RPF0249-Tax_Reduction_for_Dual_Income

00:00:00.000 | Today on the show, we tackle this question, how can dual income, high earning couples

00:00:07.200 | lower their income taxes?

00:00:08.840 | I'm going to give you a litany of ideas.

00:00:10.960 | I'm going to give you an overall framework for how to think about this problem.

00:00:15.440 | Then I'm going to systematically go through a bunch of credits, deductions, itemized options

00:00:22.400 | for you that you might be able to use to lower your income taxes if this describes you.

00:00:45.040 | Welcome to the Radical Personal Finance Podcast.

00:00:46.840 | My name is Joshua Sheets and I'm your host.

00:00:48.740 | Thank you so much for being with me today.

00:00:50.680 | Thrilled to bring you this question and today's show is a special Q&A show.

00:00:55.980 | Comes just going to handle this one question, but this question comes from a patron of the

00:00:59.720 | show.

00:01:00.720 | One of the benefits of patronage at the $200 a month level is that you get to pick the

00:01:05.180 | topic of the show and today this is a special request Q&A from Joshua.

00:01:17.040 | If you haven't been over to the Patreon page recently, then feel free to go over there.

00:01:21.880 | But you'll see as you march up, you can support the show at radicalpersonalfinance.com/patron

00:01:26.440 | and there on that page I've got a bunch of bribes for you.

00:01:29.080 | So you can contribute as little as a buck a month or even up as high as a couple hundred

00:01:32.920 | dollars a month.

00:01:33.920 | There are a number of supporters of the show who send me a couple hundred dollars a month.

00:01:37.400 | In exchange for that, there are a number of different benefits.

00:01:39.780 | That program by the way is sold out right now, although you can still send me money

00:01:43.520 | and I would greatly appreciate it, but the benefits are sold out.

00:01:46.800 | But there are a number of benefits that that level of support gets.

00:01:49.120 | One of them is a monthly mastermind.

00:01:51.420 | Another one of those benefits however is that you get to pick the show topic and so this

00:01:55.240 | question comes in from a listener.

00:02:00.440 | This listener, here's the question that he emailed me.

00:02:03.240 | "Joshua, double income medium to high earning couples frequently ask me how to lower their

00:02:08.640 | taxes.

00:02:09.640 | My median income is at a higher rate of over 28% plus a state tax of 3.75% and social security

00:02:17.440 | of 7.65% or a total of 40% all in and I really don't have a lot to tell them.

00:02:22.880 | I suggest to them that they calculate whether it's worth it for the second spouse to work.

00:02:27.040 | For example, you can do your money or your lifestyle after tax, after child care, after

00:02:31.800 | gas expenses, income per hour of total time spent at the job, commuting and working.

00:02:36.480 | I tell them the way, the qualitative factors, I tell them to max their 401k and to invest

00:02:40.200 | in real estate.

00:02:41.200 | But I'm assuming I'm missing things.

00:02:43.000 | So even if you're not able to do a complete podcast on the subject, maybe you could have

00:02:46.520 | some ideas.

00:02:47.520 | Thanks."

00:02:48.520 | And he goes on to say, "One reason my wife doesn't work is it's simply not worth it for

00:02:51.480 | her to work."

00:02:53.760 | So we're going to tackle this question and I'm going to give you the framework for it

00:02:57.920 | and I'm going to try to give a number of specific suggestions that will at least inspire some

00:03:02.840 | creativity.

00:03:04.280 | That's my hope.

00:03:05.280 | Before we do that, I got a couple of quick announcements and I'm going to go ahead and

00:03:08.760 | talk about sponsors at the beginning of today's show.

00:03:11.920 | Announcement number one first for patrons.

00:03:13.760 | If you are a patron, you should have gotten an email from me in the last couple of days

00:03:17.360 | and that email is important because in it I announced a Q&A conference call with me

00:03:23.720 | and that conference call will be on Thursday, October 15th at 1 o'clock PM Eastern Standard

00:03:29.080 | Time.

00:03:30.080 | If you did not get that notification, check your email for the call-in number.

00:03:33.900 | But that is for anybody who is a patron of the show.

00:03:37.440 | I've been slow the last two months due to all the changes in my personal life.

00:03:41.680 | I haven't been able to get the last two months of Q&A calls, the monthly Q&A calls done.

00:03:46.320 | And so as a thank you for sticking with me, even though I didn't deliver those, I'm doing

00:03:50.560 | a long conference call and I intend to answer as many questions as possible.

00:03:54.040 | So if you want to get a live answer to your question on that conference call, check the

00:03:58.400 | patron page.

00:03:59.400 | If you're not a patron, go to RadicalPersonalFinance.com/patron and you'll find all the details there.

00:04:05.300 | And if you do that before Thursday at 1 o'clock PM, you'll be able to participate in that

00:04:09.620 | call at any level of patronage.

00:04:11.980 | Number two benefit for patrons is because I've missed those last couple of months of

00:04:16.860 | Q&A calls, I've decided for the next eight weeks to do a weekly Q&A call with patrons

00:04:22.460 | who are at $10 and up rather than a monthly Q&A call.

00:04:26.480 | So for the next eight weeks, each week I'm doing a Q&A call at a certain day and a certain

00:04:31.300 | time.

00:04:32.300 | Those details are also on the patron page.

00:04:34.400 | If you would like to get access to those Q&A calls, just go to RadicalPersonalFinance.com/patron,

00:04:38.940 | sign up for supporting the show at $10 a month and greater, and you will quickly be able

00:04:44.360 | to have access.

00:04:45.360 | You'll immediately be able to have access to that and you can have access to those Q&A

00:04:48.980 | calls each week going forward for the next eight weeks.

00:04:52.900 | Sponsors of the day, number one is Paladin Registry.

00:04:55.980 | Paladin, if you haven't listened to it, go to listen to episode 248 where we launched

00:05:01.660 | Paladin Registry.

00:05:02.660 | But in essence, if you are looking for a financial advisor, I would recommend that you start

00:05:06.620 | by going to RadicalPersonalFinance.com/Paladin.

00:05:10.780 | Listen to episode 248 of the show for a one-hour discussion with the founder of that website,

00:05:16.020 | but it's a financial advisor referral service and I'd like you to check it out and start

00:05:20.860 | your search there as you search for a good financial advisor.

00:05:24.740 | I'm starting to receive, I received one email from a listener who has gone ahead and started

00:05:28.460 | that, started interviewing financial advisors through that system.

00:05:31.940 | If you have done that or if you are doing it, I would love to collect your feedback

00:05:35.300 | on their service.

00:05:38.620 | Remember the sponsors are here to serve you.

00:05:41.500 | But if you're looking for a good financial advisor, go to RadicalPersonalFinance.com/Paladin,

00:05:45.700 | put in your information and start interviewing the advisors that the system is there.

00:05:49.380 | They're carefully curated and vetted and hopefully that will help you to get a good

00:05:52.660 | one.

00:05:53.660 | My plan number two is you need a budget, budgeting software.

00:05:57.100 | This is the budgeting software that I now use to run my family's budgeting and it is

00:06:01.420 | fantastic.

00:06:03.060 | For details on that, listen to episode 246 for an extensive review of the software and

00:06:09.380 | an interview with the founder of the show.

00:06:12.680 | You can download a free 30-day free trial at RadicalPersonalFinance.com/YNAB, Y-N-A-B,

00:06:20.420 | stands for you need a budget.

00:06:22.540 | So go to RadicalPersonalFinance.com/YNAB, download the free software.

00:06:26.220 | It's a free 30-day trial.

00:06:27.780 | Put in some information.

00:06:28.780 | I recommend you just keep it very simple.

00:06:30.100 | Do one bank account, do your personal checking account and just work with it for 30 days.

00:06:34.220 | Take the free classes that they offer and see if you like it.

00:06:36.740 | I personally love it and I think everybody should be budgeting with this software as

00:06:42.020 | a starting place.

00:06:43.020 | It's fantastic.

00:06:44.140 | So announcements and sponsors done.

00:06:46.100 | Let's go on to the major point.

00:06:48.180 | So let's talk about tax planning.

00:06:50.820 | This question of how can – specifically how it's stated, how can a dual income high-earning

00:06:56.020 | household lower their taxes, this is a thorny one because from the perspective of taxes,

00:07:03.660 | this is the absolute worst place to be.

00:07:07.060 | Households that are made up of two employees, both working outside the house, both earning

00:07:12.080 | high incomes are screwed by the US tax code.

00:07:19.140 | Now the level of your screwedness depends on where you live, how much you earn, what

00:07:24.220 | you do, all of – what kind of company you work for, those kinds of things.

00:07:27.760 | But this is absolutely the worst place to be and this is why the political gamesters

00:07:33.580 | get away with talking about how the rich aren't taxed enough.

00:07:39.620 | Most famously when Warren Buffett a couple of years ago made all the news and was trotting

00:07:43.500 | around talking about how my secretary pays more in taxes, which is a lie.

00:07:48.100 | It's stupid because the secretary doesn't pay more in taxes.

00:07:51.540 | But as expressed at a ratio of income, it's absolutely true because the secretary is earning

00:07:55.940 | income and is paying taxes on her earned income.

00:07:59.300 | So she's going to be taxed on earned income, wages and salaries at a higher rate than Buffett's

00:08:05.700 | income which is all structured in the form of dividend payments.

00:08:09.660 | Now this is an intentional plan behind the tax code but what it just illustrates in stark

00:08:14.740 | contrast is how employees are screwed basically.

