011: Your Guide to Paying WAY Less in Taxes
We have a really exciting treat for you all today because we’re going through everyone’s favorite topic: taxes! Ah yes, the infamous saying ‘nothing is certain but death and taxes’ is hopefully going to take on a whole new meaning for you after this episode.
And for those of you who would rather, ya know, not deal with this topic, that is totally fair and we definitely can see why it can be so daunting. Especially if you hate the month of April. However, we know that in order to be financially free, sometimes we have to educate ourselves on the topics we would rather avoid by closing our eyes and sticking our fingers in our ears singing 🎵 LALALALA while someone else took the time to learn and is cashing in big.
That’s why we’re here, to hopefully give you a new outlook on the subject.
If you put your pants on one leg at a time, you also pay taxes. ✋ Raise your hand if that’s you. Okay, we can’t exactly see you but we imagine they’re all the way up (and maybe some eye rolls 👀 thrown in there as well)
Now, if you could legally, ethically, and morally not pay taxes, how many of you would? No, this isn’t a trick question.
We imagine hands are going up even faster and maybe some quizzical looks that follow.
Remember, we are not CPA’s 👉 Everything we are sharing in today’s episode we have learned from the greats. Real-life financial ninjas who we know personally, like Tom Wheelwright, CPA extraordinaire. We also are sharing from the infamous Rich Dad Poor Dad author, Robert Kiyosaki who we have talked about before on this podcast.
Both of these men are a wealth (literally) of knowledge. So think of this episode as one of their greatest hits albums. Just banger after banger of perfected genius to help you grow an empire of your own.
So where to start on this episode of taxes? Well, according to Tom Wheelwright, “Most people know that the tax law is there to raise revenue; what a lot of people don’t know though is that the rest of the tax law is fundamentally an instruction guide to reducing taxes.”
We all joke about the government FBI agents peering through our phones and knowing every detail of our lives, but let us tell you something they guaranteed already know about you: you hate paying taxes. What do they also know? Humans like being rewarded. That’s why they offer incentives aka tax breaks when you do things they want you to do. Such as buying a house, sending your kids to college, buying an electric car, or even adopting a child!
We love incentives. And as humans, we are geared to be rewarded. As a child, there was no better feeling after a long afternoon in the arcade, than gripping all of those precious tickets in your hand as you skipped all the way to the prize booth to pick out the shiniest toy on display. As adults, that feeling of being rewarded with incentives has just matured with us. Tax law is fundamentally a series of incentives. But let’s look at who the incentives are for.
Robert Kiyosaki famously refers to something called the cashflow quadrant. The cashflow quadrant states that there are four primary ways to make a good income 🔽
- The “E” quadrant which stands for Employee.
- The “S” quadrant stands for Self-Employed which includes private practice doctors, dentists, lawyers, or other small business owners.
- The “B” quadrant stands for Business owners who have 500 employees or more
- And finally, our personal favorite, the “I” quadrant which, as you might have guessed, stands for “Investors”.
E is for Employee
Let’s start with the basic “Employee” quadrant. Honestly, this might be a lot of you right now and that’s super normal! The E quadrant is where most of the working population resides — an employee earns a paycheck and benefits by exchanging their time, knowledge, and performance of their required job. Their finance or wage is directly tied to the amount of their traded time and their ability to perform efficiently and effectively at their job.
Sound like you⁉️ If you fall under the “E” quadrant, the only way to make more money is to put in more hours or switch to a higher-paying company. Within this quadrant, there is no passive income. If you don’t work, you most definitely do not earn any money. A very transactional relationship between your time and money. And if you have been around here long enough, you know we are not a fan of that life.
People in this quadrant pay the most taxes of any other quadrant. As you may have gathered, the majority of highly paid professionals in the U.S. fall into this quadrant and this quadrant alone. Doesn’t matter if you’re a top professional in your field, if someone else employees you and pays you and benefits off of your skills, you are most likely paying taxes in the neighborhood of about 40%.
