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Tax Planning LessonTax planning is an absolute must if you want to execute a successful financial plan. I want to be clear that nothing I am talking about has anything to do with cheating. I personally feel that cheating is the worst thing you can do and there is absolutely no need for it if you follow some basic strategies. In this lesson I want to talk about tax deductions that can help you pay less in taxes. The most common tax planning deduction that people are aware of is the mortgage deduction. With this deduction if you own your home you can deduct the interest and taxes that you pay on your home. This is much better than renting because when you rent you don’t own anything and you get no tax benefits. I encourage everybody that can to purchase a home because it is so much better than renting. When my wife and I bought our first home everybody told us we were crazy because at the time interest rates were 16.25%. I didn’t know a lot about finances but I did understand that I wasn’t getting anywhere if I kept renting. We went and looked at a house that we really liked and was afraid to purchase the home because we didn’t think we could afford it. We were in Houston Texas at the time and the market was booming so houses were appreciating like crazy. The salesman told us how fast the value of the property was appreciating and told us he could show us through better tax planning how to come up with the money we needed to make our mortgage payment. After a month passed by we went back to look at the same house which was a new home that they would build to suit only to learn it had appreciated $2,000. I told my wife you can’t win a game unless you get into the game so we gave our earnest money and purchased our first home. The salesman told me about the tax deductions I would get and told me if I could make it through the first year I would be ok from that point on. He said to get through the first year I should change my dependents on my W4 form to allow me to get more cash in my paycheck to pay the mortgage and at the end of the year when I could deduct the interest from my taxes it would offset the extra money that I was getting. This is an example of true tax planning. This turned out to be one of the best financial decisions I could have made because after two years the property appreciated by $10,000. When I started out I could only afford to put down 5% on the loan but after two years I was able to trade up to a much larger home without having to spend any of my own money. Buy foreclosures and save! View Thousands of Properties, Updated Daily Online! My favorite tax planning strategy is to purchase rental real estate. When you own rental property you are in business so you get to take advantage of the same deductions that big corporations take. You get to depreciate the rental property to help offset some of you regular income. You get to deduct your mortgage, taxes, insurance, repairs, advertising, travel & entertainment, supplies and any other general and administrative expenses related to the business. You have to claim the rent as income.
Another tax planning strategy is to put your rental properties in a LLC because the entity provides protection from personal liability. The entity has its own tax id and is treated separate from you yet the tax benefits pass through to your personal taxes. You are also protected from personal lawsuits unless you sign personally for something. If someone files a lawsuit against you they can only sue for the property that is in the entity. If they win their law suit they can get a charging order against the entity which entitles them to the profits of the LLC. However, they can only get the profits as they are distributed and guess who decides if and when profits are distributed. That’s right you do. The down side to them is even though you don’t distribute the profits they will be responsible for paying the taxes on the profits even though they didn’t receive any money. Incorporations & LLC's The key to all of this is keeping yourself in some type of business so you have legitimate business deductions. Another business that you can have that is not difficult to start is an investment business. You can take your brokerage account and transfer it into a LLC and management like a business and you can take all of the business deductions. The key is it really has to be a business and you have to trade in your account like a business. That means you can’t just buy some stocks and hold them, you have to trade on a regular basis with the intent to make a profit. This is a great discussion to have with your financial planner. Once you set this up and use it properly you can take all the deductions any normal business would take.
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