00:08:20.120 | Now in order to reduce your income tax, you must reduce your income and it's absolutely

00:08:28.460 | as simple as that.

00:08:30.700 | The higher the income that you earn, number one, the higher the total tax amount that

00:08:36.620 | you will pay and number two, the higher the total rate that you pay.

00:08:43.200 | So the only way to reduce your income tax is to reduce your income.

00:08:48.780 | This is why the system that we have of progressive taxation is so stupid.

00:08:53.020 | You're always disincentivized from making more money unless you have a really compelling

00:08:56.500 | reason to do it because the more money you make, the more total tax you're going to pay

00:09:00.740 | and the higher rate of tax you're going to pay.

00:09:03.560 | So the simple answer to the question of how do I reduce my income tax is simply, "Well,

00:09:07.600 | how can I reduce my income?"

00:09:11.380 | Now many of you are sitting there shaking your head saying, "Well, how could Joshua

00:09:13.800 | say I can reduce my income?

00:09:14.800 | I thought he was going to give me something intelligent."

00:09:16.600 | Well, that's where we get into the major question that you're asking which is, "Is there a way

00:09:21.320 | that I can reduce my income on paper without actually reducing my income in reality?"

00:09:26.900 | Or "Is there a way that I can play some kind of trick to reduce my income without actually

00:09:32.000 | reducing my lifestyle?

00:09:33.840 | Is there some fancy trick, some fancy deduction, some fancy credit, some little thing that

00:09:39.000 | I can use to allow me to spend the same amount of money but pay less in taxes?"

00:09:46.420 | The answer to that question is maybe.

00:09:50.560 | You might be able to play some tricks on paper with your income and with your deductions

00:09:54.320 | and with everything like that if you're willing to jump through hoops and if you're not consuming

00:09:59.520 | all of your income.

00:10:02.340 | If you have a high income and you consume all or most of that income, then there's not

00:10:11.440 | going to be anything that you can do to affect your taxation.

00:10:16.200 | Every single tax planning strategy that I know of is going to involve some level of

00:10:21.120 | change in your level of consumption.

00:10:23.680 | The best example I could use of this would be making a 401(k) contribution.

00:10:28.200 | This would be the first place that any employee would start, make a 401(k) contribution.

00:10:33.160 | Well as I'll go over in a moment, this is an income timing strategy and basically what

00:10:38.160 | you're doing is saying, "Well, I don't need to consume this income now.

00:10:41.240 | So I'm going to put it into a 401(k) account and then later I'll consume it at a lower

00:10:45.240 | tax rate."

00:10:46.240 | That's the whole gist of the strategy.

00:10:47.240 | It's an income timing strategy.

00:10:49.300 | But that assumes that you're not going to spend the money.

00:10:53.660 | You might think I'm belaboring a point.

00:10:55.600 | I am.

00:10:57.200 | Most of you listening aren't living up to your income but many couples are.

00:11:01.360 | The simple reality is that the high earning couple that's also the high consumption couple

00:11:08.320 | is the ideal – this is the ideal household from the perspective of US tax policy because

00:11:13.680 | you are absolutely going to pay the highest amount of taxes.

00:11:17.960 | You must be able to be somewhat flexible with your consumption patterns if you're going

00:11:22.520 | to implement any strategies around taxes.

00:11:26.080 | Now, it's up to you to try to figure out the reason why this is the case.

00:11:32.120 | I have my own opinions on it.

00:11:34.440 | Are they right?

00:11:35.440 | Are they wrong?

00:11:36.440 | I don't know.

00:11:37.440 | Personally, I think the system that results in this being the fact that high income earning

00:11:42.840 | households from wages and salaries, high consumption households are the most heavily taxed, personally

00:11:47.880 | I think it's stupid.

00:11:48.880 | It's a stupid lifestyle for most people and there are much smarter, more intelligent lifestyles,

00:11:54.440 | the ways that you can achieve better results without paying and living in this high tax

00:11:59.160 | lifestyle.

00:12:00.320 | But everything is oriented around this type of lifestyle in our modern American society.

00:12:04.280 | We're trained from the beginning to be consumers.

00:12:06.280 | We're taught to be a homogenous society so that we're easily marketed to.

00:12:10.840 | Your class is going to determine for most people your level of consumption.

00:12:15.360 | The neighborhood that you live in will be determined by the type of job that you have.

00:12:19.120 | The type of job that you have will determine what type of car you should wear, what type

00:12:22.480 | of clothes you should wear.

00:12:23.880 | So we've become a very homogenous system and this leads to a need for high levels of income

00:12:28.280 | and high levels of consumption.

00:12:30.960 | You've got to be a little bit countercultural in order to go against that and save money

00:12:34.120 | on your taxes.

00:12:35.440 | So it's up to you to figure out why.

00:12:37.320 | I'd say just simply look at your lifestyle straight ahead and then think about it intentionally.

00:12:45.880 | Create your life and your lifestyle intentionally.

00:12:50.120 | If you're willing to think about your lifestyle and create it intentionally, figure out what's

00:12:54.160 | really important to you and if you're willing to adjust your consumption patterns so that

00:12:58.920 | there's some flexibility in your budget, then you can design a much more efficient

00:13:03.720 | lifestyle for yourself.

00:13:04.720 | Now let me give you the framework for tax planning and this is very important that you

00:13:08.560 | understand.

00:13:09.560 | There are only three major tax planning strategies that I'm aware of and all of the little tips

00:13:14.740 | and tricks fit into these strategies.

00:13:17.640 | These include number one, income timing strategies or let's just call them timing strategies

00:13:25.720 | which a timing strategy is when do we recognize the income?

00:13:30.760 | Do we bring it forward or do we defer it out?

00:13:33.480 | Do we push it to the future or bring it forward to today?

00:13:36.920 | Any type of timing strategy will involve when do we actually recognize the income or it'll

00:13:42.720 | involve when do we recognize the expense or the deduction.

00:13:45.840 | Do we push the deduction forward or do we bring it forward to today?

00:13:49.700 | If this is your first time understanding or hearing about the concept of timing strategies,

00:13:54.400 | don't worry.

00:13:55.400 | I'll explain it more in a moment when we go through some specific ideas that could

00:13:57.560 | be applied to a dual income household or go back and listen to episode 36 of Radical Personal

00:14:03.320 | Finance wherein I talk in detail about this as a framework.

00:14:08.880 | The second of the three strategies would involve income shifting.

00:14:12.000 | This is where we are shifting the income that we have from a high rate taxpayer to a low

00:14:17.040 | rate taxpayer or from moving an expense from a pre-tax expense to – or from post-tax

00:14:24.160 | expense to a pre-tax expense by shifting it among an entity.

00:14:28.180 | The third strategy would be a conversion strategy where we're converting income from a high

00:14:32.480 | tax rate activity to a low tax rate activity.

00:14:35.840 | This is the framework that you need to apply.

00:14:39.680 | So if you understand the framework, then you can look at your own situation and understand

00:14:45.240 | what is the best way for me to apply it.

00:14:47.200 | Again, go listen to episode 36 and episode 41 of Radical Personal Finance for an in-depth

00:14:52.220 | discussion on it.

00:14:53.820 | By starting with goals, you'll be able to figure out how can I achieve my actual goals

00:15:00.560 | and apply the appropriate strategy to lower my taxation.

00:15:04.460 | So begin with what is my ideal life?

00:15:07.860 | What is my ideal lifestyle?

00:15:10.400 | What is my ideal day?

00:15:12.760 | What do I want the meaning of my life to be?

00:15:16.080 | At my funeral, what do I want the meaning of my life to be?

00:15:21.000 | Good journaling exercise for you if you've never done it.

00:15:23.280 | Sit down and write your eulogy.

00:15:26.560 | Find yourself a quiet place, get a cup of coffee, sit down with a journal and a pen

00:15:29.840 | that you like writing with or whatever your preferred way of writing is, maybe your computer,

00:15:34.600 | and write your eulogy as you would like your best friend to deliver it for you at your

00:15:39.000 | funeral.

00:15:40.160 | And then look at that eulogy and figure out, "Well, what do I need to do to make this

00:15:43.440 | eulogy true so my friends don't have to lie about me at my funeral?"

00:15:47.020 | If you start there, what you'll start to get closer to is what is the overall impact

00:15:52.560 | and meaning of your life?

00:15:54.120 | And that might include what you're doing at your job or it might include something

00:15:57.360 | different.

00:15:58.620 | By starting with that as a perspective, then you can efficiently design the financial plan,

00:16:04.180 | the tax plan to help you to accomplish that.

00:16:07.860 | Here would be a simple example.

00:16:09.120 | Let's say that you are a dual income household like so many people are.

00:16:12.740 | That means that when we put the aggregate of your taxes together and we'll talk about

00:16:16.720 | the different types of taxes you're paying in a moment.

00:16:18.600 | When you put the aggregate of your taxes together, then the second income is being taxed at an

00:16:23.600 | aggregate rate of about 40-ish percent.

00:16:26.380 | Now assume that you're in a situation like so many families are where you have children

00:16:30.760 | at home and you have also aging parents and perhaps you have an aging parent who needs

00:16:35.320 | care of some kind.

00:16:37.760 | Well, there are a couple of ways that you can do this.

00:16:39.920 | Number one, you can keep on working at your job and you can continue to earn money.

00:16:45.920 | You can use that money to pay with – number one, you got to pay 40% on every dollar.

