions in there are credits and understanding. What can be deducted is one of the huge advantages of the rich, most of whom owned businesses that have large deductions. Now you can still take advantage of lots of deductions if you don't have a business or a small business. But it is one of the sort of tricks of the trade of the wealthy. When you own businesses, you have lots of deductions that you could take and so you can report a lot less income than you actually make if you make $200,000 in income. But you have a whole bunch of tax reductions through your business expenses, and again, this is all totally legal, untold legitimate. Your reported income could be much, much lower and therefore the amount that you pay in taxes will be much, much lower. Now, this is a big thing to understand. This is a big deal, okay? And the way the deductions work of your if you're new to this, is that you subtract the amount that is deducted from your salary and you pay taxes. You pay whatever rate that amount of money would put you under in the marginal rates, for example, of you have $50,000 in earned income, but you have $10,000 in deductions. It doesn't mean that you save $10,000 in taxes. It means that you will report $10,000 less in incomes. You would have $40,000 in taxable income and therefore you would end up saving whatever amount of money that marginal rate would put your orders. You probably end up saving 20 to 30% in taxes, which in that case would be a few $1000 so it would be $10,000 but it might be two or $3000 and so it's a big thing and has lots of deductions. So when you learn which ones, you can take it can make a really, really big difference for you. So let's look at some of the major deductions that you can take. Some people, you know, know about a lot of these Ah, lot of these you you may not know about. But, um, knew this to say it's important to make sure that you're taking all of these deductions. The 1st 1 that most people do take is the mortgage interest deduction. So if you have a mortgage on your house, is one the reason why a lot of financial gurus advocate homeownership. In addition to the fact that you're forcing yourself to save money by paying off the principal and your asset hopefully is appreciating and many benefits like that, you also get a deduction on the mortgage interest. This is one of the reasons why investing in multiple properties, if you can do it, is tax efficient and good for building wealth. Because of you have multiple mortgages that renters are paying for you with their with their rent payments. Then you can deduct all of the interest payments on all those properties. So you have somebody else paying. Your mortgage is down by living in that house. And then not only do you make money off of that and have an appreciating asset, but you can deduct all of the interest on those mortgages that is being paid and reduce your tax bills. This is one of the things that really increase. A lot of the wealthy tax bills, is having a lot of real estate with with mortgages on them and then paying less in taxes. So it actually helps you to be in debt in this case, as long as the debts manageable and you're not overextending yourself, so it's a really big one that a lot of people take. But if you just have one home and you have, ah, you know your mortgage interest on that, you can deduct that as well. More and more people have student loans. That's now up. Teoh $1.3 trillion in student loan um, debt in America. It's the second largest amount of debt. Um, even Mawr, I think, now than consumer debt. It's on Lee behind mortgages, so student loan, they're going up. It's something crazy like $2500 a second. The amount of money that is borrowed on student loans but the interest you pay on student loans is deductible. So if you have a large student loan bill and um, you know, you're working in a job that took you a lot of education to get to a doctor lawyer engineer , etcetera. You can deduct the interest you're paying your student loan, so that can help bring your taxable down. Um, whether or not you have a small business, that's your full time gig is already touched on. You can also start a part time small business and deduct any expenses related to that. And so this is a big one. This is huge because, you know, if you're taking clients out, we're having business meetings, and there's expenses really into that, such as meals and entertainment. That stuff is deductible. Now, if you've got tons of, you know, dinner bills that are you deducting, that can be a red flag. The I. R s. If it seems kind of disproportionate, like you only making $5000 a year off of that business. And yet you say you have $10,000 right in, um, dining bills, expenses there, Look at that and say something to that up here, but legitimately, if you are taking clients out to having business, meetings and expenses related to that is deductible. So this is one of the reasons why there's just so many ways to save money on your taxes by having a business. Even if you just have a small business on the side and you're earning some extra income off of that, you can deduct a lot of things related to business expenses. So it's a big one, and there's so many expenses expenses that it's beyond the scope of this course to go in what you conduct. Any legitimate expense related to your personal small business is deductible. Okay, so that could be a really big strategy for you to use. Medical Spencer's beyond a certain level around $1000 per person are deductible. So if you had a surgery or you had some major medical expenses in the previous year, those deductible is one of the things that a lot of people don't realize and they don't take this deduction. And so if you spent thousands dollars, you know, unfortunately had some major medical. If you come up, you pay less in taxes, so that's a nice one, and it could make a big difference for you, even if you just have a baby. And you know that costs a few $1000 for your medical expenses for the baby, a lot of that is deductible, and then childcare expenses. If your kid goes Teoh a daycare and you have baby sitters and all kinds of things like that , as long as that's documented, those expenses are deductible as well. So you got multiple kids, and they're all going to day care. You're paying for expensive daycare. That could be a really big deduction for you. So, um, each of these things in and of themselves by themselves might save you a bit of money. Obviously, if you got lots of business expenses, it could be huge. But these all add up. You have a mortgage and you have student loans. You have a small business, whether for your primary income or on the side, you have childcare expenses. Medical Spence is if you have a lot of these things going on, you can drastically reduce your tax bill and save yourself thousands of $1000 a year, and doing that can really increase the rate at which you become financially independent. Let me have your saving an extra five or 10 grand a year, and you're investing that money rather than spending it. You're gonna get rich really fast. And this is one of things the wealthy do the savings that they get from being tax efficient . They invest those savings and they invest them into tax efficient accounts such as IRAs and other tax efficient retirement accounts, things that are long term investments that you're not gonna pay tax taxes on for a long time, if ever. And it makes a huge, huge difference. If you're not doing that, you're sitting here. Listen to this, thinking that, you know that's fine. But I don't make enough money. I can't really make those investments. Well, if you start to implement some of these new tax knowledge, you will be able to take at least a little bit of money each year and get your investments started. It may take some time, but eventually that will grow and it will grow in ways that is hopefully tax efficient. Okay, so there are some other major deductions that we also can can take. One of them are business or investment losses. So none of us have the goal of them to go out there investment money and lose it. But sometimes if we lose money and investment, whether it's a stock or whether it's in our business, we show losses for that year. Well, you can deduct those. So, for example, let's say that you have a stock that has depreciated substantially. Well, you haven't sold it yet, right? Um, and if you don't sell it, it's not gonna count as a taxable event. But if you think OK, well, it's December now. It's almost the end of the year. I lost $5000 on this stock. I don't think it's gonna go up any time soon. I'd like to lock in $5000 of deductions. You can sell that stock at a loss, and then you can deduct that loss so it could be a smart thing to do. If you don't think you're gonna get that money back for a long time, or it's never gonna appreciate again, you lock in the loss in that taxable year, and then you can deduct that off your taxes That can save you money. So it's a big one. A lot of people lose money in business is for one year on, and I don't know that they can deduct that and pay less in taxes or nothing in taxes. If your all of your income comes from business and you lose money, obviously you're not gonna be paying anything in taxes in that situation. As I already mentioned, charitable donations are, um, deductible. And so if you donate five or $10,000 to charity, you conduct that off of your taxes rather than paying a double standard. Way to look at this is if you don't want to pay more in taxes, you'd rather have your money go to a better purpose or something that you choose for it to go to some specific charity. Maybe it's cancer research. Maybe it's protecting the poor, whatever. Whatever it is, you can direct your funds to a charity rather than leaving it up to the giant bureaucracy of the government to spend on whatever it is. They will spend it on maybe more bureaucracy, right? You will get a deduction for that. So you're transfering the money that you would pay in taxes into another cause that's something that the wealthy often dio and that reduces their tax bill by large. Large amounts, of course, is no limit to how much money you can donate to charitable donations, casualty and theft losses. This is less common, but a lot of people have stuff stolen from them or, um, have depreciation in their assets from damage. And he's like this and that can be deducted on your taxes. People don't know that, and so they end up not taking these deductions, and they could be saving a lot of money. And then, finally, another relatively major one that can affect a lot of people is education expenses required by an employer if they require you to do some sort of continued education than those expenses are deductible. So if you're a teacher and you have to renew your license, for example, and you are, you know, of course, you're required to do that and you go and you take those courses from university cost you 1000 bucks. Those education expenses are deductible, so it's going to save you a few $100 in taxes and reduce the expense of those courses. So there's a lot more reduction to this. There's a huge, huge number of deductions. It's beyond the scope of this introduction course to go into all of them. But these are some of the biggest ones that will make a big impact on what you pay. So I encourage you to look into ITM or talk to your tax professional about