S is for Self-Employed
Where are our “be-your-own boss” people at? We see you, those who struggle with the 9-5 and now work 24/7. The self-employed person owns their own business and dictates the daily activities without the input of a superior or senior partner. While an employee works in a management top-down structure.
Look, we’re not mad at the hustlers of this cashflow quadrant, however, those who are self-employed and those who are just regularly employed share more similarities than you might think. Both are exchanging time for money and paying high taxes. As financial Yoda Robert Kiyosaki once said those who fall under the “S” quadrant are “owned by their business.”
Sure, there is definitely the benefit of time with those who are self-employed. You don’t have to answer to anyone else’s schedule but your own and there is a sense of freedom that comes with that. I mean, who doesn’t like to take random runs to Target throughout the day or stay at home with your kids when they’re sick?
However, if you do not put in the work you will not get paid. You may have your own business, but you still have to take up new projects, make appearances, draft documents, and bill your time in order to earn money. Sounds like a lot of time to us. If you are in the “S” quadrant and you make a good income, you’ll probably pay somewhere in the neighborhood of 60 percent tax 🧐🧐, because you’re paying both the employee and employer.
B is for (Big) Business Owner
Ah yes, our business owner quadrant. These individuals really looked at jobs and thought to themselves “why work at a job when I can own the whole damn system?” 😵😵 And to that, all we can say is—respect. Business owners are known to outsource their tasks to experts instead of taking it on themselves. These people really know how to work the system and they know the best talent doesn’t always mean themselves.
If you are a business owner, you likely own a system that creates income that doesn’t equal the amount of time you put in. You can stay out of your office for months or travel around the world for vacations without your business suffering. Your income isn’t directly linked to your time. It’s linked to the systems and people you worked hard to create and delegate. You’re creating jobs and adding products and resources to be purchased to boost the economy.
Due to the difficulty of breaking into this quadrant, only a select few professionals go on to become business owners. However, professionals that can make it into this quadrant are on the right path to attaining financial freedom. This quadrant isn’t for the faint of heart. Owning a business of over 500 employees can be daunting and there is a lot of research that goes into picking the right field. However, all the hard work pays off because big business owners are paying only about 20% in taxes.
I is for Investor
The unicorn investor quadrant that Robert Kiyosaki described as “the peak of all the quadrants, and only a few get to attain it.” While the self-employed guy down the road owns a business and the business owner living across the street owns a system, investors own assets that make money for them while they sleep. Do you know who else loves investors? Uncle Sam. And he is waiting for you at that prize booth with incentives, tax breaks, and loopholes.
This quadrant is the equivalent of the finest caviar, the most decadent champagne. ❣️ Because investors are individuals who may have made money from one or more of the other quadrants and has learned how to put that money to work for them passively, not actively, like the other three quadrants. Investors often invest in stocks, royalties, apartment syndication, and owning portions of businesses. So while you’re sipping on brut, they’re brutally working.
If you are a busy high-level entrepreneur looking to achieve financial security and regain more of your time, then the “I” quadrant is where you need to get to and therefore where you need to focus your goals. Once you are here, your job becomes more of a hobby than actual work. You can choose to work when you want to, not because you have to.
If you’re in the “I” quadrant, you may actually pay zero tax. That’s the quadrant that we as investors are in, and that’s why we love apartment investing so much because again, it isn’t how much money you make, it’s how much money you keep.
Let’s look at a couple of case studies. Hilary Clinton, for example, is an attorney and public servant. She bounces in between the “E/S” quadrant. Employee and Self-Employed. She’s probably paying somewhere in between the 40-60% neighborhood of taxes. And love him or hate him, the 45th of President, Donald Trump, falls under the “I” quadrant which is where he makes his money.
How many of you remember learning about consumers vs. producers in school? Ya know, the rabbit eats the plants and the lion eats, well, anything that stands in its way? We’ve all seen Lion King. 👑🦁
Well, our guy, Robert Kiyosaki also has his own version of this. He took the quadrant a step further and split them in half. The left and right sides of the quadrant. Under this division, Kiyosaki analyzed the quadrants using each quadrant’s varying level of effort required to make money. The two quadrants on the left (E & S quadrants) are regarded as consumers. The two quadrants on the right side (B & I) are producers.