00:16:50.560 | You can turn around and use that money.

00:16:51.960 | You can use it to hire a caregiver for your parents.

00:16:55.520 | You can use it to hire caregivers for your kids, all of which are extremely expensive

00:17:00.200 | activities.

00:17:01.200 | So you're going to earn a dollar, pay 40 cents in tax to the government and then use

00:17:05.000 | some of the 60 cents that's left over to pay for the caregiver and pay for your kids

00:17:09.520 | which is all non-deductible activities.

00:17:11.880 | Well, if your goal of your eulogy is to be a corporate titan and you are proud that your

00:17:20.560 | best friend talks about your business acumen and how high you rose in the ranks of the

00:17:26.040 | corporate life, that would be an appropriate strategy.

00:17:30.040 | But perhaps your eulogy involves something like Joshua was the most loving person I know.

00:17:35.680 | He always had time for the people that were close to him.

00:17:38.240 | He built strong family relationships.

00:17:41.420 | His family always knew that no matter what, he loved and cared about them.

00:17:44.880 | I'm not saying that you can't maintain that as an accurate reality through hiring

00:17:50.740 | caregivers for your children, for your parents.

00:17:53.180 | But if you were facing a situation like that, it might be much more efficient for you to

00:17:56.080 | simply say, "Why don't we stop paying this 40% marginal tax rates, drop back, cut

00:18:02.540 | our income, cut our taxes and I'll go ahead and be the caregiver for parents and kids."

00:18:08.120 | It's up to you what you do.

00:18:09.960 | I'm not telling you how to live your life.

00:18:11.440 | But that would explain an example of how your long-term values would impact what you actually

00:18:18.320 | did in the type of strategy that you chose to pursue.

00:18:21.520 | It's up to you to figure out how to actually implement it.

00:18:25.880 | So begin with what are your actual goals for your life and your lifestyle and then design

00:18:29.640 | around those goals an intentional plan.

00:18:32.720 | A good way to think about this is pretend that you're hired as a consultant to a

00:18:35.920 | business, the business of U, Inc., so Joshua Sheets, Inc.

00:18:41.600 | And if I were hired as a consultant to Joshua Sheets, Inc. and I were hired to run Joshua

00:18:46.080 | Sheets' life, what would I do?

00:18:48.640 | Well, I would start with saying, "What is the mission and purpose of this company?

00:18:52.520 | Why does this company exist?"

00:18:55.320 | Get very clear on that.

00:18:57.200 | Bring that back to your life.

00:18:58.760 | Why do you exist?

00:19:01.480 | Get very clear on that.

00:19:02.640 | That's number one.

00:19:04.160 | Number two, I would do an audit to find out where are we with regard to fulfilling our

00:19:08.080 | mission.

00:19:09.200 | What's the current status?

00:19:11.360 | Is Joshua Sheets on track to fulfill the mission for why he exists?

00:19:15.800 | Is he ahead of the game?

00:19:16.800 | Is he behind the game?

00:19:18.240 | Where are we with regard to that mission?

00:19:21.320 | That's number three if I were coaching Joshua Sheets, Inc.

00:19:24.440 | I would say, "All right.

00:19:25.960 | We've got a clear mission and purpose.

00:19:28.440 | What tools and equipment and personnel are going to be required for us to achieve our

00:19:32.000 | mission?

00:19:33.280 | Is this mission the type of thing that will be achieved with a small number of employees

00:19:37.280 | or a large number of employees?

00:19:39.560 | Minimal equipment, lots of work.

00:19:42.600 | Maximum equipment, minimal work."

00:19:44.600 | All goes back to the mission and purpose.

00:19:47.000 | Then I would go to the financials and I would say, "Where are we with regard to our financials?

00:19:51.840 | What income do we have?

00:19:52.880 | What assets do we have?"

00:19:53.880 | We'd take a look at a balance sheet and we'd create a balance sheet.

00:19:56.840 | Then I would say, "Where are we with regard to our cash flow, our income and our outgo?"

00:20:01.760 | That's where our cash flow statement works in.

00:20:04.720 | Search the archives for balance sheet and cash flow statement and you'll see how those

00:20:08.480 | things drive everything in the financial plan.

00:20:11.080 | So you start with the big picture and then you go to the line by line item analysis.

00:20:16.280 | You've got to have both the big picture and the line by line item analysis in order to

00:20:20.600 | do effective tax planning because tax planning is not one big thing.

00:20:26.160 | It's many, many little things applied in a specific local situation.

00:20:31.020 | If you're a corporate executive living in New York City paying in excess of 50% taxes

00:20:34.920 | and you find out that your mission statement, your purpose statement actually involves you

00:20:39.680 | rescuing Mustang ponies in Wyoming, you'd be a fool to continue paying 50% of your income

00:20:47.420 | in taxes when you can go and take $100,000 and buy yourself a ranch and start rescuing

00:20:53.000 | Mustang ponies in Wyoming in a state that has no income tax, no state income tax.

00:20:57.440 | You drop your total tax burden to under 10%.

00:21:01.560 | That would be the big win.

00:21:05.040 | But if on the other hand your mission is to transform New York City and bring it into

00:21:09.280 | a global leader as a city, well, sitting on your horse ranch in Wyoming isn't a very

00:21:14.680 | good way to do that.

00:21:17.740 | So first you make sure the big things are there by talking about mission, purpose, strategy.

00:21:21.720 | Then you go to the line by line item and whether you're running a horse ranch in Wyoming or

00:21:24.720 | whether you're running the city government in New York City, you go line by line through

00:21:28.760 | the budget, through the balance sheet and you make sure that you're approaching things

00:21:32.080 | efficiently.

00:21:33.480 | What happens though is people get these things wrong.

00:21:36.040 | I'm laboring on this point.

00:21:38.440 | Hopefully I'm not belaboring it, but I'm laboring on this point because this is what I see throughout

00:21:42.920 | the world that people get wrong.

00:21:45.160 | The basics of tax advice is start a 401(k).

00:21:48.480 | Well, a 401(k) might be a useful tool for you or it might not.

00:21:53.400 | I regret some of my 401(k) contributions at this point in my financial life because I

00:21:57.880 | wasn't clear enough on my mission and purpose and what I wanted my life to look like when

00:22:01.640 | I was making those contributions.

00:22:03.600 | And how many times have you seen this happen where somebody diligently labors to put money

00:22:08.120 | in their 401(k), then they decide they want to pursue another course of action and now

00:22:11.480 | they have no access to the money that's in their 401(k) because they took that deal of

00:22:15.640 | giving up access to it thinking that that was what they needed to do to reduce their

00:22:19.080 | taxes.

00:22:20.440 | In some circumstances it might have been much better for them just to put the money in a

00:22:23.280 | bank account, pay the tax now so that they could fulfill their larger purpose and their

00:22:27.520 | larger mission.

00:22:29.360 | We get these things wrong, we get them backwards by focusing first on the strategy and on the

00:22:34.480 | tactic instead of focusing first on the mission and on the purpose.

00:22:38.880 | The strategy and the tactic is important, but it must be subjugated to its proper place

00:22:45.560 | in our planning approach.

00:22:47.920 | If you're not clear on the mission, purpose, and vision for what you're trying to accomplish,

00:22:53.560 | you don't know whether you should build warships, airplanes, or intercontinental ballistic missiles

00:23:02.800 | or order a bunch of rifles for your soldiers.

00:23:08.080 | If you're fighting a global superpower and you want to have a way to destroy their major

00:23:13.640 | air base facilities, an intercontinental ballistic missile is a useful tool.

00:23:18.160 | If you're fighting a guerrilla warfare in the streets of a far-flung city, you need

00:23:22.320 | rifles and well-trained people, not intercontinental ballistic missiles.

00:23:25.760 | I'm mixing about a dozen metaphors in this show and I'm going to move on, but don't

00:23:31.560 | miss the point.

00:23:33.400 | Get clear on the big picture and then craft the plan to that.

00:23:38.920 | Don't start with this prescribed predetermined lifestyle that is marketed from the pages

00:23:43.960 | of every financial magazine, from the advertisement on every page of every media communication

00:23:49.680 | that you get.

00:23:51.480 | Create your own lifestyle.

00:23:52.760 | Choose it yourself based upon your personal mission, your personal values.

00:23:58.000 | Design it intentionally.

00:23:59.800 | That's the most efficient process for you to build a good tax plan.

00:24:06.720 | If you've got that message loud and clear, now let's dig into the specifics.

00:24:11.280 | So back to the analysis.

00:24:12.920 | We need to begin with some basic financial statements, balance sheet, cash flow statement,

00:24:18.120 | and then we need to do an analysis of where we are with regard to the total taxes paid

00:24:23.640 | over the previous – let's go with year, whatever the accounting period is that you're

00:24:27.160 | going to look at, but let's go with year.

00:24:29.160 | This will be where most couples – if you're helping somebody with tax planning or if you're

00:24:33.080 | doing it yourself, this will be where most people will absolutely fail because most people

00:24:38.000 | do not have any kind of financial records.

00:24:40.440 | They don't have any kind of transaction record.

00:24:42.760 | They don't have any ability or knowledge of what they're actually paying in taxes.

00:24:48.360 | You can get some of this info directly from the tax return.

00:24:52.040 | So a good place to start if you're doing this for yourself is learn how to read your tax

00:24:54.920 | return.

00:24:55.920 | Take a look through.

00:24:56.920 | They're not that complicated, especially for employees.