this. Definitely make sure that if you fall into any of these situations that you take these deductions and lower the amount of taxes you get. Of course, if you ah, relatively low income and you have dependence and stuff, then this will increase the amount in many cases that you get back in form of the earned income tax credit, which we're gonna talk about more later. So in some cases, maybe you're not gonna pay much in taxes over. You're not gonna pay anything at all. And so you think, Well, why don't need to worry about this, But you can actually get more money back from the government and actually earn money during tax season rather than and then paying it out by by using some of these methods. So the key here is maximize your deductions and save money 5. Lesson 5 Tax Credits: So, as I mentioned earlier in the course, credits are even better than deductions because instead of it just subtracting the amount of money that you're going to report to the I. R. S. That is taxable. You get a dollar for dollar amount of savings Credits are better than deductions because there dollar for dollar. So, for example, a $1000 deduction reduces your taxable income by a bit. But a $1000 credit puts the full $1000 back in your pocks. If you have $1000 tax credit, you get 1000 bucks back full stop so they're more powerful than deductions. And there are some very, very large credits that you can get, for example, by using clean energy, installing clean energy into your house and the things that we're gonna look at in a moment . If your tax rate is 10% $1000 deduction, Onley saves you $100 right, because it's $1000 times 10%. It's only 100 bucks, so that $1000 deduction doesn't actually save you very much in that tax rate. But if you're $1000 credit, it said you 10 times as much money. You're getting $1000 back, so it's a big, big difference, depending on the marginal tax rate that you fall into. So, of course, some of the major credits are the earned income credit. The Foreign Income Credit, American Opportunity Tax Credit, Child Independent Care Credit. These are some of the really big tax credits that you want to make sure that you're aware of so you can take advantage of them. If you fall into any of these categories, so the most well known is probably the earned income credit. And this just means that if you fall within a certain low income tax bracket, of course the threshold is much easier to reach. If you are married and have dependents write, the tax code treats people that are married and especially those that are married and have dependents much better than single individuals. You will pay less in taxes, so the earning him credit, I will put money back in your pocket. The average of the amount of the earned income tax credit this last year in 2016 was around $3000 so one of the ways that a lot of politicians are looking at now to try to help the poor to replace some of the really, really expensive welfare programs that are out there. So called entitlement programs is to expand the earned income tax credit because it benefits people that are working but not quite, making ends meet by increasing the amount that you get in the earned income tax credit. But for you, the point is definitely won't make sure that you take the earned income tax credit. If you qualify for the earned income. Tax credit can be a really big amount to if you have three or more Children and you fall into the right tax bracket could be up to $6200 a year. So the earned income tax payer right now is a lot. If you have two Children that it could be the maximum of $5500 a year for one child. It's a maximum of around $3300 a year, So this is a really big taxpayer that helps the working poor, as a thought of hopefully were in that working poor category. We don't think of ourselves as being poor, but that's kind of what it's for, and if it is expanded in the near future, those rates will go up. And a lot of people are looking at trying to expand it a great deal. Maybe putting like 10 or $15,000 will be the highest amount that someone could get on the end of the earned income tax credit. If you have dependence and you are married, so it's a big one. And, um, if you fall into that category, you probably didn't know about it. You're probably taking it, but it's It's a major tax credit that you can get if you are low income, another really big one that affects a lot of people. There are thousands and thousands of Americans that live abroad. Excuse me. So the foreign income credit allows you Teoh not to pay any taxes at all up to around $100,000. If you live abroad or you have money, you have income from abroad. This is a really big deal. Let's say, for example, you got a lot of student loans. Um, and you always wanted cha views what was wanted to live abroad, and Ugo and you work abroad Well, you don't to pay any taxes at all on that income, except for, of course, attacks that you would Oh, to the foreign country that you're working in. And this is a way to give you make sure that you don't pay double double taxes. Now it's not quite as good as it sounds. And compared to other nations, because America is actually one of the very, very few countries in the world that does tax, um, their their citizens income anywhere in the world over $100,000 thereabouts. You do have to pay taxes on that. So you got a business and you live abroad and you're paying taxes that local country. But you make, you know, a few $100,000 a year arm or you're gonna be paying double taxes. And so this is a big bummer for a lot of Americans who live abroad. I'm one such person. I never made that much money living abroad, so the tax code didn't didn't really affect my my taxes on incomes very much. But a zoo we're gonna learn in one of the next lectures. There are special rules for assets and income that are from outside the country, and it could be very, very cumbersome and very, very complicated for a lot of people. And so it's really important to know how that works. So if you're planning on living abroad, um, it will be important for you to take one of the, uh, taking one of the lectures that later in the course all about the ins and outs of that. But the good news is that you don't have to pay taxes on the 1st 100,000 or so of foreign income. And as of the rules right now, in 2016 your student loan payments if you have a, um, income based repayment plan, the government is not count. Foreign income is part of the address. It gross income calculation for your student loans. This is a really big I don't want to call it a loophole, and I really hope they don't change this because I have some student loans myself. But if you owe a lot of money from grad school, or what have you and your enrolled in income based repayment plan because you have a relatively low salary compared to your debt amount? If you earn money abroad that is not counted as of right now towards your income so you can make you know $90,000 over there and not pay and make any payments on your student loans. So that's a really nice piece of information toe have. But at any rate, the foreign income credit is a big one for those of us who any point are going to live and work abroad or have income from investments. For example, real estate in a foreign country really important one. The American opportunity tax credit is a really nice one that most people do not know about , even though it affects a lot of people. So this is for higher education. Have you have education expenses during the 1st 4 years of college up Teoh, as of right now into other 16 25 $100 worth of higher education expenses? Um, are a credit. So a lot of poor students may not be affected by this that we have, you know, basically like no income or very little income, but we're going to college. But if you have income while you're in school and you have a tax bill, well, you can have a credit up to $2500 under this American opportunity tax credit of the 1st 4 years of undergraduate expenses. So I said, that's a nice one that a lot of people could collect if they knew about it, and I simply don't know about it. So it's a good one to know about and to look into the one that's really big. It affects a lot of people, is a child and dependent care credit. This is a credit that can be up to $6000 if you have two or more dependents, and you have expenses related to that. So that means that if you have, ah, center kids a day care and you're working and you have dependence not only your kids, but it could be a Nelda Lee parent that requires a nurse or some care that's very expensive , or you have, um, another dependent, such as even your spouse. If they're not working in certain situations, you can get a lot of that. Those funds those expenses back in the form of a credit. This is a really, really big one that you definitely want to make sure that you take when you file your taxes . And one of the great things about the way that you know the modern world with the Internet now is there's lots and lots of tax software that makes it really easy for you. So you can really easily use this thes software programs to find these credits for you. They just ask you these questions in them on, and I actually have ah later lesson where we're gonna look at some of the the best software program some of the best options for you, depending on your current situation. But it's really easy now to take these these credits knowledge before where you had to know which forms to fill out. And if you just forgot to do it well, you just were out of luck. Now. It's really easy through some of the online platforms to make sure that you don't miss some of these credits. So those are some of of the really big ones that a lot of people don't take, and they end up paying too much. Another one is a saver's credit, so in certain retirement accounts you can get a credit of up to $1000 so the government has a lot of these incentive deductions and credits for people to invest. Their money savings rate of Americans right now is that's lowest level in our history, pretty much. And the government wants to discourage that. They want us to be saving our money and investing our money, and because of that, they give you incentives to do so. Retirement accounts are are one form. We've got a whole lesson just on retirement accounts, which are tax efficient, and the saver's credit is one that a lot of people don't know they could take in certain retirement accounts. You put $1000 in there and you get that back as a credit. So it's a nice incentive to to invest the lifetime learning credit. Now, this is similar to the American opportunity credit. Except for that, it's for all post secondary education after $2000. So if you're taking any college courses at all, that is after high school, any college courses at all, you can deduct $2000 or excuse me, you get a credit of $2000 back if you have that much in expenses. So if you're working really hard, and you're going to a night school and you have taxable income. You can deduct those those credits. This is called the Lifetime Learning Credit, and you get 2000 back as a maximum. From that, that's another really good one. And then these clean energy credits. Now they're huge because the government really wants to incentivise us to invest in clean energy. Teoh slow the tide of global warming to switch off from fossil fuels, etcetera, etcetera. And so right now they're giving up to 30% of the cost of solar