Again, tax law is all about those incentives. So if you’re making money just to consume (looking at you, E & S quadrants) you’re definitely going to be taxed on it.
The government likes it when we can produce, which is why a lot of the incentives lie with the B & I quadrants. If you’re on the right side of the quadrant, you produce jobs, housing, energy, agriculture, and so on. What the government has said, especially in new tax laws enacted in 2017, is that if you are on the producer side of things, the government is going to give you tax benefits.
This is all a reward for stimulating the economy. It’s important to reward companies for improving technology, increasing capital investments, and reinvesting in the growth of their businesses. Thus, they expanded the rewards for investing and entrepreneurship. The more people who produce, the better the economy. And they get people to produce through tax incentives.
But, like anything in this life, there are some exceptions. And in this case, not all investing gets rewarded the same.
If you have $100,000 to invest and you invest in the stock market, you’re basically investing as a consumer. The government is going to say, “Look, we won’t tax the income high. We will tax you at a lower rate; however, we’re not going to give you any tax benefit.”
On the other hand, if you invest in oil and gas businesses, energy, renewable energy, and/or apartment buildings in ways that help consumers consume more, then the government is going to give you a bigger tax benefit.
In the first example, the only benefit is to you the investor when you invest in the stock market. However, in the second example, by investing in businesses that serve consumers, your investment can actually help many other people outside of yourself, thus the bigger tax breaks.
Consumers gonna consume. But producers? They just keep people consuming.
If you invest $100,000, but you get back $40,000 in tax benefits, then really your net investment is only $60,000. In Uncle Sam’s mind, he’s thinking “You can invest $60,000 and we’ll do $40,000.” So basically, the government has invested $40,000 and you’ve invested $60,000. It is their way of stimulating growth. Making you think “Hey! I only invested $60,000! Guess I should invest more next time!”
The harsh reality is also this: The government doesn’t care about you. They just care about that 40%-60% that they know is their fair share. When you make income from an investment and again reinvest it, you’re going to share 40 percent with the government. So they’re just happy to take their cut every time.
They also don’t care about which quadrant you live in because they’re happy to take your 40%-60%, or they’re happy for you to invest your money, and therefore, pay much less in taxes. They still get their cut. What they are saying, though, is that anybody who is a professional investor can actually pay zero tax if you invest your money properly like how we, as in your financial BFFs, The Kitti Sisters, want you to. 🧡🧡
If you’re a big business, you can actually pay only 20 percent if you reinvest your profits back into the growth of your business; whereas if you’re self-employed, you’re probably going to pay close to 60 percent, unless of course, you reinvest your profits back into your business. Or better yet into quadrant “I”.
Get Me Out of Here
Okay, if you’re in this deep the next natural question on a lot of your minds is probably: “How do I switch my quadrant? How do I change from being a high-level entrepreneur who trades his or her time for money and resides in the E and S quadrants to a financially free individual who resides in the B and I quadrants? How do I make the switch from an employed or self-employed individual to an individual with multiple streams of passive income?”
Well, now that you know your ABC’s, as in, the ABC’s of cashflow quadrants, it’s all about continuing your education on how to build and take advantage of becoming part of the producers and generate passive income opportunities. Then, tap into your inner lioness and take action. Did we say producer? We meant predator.
But here’s the best news ➡️ you don’t have to leave what you love. You don’t have to abandon your “Genius Zone” that thing that makes you feel alive. You have worked too long and too hard to build your career and what you do is important.
Switching to the right side of the quadrant doesn’t require leaving your career, but it simply means taking your active income and diversifying into several smart passive investments. Think of this as just adding to your resume. ✍️ All of this simply means taking your active income and diversifying it into several smart passive investments. The good news is that diversifying your current active income into passive investments will provide you with sustainable cash flow is a lot easier than you might think. And gives you your time back in the process.
All of this comes down to one simple question: How much in taxes do you want to pay? Based on that answer will help you determine what quadrant you should move into by taking advantage of all that apartment investing has to offer.
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