00:24:59.280 | Just go through and read it.

00:25:00.800 | What you want to do is you want to figure out how much total tax did I pay.

00:25:05.760 | Here you'll see the first reason why you need a complete cash flow statement.

00:25:09.960 | There are many kinds of taxes and federal income tax is only one type of tax.

00:25:16.220 | As my listener who asked the question astutely stated, there are other types of taxes including

00:25:20.960 | state income taxes, also including employment taxes.

00:25:26.120 | As an employee, employment taxes will be a major factor in your planning.

00:25:30.720 | Remember that the employment taxes that you pay as a W-2 employee, salaried employee,

00:25:35.720 | are going to be always 7.65% of the first $118,500 that you earn.

00:25:44.920 | So for the first $118,500 that you earn, you're going to pay $9,065 of employment taxes.

00:25:56.480 | That's what $118,500 is, the 2015 Social Security wage base.

00:26:02.120 | Then you're going to pay an additional 1.45% Medicare taxes on every dollar in excess of

00:26:07.880 | that and then you need to look to see if you're going to pay the additional Medicare, Obamacare

00:26:11.920 | taxes on investment earnings and it gets a little more – I'm sorry, more complicated

00:26:16.560 | but it's less apt.

00:26:17.560 | You do need to look through that.

00:26:19.640 | That may or may not be a big number for you.

00:26:22.880 | But for every again 120 grand, you're going to pay 9,000 bucks of employment taxes.

00:26:26.660 | You need to be aware of that and you need to factor that in.

00:26:30.440 | Here's where scale of income becomes a big deal.

00:26:34.040 | You've got to look and understand what is the scale of your income.

00:26:37.600 | What does high income actually mean?

00:26:39.640 | If you have $100,000 income, you can do a lot to save taxes with simple retirement accounts

00:26:45.360 | and deferral of income.

00:26:46.960 | If you have a million-dollar income, a 401(k) deferral is practically useless to you.

00:26:52.800 | Just consider that if you make a maximum 401(k) deferral amount in 2015 of $18,000, if you're

00:27:01.000 | earning $100,000 a year, that will allow you to save 18% of your income.

00:27:05.240 | That will be useful for you.

00:27:08.120 | If you're making a million dollars a year, then the 401(k) account will allow you to

00:27:12.840 | save 1.8% of your income.

00:27:16.360 | Not that big of a deal.

00:27:17.800 | So you've got to look to figure out what are my big taxes that I'm facing and what are

00:27:23.120 | going to be the strategies that are going to get me there, back to that $100,000 and

00:27:25.520 | million-dollar number.

00:27:26.960 | If you're making $100,000 a year, your federal income taxes are not going to be very, very

00:27:34.560 | substantial, especially as compared to things like your employment taxes.

00:27:40.940 | Your employment taxes are going to be a big, big number for you, 9,000 bucks-ish on $120,000.

00:27:47.240 | So that's going to be a big number, and it's going to be comparable in many ways to your

00:27:52.280 | federal income taxes that you're paying.

00:27:54.920 | If you're making a million bucks, then the employment taxes are going to be relatively

00:27:59.640 | insignificant.

00:28:02.280 | But the federal income taxes are going to be extremely significant.

00:28:07.080 | So you've got to always keep in mind that your scale here is a big deal.

00:28:11.080 | So that's why you look at your actual cash flow statement, and on that cash flow statement,

00:28:16.200 | you start with gross income, your total income prior to any taxation, and then you have a

00:28:22.200 | line item for every single category of expense and every single category of income.

00:28:29.320 | So you know where is your income coming from and what is every expense, including all of

00:28:35.480 | the different types of taxes that you're paying.

00:28:40.800 | Based upon which of those tax line items is the largest, and we'll keep it simple, employment

00:28:45.680 | taxes, federal income taxes, and state income taxes, that's going to adjust your strategy.

00:28:52.600 | But you also want to look at your other taxes, property taxes, sales taxes, miscellaneous

00:28:59.640 | consumption taxes, use taxes, et cetera, and figure out which of those is going to be the

00:29:04.280 | biggest deal to you.

00:29:07.120 | Most people simply will not either have the capacity or make the time to create good data,

00:29:13.280 | to create for themselves good statements.

00:29:15.160 | But if you have it, it should show you the big wins.

00:29:19.600 | Example, you're a dual-income, high-income earning household.

00:29:24.600 | This goes back to my listener's point about calculate the actual costs of working.

00:29:29.640 | Let's say that you're a dual-income, high-income earning household.

00:29:31.840 | One of you has a corporate job where you work in one office location.

00:29:37.200 | The other of you has a corporate job where you're on the road a lot, sales.

00:29:39.920 | I just was up in Asheville, North Carolina.

00:29:41.360 | I spoke with a bunch of sales people.

00:29:43.040 | That's a big financial hub – excuse me, not Asheville, Charlotte, North Carolina,

00:29:46.520 | big financial hub for sales guys.

00:29:49.740 | They spend most of their week on an airplane.

00:29:51.360 | It doesn't really matter where they live.

00:29:52.680 | They pick Charlotte because it's good cost of living and it has easy access through the

00:29:57.080 | airport.

00:29:58.640 | Now two households working, living in – or two – a couple, both people working, living

00:30:04.140 | in New Jersey.

00:30:05.380 | You can dicker around and get a child and dependent care tax credit if you qualify based

00:30:09.360 | upon the income limitations but your maximum tax credit here is $1,200.

00:30:13.480 | That's the most that you're going to be able to get for dependent and child care credit,

00:30:17.680 | $1,200.

00:30:18.720 | You might look down however and notice that you're paying $10,000 to $12,000 a year

00:30:23.920 | of property taxes to live in New Jersey.

00:30:27.000 | You realize that, well, if we just made a simple shift and moved from New Jersey to

00:30:32.360 | a state with lower property taxes, which is pretty easy to find, then all of a sudden

00:30:37.800 | we could kiss say $8,000 a year of these property taxes goodbye.

00:30:43.600 | If the employment situation works out where one of the spouse can negotiate a work from

00:30:47.200 | home scenario for a part-time pay, living in a different state and the other spouse

00:30:51.440 | is on an airplane anyway, you might find the big win.

00:30:55.120 | A lot easier to just simply change property taxes by changing states than it is to try

00:31:02.740 | to figure out how can I maximize my dependent care credit.

00:31:06.280 | If you're eligible for it, take it, but stay focused on the big wins first.

00:31:13.280 | When you start looking and saying, "Oh, my state income tax, I can change that and

00:31:17.160 | my property tax level," now all of a sudden you open up more wins for yourself.

00:31:26.120 | At this point of my knowledge and understanding of tax planning, I am convinced that the big

00:31:30.000 | wins of tax planning are all going to be major lifestyle changes and they're not going to

00:31:34.800 | be found in lists of deductions and credits.

00:31:37.040 | I'm going to give you a list of deductions and credits, but the big wins, I'm convinced

00:31:41.960 | they're not going to be there.

00:31:42.960 | I could be wrong.

00:31:43.960 | If you can prove me wrong, tell me.

00:31:45.520 | I've never really found somebody who does a good job and can say, "Look, here, Joshua,

00:31:50.080 | is your approach, so I've made this up from synthesizing information," but I'm convinced

00:31:54.400 | they're major lifestyle changes.

00:31:57.020 | By starting with the vision, mission, purpose, then focusing on the aggregate of all the

00:32:03.040 | different types of taxes, starting there, that's going to be the major wins before

00:32:08.480 | we get to the minor wins.

00:32:10.360 | Now, to keep this continued to be practical, with that as your backdrop, now let's dig

00:32:14.520 | into what can you actually do to lower income taxes.

00:32:18.360 | I'm going to stay focused on federal income taxes.

00:32:21.520 | The strategies for changing employment taxes are going to involve changing who you work

00:32:26.420 | for and how you work.

00:32:29.240 | That's a different show for another day.

00:32:31.400 | The strategies of state income taxes are going to involve a very small number of credits

00:32:36.280 | and changing states.

00:32:38.480 | That should be something you should seriously consider, but that's also a show for another

00:32:41.920 | day.

00:32:42.920 | Let's stay focused on federal income taxes.

00:32:43.920 | Let me give some examples of how we could approach this problem with the backdrop I've

00:32:48.120 | given you for young couples.

00:32:50.520 | Here's the stereotypical case study I'm going to use.

00:32:53.800 | Here's why I say that the basic situation, that the high-income, dual-income household

00:32:59.920 | is a disaster from a tax perspective.

00:33:02.920 | Pretend I have two attorneys that are married to each other.

00:33:05.080 | Each of them makes $150,000 a year as employees of a large law firm, so you've got $300,000

00:33:09.640 | of total gross income.

00:33:11.160 | Well, that kind of lifestyle for most people is going to lead to a certain consumption

00:33:16.800 | pattern.

00:33:17.800 | It would be an unusual attorney who would drive around a 1998 Toyota Corolla like I

00:33:22.840 | do.

00:33:23.840 | In general, if you're going to be an attorney, you need to maintain your image.

00:33:28.120 | You need to signal the proper amount of competence for your clients.

00:33:32.680 | That's going to involve your purchasing a BMW or a Mercedes.

00:33:37.280 | Can you avoid that?

00:33:39.240 | Well, I'm not sure I would because it is important.

00:33:43.640 | You have to market the appropriate thing.

00:33:45.880 | You have to put forth that, again, signaling.