installation. And purchase is just one example. There's lots and lots of these for energy efficiency in your house. That's beyond the scope of this course, because there are so many credits. But think about 30% of the cost of solar installation and purchase. That's a big, big credit. So over the long term, you're gonna save a lot of money in most cases by putting solar panels on your house. Because, of course, once they're installed in everything you're paying nothing right. The energy is coming from the sun. But if they give you a safe example of the installation and the purchase of all those panels cost you $9000. Well, they give you a $3000 uh, credit. So you get $3000 back so that $9000 expenses now down to only 6000. And then, of course, once your savings pay off, the other $6000 worth of expenses than all of your energy is free forever. Theoretically So. These clean energy credits are really big right now, and it's even for, like, putting and clean lightbulbs, putting clean, energy efficient windows. There's all kind of stuff you can put into your home that are energy efficient that will count towards these credits. So knowing this you can will save money by putting the energy efficient technology into your house and get a tax credit for it. So that's ah, really big one that a lot of people should be taking advantage of. Um, it's a large amount of money that you can save, so that's a short crash course in some of the major credits. Hopefully, that is useful to you. Just understand that credits. It's a dollar for dollar amount. It's better than deductions and depending situation. You should be able to take advantage of some of these credits if you're not already and put more money in your pocket 6. Lesson 6 Retirement Accounts: retirement accounts in one of the really big ways that you can shelter quite a lot of your income from taxes while investing in getting wealthier. And the cool thing is, the government gives you a few different options for tax sheltered retirement accounts. We're gonna look at three of the major ones that you really need to understand and know about, and then a few of the lesser known ones that are as common either, but just give you a brief overview of those. So the major tax efficient retirement accounts are the individual retirement account or otherwise known as a traditional IRA or the Roth Individual Retirement Account. As the Roth I. R. A. Um, we're also going to look at the very famous for a one K and then lesser known for three be plans that are all pretty similar but have some very, very important differences in their rules. First of all, each individual is allowed to open up one of each type of IRA, so if you are individual, it doesn't work at a company with 41 K For example, you qualify for ah traditional IRA or Roth IRA. You can open up one of each type of account. Under current rules, you can put a maximum amount of money into each of these accounts of $5500 per year. But if you're over the age of 65 you need to get caught up on your payments than you could put $6500 in there and catch up on go even faster. And so the reason why there's these limits on there. Because if there wasn't a limit on how much money you can put into these accounts, when of course, the wealthy would just put unlimited amounts of their income in retirement accounts and pay almost nothing in taxes, that wouldn't be fair. So they limit the number of accounts you can have, and they limit the amount you can put in them. But if you start early on your career to be putting money into these accounts, you can save yourself huge, huge amounts of money that you would pay in taxes. So we're gonna look at these one at a time and, um, go from there. Some other retirement accounts are something called a simple IRA. This is for small employers, employees. If you have a small business. Then you open up a simple IRA for your employees, and you could put money in there. The rules operate the same as the other IRA accounts. A Step IRA is a simplified employee pension. Um, basically the same is the same thing as a simple, simple IRA. Just few different rules. Not that important for the this course, but something you may see out there. A star step IRA is even more obscure, one that is actually for accounts that before 1997 and Sarse up account employees can have the employers put part of their income into the retirement accounts kind of forced savings plan for them. Those are pretty uncommon. And then, of course, and he stop is an employee stock ownership plan where the company contributes stock to the employees rather than money. And that's a very popular plan amongst large companies. So I'm gonna go into these major three accounts that most people are going t o be be using and make sure that you guys understand the differences of these accounts. So in a traditional IRA, the deductions come from contributions in the current year. So if you put money into a traditional IRA. It's to be this. You max it out, and you put $5500 into your traditional IRA, and then you buy stocks with it or whatever. That contribution is the deduction, so you can take $5500 off of the amount of income you report to the IRS and pay less. Okay, so you get the deduction in the current year. That's a big difference from a Roth IRA, which does not give you a current year deduction at all. But you don't pay any taxes when you withdraw the funds. In general, the Roth IRA is considered to be superior for most people. If you can wait, you don't need the deduction in the current year because all your money in the Roth is compounding and compounding tax free. So you get your money in a Roth IRA up to, you know, a $1,000,000 over the course of your career. When you withdraw that money when you retire, you pay zero taxes on. It's a really, really big deal and the Roth IRAs only like about 20 years old. So it was a new thing in the nineties, and it benefits a lot of people. So if you're an individual that wants to invest in the stock market, for example, wants to invest in a retirement account yourself, you can open up a Roth IRA, and we're gonna look at some of the places that you can open these up out later in the course. But you don't pay any taxes when you withdraw. Of course, you're putting money that's already been taxed into it, Right. So this is your own money that you got from your income. You already paid taxes on you, but you put it into the Roth IRA, and then as long as you wait until you're 59 a half to start taking withdrawals, you don't pay any tax on it. That's huge. That could save you hundreds of thousands of dollars by not having to pay taxes on it. A traditional IRA. In contrast, it doesn't look quite as good. And you think about when you do start pulling money out of there. After the age of 59 a half, you're gonna be paying the capital gains rates on that income, and they're going to be paying quite a lot of taxes on it. But in the year that you put the money in, you already got the deduction off it. The big difference here is that the Roth IRA money is compounding. It's in the market, and it's growing and growing growing. So the amount of tax savings that you're going to get at the end is gonna be a huge, huge amount mawr the amount of tax savings that you probably got from a traditional IRA contributions. So think it over 10 years, for example, you put $5500 into your traditional IRA every year you put a total of $55,000 in there in 10 years, so that means that you reduce your taxable income by $55,000. So maybe the maximum amount of tax savings you got might be around somewhere from 10 to $20,000 total, depending on your marginal rate, whereas with a Roth Ira, you're not gonna get those savings. But all the money that's in there compounding away. Let's say you put $55,000 in a Roth IRA over the course of 10 years. But 20 years later, over the course of the total 20 years, that money has been compounding. And now let's say that $55,000 is worth 300,000. Well, now, when you take it out, you pay no taxes. Now into your marginal rate. You might have had a $50,000 or $100,000 tax bill on the larger amount of money, but you pay nothing with the Roth IRA, so it's a really powerful idea. The great thing is, is that you can open a both. You have one traditional IRA, and you can have a Roth I write. You know, if you have a spouse, your spouse gonna have one of these accounts as well of each type, and so you can have multiple tax efficient retirement accounts. I mean, you and your spouse can have $5500 in contributions times four if you have two accounts of each under your names, so that would be a total of $22,000 that you guys could be putting into these tax efficient accounts per year. If you could afford that, you know you be getting wealthy very quickly without having to pay much tax at all on those funds. So it's a really powerful thing, especially if you start putting contributions in their relatively early Once those accounts get upto, you know, in the hundreds of thousands of dollars that tax savings start to become enormous. And so this is one of things that the wealthy definitely know about and take advantage of. And, of course, even if you just middle class and you can afford to put even just a couple $1000 away into especially a Roth IRA account, no matter whether or not that only gets up to $50,000 by the time you retire or a $1,000,000 of the time you retire, you pay no taxes whatsoever on it. Once you start making your withdrawals, so they're very powerful accounts there, definitely worth looking into. And a cool thing is you can make them automatic. Two. You can have money automatically deducted from your bank account at the same time every month. If you want to do something called dollar cost averaging and have it by stock market index fund and just totally have it be automatic and passive. So you know you think about it. Let's say, for example, you just attach your your account to the S and P 500 index fund. In the stock market, you're gonna get average prices and giving average returns. We know the average turn returns in the stock market, or around 10% over the very long term. And so you don't have to think about your investments. You don't to be a genius and understand the stock market barely at all. All you do is you automate it, Um, in accounts such as E Trade or Scott Trader. There's tons of Vanguard accounts, all different kinds of index accounts you can you can use, and you just have a safe example of all you can afford. Every month is a $500 to come out of your your bank account. You just have it so automatically on a specific day. Let's say it's the 15th of the month that money goes into your IRA account, and then it buys, um, $500 worth of that index, that whatever that that days prices are and the reason you get average prices because, of course, is the stock market fluctuates and the prices go up and down. If you're buying the same amount every month. Then you're gonna be getting an average price. That's why it's called dollar cost averaging. And that's like an automated guarantee way to become financially independent through a tax efficient retirement account. So it's just a brief overview of those, but it is a big difference between the traditional IRA and a Roth IRA. Now, one of the reasons you might want toe open a traditional IRA. Is it? For some reason you had a windfall or you had a particularly large amount of income in