056 - Do This Before Filing Your Taxes

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Tax day is coming and you can't hide or run from it. So what are you going to do before that time comes? Well, there's some things that you can still do to make sure that the big bad tax man doesn't get more than their fair share. All right, we're going to go ahead and pay the right amount of tax, but we ain't leaving a tip. In this episode of the Affluent entrepreneurship, I'm going to talk about a couple things that you need to focus on that to protect yourself from that, and I'll see you in the episode. This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, scale your life while creating a deeper impact than living with complete freedom, because that's what it really means to be an affluent entrepreneur.

All right, welcome to this episode of the affluent entrepreneur show. All right, we're going to talk about something that people really don't like talking about. It's like going to a dentist for a root canal. We're going to talk about taxes. We're going to talk about how do you protect yourself from paying too much in taxes. I mean, the fact of the matter is that the taxman is lurking to take a percentage of all of your hard earned income. Here's the thing. I am totally cool with us paying the appropriate amount of tax. I am not cool with overpaying. I am not cool with giving them more than what they deserve. So there are still some things that you can do before tax filing day to position yourself properly for taxes while setting yourself up for this year to come out ahead. So what we want to do is kind of walk through it. I'm going to talk about some of the Things that you need to be aware of. And I'm going to talk about some specific things to consider that are still open to you as we move forward towards the tax deadline. And I'm going to give you kind of a rundown of how the tax system works, because that also impacts what we want to do. Now here's the thing. Like I said, we have to pay our appropriate amount. I do not want to overpay, and we don't want to get overly aggressive, and we don't want to do things that are going to get us in trouble. Let me tell you about someone you might know, okay? You may have heard about this, but Wesley Snipes, I don't know if you know that Wesley Snipes did jail time. He did jail time for tax evasion. Now here's what happened. Wesley made a fair amount of money back when he was doing a lot of movies, and he found a guy by the name of Eddie Khan. Okay? That should have been his first hint, okay? With a last name like Khan. Now, Khan actually served jail time for tax evasion in the 80s. And here he is coming back out and he convinced Wesley to take a position to save millions of dollars in taxes, I mean like $14 million in taxes, by amending a tax return and saying that he's filing. Now when you, when you sign your tax return, you're saying you're filing it under penalty. You're signing it under penalty of perjury. Basically crossed that out and says, said, no, I'm not signing under penalty of perjury. She ended up in jail anyways. And he took a position, which was really a interesting position. He said, I am a fiduciary of God and therefore I am a non tax taxpayer and I'm in effect, a foreign diplomat and I'm not obliged to pay taxes. Well, clearly didn't work so well for Wesley, and he took an overly aggressive position and found himself three years in prison, plus having to pay the taxes, the penalties, and the interest. Now, I'm not saying that you do that or you get, but I am saying that we need to be careful and we need to be mindful of not doing something that is way out of line, way on the edge and way aggressive because it could land you in a whole lot of trouble and it could even land you in jail. Okay? So that's, that's the thing that we want to do, but it's important for us to, to not stick our head in the sand to know some things and have some, some rules. You Know me of investing and all that stuff. I want to work from rules. So I want to walk you through seven things that you need to be aware of before I talk about the taxes and some specific things to know. So I'm going to jump to the iPad here real quick and let's just talk about the first thing is this is to understand that you have a partner, like it or not, okay? We're not sticking our head in the sand. You have a partner, like it or not. Fact of the matter is, is that the government is your partner. Now you have the choice to look at it this way. I have to pay my partner 30% of everything I get, or 40% or 50% if you're in California. It's crazy. Okay? Or you can look at it a different way and say my partner is subsidizing every expense by 30 or 40%. What do I mean by that? That means that every legal expense that you can take, you get a tax deduction at your tax rate, 30, 40, 50%. So in a sense, it reduces your taxes. And so I choose to look at it as there are partner in my business that allows me to reduce my taxes moving forward if I understand how to use the code in an appropriate way. So that's number one. Number two is solely relying on a professional isn't enough. And what I mean by this is this whole thing that happened with Wesley Snipes, you do not hand things over. You do not hand things over.

