How The Rich Avoid Paying Taxes...Legally (Part 1)

it's no secret that the wealthy have figured out how to avoid taxes legally it's not only that they have better financial advisors as they have access to better information as a part of this video i want to give you access immediately to what the wealthy of the leverage and the mindset that they have in regards to avoiding taxes legally and leveraging the money game let's dive [Music] in [Music] when it comes to avoiding taxes the wealthy have perfected this game and it is truly a game and part of the reason why i am going to teach you guys over three different videos the wealth and tax game is because many individuals realize that this information isn't being provided in grade schools and in classrooms in college so what we're going to do is we're going to go over how the wealthy view income what is the information that they're teaching their children that allows for generational wealth we need to break down the federal tax systems classes in an approach that is digestible as i was studying wealth and financial literacy training i ran into various different teachers such as robert kiyosaki tom will wright grant cardone and all these various different investors that you guys are aware of one of the teachers robert created a very catchy cash flow game called the cash flow quadrants he created this game to show how everyday taxpayers are being taxed whether they're an employee a small based business owner or an investor but it's important to understand it coming from a tax strategist as well when robert created the cash flow quadrants he started out by drawing two lines on the page and he wrote an e an s a b and an i in the top left hand of those four corners and he started explaining how employees pay upwards to 40 in taxes and how small business owners and small professionals pay upwards to sixty percent in income taxes and how big business owners pay only twenty percent in federal taxes and how professional investors pay zero percent in income taxes you're getting 30 grand i'm getting a thousand you guys are getting paid now my goal in in my office is to help people get to the point where they can qualify to become a professional investor to pay zero percent taxes but not every taxpayer starts off as an investor it's not like you you woke up one day and your parents said you know what you're not gonna go and play football or soccer you're gonna study to become a real estate investor and become a professional investor because that's the best beezness ever in the world no one taught you how to do that typically your your parents are employees most cases and like many employees they're teaching you and showing you how to become a employee like themselves or even a better employee so you can make more money than your parents one of the reasons why the e-quadrant happens to be an quadrant to be in for the wealthy is because the wealthy understand that the government views employees in a different way than they view small based business owners big business owners or personal investors they view employees as having an easy lifestyle let's think about that if we're employees how exactly do we have easy lifestyle well we have to think about it if you go to school and you work really hard or even if you don't go to school you could end up deciding to go work for somebody who has decided to create a business that is going to house you so the government realizes that you're working for someone else and you didn't have to create the position for yourself the position was created for you and another thing that the government understands about the e-quadrant is that you have no managerial responsibilities so when it comes to processing your own payroll maybe you're not responsible for processing payroll for yourself and the other employees when it comes to setting up work events maybe you're not the one that's responsible for setting up the work events when it comes to dealing with hr issues maybe you're not the person in the office that deals with the hr issues the business owner has put people in place to handle these things and the business owner was the one that created the ideas around needing these types of things inside of the organization that you could be working for so the government understands that you might also get some benefits by working for the employer maybe you receive a 401k plan right that's really awesome a 401k plan is going to be a plan that allows for you to grow your retirement and maybe you even have your employer that's matching the contributions that you're making maybe you're getting health benefits and you're also receiving certain dental benefits these are the types of things that allows this quadrant to be so desirable because it's expensive having to pay for health insurance and pay for dental insurance especially if you have children and if you're underneath your employer's medical plan you might be able to have these things covered underneath what your salaries is supporting you on so this e-quadrant the government realizes puts you into a place of constantly working for somebody else and earning a paycheck when you're earning a paycheck from somebody sometimes that paycheck might be linked to you working extremely hard where you're earning commission but sometimes you may not be linked to the amount of work that you're doing maybe you're someone who goes into work and whether you're working you're working to a hundred percent of your capacity or you're working at 25 of your capacity you're still earning the same paycheck and the same amount and the government's aware of this i just stare at my desk but it looks like i'm working i'd say in a given week i probably only do about 15 minutes of real actual work and so i have a lot of taxpayers that get upset with me because they say carlton how come i have very little write-offs every time i go into my tax guy's office all we talk about is my itemized deductions he's just asking for my my mortgage interest or he's asking for my medical expenses or he's asking for my property taxes or gifts gifts to charity you see your tax your tax guy understands that if you're an employee and if your spouse wife husband's an