the current year, and you want Teoh shelter it that might put you up into a higher tax bracket. Let's say you got $5000 in extra income from a side business or inheritance or gift, whatever it is. If you if you go ahead and open up. Attritional. IRA. You hadn't done so, and you put that $5000 into the IRA. Then you could deduct that and knock your, um, your taxable income down to that lower tax bracket. So it's something that you could be strategic about, just like with the loss from an investment, you find out towards the end of the year that you can sell your stocks and take a loss on. Deduct that and shelter your income. You can also use a traditional IRA in the current year to put money into Andi shelter income. Now it's kind of like a double whammy because you're not only are you saving money on taxes , but you still have that money and you're investing it so that money that you would have had to pay more taxes out of is not only being sheltered, but now it's growing. So this is This is the power of understanding these tax efficient strategies. You get two things out of it, you get the saved money, and you get the growth from that money being in the market in an investment type account. So over time, the nature of compounding makes that a drastic difference from having not used these tax efficient methods. Now, down to a 41 K and a 43 B, that's a really, really similar. They just happen to be ones that are set up by your employer. If you work for a big company, um, then they might set up a 401 K for you. They're funded with pretax dollars on DSO. You don't pay any taxes on those, but just like a traditional IRA, you are gonna pay taxes when you retire, but the money gets taken out of your paycheck before it's taxed. And so you're getting pretax dollars getting put into their Ah, the only difference arena for a one K and four or three B's and 1/4 Ruby is a is a type of retirement account that's just like a 401 K But it's for the public school system, so people like teachers and administrators, they will have a 403 B instead of a floral three K. But they behave pretty much the same way other than than that. So if you can open up ah Roth IRA especially, and put money in there, you're gonna have a really nice windfall when you finally retire and you have all of your invested compound earnings coming out totally tax free. If you're a citizen of the US and you have any savings at all, and you are not taking advantage of a traditional IRA or especially a Roth Ira, well, then you're just shooting yourself in the foot because the government gives you this advantage. It gives you this incentive to save an investor money and not pay taxes on it at the at the end, when you start taking it out, so look into it. Make sure you go and start one, and even if you can only afford $100 a month right now, that money is going to be coming out much larger in the future. Tax free. And who knows when your salary goes up? Or maybe you can save more in the future. It's a guy. You just get started now and start building on it. You'll be really glad you did. So I've never met anybody who saved and invested their money over a long period of time. That that regretted it. I really haven't. People tend to be very happy that they did this and one of the things that stops people from starting. Besides, the fact that a lot of times you don't have much knowledge about investing or about taxes, as they just feel like, Well, I can't say very much And what's what's $100 or what's $200 every month going to get at the end of the year, two years, and I'm still not gonna have very much money. But when you understand the nature of compound interest over time, as that nest egg grows eventually get to 5000 eventually get to 10,000. Now, if you have a year where you get 20% returns, it's a couple 1000 bucks. That's more than you know. It took you a couple of years of, say that much money, but now you get it in one year, just off the interest. Now, once you get it up into 30 40 50,000 10% or 20% years, 10 or $20,000 that you're getting off of your capital. So it's important to get started. And even though it takes a lot of patients, it does pay off in the 7. Lesson 7 Foreign Income: So for those of you who planned to live a broader already do live abroad, I wanted to do include this lesson on earning money abroad because it could be very, very complex. And a lot of people do not understand that at all. If you fail to report anything that you've earned abroad now, you can get in very big trouble. The US government has agreements with major financial institutions all over the world due to their power through controlling the international banking system. Basically that they can essentially ah, block or punish foreign banks from operating in the international banking system. And so they have made it. So those foreign banks have to comply with the U. S. Government and report any American citizens who have bank accounts in their banks. This is one of the reasons why I like the old haven in Switzerland. Swiss bank accounts and other places like that came out in such no longer can hide. Money, at least, is easily from the U. S. Government because they are required to report any funds in the accounts that are being held by Americans. So knowing that the best thing to do is make sure you are compliant, and if you have any income from a broader and you assets abroad, you have to report it. Luckily, though, you don't pay taxes on the 1st $100,000 earned abroad. Now this is pegged to inflation, and this is 2016. So as, um, as inflation occurs at one or 2% average per year, that amount is going Teoh go up. So in 10 years from now, if, after inflation has gone up that that rate might be 350,000 or whatever, most people don't make that much money while living abroad. Unless you're an executive at a big company or you have a successful business, whatever your salary is will probably fall within that. And so that is the foreign earned income exclusion or tax credit that you may hear about. And again, I already mentioned. It's different for most risk rich countries, most Europeans and other countries like Canada and Australia in such their citizens to knock it tax on any money that make outside the country. S O America is your unique in this regard. It's a bummer for those of us who have lived abroad. Even if you do not make over $100,000 you don't to pay any extra taxes on your income, you have to report it and you have to report your assets so you have real estate or stocks or other assets in a foreign country. You have to report those to the U. S. Government just the way it is. But again, you don't have to pay extra taxes up to $100,000. But it's complex, and a lot of people, they say they just hire professionals, and they might spend a couple $1000 on there from their forms and tax prep as an expat. So I'm gonna go through some of the forms you have to fill out just to kind of make it a little bit less daunting. And I'm show you that it's really not as complicated as it sounds, especially if you don't have a lot of assets. I mean, if you're a teacher, you live abroad. You don't have real estate or stocks or lots of investments. I mean, it's not that complicated. You felt these forms. You have the online tax software basically and put the numbers for you, and it's pretty simple. But if you have a lot of investments and assets, or if you have a high income, then it becomes more complicated, especially if you're moving around from country to country as a lot of people do. You know, if you live in Japan for a year in India for a year, and Southeast agent for a year, whatever now your tax situation becomes more complex. So again, US residents must report income earned abroad to the IRS but still benefit from normal deductions and credits as such as the earned income tax credit and mortgage interest deduction. So this is a big point here, so even though you have assets you have to report from abroad, you still get the deductions. You still get the same treatment under the tax laws, which is pretty nice. So if you live in a really cheap country, let's say you you live in Ecuador somewhere in South America that has, ah, much lower cost of living. But you still you know, you report your taxes, you can still get the earned income tax credit so you've got kids and you're earning on task. It's five or $6000 You're still gonna get that money deposited into your bank account by the I. R. S. And then it's gonna go much, much further in those foreign countries. So this is a strategy that a lot of people are using now, especially people have lots of student loans and stuff moving abroad, living abroad, taking advantage of having the American dollar and having ah, tax returns and stuff come to you and but then spending it in the developing world where the cost of living is much, much lower is the really smart financial strategy for a lot of people who don't or wouldn't otherwise have really high salaries but can take advantage of these rules and take advantage of just being lucky enough to be American or a Westerner and go live in 1/3 World country or developing country. Maybe a tropical country where it's really beautiful, has great beaches and scenery and have a much, much higher standard of living than you would at home do Teoh both. You're your citizenship of the power of your currency and the tax laws, so it's pretty cool. You can get the mortgage interest deduction Still, if you got If you have real estate abroad, which is usually less expensive than it would be back home, then you can still get the deductions on it. So you might be able to get a really, really big tax return, which might be like 1/3 of your income in another country and really increase your income a lot. So these are some of the things that the wealthy know. They know about all of these rules, and they have assets and investments abroad, and they still take advantage of the deductions in the credits. And while this may sound complicated to you, and it may not affect some people that listen to this course right now, you may want to consider working and living abroad or retiring abroad and taking your your Social Security check or your pension check, which might only be one or $2000 basically making you poor in the US, moving to a nice, warm tropical country with a much, much lower cost of living and having you be upper middle class and live on the beach and still taking advantage of all these tax rules. One of the case may be. You must fill out these particular forms the number to 5551116 the F bar and the fat cut, which is also known as its form 8938 So these these four forms are for different foreign income and assets that you have to report. So the 2555 calculates foreign income tax credit or tax exclusion shown. So no matter what your income is abroad, whether it's $10,000 or $200,000 you have to fill this form and will show you how much of an exclusion that you're gonna get. This is one of the things that as a big pain in the neck for a lot of foreigners who don't make very much money, they're going to get the exclusion. They're not gonna have to pay any taxes on income to the U. S. Government, but he still two fellas former still to report it and do their taxes. The 1116 is used to claim credit for taxes paid in the foreign country, just so you don't get double taxed. So whatever your taxes are that you have paid in that foreign