00:33:48.440 | You have to signal how you want to be perceived, and you need to be perceived as successful

00:33:52.960 | in your career in order to attract clients, which is the way you make partner, where you

00:33:56.560 | go from $150,000 to $1.5 million per year, which is the basic function.

00:34:00.920 | But what that means is that early in your career, you are purchasing an expensive car.

00:34:05.680 | Let's say you find a good deal.

00:34:07.040 | You're still $20,000.

00:34:08.040 | Well, you're going to incur a sales tax on a $20,000 car, big sales tax.

00:34:12.480 | You're going to incur a depreciation, $20,000 car.

00:34:16.080 | This is about as conservative as I can conceive even with talking about a $20,000 car, but

00:34:20.680 | big depreciation, $20,000 car.

00:34:23.880 | First of all, all of these expenses are after-tax expenses.

00:34:29.240 | As an employee and as an employed attorney at a large law firm, you're going to have

00:34:35.180 | a minimal ability to deduct any personal transportation expenses.

00:34:40.020 | What else is associated with it?

00:34:41.020 | Well, you got to have a certain level of clothes.

00:34:42.720 | I mean, it's going to mean nice suits.

00:34:45.320 | Well, those clothes are entirely non-deductible.

00:34:47.720 | The only type of work clothes that are deductible are specialized work clothes that are needed

00:34:51.360 | for a specialized occupation.

00:34:53.160 | A nice suit for an attorney doesn't count.

00:34:56.160 | You're going to, based upon your social status as a working professional, you're going to

00:35:00.680 | be expected to live a certain lifestyle, which means you need a moderately fancy house or

00:35:05.280 | apartment or condo.

00:35:07.640 | Not much you can do there as far as say tax savings.

00:35:10.760 | You're going to be expected to engage in a certain lifestyle, drinks after hours, dinners

00:35:15.280 | out, a certain level of entertainment, most of which is going to be relatively expensive

00:35:19.800 | and all after taxes.

00:35:23.880 | As a junior, considering here a young couple just starting out, as a junior level attorney,

00:35:31.400 | you're not going to have a substantially padded expense account for you to easily be able

00:35:35.480 | to move that entertainment over and deal with that on the corporate credit card.

00:35:40.800 | So what you have here is you have a relatively high gross income with very few deductions

00:35:46.300 | and all of the income is going to be front loaded and most of your expenses are non-deductible.

00:35:51.240 | So you have heavy tax across the board and every one of your tax categories is heavy.

00:35:56.380 | You're paying high employment taxes because your income is salaried.

00:35:59.680 | You're paying high income taxes because you have a high household income.

00:36:03.400 | You have very few deductions that you can put against that.

00:36:06.220 | You have all of your income is structured as salary so you're not able to take advantage

00:36:10.840 | of any capital gains tax rates or dividend tax rates.

00:36:15.440 | This is the problem that employed dual income households face.

00:36:22.040 | Now I said the big wins are going to be major lifestyle changes, not just in lists of deduction

00:36:26.720 | and credits.

00:36:27.720 | Here would be the example.

00:36:28.720 | Compare that scenario to the million and next door as outlined in Tom Stanley's books.

00:36:33.580 | Let's assume that instead of being a young attorney, I decide I'm going to be a young

00:36:39.020 | house flipper.

00:36:40.020 | Well, all of a sudden I don't need to drive a BMW or Mercedes.

00:36:42.760 | I can drive a $6,000 or $8,000 Ford F-150.

00:36:46.480 | That Ford F-150 is going to be an important part of my business and so as part of that

00:36:51.440 | business now, it is either a depreciable asset or a deductible expense asset.

00:36:59.280 | So I can deduct the cost of it right off of my profit.

00:37:02.520 | Now I don't need to set up a high cost office in a class A office space.

00:37:06.160 | I can set up a home office.

00:37:08.040 | Because of the nature of my work, most of my driving now goes from instead of me commuting

00:37:12.260 | to my inner city attorney office, now most of my driving is going to have some business

00:37:17.560 | association to it.

00:37:19.360 | When I'm driving my pickup truck, I might be going to look at a house.

00:37:21.480 | I might be going to meet with a contractor.

00:37:22.800 | I might be going to deal with something like that.

00:37:24.720 | I can wear a pair of work boots and blue jeans which cost me $4 at the local Goodwill.

00:37:30.240 | I can live in a middle class type of neighborhood instead of having to live in the upper class

00:37:40.280 | posh neighborhood with all the fancy people because I'm not trying to get my neighbors

00:37:45.020 | as my clients and joining the local country club so I can meet prospective legal clients.

00:37:49.240 | Rather, I'm simply trying to find people who need to rent houses and I can have the most

00:37:53.020 | comfortable house in my lower middle class or middle class neighborhood instead of having

00:37:57.260 | the aspirational house in my aspirational neighborhood.

00:38:01.060 | Because I wear blue jeans and drive an F-150, I can enjoy a Friday night out at the local

00:38:06.020 | high school football game with a $6 beer and a $4 hot dog instead of having to go out to

00:38:11.540 | the fancy country club.

00:38:13.620 | So even if I made the same net, let's say that I grossed $150,000, even the structure

00:38:19.660 | of my company where I can – the structure that I can put in place with my simple house

00:38:23.760 | flipping company is going to be much more advantageous from the structure of my income

00:38:29.420 | versus the W-2 attorney income.

00:38:33.260 | So even if I just grossed the same amount, $150,000 from a legal job as a junior attorney

00:38:40.140 | or $150,000 as a house flipper, there's going to be a dramatic difference in lifestyle

00:38:45.180 | and taxes based upon that.

00:38:46.740 | That's why I talk about the big wins going to be major lifestyle changes.

00:38:50.300 | I hope that's helpful.

00:38:53.260 | Next, let's go on to applying those strategies and the order of the show in case it's unclear,

00:38:58.780 | focusing on the things that have the biggest impact first.

00:39:01.700 | Now we're moving on to the things that are going to have the medium impact and we'll

00:39:04.300 | finish with the list of credits and deductions that are going to have the least impact rather

00:39:08.420 | than starting with all the noise of credits and deductions, blah, blah, blah, that has

00:39:11.900 | a small impact.

00:39:13.460 | So medium impact, let's apply these timing strategies, shifting strategies and conversion

00:39:18.260 | strategies to employees.

00:39:22.180 | How could we implement this?

00:39:23.620 | Well, first, timing strategies.

00:39:25.760 | Any kind of timing where we are either deferring or accelerating taxable income or deferring

00:39:30.940 | or accelerating tax deductions in order to take advantage of the lowest tax rates.

00:39:38.340 | With regard to your income, one of the things that you should think very carefully about

00:39:41.700 | is when do we want to actually recognize the income?

00:39:46.380 | This start with 401Ks.

00:39:47.940 | 401K, major place to start.

00:39:50.300 | I can put $18,000 in a 401K.

00:39:52.900 | What you're doing is you're deferring the recognition of the $18,000 of income from

00:39:57.180 | today to a future date and the only reason that you would do this is if you expect to

00:40:02.580 | be in a lower tax bracket in the future at retirement than you do today.

00:40:08.220 | Probably that's a reasonable expectation.

00:40:10.980 | Now could you do that with a heavy focus early in your career?

00:40:18.420 | What most people aren't doing if they're early in their career as employees is focusing first

00:40:24.340 | on savings.

00:40:25.340 | Most people are focusing first on getting their consumption established.

00:40:28.700 | Back to my stereotypical dual attorneys in a household as a simple example.

00:40:33.580 | Both of them, we're going to get our cars.

00:40:34.580 | We're out of college now.

00:40:35.980 | We're tired of being broke students.

00:40:37.260 | We're going to get our house set up.

00:40:38.260 | We're going to get our cars set up.

00:40:39.740 | We're going to get all of our things set up.

00:40:41.940 | We're going to have our fancy vacations.

00:40:44.020 | What most of those people are doing is they start by focusing on the lifestyle expenditures

00:40:51.620 | and they don't focus first on the savings and investments.

00:40:57.740 | What often ends up happening is kids come along and after a while when kids come along,

00:41:02.860 | one of the spouses will switch to either part-time or switch to staying at home.

00:41:07.460 | This is often what happens.

00:41:08.940 | Even if both spouses don't switch to doing that, there are going to be other expenses

00:41:12.600 | and because you start to have kids, there might be some deductions that are associated

00:41:16.860 | with that.

00:41:17.860 | What I would love to see people do is substantially reduce their income in the early years by

00:41:23.620 | investing the maximum in the 401(k) and then as their kids come along and perhaps they

00:41:28.100 | pull back a little bit from the career track, perhaps they have child credits and things

00:41:33.440 | like that that are slightly helpful, then go ahead and pull back on the 401(k) contributions

00:41:39.500 | and save less in the 401(k).

00:41:42.860 | That could be a timing strategy.

00:41:44.860 | Front load your retirement plan contributions.

00:41:48.900 | If you have – back to the big picture vision, if you don't always intend to be employees

00:41:54.100 | and most people don't always intend to be employees, usually in most families that I've

00:41:59.060 | worked with, there's some kind of self-employment career transition that people want to do,

00:42:04.500 | do that early.

00:42:05.500 | So instead of both people trying to work in full-time jobs where now you're paying high

00:42:11.320 | marginal tax rates on the top levels of income and then at some point in time, we're going

00:42:15.820 | to have kids and now mom or dad is going to transition to the next job, building the business

00:42:20.580 | that can be the part-time business from home, switching from being the employed attorney

00:42:24.180 | to being the self-employed attorney, why don't you do that early?