To a professional and just assume that they're going to do it right. You want to challenge, you want to question, you want to be aware of it. I don't expect you to be a cpa, but I don't expect you to be a tax preparer. I don't expect you to be a tax attorney. But I do expect you to be somewhat informed about the decisions that are being made. Because at some point, you got a sign on the dotted line. Not them. Not them. Okay? Number three, I want you to understand the basic tax law. Now, the basic tax law is not something that a lot of people will talk about, but here's what it is. The bottom line is everything you earn is taxable. Everything, no matter how it's earned, if it's done through barter, if it's gotten illegally, okay? I mean, this is how they got Al Capone, because they got him on tax evasion and not racketeering, because he wasn't paying taxes on the monies that he was generating illegally. So every dollar that comes in is taxable to You. And nothing is deductible. That's the basic tax law. Everything is taxable. Nothing is deductible. And then the rest of the tax code, all those volumes, all those pages, all of it, are the exceptions to the basic rule. They'll tell you what isn't taxable, and they'll tell you what is deductible. But you need to understand that everything you receive, unless the code gives you permission to say it's not taxable or it is deductible, is fully taxable and not deductible. So we have to look to the code, and we have to look at it from that perspective. There's no such thing as free money in there unless it's written in the code. Now, the fourth thing to understand is that as an entrepreneur, and this one's a big one, as an entrepreneur, you are. You have the ability and the opportunity to deduct the. Those things that are considered ordinary and necessary in generating your income. Ordinary, necessary expenses in generating your income. And so you want to look at that from those eyes. If there is a deduction that you want to take, is it ordinary? Is it necessary? And there's probably a third subset here is, is it not lavish? It can't be lavish per se. So you want to look for all those things that are ordinary and necessary. You want to look at the deductions or the expenses or the checks you're writing or the bills you're paying and say, how can I make that ordinary necessary so it becomes more deductible? And number five is to know the difference between deductions and credits. I'm going to show you an example of how this plays out. Because they're two different things. They're not the same thing. And we have certain credits that are available to us, and we have certain deductions that are available to us. And then, number six, number six, want to know the difference between capital gains and ordinary income. Why is that? Because your capital gains rate ranges from 0% to 20%. Your ordinary income can go close to 40%, not including state taxes. So it can get really expensive.

Fast. And so to the extent that we can use the capital gains rate, we can reduce our tax bill. It becomes really important for us to understand that. And then the last piece is this. I want you to always, always, always review your tax returns in detail. In detail. Remember what I said earlier.

You're signing your tax returns under penalty of purpose perjury. Okay? And when you sign under penalty of perjury, you. You put Yourself in, in a position where you can get.

Put in jail. So it's important for you to understand what's on the tax return. Do not blindly just sign up. I want you to go through it. I want, and, and your accountant should explain it to you so you understand it. I don't expect you to prepare it. I don't expect you to know all those nuances, but know what you're signed. Your spouse needs to know what they're signing to make that happen. Okay? So hopefully that that helps. Now let me explain how this whole thing works about deductions versus credits. This is how our tax system works. I'm going to take you through a flowchart so you can understand it. Because I think once you understand this, it'll start to inform you of how things will play out. When we talk about taxes, we have income. And remember I said that everything you have, unless it's excluded by the tax code, is considered income, it's considered taxable. And doing that, then we have something that are expenses for the business. Let's say those are called deductions. So it could be office expense, it could be Internet, it could be your cell phone, it could be certain travel, certain meals, those kinds of things that come into play. What that does is that gives something called taxable income. This is the amount that your tax is calculated on when you do this, okay?

And so from that point, you now will calculate the tax. This is the base amount that you're going to owe. Okay? But this is where credits come in. Things like the child tax credit or an energy credit or, or something like that. There's a credit, the credit comes off the tax. Now this is what the difference is. A deduction reduces the income in the calculation of taxable income and the tax. But a credit is a dollar for dollar reduction in the taxes. I'll give you numbers in a second in the tax number itself and that gives you the net tax owed. This is the amount that you actually pay. So let's look at some numbers here so you can see how this plays out. Let's assume that I have $100,000 in income and I have $20,000 in expenses, okay? This is office expense, travel, Internet, whatever it is, okay? That leaves us with $80,000 in taxable income. So we calculate the tax on the $80,000 and let's say that we have a 40% tax. That means that we owe $32,000. But let's assume that we did something with solar energy and we've got a solar energy Credit available to us. So we get a credit of $10,000. Well, that is a direct reduction of the 32,000. So the net tax owed is only $22,000. So you see how the 20,000 reduces the income. But it's before we calculate the tax, the 10,000 reduces the tax directly. This is an important concept to understand that deductions and credits are not the same thing as you move forward. So with that, let's talk about some specific things to consider before your tax filing date that's coming up. Okay? And I think that this will help you out. You still have some time to look for some of these deductions before you prepare your taxes to make that happen. So the first is this idea of what we call code section179.179. This is, this is something that allows you to expense something. Normally, if you buy a piece of equipment, a computer, you would have to take it. You can't do, you can't deduct 100% of it in the, in the year that you acquire it. It's usually like over, depending on the piece of equipment, could be three to seven years. Okay, so if I buy a $5,000 computer and it's a five year.