country. You gotta fill this form out. Show those taxes And this could be a pain because a lot of times when you live in work in a foreign country, the tax system is not very clear. They don't give you like a really clear statements and reports like they do here. Who your employer is may not actually show how much taxes air getting taken out over checks , if any at all. Because depending on the legal system they have their the employer may be hiding taxes or sheltering taxes. And so this is one of the ones that can be a headache for Americans living abroad. But whatever the case may be, you you have to use this form to claim credit for tax you paid in the foreign country. Otherwise, you won't get any, um, credit for those taxes. And then f bar and FACA are really important there. Used to report your foreign assets and income from bank accounts and real estate etcetera. So there is a little bit of overlap in these forms, the F bar in the fact, but they have different thresholds for how much those assets need to be. Whatever the case may be important. Thing to know is you gotta fill out these these F barn FACA forms and, um, report your real estate or your cash that you haven't bank accounts or brokerage accounts anything like that. You have to report that to the U. S. Government. You cannot hide money in bank accounts in foreign countries anymore. Those banks report that asset those funds to the iris. The iris knows that you have that money. If you have $10,000 in a bank account in Zimbabwe and you think that there's no way the U. S government knows about it, that bank likely reports that an American citizen this name with this still security number which you had to give them when you opened the account. Because all the banks in the world are on notice. The iris has that information. And if you fail to report income in a foreign country, that could be very, very serious consequences. In addition to the fact that you can get in trouble and even go to prison in some cases for tax evasion, just like you would at home. If you owe more than $50,000 now to the I. R. S and you're thinking that maybe you know you're gonna live abroad and kind of get away with it. They will now revoke your passport. So it's a really important rules and no, don't. Oh, the U. S. Government tax money and live abroad. You can't run. They will revoke your passport and then they will ground you and they will bring you back. You'll have to pay it. So that's, Ah, relatively new rule. They just started to try to enforce these laws, but it's a really good want to know. The moral of the story is, do not try to evade taxes. Benjamin Franklin. So there's nothing is certain, but death and taxes for a reason. A lot of people think they can outsmart the I. R s and maybe they because they can. For a while, they've never been audited. They don't think the iris knows, but it will catch up with you and maybe it will take years. But if they get on your case, the penalties could be severe and the consequences could be very, very severe. So my advice to you is to learn about the tax rules so that you can report everything and use them legally to protect your income. There are plenty of ways to do it as we're learning about in the course. So you don't really need to break the rules or run from the I. R. S. You can just take advantage of the nice, tax efficient strategies that already exists. 8. Lesson 8 CPAs and Tax Preparers: So, depending on your tax situation, how complicated your Fanjul affairs are, it's important to be able to know, you know, do you need to use a certified public accountant? Do you need to use just a regular bookkeeper or someone who prepares your taxes for you, or should you do them yourself? There's really a lot of considerations when it comes to this, and people sometimes get confused about it. A certified public accountant count into RCP A. They're the most well trained right at the most well trained people have been. See the professional tax, um, gurus on. They tend to be the most expensive. They're more expensive than is using the tax software generally and stuff. But if you got a complex situation like you have a small business, you got lots of assets. You have lots of different types of income. They could be really smart to simply use a C p A. Pay them their feet, which might be, you know, a few $100 for a year for taxes. Um, and make sure that you don't have any mistakes. Make sure that you're sheltering more your income. They will know all of the tricks hopefully, if they're good that we're learning in this course and Mawr and most wealthy people will have a very, very good C p A. They work with that mixture. They get the maximum out of deductions and credits and everything. However, if you got pretty simple taxes, I mean, you just have a regular paycheck and you don't have a lot of investments, will it? Of course, you can just use the 10 40 easy form to your taxes yourself. If you qualify for any deductions, then you can take them. Or just take the standard deduction, which this year was close to $13,000. And it's very, very simple. So there's not much you need to know if your if your taxes are really, really basic like that. The online tax repairs they usually less expensive than a C p A. But they may not be enough for really complex return. If you're trying to seek maximum tax efficiency so it just depends usually only need um, C P. A. If your taxes really complicated or an online tax repair, if your taxes are a little bit more complicated, I use a new online tax software. It works really well for me, it's pretty inexpensive. And, um, I know that I'm getting a lot of the deductions and credits pretty much all of them that I possibly can. And the service that I used H and R Block, which was voted as having the best customer support turbo tax, is a really big one that's voted as being the best overall by reviewers on the Internet and then one called tax act. This is the cheapest, but it may not be quite as good in terms of the customer support and the services that it has as TurboTax and H and R Block H and R Block's is the biggest. I think they do around 60% of the entire 50% of entire online market for for tax prep, and they have really good customer support. I mean, I use them and they help a lot. If you need to chat with someone to call them, they pull your stuff up is very, very useful, and a lot of the services once you pay the basic fee, will be free. It will help you go to their offices and have already paid for the fee for the online service. They will help finish your taxes up for for free. Um, but this really makes doing taxes much, much easier than it used to be. In many, many cases, you will not need to pay for a certified public accountant for your taxes. They will just in put everything into this software, and it will do it for you. And if you live abroad or you earn money abroad as complicated, complicated as I made that situation sound as it as it can be for some people, Um, there's a special package I know that H and R Block has. For example, it's about $400 specifically four people who live abroad. It will pump all the numbers into the those forms F bar, fat cat and other forms for you and make it pretty painless. So while I've heard horror stories of people paying $2000 for CPS living abroad, I know at least H and R Block now has a specific program and service just for expats, and it's about 400 bucks. But if you tax it too complicated, you know you're gonna save a lot more money by using it. That's a pretty small price to pay for for peace of mind. So there are lots of benefits. The online prepares their automated. They do keep your returns for the following year, so it's really easy to re populate them. If you have a really similar return, it'll make it so it'll go go by much faster. And, um, it's clear information about the services, like just mentioned the H and R Block packages for expats. When you go there websites, it shows you the different services, whereas with a c p A. I have myself and and also aware of other people who have. You know, I've been taking advantages of by the CPS. They're the ones who have the expert knowledge. They can overcharge you. They Conover bill you. That isn't to say that CPS or not, honest. But there's a reason why you know, attorneys got the nickname of being, you know, blood suckers. And some some tax professionals also take advantage of their status as being an expert in something with money that you may not understand very well taken over bill you for things that they shouldn't. One of the typical ways out of CP might over. Bill you is by charging you a fee for research. They may say a $100 on my bill extra for research about this particular thing. Well, they're a certified public accountant. They shouldn't need to be doing a bunch of research on your tax return. They're supposed to know that there is any time that they spend. I'm looking stuff up and stuff that should be part of their regular feet. And that's their job. And so it's similar to some other professions out there. You got to be careful when you hire C P A. And make sure that you're not getting overbilled. Especially we have a complex return because it's very easy for them to say there's a fee for this feat for that and rack your bill up to 1000 or $2000 very easily, and you're basically getting swindled. Whereas, you know, at least with one of the online um, software plans, they have very clear prices, and you know what you're getting and it's pretty painless, and I personally recommend using this software. I think it's the right way to G O. Unless, of course, you have a lot of assets and you have a C P A. That you know and trust and that often times can be the best way to get the absolute max amount of tax efficiency and protection. If you have a business, that might be the way to go. So it's really up to the individual person. But those are some of the options that you have. And if your if your return is is simple, well, then you really don't need to worry too much about it. 9. Lesson 9 Tax Strategies of the Wealthy: in this lesson, we're going to return to the very, very important idea of increasing your income from capital gains, which I touched on earlier. In the course you want to increase your income capital gains and decrease your ordinary earned income. This is such a powerful strategy. It's so important that we want to dig a little deeper. India the really big difference that it can make for you paying only 20% in taxes instead of 39.6%. For example, if you're the higher tax brackets, saves you huge amounts of money that could then be reinvested and increase the rate at which you are building your net worth. When the saved money is invested, it starts compounding tax free. Capital gains are only paid. Remember when assets are sold as well. So if you have these investments that are compounding and growing your urine, you're out. You're actually getting an additional tax benefit because you're not paying any taxes on them. You could be for 10 or 20 or 30 years at all. All those money, all that money that would be paid in taxes if you sold those assets is compounding and compounding tax free. So even if the capital gains rate waas the same rate as a regular earned income rate by leaving your money invested and compounding over time, you're still getting a big tax benefit by investing money and having your assets grow in