00:42:28.860 | Take that lower income that it requires to set up a business earlier in life when the

00:42:35.420 | marginal tax rate is the highest and adjust the timing and bring that reduction of income

00:42:39.300 | forward instead of trying to do it when you got a two-year-old in the house and you're

00:42:43.100 | going to have lower tax rates because of that transition.

00:42:47.360 | So use those high-earning years and think like a family unit instead of as business

00:42:52.340 | partners.

00:42:54.620 | When you don't have many deductions to use, renting an apartment perhaps, you don't have

00:42:58.500 | mortgage interest deductions, things like that, why not just keep your income low and

00:43:02.540 | your expenses low and build the business then?

00:43:06.340 | You can do the same thing with your investments even if you're not using retirement plans

00:43:10.380 | and even if you're not investing in business.

00:43:12.500 | If you're going to invest in something that's going to require capital expenditure, do that

00:43:16.100 | early so that you can use your upfront depreciation expenses which are going to be higher in the

00:43:20.700 | beginning stages to offset some of your higher earned income.

00:43:26.660 | This is back to the strategy that my listener mentioned of real estate.

00:43:30.060 | One of the major advantages of real estate is you can enjoy the higher upfront depreciation

00:43:34.740 | and that depreciation can count against your income from the investment and also potentially

00:43:40.420 | against the income from your job.

00:43:42.520 | So do that early.

00:43:43.620 | Buy those investments early using that upfront depreciation to offset the high income so

00:43:48.580 | that over time you can pivot and instead of needing to live on the high income, you can

00:43:52.180 | live off of the – your high earned income.

00:43:54.460 | You can live off the income from your investments.

00:43:58.260 | Working a high income job can be an awesome strategy.

00:44:01.500 | That young attorney can – those young attorneys can do a really amazing job with that $300,000

00:44:07.780 | income and if they just switch from buying BMWs, fancy aspirational middle class – upper

00:44:13.620 | middle class housing, all of the fancy deals and they focus on buying investments and all

00:44:19.380 | of a sudden you take five years of focused effort and they come out the other end with

00:44:23.500 | five to ten rental houses, that's going to make a massive difference in their overall

00:44:30.100 | lifetime wealth as compared to the kind of scuzzy looking vehicles, worn out suits, et

00:44:37.100 | cetera.

00:44:38.100 | Now obviously you got to figure out a way to meet the minimum requirements and that's

00:44:40.780 | up to you.

00:44:41.940 | But as a concept, that can be a useful scenario.

00:44:46.980 | Timing of your expenses or your deductible incomes, obviously we talked about funding

00:44:50.540 | the retirement accounts early.

00:44:52.980 | From a tax perspective, rather see those retirement accounts funded to the max from an early perspective

00:44:58.860 | if you're going to use retirement accounts.

00:45:01.060 | Consider funding all of the accounts that you have.

00:45:02.900 | Can you fund five to nine plans early when you can take the deductions if you're going

00:45:06.100 | to use five to nine plans, if you're going to be able to get a deduction on your state

00:45:09.020 | income taxes?

00:45:10.600 | Can you fund your health savings accounts?

00:45:13.260 | Fund those early.

00:45:15.380 | Maximize all of your expenses and deductions.

00:45:18.300 | As an employee, most of your deductions are going to be the freebies, the retirement plans

00:45:23.480 | and things like that.

00:45:24.820 | Those all have problems associated with them.

00:45:26.500 | They're locking up the money.

00:45:27.500 | That's a show for another day.

00:45:28.980 | There aren't many deductions that you can really, really capitalize on.

00:45:33.300 | That's what's so limiting about being an employee as compared to a business owner.

00:45:37.780 | Shifting strategies.

00:45:39.280 | Shifting strategies always involve how can we shift income from a high-rate taxpayer

00:45:43.780 | to a low-rate taxpayer.

00:45:46.500 | Here there's not much you can do as an employee.

00:45:49.980 | You can't assign the income from your job to your eight-year-old daughter.

00:45:55.500 | That's not going to work.

00:45:58.020 | You could focus on the state that you live in.

00:46:03.500 | That's a big deal.

00:46:04.500 | That would be one way of shifting from one high-tax-rate jurisdiction to a low-tax-rate

00:46:08.820 | jurisdiction.

00:46:10.340 | This would be especially useful to you if you live on an airplane or if you work remotely

00:46:13.980 | or if your company has multiple locations.

00:46:16.820 | Sometimes this could be an easier type of transfer to make.

00:46:20.940 | Shift from the high-tax-rate state to the low-tax-rate state.

00:46:23.780 | Look for that.

00:46:24.780 | Shift from the high-tax-rate county to the low-tax-rate county.

00:46:27.020 | On expenses, you just want to look to see are there any expenses that you can shift

00:46:30.500 | from personal expenses over to the company.

00:46:33.340 | Simple examples come to mind here.

00:46:35.220 | Phone.

00:46:36.220 | Do you pay for a personal phone and you have business on it or does your employer pay for

00:46:39.980 | it?

00:46:41.100 | The IRS is pretty loose with simple things like an iPhone, iPhones, iPads, things like

00:46:45.300 | that.

00:46:46.300 | So get your employer at least to pay for that phone so that you don't have to pay for it

00:46:50.780 | completely yourself.

00:46:52.580 | Is that going to make a big difference if you're making $300,000 a year?

00:46:55.660 | No.

00:46:56.660 | But again, tax planning is all about little things, as many little things as possible.

00:47:00.520 | Can you arrange and negotiate a company car, sales reps, things like that?

00:47:03.920 | That company car, if you're in a service business, even if you're an employee, that company car

00:47:07.980 | can be a big benefit for you.

00:47:10.220 | Your employer by law is required to track your personal use and your business use and

00:47:14.500 | to disallow any deductions for any personal use.

00:47:17.900 | But still, many businesses can be arranged in such a way that you are traveling from

00:47:22.780 | your home to the job site and therefore the business car is part of your business use.

00:47:28.020 | So look for any way to shift any personal expenses from your bank account over to the

00:47:33.140 | company's bank account.

00:47:34.740 | Finally, conversion strategies.

00:47:36.980 | Conversion strategies is all about where we can try to convert income from a high tax

00:47:40.260 | rate activity to a low tax rate activity.

00:47:42.900 | First thing is can you convert from salary into ownership?

00:47:46.220 | Can you participate in some sort of bonus program, stock option program, executive compensation

00:47:50.660 | program?

00:47:51.660 | And rather than recognizing your salary immediately, can you start to transition to the ownership

00:47:56.820 | perspective?

00:47:57.940 | That's going to be a big savings.

00:48:00.500 | For your expenses, can you switch out some of your expenses and possibly transfer anything

00:48:05.300 | over to the company checkbook?

00:48:08.180 | For example, if you like to go out to fancy dinners, then go ahead and sign up to be part

00:48:13.540 | of the client entertainment team.

00:48:15.380 | And do your fancy dinners out with clients.

00:48:17.620 | You can take your spouse along if your client's spouses are present.

00:48:20.060 | The IRS rules on that are that if your spouse's attendance is necessary in order to be appropriate

00:48:28.300 | for the situation because the people that you're entertaining for a business purpose

00:48:31.220 | also have their spouses along, then that's an okay scenario.

00:48:33.820 | If not, you would need to pay for your spouse out of pocket and that would be a disallowed

00:48:37.700 | business expense.

00:48:39.380 | But can you just switch some of your entertainment over and turn it from personal entertainment

00:48:43.580 | into business entertainment?

00:48:46.060 | Why not do the fancy dinners out?

00:48:47.940 | Why not do the baseball games with clients?

00:48:49.740 | Things like that.

00:48:50.740 | It can be perfectly enjoyable, can help you to move it over to your expense account.

00:48:55.540 | Make sure you get all the little ones.

00:48:57.280 | Take all the tax-free money you can get.

00:48:58.780 | Take the tax-free airline points.

00:49:00.620 | Take the tax-free airline miles.

00:49:01.940 | All of those types of things are a big deal.

00:49:04.380 | If you're paid a per diem allowance on business travel, underspend your per diem.

00:49:09.660 | That can be tax-free money that flows into your pocket.

00:49:12.660 | You should just look for whatever is appropriate to your situation.

00:49:17.620 | Now let's go through some specific employee benefits, deductions, credits, things like

00:49:22.420 | that.

00:49:23.420 | Always look for all the tax-free money that you can get.

00:49:25.300 | So for example, maximize the tax-free health insurance premiums that your company is paying

00:49:30.500 | for you.

00:49:31.500 | Get your $50,000 of group term life insurance premium for the company.

00:49:35.340 | That's tax-free money.

00:49:37.540 | Get any kind of health plans that you can that are going to be a benefit to you.

00:49:43.660 | Look for the tax-free merchandise that's distributed to the employer.

00:49:48.560 | Make sure that you carefully track all of the appropriate expenses of your employer.

00:49:54.580 | Simple one, make sure you get your cab fares tracked.

00:49:57.020 | Make sure that you get your supper money.

00:49:59.640 | If you can arrange to work as an employee – if you can arrange to work from 11 AM

00:50:05.280 | to 7 PM instead of 9 AM to 5 PM and your employer agrees to pay you supper money because of

00:50:13.620 | your work hours, then those otherwise personal supper expenses are converted into non-taxable

00:50:20.400 | income.

00:50:21.400 | Simple change could be something that could accumulate over time.