Depreciation, as they call it, I would take $1,000 a year, basically. Okay. I'm not getting into the details of, of how this thing plays out, but I just want you to understand the typical tax code says that you only take the asset over a period of time and not in the year that you expense it. Now, but code section179 says, and this is, this is a beautiful thing, I want you to look for assets that you might have acquired, furniture, fixtures, equipment, things that have to do the business. As long as you use the business, I mean the asset over 50% for business use, as long as you use the asset for over 50% business use, you can take 100% of it as a deduction. So if I buy that $5,000 computer, I get a $5,000 deduction in the year. So I want you to go back, I want you to look at, did you have any of those expenses? You can do that for up to a million dollars and a million $50,000 for last year and a million $80,000 this year. So if you bought something that is a piece of equipment, let's make sure that you are taking it as a 179 deduction to accelerate it going through. Now, it is limited by your income. So if I bought something that's $100,000. But my income's only 50. You're not going to get the full 100. You'll get the 50. You'll carry the other other 50 over to another year. So you want to look at it from that perspective. And then if you're talking about cars, cars have some other limitations around that. Unless the car is over 6,000, 6,000 pounds. Okay? So 179 is, is the first thing that I want you to consider. Go back, see if you've got any equipment or purchases that might be able to be considered ordinary necessary in your business that you can take. Number two, Meals, entertainment. All right, this thing's changed a little bit. Okay, meals are 100% deductible for, for last year and this year. Okay, it will change. Okay, Last year and this year, if it's from a restaurant, okay, that you go out to a restaurant and that type of thing, otherwise it's 50% deductible. Okay. Meals are 100% deductible from a restaurant. Otherwise it's 50% deductible. So, so things like bringing snacks in for, for the employees, it's going to be 50%. It's not going to be 100%. But to go out with a, with a business associate or a client, discuss business and that type of thing, 100% deductible. Now you need to keep documentation unless it's under $75. Okay? But if it's more than $75, and I would say just keep documentation either way, you want to know who was there with you, what was discussed, what was the purpose of the meeting? At a minimum. At a minimum, okay? The business you're trying to document the ordinary necessary and business case for that deduction because you can take 100% of it this year as long as it was at a restaurant. You cannot do entertainment. That's pretty well gone. Dues for like country clubs, pretty well gone. Okay, that leads me to number three. Number three, I know I'm going through this fast, but I think there's some, there's some seeds of things here that you'll need to have a conversation with your tax preparer or your CPA or your advisor on these. So number three is retirement plans. Here's the thing. You have the ability now, some retirement plans. If you wanted to do a 401k or something like that, it's too late. If you haven't got it set up because it had to be set up before the end of the year. But you have the ability to put a Tax deductible IRA in place as long as it's before the tax filing deadline before, you know, April 15th. Actually, it's April 18th this year. Because emancipation day. If you're under 50 years old, you can put in $6,000 a person. If you are over 50, you can put up to $7,000. There's this catch up thousand dollar situation. Now if you happen to have a 401k with your company or with your work, then there are income limitations. So you can still put it into an ira, but you may not get the tax deduction based on the income limitations. But my point is, is that if you're looking for a tax deduction, you might want to look to see if you can qualify to make an IRA contribution. If you're self employed, you can still set up a SEP IRA by the tax filing deadline. Unlike 401ks that need to be set up before the end of the year, you have the ability to set up the SEP IRA. Now. You can put up as much as 25% of compensation up to $58,000. But here's the catch. You must do it for all employees. So it's a good thing if you're a solopreneur or it's just you and your spouse. But if you have a bunch of employees, it's probably not the thing you want to do because you're going to have to cover all employees at the same rate that you did. But it is a deduction that you can still get access to prior to the filing deadline. Okay, number four.