the form of capital gains. So how powerful is this idea? Earned Income versus capital gains? Look a comparison here, so let's say $480,000 earned income. If you have that much money in a year in regular income, you would pay $178,000 in taxes. This is just a really basic, simple example off of a single person scenario. However, if you have for and $50,000 in capital gains in the highest rate, you would only pay $90,000 in taxes. Okay, so that's a huge, huge difference. You would save $88,000 by having your income come in the form of capital gains from selling stocks and real estate or other assets. A supposed to having come in the form of a salary or dividends or just regular earned income. So let's say you invest that save $88,000 at 10%. For 10 years, you've created another $228,000 from Onley that one year of savings. So you're building wealth at a very rapid, rapid pace. This is why the rich get richer and the poor get poorer. Because when you have capital, when you have assets to invest, you can take advantage of the increased tax efficiency of the federal government's tax code and get wealthy at a faster rate and shelter more of your taxes. So start investing today and make sure that you are taking advantage of these rules. You do not want all of your income to be coming from ordinary earned income. You want your capital to be put into retirement accounts, stocks and bonds and real estate that grows and grows and grows. And ideally, you won't be selling it every year anyway. Obviously, we all need income to live off of, but the mawr you the longer you wait, and the more of your capital stays invested over the years, the faster it grows and the less you're gonna end up paying in taxes. So if you put like $100,000 in the stock market and 20 years from now, that's worth 500,000 or a $1,000,000. You only put that original $100,000 in there. But when you pay capital gains tax of the N S A. In the case of, um, a $1,000,000 that 20% would only be $200,000. You have $800,000 off of that original amount, which is much, much less than you pay in taxes and a lot more money that you earned off of it by letting it be invested for a longer period of time. Now, let's say, for example, you took that $88,000 that you say from that one year of having your huge income come in the form of capital gains as opposed to earned income, which is, of course, with the wealthy. Always try to dio. And then you did that for 10 years in a row, so you would have $880,000 mawr and income that you saved just by having the form of income be different. Okay. And so this is one of the things that makes the poor cry foul. Say the richer already rich. And now, because of these tax rules, they're actually paying less than me. They're taking advantage of the tax rules. Whether or not it's fair is not for me to say, but this is a system that we have in my solution to it. And I urge you guys to approach it from the point of view of Why don't you behave like the wealthy dio and take advantage of the tax rules the way that they dio? Um, it's obviously harder if you don't have a bunch of capitalists to start with. But through saving Big Frugal in saving money, you're gonna slowly start Teoh, build it up now imagine saving another $40,000 from your deductions and credits and re messing that money as well. If you get your income up to you large level like this, not only are you saving money from capital gains and then reinvesting that, but then you take advantage of the other deductions for having a small business. Other credits that we learned about in this class and you're saving investing even more money now. Obviously, I use an example that's kind of a high amount of money for $30,000 a lot. Most of us don't make that much, but the principle is the same, even if you only make 50 or 60 or whatever. That just shows you the large amounts of of savings from capital gains as opposed to regular earned income. The principles apply no matter what your income is, and the compounding effect is the same as well. So I really want that to sink into your heads. Think What can you dio to start? Get your money to become pounding in a tax free way? Put your money into an IRA, invest in real estate, open a brokerage account and buy stocks. If you've already maxed out your IRAs or if you want, Teoh start can start withdrawing that money before your 59 a half. Right, because the rules for those IRAs that you can't withdraw the money without penalties before you're 59 a half. But, um, you know, if you want to open its regular brokerage account and put money into the stock market, and maybe you only want to have invested for 10 years or whatever, you can withdraw that without penalty. And even though you'll pay taxes on it. You will pay the lower capital gains rate of taxes, and you have the flexibility of being able to do things like I told you about. If you have a loss, you can take that loss and reduce your taxable income for that current year, you have a lot of flexibility. There's a lot of flexibility when you understand some of these basic rules in the tax code . This is what the wealthy do. It's like a game like they're playing a game of chess and they have power to increase the amount they pay in taxes, decreased amount, they pay in taxes, increase the amount they make up their investments. And this stuff is not taught in school. This is something that the rich teach their kids is something that, um, you know, you have to take classes like this, which takes time and effort on your part to go out and seek and learn on your own. But if you have the um, if you have the energy to do it and the foresight to think this is important, it could make the difference in your life of being able to retire well off or being poor off of the exact same amount of income. It's not. This is not, you know, you have to make a lot more money and become a millionaire through some business investing idea. This is simply taking advantage of the current rules of the tax code Teoh Shelter income, save more and invest more. So I hope that, um, the power of this idea is really sinking in for you. And you can get started investing in long term, uh, vehicles that will allow you to not only become more tax efficient, but, um, pay less and make more year in and year out. 10. Lesson 10 How to Avoid an Audit: So we talked a lot in the course about how to save money on your taxes and invest in all that good stuff. Very, very important. But we also would like to know probably how to avoid being audited by the I. R. S. And there are a lot of red flags that increase the likelihood that you will be audited. Being audited is not fun. They can look at all of your financial data. They can actually do a field on it where, um, agent actually comes to your home or your business looks through all of your stuff. Looks through inventory looks in your bank accounts, and auto is not fun. And even if you have made some honest mistakes, you can pay huge, huge penalties. But fortunately, there are ways that we can totally reduce the chances that we would get audited. And we're gonna look at some of those ways in this lesson. So some of the main red flags that have been known to lead to an audit are you take the home office deduction. A lot of people, I think this is a good way to get a huge reduction. They work out of their home and they say, Oh, yeah, well, my home is in office. I've got a home office, but you're actually allowed to take this home office deduction unless you have a separate room in your house. That's on Lee used for an office that's a specific rule. So if you work out of your living room on your laptop and your living room is also used as a living room on a playroom or whatever, that's not a legitimate deduction. And the iris is really keen on looking at these home office deductions, and it may be something that will trigger that. May say, I want to come and check on this and make sure you're not fudging the rule here to the home office deduction. I mean, you legitimately can take it. Take it. Don't worry about an audit. I mean, that wouldn't be good if you were afraid. You know, toe, actually save the money that you legitimately should be saving, but definitely don't take this deduction if you're not following the rules. That is one of the things that can be a red flag for them. As I mentioned earlier, a lot of dining out entertainment expenses. If you have a small business and you're showing like thousands and thousands of dollars in dining out, most businesses won't require you. Most small businesses won't require you to be taking clients out so much that you're gonna have a huge amount deductions from this. Now there may be a legitimately large amount of you. If you really take a lot of clients out to dinner and you entertain them as part of the way that you wined and dined them to get their business, that's legitimate. But this is one of the things they look at carefully to see if they want to trigger an audit. So those are two things you want to be really careful about. Any unreported income that has been reported to the I. R. S. Um, it will probably be caught by them and will lead to an audit. So the IRS has about a 90% 98% accurate system of catching unreported income. Um, a lot of times we don't realize that some organization, um, or some some bank or someone that's sending us money or whatever can be can be tracked by the I. R. S. But those organizations are bound by law to also report to the IRS. So any income you have from any Internet site or company of any third party site from a contractor or from anything you should assume that the Iris knows about it. I mean, obviously, in some cases, if you do some work on the side or somebody, they pay you in cash or whatever. The iris isn't magical, but the iris has really, really good systems in place, especially now that we live in a digital world. Will they contract that? So any unreported income? It could be $100 if you don't report it, and the IRS sees it, that can trigger an auto. So it's important thing just to be aware of. And be careful about, um, other red flags that could lead to an audit deductions that could be disguised as personal expenses. When you take deductions such as, AH, Travel, conducting a lot of gas expense right, something that could be a personal expense, you could just be deducting all of your regular gas expenses. And if you're a driver for a company, or if you have ah, fleet of cars for deliveries for your small business. That's something that if there's a huge amount deductions for that gas expense, even though it might be legitimate, they might look at that and say who? This seems like a lot right here. I'm not sure this makes sense for that particular business that might sugar, um, a audit, household items being purchased to your business, right? If you're purchasing a lot of stuff that you can use in the home, like cleaners and office supplies and other household stuff furniture through your business account, you know, buying it wholesale and then getting it cheap and deducting as a business expense. The I. R s. They're intelligent people that work there. They understand how this stuff works. That is the kind of thing that they look at. And so most of the audits that are done in the US are done for people that own small businesses or are self employed. So it's kind of a double edged sword because I already mentioned a lot of the greatest