00:50:24.640 | Again, make sure you get all those benefits that you can with personal phones, computers,

00:50:29.600 | etc.

00:50:31.240 | Take advantage of any meals and lodgings that your employer provides.

00:50:35.840 | If your employer provides, for example, lunch on the premises so that they minimize the

00:50:41.400 | time that employees are away, that's a non-taxable fringe benefit.

00:50:45.480 | If your employer doesn't do that, consider investigating that and asking them to do it.

00:50:51.060 | You have to make sure that it's done for the convenience of the employer so it follows

00:50:54.000 | the rules but that can be a substantial win.

00:50:57.240 | So maybe you can start a corporate program like that and that could be substantial.

00:51:02.040 | How substantial?

00:51:03.040 | Well, consider this as an example.

00:51:04.600 | I'll do some math here to show you what I mean.

00:51:06.900 | Little things add up.

00:51:07.900 | Let's assume that you're in the habit of spending $15 a day for lunch, eating out

00:51:12.220 | each day on personal expenses.

00:51:13.800 | Ignore the concept of brown bagging for less.

00:51:16.720 | Just assume you're in the habit of doing this, going out every day with your coworkers.

00:51:19.800 | Well, $15 per lunch per day times – let's use 220 days of work.

00:51:25.520 | That comes out to be $3,300 per year that you're spending on lunches.

00:51:32.320 | Because you're going out with coworkers and you're just simply going out for personal

00:51:35.880 | lunches, you have to pay for those lunch expenditures with after-tax dollars.

00:51:41.600 | So that means if you're in a 40% tax bracket with that higher income, take 3,300, divide

00:51:46.640 | that up by 0.6 and you wind up with $5,500.

00:51:50.280 | You have to earn $5,500 just to pay for your lunches out every day.

00:51:56.080 | Now assume you go to your employer and you ask your employer to go ahead and institute

00:51:59.800 | some sort of employee lunch program where for the convenience of your employer, your

00:52:03.880 | employer serves lunch to all the employees every day.

00:52:06.240 | That's a valuable fringe benefit which can be fully deductible to the employer and allows

00:52:10.840 | you to save the $15 a day.

00:52:14.400 | That's $5,500 that you don't have to earn to put towards that.

00:52:19.880 | Simple, small, but actually powerful in the aggregate.

00:52:25.840 | You could apply the same thing to coffee.

00:52:27.440 | A lot of people want to have a fancy coffee.

00:52:30.600 | Well, a couple of dollars a day for a fancy coffee.

00:52:33.800 | What about going to your employer and asking them to install the equipment for a coffee

00:52:38.160 | bar for the employees?

00:52:39.440 | Even if you don't have a barista, what about just getting the equipment?

00:52:42.960 | Many employers might be willing to spend a few thousand dollars on fancy equipment.

00:52:46.040 | You go ahead and get fancy equipment.

00:52:47.040 | Now you can have fancy coffee and ask your employer or negotiate if you're in a leadership

00:52:52.120 | position.

00:52:53.120 | Arrange for a beautiful break place, a nice little outdoor patio seating where employees

00:52:57.220 | can go and have fancy coffee together.

00:52:59.460 | That's a material benefit which allows you to minimize your expenditures that are after

00:53:04.560 | taxes and move them over even as an employee to the business balance sheet.

00:53:12.880 | Get creative with that.

00:53:14.760 | Make sure you maximize any type of flexible spending accounts or cafeteria plans that

00:53:20.160 | are established.

00:53:22.400 | Perhaps you can encourage and persuade your employer to establish a dependent care assistance

00:53:26.480 | program.

00:53:28.120 | The benefits received under that type of program can be substantial to you.

00:53:34.840 | Maximize your employer educational assistance opportunities.

00:53:37.800 | If they provide for you any type of tuition payment, things like that, that can be extremely

00:53:43.880 | valuable.

00:53:45.840 | Shop for employers carefully based upon that if nothing else.

00:53:49.360 | Simple example, if you wanted to be an attorney, continue to pick on my attorneys, maybe you

00:53:54.240 | get a job at a law firm that provides reimbursement for law school expenses and you get a job

00:54:00.120 | there as a paralegal and you work through and you take advantage of their program.

00:54:04.240 | That would be a deductible expense for the employer and that's tax-free money for you,

00:54:12.440 | the employee.

00:54:13.440 | So if many of your compatriots have to earn – let's say law school costs $100,000.

00:54:18.960 | If many other people have to earn money at a 40% tax rate, so $100,000 divided by 0.6

00:54:25.640 | would be $166,000.

00:54:27.840 | So your friends have to earn $166,000 to get the $100,000 out that they can then use to

00:54:33.720 | pay for school and you can get that as a tax-free benefit by working for a firm as a paralegal

00:54:40.600 | and then allowing that firm to pay for law school.

00:54:44.000 | That could be a useful thing for you to be involved with.

00:54:49.000 | Maximize any of your employee awards programs.

00:54:51.760 | Get the gold watch, get the pen, set up those programs as part of your employer so that

00:54:57.000 | they can benefit you.

00:54:59.280 | Try to take advantage of any scholarships or awards that you can find.

00:55:03.520 | Take advantage of any other fringe benefits that your employer provides.

00:55:06.920 | For example, sometimes you might be able to find a system where your employer will move

00:55:12.080 | you and will pay a moving allowance as part of your contract.

00:55:15.920 | Well, if you can negotiate that moving allowance and also involve that as something where you

00:55:21.800 | are purchasing real estate, you could theoretically put together a couple of those things to create

00:55:28.080 | tax-free income for yourself.

00:55:30.880 | If your moving allowance offsets some of the costs of your moving and you take advantage

00:55:37.560 | of the Section 121 tax-free income from the sale of your house, you might be able to put

00:55:44.440 | those together to enrich yourself.

00:55:47.960 | If you need to drive to work, put together a carpool association with some of your coworkers.

00:55:53.600 | Award them money, those carpool receipts coming to you are tax-free income.

00:55:59.540 | As you can see, most of these ideas are things that will involve – many of these ideas

00:56:05.180 | are things that will involve negotiation with your employer.

00:56:09.080 | Something as simple as this.

00:56:10.080 | Let's say that you travel a lot for business and whenever you travel for business, you

00:56:13.960 | have to – again, two spouses, husband travels – husband is the one who works at a job

00:56:21.200 | that doesn't involve travel.

00:56:22.200 | The wife is traveling for business.

00:56:24.280 | Husband's job involves a long commute.

00:56:25.920 | So what happens is the wife's job involves a short commute and so she is able to take

00:56:31.300 | care of the dogs when she's home.

00:56:33.340 | But the husband's job has a long commute.

00:56:34.940 | So on the times when the wife is out traveling, that means that she has to put the dogs in

00:56:39.920 | the kennel because – during the day and pay for doggy daycare.

00:56:43.360 | So doggy daycare rates in your area are a total of 20 bucks, 20 bucks per day.

00:56:49.800 | This happens a total of 40 days per year.

00:56:51.920 | 40 times 20 equals $800 per year that you spend in doggy daycare.

00:56:56.800 | So you're going through that cash flow statement and you're asking yourself, "Is there a

00:56:59.760 | way that I could change this expense from a taxable expense and shift it over to a non-taxable

00:57:06.800 | expense?"

00:57:07.800 | Well, you look at that and you say that's $800 we're spending and the reason we're

00:57:12.160 | spending it is because it is part of the travel expenditures.

00:57:16.120 | Well, it's not going to work to get your employer necessarily to pay you extra for

00:57:20.760 | the doggy daycare, although check it out.

00:57:22.720 | But maybe you could convince your husband at his company to lobby for a dog-friendly

00:57:27.760 | work environment so that he can just simply take the dog with him to work.

00:57:31.640 | Well, $800 that otherwise was an after-tax expenditure that meant that you had to earn

00:57:40.720 | $1,333 pre-taxes at a 40% aggregate rate to pay for that expense.

00:57:48.240 | Well, just simply him going in and asking to change the company into a dog-friendly

00:57:54.640 | environment where he can take the dog to work is going to make a big, big difference.

00:57:57.880 | That's $1,333 that you don't have to earn in order to cover that expense.

00:58:04.240 | Now you can go through more and more lists of all the deductions, the above-the-line

00:58:09.320 | deductions, below-the-line deductions, your child and dependent care tax credits, moving

00:58:15.160 | expenses.

00:58:16.160 | You can go through the list of those.

00:58:17.160 | But from here, all of those deductions are all going to be equally applicable to business

00:58:21.520 | owners or employees.

00:58:24.560 | Hopefully you see at least the process that you can apply to personal tax planning.

00:58:30.560 | It's a lot, but it's also just a system of little things.

00:58:34.200 | But I'm going to close with reiterating the thing that my listener mentioned even

00:58:38.960 | in the comment.

00:58:40.280 | Well, two things actually that my listener mentioned even in the comment.

00:58:44.360 | Number one, you heard me at the beginning when reading his email talk about calculating

00:58:49.380 | is it worth it for the second spouse to work.

00:58:52.320 | I would challenge you, any of you listening, whether you're married, whether you're

00:58:56.880 | not, whether there's one income, whether there's multiple incomes, go through the

00:59:02.200 | income calculations and figure out the true income per hour and figure out what it actually

00:59:08.640 | costs you to work.