Oh my gosh. Make sure that you've got all your income. Okay? PayPal, Venmo Zelle. Here's the thing. If they disallow a deduction, it's a disallowed deduction. If you're not picking up 100% of your income because it's in a PayPal account, it's in a Venmo account, it's in Zell, or, or it's in crypto, which I'm going to do a separate video on. Crypto. That could be tax evasion. That's a big no. No, we don't do that. All right? We want to do tax minimization. We don't want to do evasion. Evasion is illegal, okay? Minimization is legal. All right? So I want you to make sure that you picked up all of your income from all the sources to make sure that you've got it covered. Okay, that leads me to number five. Number five is beware of crypto. Transactions. There is a question on the tax returns this year about crypto and they take it really seriously. Crypto transactions are much more complicated and the fact of the matter is you may be triggering taxes with your crypto without you even knowing. And fact of the matter is if you buy something using crypto, you probably have a taxable transaction. Like I said, I'm going to do a separate video on on that because it is so complicated. I'm going to walk you through it. But you need to be aware and be careful of crypto transactions because they can create tax situations that you had no idea was going to happen. Okay, then you have number. Number six is charitable donations. Charitable donations. Even if so you can take donations, a deduction for charitable donations. But even if you don't itemize, in other words, you don't get a chance to take itemized deductions. You have the ability to take either 300 or $600, depending whether you're single or married, as a deduction for charitable donations. So you want to make sure that you take into consideration any charitable donations that you've made. Leads me to seven. And then I got one more for you. Number seven is the child tax credit. Okay? Child tax credit. This is something that came in and has been spruced up. It has been really geared up. And here's the thing, you get for every qualifying child that is over age 6, you get a tax credit. Okay? Remember, it's an offset to the tax of 3,000 up to $3,000 if the child is as under 6 years old. Okay, you can get up to $3,600 per child. Child. So you make sure that the tax preparer and whoever you're using is taking consideration whether you have qualified children that can get you 3 to $3,600 back, depending on the age of the child. If you've got a qualified child, and that is a dollar for dollar reduction in the tax, that's money in your pocket. We don't want to leave that on the table. All right, leads me to the last one. This one might get people to think a little differently. Number eight, a refund isn't a gift, it's a mistake. A refund isn't a gift, it's a mistake. What do I mean by that? Here's the deal. I can't tell you how many people go woohoo, I got a refund. Let me explain something to you. The refund isn't something from the government as a gift. The refund means that you gave the government too much Money during the year. You gave them the use of the money instead of investing it for your future. It's a mistake. What I want to do with my clients is I don't want them to have a huge refund and I don't want to have a huge payment. I want to give the government just enough during the year and not bank on the refund. I'd rather have the money in my client's pocket, in my pocket so I can use it, so I can invest it, so I can build it and build wealth with it, so I can create my legacy wealth so I can live with it. But a lot of people going, I got a huge refund as if it was a gift. No, they're paying back your own money to do that. It's not a gift, it's a mistake. All right, So I would look at your numbers moving forward to say, how do we make sure that we're balanced right at that break even point? So I don't get a huge refund and I don't have a huge balance paid. All right, so these are things that I want you to consider as you're going into the tax deadline. They're still available to you. I want you to look at. There's plenty of more things, but I think these are the ones that are going to move the needle for you the most. But here's the bottom line. You've got a partner in your business, you've got a partner in your life, and it is the tax man. And the key to you making sure that they don't take more than what they deserve is that you understand a little bit about the tax code and how to use it to your benefit. It was built especially for entrepreneurs. So you have the ability to pay your fair share, pay what you owe, but you're not going to overpay what you owe. All right? So I hope that helps. And I'm going to hook up a couple of other videos. We'll hook up the, the cryptocurrency video here and a couple of other videos for you. So check those out. Let's keep you moving forward because listen, if the tax man is taking 30 or 40% of your income, they're taking 30 to 40% of your wealth at a minimum. If we think about the growth on it, it's even more. So let's keep most of that in your pocket. All right, all right, all right. I get fired up on this. So I hope that you found this of value. And if you have any questions or comments or anything like that. Do me a favor, post them, send me a dm. Let's keep you moving forward, all right? Until we get a chance to see each other on another episode, another show. Always, always strive live a life that out lose you. Cheers. Thank you for being a part of the Affluent Entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join the Affluent Entrepreneur facebook group@melabraham.com group and I'll see you there. Cheers. Bye.

And that's it for this episode of Building youg Money Machine, where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people, because I truly believe that financial freedom is your birthright, and I want to help each and every one of you claim it. Thanks so much.