tax benefits are for people a small business because you can deduct so much. It's also higher likelihood that's going to lead Teoh unaudited as well, which is why it's good sometimes to have a c p a or use the professional tax preparing software that can give you a sort of shield from the I. R. S and say, Well, you know, this is an honest mistake. Or actually, it wasn't my mistake. You at least have a little bit of a buffer between yourself and an audit that you can use to protect yourself any large deductions that are out of line with your income if you only make $30,000 a year, but you have, like a 20 or $30,000 deduction that RS is gonna go home. What would you have that would be that big of a deduction, right? I mean, it has to make sense, so any really large deductions out of line with how much you make might trigger it. And, of course, if there's a business that you have and your reporting large losses every year, and they may think that you're your only operating that business in order to avoid paying taxes, which, of course, is something that people do. Do you know? Let's say, for example, you wanna have $20,000 in deductions you open up a company, and it can be not even really a real company. And you just do paperwork for that company. You fill out taxes and you show that it's a loss every year. Well, that's going to trigger a lot of suspicion those the kind of things that will lead to an auto, even if you have a legitimate business on the side that that loses money every year. That also might lead Teoh naughty, even though it's, you know it's legitimate and you're not actually doing that. Teoh. Avoid paying taxes. Those are some of the things that the IRS looks at. So, um, just make sure you're aware of those things. In some cases, you you may even want to avoid taking the deduction. It was a really small one and is one of the things that could trigger an audit. You know, it's up to you and your judgment. But, um, you know it's not funding with the ire s if you're in default or you owe extra money in taxes, so knowing those rules could be really beneficial to you definitely don't fudge on things like the Home Office to the Home Office deduction and stuff like that. You think? Well, you know, they can't really prove this. I do work out of my home. If you ever do get audited, you get nailed really hard for that to pay really big funds. So hopefully that's useful information for you. Um, and again, you know, using a C P. A or other tax repair, it gives you a layer of safety. You know, you can amount to say that you should place blame on them, but if you don't have a c p a. Didn't using tax preparation software, you just did it all by yourself. There's no one you can blame yourself. You're going totally responsible for everything. According to the law. You're actually you're still responsible no matter what, the CPI is not responsible. But you know, it's obvious that if you have a professional tax repair, doing your taxes and there's some big mistake or there's some big discrepancies, at least to an audit, you can definitely, you know, kind of play dumb in that one and say, Listen, my c p. A. Did that for me, and it does give you a layer of protection, some sort of plausible deniability. There So it's a good idea if you have complicated tax is to use a professional. For that reason, of course, the best policy is Do not ever try to evade taxes. It's not really worth it. Use every tool at your disposal to shelter income so you can build will wealth more quickly over time, use all the deductions, Use all the tax efficient retirement accounts. Use the strategies of the wealthy with your investments. But just don't ever actually try to evade taxes because you might think you're clever. But the IRS has a really, really good track record of catching those people. And as we know from some situations, like famous actors like Wesley Snipes and others, you could even end up in prison. So the easy thing to do is just pay the pay, the taxes and use all the legal strategies that we're learning about in this course that are at your disposal 11. Lesson 11 Bringing it all together: So in this concluding lesson, we want to bring it all together and do overview of what we learned and reemphasize some of the really major points here. Um, first off, the vast majority of people really underestimate the importance of taxes on building. Well, that's not something that is emphasizing business school. It's not something as I mentioned throughout the course that is taught in our public schools, but it's extremely important. Every dollar you save is a dollar that could be invested. So it's not just that you're saving money, you're actually when you're not saving money in taxes, you're losing all the compound interest and earnings off of your capital that could be diverted, um, to investments. As Benjamin Franklin also said, a penny saved is a penny earned. Um, that's an important thing to understand. When you don't pay money in taxes, your building more well, the wealthy understand it's the rich, understand how to shelter their income and employ every tool at their disposal to do so. You could do the same thing as then with a little bit of knowledge on. Hopefully, this course could be a starting point for you to understand. Some of the main tools for sheltering your income and just the importance the power of understanding how to be tax efficient. The power on the effect that has on your wealth over long periods of time, especially understanding basic tax rules, provides peace of mind and keeps you out of trouble, right? We want to avoid, um on auto by the I. R. S. You want Teoh be comfortable during tax season is not, you know, have it be a really stressful time every year and knowing how the thing, how these things work, knowing how the IRS works, knowing which deductions you can take, which credits you can take because you peace of mind. It helps you to sleep well at night and rather than just a, you know, avoiding taxes or dreading them, you know, even enjoy taxis and make it a game like how much going to save this year? How much of return can I get back knowing these new strategies and rules that I now know, it could be fun? Um, and they said Americans over pay an estimated $1 billion in taxes every year, so chances are you're probably over paying as well is probably some deduction or some benefit that you're not taking that you that you could be. So that's one of the reasons I wanted to make this course for all of those of you who you know aren't getting the most out of your out of your taxes. Hopefully, I helped you, too, You know, even if you save an extra 50 bucks or $100 in your taxes this year with, at least I'll helped a little bit knowing what deductions and credits are available. Consider thousands of thousands of dollars and so make sure that you know those and that you utilize them and probably the most important thing. Perhaps the most important thing related to taxes, in addition to all the rules and all the fancy concepts and accounts, is that investing in appreciating assets where you don't pay anything until you sell them, and then you pay the lower capital gains rate. It's an easily overlooked strategy of the middle class, but it is the most powerful tool of the wealthy. They understand that when you put your capital in the long term appreciating assets, you're getting tax free. Compounding you're not forced to sell those assets if your $100,000 stocks goes up 10% as $10,000 in appreciation. But you didn't sell it, so I have 100 10,000. The next year goes up 10%. That's $11,000. Now you've got 100 $21,000. You're paying zero taxes on those appreciating gains until you sell them. And so, even though even in a regular brokerage account that's not a tax efficient retirement account, this is a tax efficient wealth building strategy. And so it's related to taxes. And, um, I can have a huge, huge effect on you being able toe, retire wealthy or retire poor. If you want to get rich and pay less in taxes, get mawr of your earnings from capital gains. Just like Mitt Romney. Don't get mad, but just do what they dio, and you will be glad that you did so good luck on your next tax season. I hope that you got something out of this course that that benefits you and, um, you all, uh, save lots of money on your taxes 12. Tax Cuts and Jobs Act Update: Welcome to the course Update. Tax Cuts and Jobs Act of 2017. If you recently I joined this tax course, then you are certain you're aware that there was a huge tax overhaul. Two American Taxco that just went into actually a lot of it will not go into effect for a hold of the year until 2000 and 19. Fire kills and making taxes for this year 2000 and 18. You have, ah, year to get all of our taxes in order and to figure out what is going to be different. So that's a really good thing. We have a little time to adjust to this, and there were pretty immense changes to the tax code. However, Azzam going to discuss in a moment our general tax strategies for building well are not going to change all that much. The same strategies will still apply, but we do need to know how it's going to affect that of the amounts that we will save. And there are some deductions I wouldn't be lost that something's obviously are going to be a little different, so let's just jump right into it. So, first of all, the standard deduction that you can take is going Teoh roughly double to about $24,000 for a married couple from rough, about $12,000 for individual, which what it used to be. So this is really, really good If you don't wanna have to itemize your deductions if you don't have a ah business view of a business where you have more than $24,000 worth of expenses as almost a force, any business is going to and you're still going to want Teoh, itemize your deductions and maximize your deductions to reduce the amount of income that you show to the I. R. S. But if you're a regular working Joe and you don't itemize deductions than this, this is a really great thing that they've increased standard deduction that makes you text really simple, and it helps the lower your taxable income. So, I mean, if you're normally reporting $60,000 in taxable income, subtract 24,000 back and you are on Lee showing $36,000 of taxable income, so it greatly reduces the amount of taxes that you will have to pay. So that's a good thing And then the marginal rates have been reduced, which we're going to go into on the next slide so you can see that for every tax bracket is still the same. Number of tax brackets are still about six attack brackets. But each tax bracket each marginal rate has been reduced, which has a big effect on your taxes because, as we learned earlier in the course, the way marginal rates work. Is that the first you know, chunk of your income 10 or 15% of any family talk about it's taxed at the lower rate. As your income goes higher into each tax bracket, just that chunk that falls into that tax bracket is taxed. And so having every single Marshall text bracket with reduced rates has a big impact on lowering your taxes. Of course, it has a huge impact. The more money you make. This tax cut was definitely getting towards people that have the most money that will save the most. But those of you that are in lower and middle rate of the tax bracket are still going to see some savings as well. Well, this is just for talking about normal