00:59:12.280 | If you compare the expenditures that I went through as an example with my attorney example,

00:59:19.800 | the young aggressive attorneys working through these things, if you were to go through those

00:59:24.600 | lists of expenses of what it actually costs to be a young attorney and all of those lifestyle

00:59:30.240 | expenses associated with it, the long hours, the billable hours, things like that, you

00:59:35.040 | would find that the actual rate per hour, if you take the gross income, pull out the

00:59:40.560 | costs of working, the costs of lunches, the costs of the BMW, etc.

00:59:44.740 | If you pull out the rate per hour, it's actually much lower than it seems at first

00:59:49.440 | glance.

00:59:51.420 | Many of you listening would love that lifestyle.

00:59:53.080 | For me, I would hate it.

00:59:54.080 | I'd rather do what I'm doing now, which is work in a pair of shorts and a t-shirt

00:59:57.380 | every day and drive a $500 car because I enjoy this type of lifestyle much more than

01:00:04.160 | I would enjoy the other.

01:00:05.160 | It's a free world, sort of.

01:00:06.760 | You do what you want.

01:00:08.620 | But recognize the costs and if you run those calculations and you actually sit down and

01:00:13.060 | figure out what is the incremental tax rate, you might find the opportunity to do something

01:00:17.720 | different.

01:00:18.720 | I'm going to read here in closing one of my favorite emails that I've ever gotten

01:00:21.800 | from a listener of the show.

01:00:24.000 | This email says this, "I've been meaning to tell you, Joshua, about some exciting

01:00:27.820 | changes in our family, much due to the inspiration from your show.

01:00:31.640 | After the inspiration to track expenses, cash flow, taxes, etc., and after reading the book

01:00:36.220 | you recommended, How to Pay Zero Taxes, I realized that my wife did not need to be working.

01:00:41.020 | She put in her notice one month ago and will begin as a stay-at-home mom on Monday.

01:00:44.820 | She's thrilled.

01:00:46.020 | Through tax savings credits and reductions in income-based payments to student loans,

01:00:50.220 | I discovered nearly $30,000 in savings right away for her not working.

01:00:55.580 | In addition, we can enjoy more home cooking, slow living, and hopefully less stressful

01:00:59.180 | purchasing.

01:01:00.360 | Some example savings.

01:01:01.620 | Previous work expenses were $5,000 per year of the cost of actually working.

01:01:05.980 | Pay as you earn student loan payments, $6,000.

01:01:08.620 | Taxes, $7,000.

01:01:09.940 | Savers credit, we now can get an additional $2,000 tax credit because of the lower income.

01:01:14.980 | And an IRA contribution for both of us saves us $3,000 of additional tax.

01:01:19.940 | Long story short, I discovered savings of nearly $30,000 for her not working.

01:01:25.140 | Now instead of three hours of getting the family ready, sitting in traffic and getting

01:01:28.260 | to work late, I can wake up at 5 a.m., get on the express bus and be at work by 6 a.m.,

01:01:33.220 | getting home much earlier, all while they sleep in, have a casual breakfast, and enjoy

01:01:37.220 | life.

01:01:38.220 | Thank you for the inspiration and your shows on stay-at-home parenting.

01:01:41.100 | It's made a great difference in our lives."

01:01:43.260 | That is one of my favorite emails that I've ever gotten from the show because I see this

01:01:48.980 | as a very doable thing for many people.

01:01:53.500 | The reason that I close with this email is to demonstrate to you that the major savings

01:01:57.980 | and the major lifestyle improvements are not found on a list of IRS Form 1040 deductions

01:02:03.740 | and credits.

01:02:05.500 | I hammered that point home throughout this show by starting with the things that are

01:02:10.220 | most impactful, moving to less impactful, and moving to least impactful, which are deductions

01:02:14.220 | and credits.

01:02:16.220 | In short, consider your lifestyle.

01:02:19.900 | The modern U.S. American lifestyle for many people, especially many people in this situation,

01:02:26.540 | flat out sucks.

01:02:28.140 | I think it's well characterized by that Facebook meme that goes around of a picture of massive

01:02:35.820 | gridlock on the highway.

01:02:39.300 | I'm sitting in a car that I don't own on my way to...

01:02:41.860 | I'm sitting in traffic in a car that I don't own, driving on my way to work at a job that

01:02:46.100 | I don't like, to pay for a house that I don't get to live in because I'm sitting in this

01:02:50.580 | car in traffic on the highway going along the way.

01:02:54.780 | I got to do this so that I can pay for...

01:02:57.180 | You bring it into dual income households and you say, "I've got to do this so that my spouse

01:03:01.540 | can be doing the same thing.

01:03:02.660 | We've got to get up early to take our kids to daycare so that we can pay with after-tax

01:03:06.300 | money someone else to take care of our kids, or so that we can pay our property taxes so

01:03:10.580 | that we can hire people to babysit our kids."

01:03:13.980 | It sucks.

01:03:14.980 | The lifestyle sucks.

01:03:16.740 | Whoever sold us a bill of goods that you should determine your self-worth based upon the amount

01:03:22.100 | of your income as measured in dollars, sorry, I don't buy it anymore.

01:03:27.900 | The whole concept of work, work, work, work, work so that you can spend, spend, spend,

01:03:31.300 | spend, spend so that you can save a little bit of money so hopefully someday maybe you'll

01:03:34.340 | be able to retire and play golf every day is stupid.

01:03:41.020 | I'm not playing that game.

01:03:42.580 | Now it's not either or.

01:03:43.740 | It's not you got to be broke and poor and make $10,000 a year just so you can be happy.

01:03:47.980 | I fully intend to make millions of dollars a year.

01:03:50.820 | That's the plan.

01:03:51.820 | I got the business plan for it.

01:03:54.380 | But that business plan is built out of mission, purpose, values, what I started with the show,

01:04:01.220 | and then it's built on lifestyle, and then it goes finally to tactics.

01:04:06.940 | If you're in the right place so that you're able to actually make these things happen,

01:04:11.740 | go for it.

01:04:13.140 | But consider as you're looking at saving taxes, is it really worth it?

01:04:18.100 | Should I make some big change or should I make the little changes and then do both of

01:04:21.500 | them?

01:04:22.980 | That would be how I would answer the question.

01:04:25.700 | Hope this content is useful to you.

01:04:26.980 | I felt a little bit off of my game and a little bit off my timing.

01:04:31.540 | I think I've done so many interview shows lately it's been tough for me to get back

01:04:34.920 | on my timing but I'm working on it.

01:04:36.820 | So if this show is a little bit flat, let me know.

01:04:39.900 | I am working on it.

01:04:40.900 | A couple of things as we go, a couple of announcements.

01:04:44.260 | Number one, that email that I received from that listener, if Radical Personal Finance

01:04:49.140 | has helped you, would you do me a favor and just email me and let me know?

01:04:51.900 | It's so helpful and it's especially helpful.

01:04:53.940 | I am launching the details of the coaching program that I'm starting, personal coaching.

01:04:59.540 | I'll go over that on a future day.

01:05:01.180 | But I'd really love to have more emails like that to just simply share with people as part

01:05:05.420 | of testimonials that I can show.

01:05:07.700 | I will clear your name from it.

01:05:11.380 | I'll redact your name so that it's private or something like that.

01:05:14.820 | But if you're okay with my sharing your name, that would be helpful too.

01:05:18.120 | But I'd love to get some emails from you guys.

01:05:19.660 | Joshua@radicalpersonalfinance.com if any of the content on the show has been helpful.

01:05:23.220 | Or of course you can leave the iTunes reviews.

01:05:24.980 | Those are super useful and helpful as well.

01:05:27.940 | Remember that if you are a patron of the show on Thursday, what did I say?

01:05:32.020 | At one o'clock.

01:05:33.020 | Where's my calendar?

01:05:34.020 | Yeah.

01:05:35.020 | At one o'clock Eastern, there is a conference call for all patrons of the show.

01:05:38.460 | I have two hours blocked on my calendar.

01:05:40.220 | I intend to answer as many questions as possible and have a conference call.

01:05:44.260 | You can dial into that.

01:05:45.260 | There's no video feed.

01:05:46.260 | I've cut out the video feed because the video feed was just a pain.

01:05:48.820 | So we're just going to do this with phone calls and actually get it done quickly.

01:05:52.320 | And also remember for the next eight weeks, I am doing Q&A each week for patrons of the

01:05:58.500 | show at $10 and up.

01:05:59.640 | So feel free to go to radicalpersonalfinance.com/patron and sign up to support the show there.

01:06:06.520 | Also make sure to remember our sponsors of the day, Paladin Registry and YNAB.

01:06:09.560 | If you need a financial advisor, start by going to radicalpersonalfinance.com/paladin.

01:06:13.960 | Interview the advisors there.

01:06:15.240 | See if anything is good for you.

01:06:17.240 | I don't get paid based upon your choosing any of those advisors.

01:06:19.760 | I get paid based upon your interviewing those advisors.

01:06:23.800 | So no harm, no foul.

01:06:25.080 | Feel free not to choose them.

01:06:26.560 | And if you have gone through that process, please give me feedback.

01:06:29.880 | Also budgeting software, go to radicalpersonalfinance.com/ynab.

01:06:33.080 | If you're not using You Need a Budget, YNAB, then check it out.

01:06:37.040 | Try it.

01:06:38.040 | Free 30-day trial at radicalpersonalfinance.com/ynab and see if it can be useful to you.

01:06:43.240 | Peace out, y'all.

01:06:44.240 | Be back soon.

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01:07:18.120 | (upbeat music)

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