income when it comes Teoh appreciation and other types of income. Then it's going to be different. The mortgage interest deduction has been limited to $750,000 of mortgage debt, So this is a seen as a negative for a lot of wealthy real estate investors. This is just one of the things that they had to do to get the deal passed there, saying that lower taxes. But we're gonna get rid of some of the deduction that was kind of trade off they had to make. So the compromise that made Waas that they limited the deduction to $700,000 of mortgage debt. So, you know, if you don't have more than $700,000 that you still take this same number of deductions that you normally would. But if you have a lot of real estate that your deductions for the interest on that are going to now be limited, so it's negative of your wealthy real estate investor. So these are the Martin for rates. I simply found them on a website so we can have a look and compare them to the current law . So for the first tax bracket, nothing has changed up to $19,000. Youling it tax 10% of your income. And of course, just remember that since we're taking the standard deduction, that standard deduction is not 24,000. Wherever you fall into this bracket right here, you're gonna subtract 24,000 units gonna knock you down, probably into another brackets. That's a good thing. And then same thing with the 2nd 1 we noticed that instead of 15% though, for the same tax bracket, your taxes have gone down, Teoh Only 12%. So you're saving 3%. Now, if you make anywhere between 7 $26,000 your taxes went down 3%. Next bracket used to be 25% now is 22 was in the 3% savings, and then they also increased the amount of money 255,000. So, again, this is for married filing jointly. So if your individual it's gonna be a little bit different. But for the sake of the example, this is gonna be it's the same set up its exact same amount of money that you're saving, but for a single person, it just means that the numbers will be smaller because they assume only one income for one person. But the brackets are the exact same. Of course, you can look it up yourself to the next one. Used to be 28% now, 24% that you notice the percentages, but here this is 4%. That's more savings than the other ones, and it's at a much higher income rate. So if you're making $200,000 you say 4% in your taxes, whereas people making these lower amounts only saved 3%. So all of a sudden the benefit has got bigger for you. You haven't evolved in this next tax bracket. You only got a 1% saving, so it's kind of interesting on. Then again, with this next one on, they kept the same 35% but they increased the top rate. So if you're making $500,000 or $550,000 you're getting text only 35% instead of what used to be 39%. So you just save yourself 4%. Of course, 4% on a larger figure, like half a $1,000,000 is a lot, right? So talk about tens of thousands of dollars that you'll be saving now, just from these few percentage points. And then they lower the top rate of 39.6% the only 37%. So they have a tax cut across the board and everyone's going to be saving a little bit. But again, this is Onley having to do with your regular earned income in the fourth of wealthy, the wealthiest, always trying Teoh increase the amount of income they have from capital gains and investments because those, as we've learned throughout the course, our tax at a significantly lower rate and especially if you hold those investments and of the compound over time and don't sell them, then you don't pay any taxes at all until you sell them. And your mind is compounds and compounds about. This is really the habit of the wealthy that you wanna have. You wanna have your assets, you're making your income for you rather than your job, and you want to have your capital be invested in something that is going to compound for a long time. That's the mentality of the wealthy. Okay, so more details here is that the new law limits a compulsory health insurance That's called the individual mandate. So now you don't want to have health insurance when you can afford it or whatever, then you don't have to. Whereas the so called Obama care before care act, it made it. So we we had to have health insurance undermined. Otherwise, we're gonna get a huge, huge fines, which I understand why they did that. They do that because actually, it saves money in the system because something that are insured and having to go get taken care of in the hospital and actually increases costs. But I found that really, really knowing that forced you to have helped you if you if you don't want. And yet the baby's massive find. So I'm actually pretty happy about that. Although I understand while they had it before, um, so they limited the number of deductions and a whole bunch of deductions that really minor deductions that they cut out most won't affect us. And you know, a lot of this was political. They say they're going to limit the number of deductions in order to lower taxes. They say that to get the law passed, but they actually didn't cut out that many deductions. I mean, we saw that limited the mortgage deduction to $780,000. That was the biggest one needs to be no limit on the number of deductions. You take paralysis. That was a really big hit toe all the wealthy real estate investors out there, and they had to do that basically to get the law passed and ran through all of these other reductions and such. So that's the way it is. The law is only in effect for 10 years, so they kind of kick the can down. The valuable expires in 2000 and 28 so Congress in the future is going to have to either renew all this or it's going to go back to the old tax rates. So that's kind of interesting is not a permanent cut, however. The tax cut to the businesses to corporations and went from 35% down the only 21% so they cut taxes for businesses by a huge huge amount of That's a corporate tax rate, and that one is permanent. So that was not gonna go back and 10 years in orderto increase the corporate tax rate from 20%. Now back to what it used to be and they have to pass an entirely new large, as we know, is not easy thing to do so that one is going to be permanent right now. Capital gains taxes. They are now 0% up to a certain amount of capital gains, as we'll see in the next pages $38,000. So you had you sold stocks that you held for over a year and your capital gains and those being just a profit is under 38,000. You won't pay any taxes on that at all. So it's pretty sweet, and that just shows you the bias towards that type of activity towards investing activity. You have a 35 or $36,000 salary. You're still gonna be paying 10% of part of income and 15% of part of that income. Whereas if you have all that income from capital gains nothing, it's a big deal because we learned the course. You can reinvest that money. Those tax savings that have a compound further such a big deal, and the next one is 15%. We're gonna look in a moment at the actual amount of money you have to make to be in a 15% and the 20% brackets noticed. These rates are significantly lower than the marginal tax rates that we saw over here of this slide. If you're up above 17 $77,000 a married couple, you are looking at 20 to 24 32%. All these percentages, rates and up or, as capital gains you could, and there's no limit you could be making millions of dollars. If you're so lucky you get you get wealthy enough off of your capital gains that you still never pay more than 20% in taxes. So the tax code is definitely skewed towards investing, and a lot of people complain about that. They say it helps the wealthy, but the way I look at it is, if you can't beat them, join them and you should modify your behavior to make it so it benefits you. What that means has become investor and make a much money as you can from investing. And so here we go. Here are the race for the capital gain. So for a single taxpayer, up to $30,000 you pay zero. Look, this married filing jointly did you make a $77,000 from capital gains? So let's say you had $100,000 in the stock market, for example, you had an amazing year. It went up 77%. And you you are $77,000. And after a year, you said, you know I wanna lock in these gains. You sell those stocks, sell all your stocks. You got $77,000 in profit. You would pay no taxes on that. Now, that's huge, because you have $77,000 as a married couple in earned income. Let's see what the rate is right here. You would be paying 22% in taxes or, as you paint zero, nothing in taxes. If that was a capital gain, so you're saving 22% 20% thats you know, thousands and thousands of dollars. So I think it's a really good example to show you how much you will say. And then the next one is you pay 15% If you're look at the married couples 1 15% 77,000 all the way up to 40,000. So that means if you had 460 or $470,000 in capital gains from I keep using stocks an example. But the same thing is shoot for real estate or gold or any appreciating asset that you've held for longer than one year. That's why it's called a long term capital gains tax has to be longer than one year. Then you only pay 15% on that, okay? And this is why the wealthy continue to get so rich, because if they have a huge gains in the hundreds of $1000 even even though they technically have to pay 50% of that, they still have all kinds of deductions and stuff usually have businesses, so then they use their businesses to shelter the rest their income. This is why they usually end up paying something like just a few percentage points and taxes, even though they're very wealthy, whereas the average person ends up paying 2030% because they're not behaving in the same way. And a lot of people say, Well, we don't have the money to be able to do that. But, you know, you gotta get started somewhere, and the way I think about it is, you know, start putting a few $100 if that's all you can do in a stock market or people for gold or whatever. The stock market is better, though, but put money in the stock market over time. We know that it outperforms all other asset classes and just leave it in there that it compelled over time it will start to amount to something. It will turn into something larger. They don't start compounding at a more rapid rate, and you will enjoy the benefits of our tax code as you get wealthier. And so, look at this. There's no limit whatsoever at the top end, over 20% you make $10 million in capital gains. With selling assets, you will never, ever have to pay more than 20% whereas the top rate for earned income is now 37%. So we're talking about a huge difference. Enormous difference, and your money will be compounding the entire time untaxed and tell yourself so this is a big deal as we talked about throughout the course, and now you can see how the tax code has been updated. There are a lot of details in it. If you want to look up even more details of all these little deductions and things like that that have changed, you can do it on your own. But these are the main things that you need to know about these of the race. These are the main changes. And, um so you know, if you have any more questions, you want to comment in the discussion board of the course? I'm gonna keep updating this course, um, as, uh, as we go along and feel free to be part of a community update. Anything. You have any questions or comments? Leave it in there. And, um, we'll go from there. Thank you.