employee that there's very little that they can do to help you save money on your taxes so they're going to ask for the typical things that they're aware of asking for as accountants which is your itemized deductions your mortgage interests your medical expenses your property taxes and the gifts that you give to charity but really other than that and contributing to a 401k or a traditional ira that you cannot touch until you're 59 and a half you have no write-offs and this is a part of the tax code that the wealthy have figured out they figured out okay if i go work for somebody i will continue to make income and if i work even harder the more money i make the more it goes to the government so i can do one or two things i can work my tail fin off and have more of my income tax or i can try to figure out other methods to avoid taxes this brings us to the s quadrant the s quadrant stands for small business and part of the reason why is because many employees who now have decided that they want to have a lifestyle by design they want to control their own lifestyle and how they wish to earn income and have more of their time back they'll take it upon themselves to start a small business but one of the things that you have to understand is that when you become a small business or a specialist someone who is very skilled at a at a job such as like a surgeon or doctor your income is going to continue to increase and when you're a self-employed individual some of the taxes that you experience include self-employment tax federal tax and then you have your state tax these three taxes is how small-based business owners sometimes and specialists sometimes end up paying upwards to 60 in taxes guys self-employment tax is 15.3 if you you haven't uh been taught that please jump back into some of my other videos where i discuss self-employment tax that's 15.3 that's automatically money that you're paying into by being a small-based business owner and then you're also going to pay federal taxes to the either r and the s which you're already aware of and if you're in a state that taxes you also pay state taxes one of the reasons though that the small business owner is winning a little bit more than the employee is because the small based business owner has now converted themselves into a business which means they can turn some of their personal everyday expenses into business expenses if i have a cell phone that i'm paying 130 a month because i have me and my spouse on this joint plan that's 130 that i can deduct a month if me and my spouse are now running a business if we both have a 500 car payment that's a thousand dollars a month right if we have car insurance or if we have a home where we have a office space we can start to write off these type of expenses that we normally are not able to deduct as employees you guys when you're an employee and your whole office told you to go home and you had to pack up your monitors and everything into your car and then set everything up in your living room a space that was in your house that really wasn't dedicated for you to do business you may have thought okay since i'm doing all of this and i'm paying for all some of this stuff then i'm going to be able to write some of this stuff off the tax laws have changed tax cuts jobs act tcja 2017 changed a lot of the tax laws for employees guys who was in office in 2017 trump what is trump business owner investor so what trump did was he created tax law changes that were going to support small based business owners and real estate investors but it was going to hurt the employees how did some of the tax law changes in pert employees well we just talked about the cell phone the car the car insurance the home office maybe you were someone previous to 2017 that used to have to come out of pocket for some of your own expenses i have my doctors sometimes paying for their own materials i have police officers who sometimes pay for their own guns firefighters who pay for their own boots teachers who pay for their own crayons and crayolas if you're an employee in the e-quadrant paying for your own items and materials previous to 2018 you were able to deduct those items as unreimbursed employee business expenses after the tax cuts jobs act of 2018 the trump administration got rid of the unreimbursed employee business expenses so all those expenses they used to incur they're no longer deductible right so now your tax accountant can have only one or two conversations with you what are your itemized deductions which we discussed right we have our mortgage interest or medical and dental or property taxes and our gifts to charity and what is the standard deduction if you're single it's 12 550 and if you're married is 25 510 guys that is it as the w-2 taxpayer what so this is why many w-2 taxpayers will take it upon themselves to start a side hustle or just jump full into becoming a business owner so now they can leverage some of these additional expenses now we understand that there's other types of business owners and that is where the b quadrant comes in the b quadrant is reserved for large-scale businesses if you're a big business owner let's just think about big business owners nike google microsoft tesla amazon those are big business owners right if you're a big business owner you're doing certain things that the government wants you to do and we're going to really expand on that in part two the the next video but to bring it to light right now big business owners are providing jobs affordable housing they're providing innovation energy food and sustainability if big business owners provide these things they're in a place where they can pay as little as 20 taxes and sometimes even less than that i know that you guys are aware that companies such as amazon and berkshire hathaway paid zero percent in taxes these companies guys they're not focused on little problems okay they're focused on very big problems amazon is trying to solve very big problems that's why they purchased whole foods and we're going to talk a little bit more about that google and microsoft are trying to solve very big problems but if i'm a real estate agent or if i'm a broker or if i'm a dentist i might be solving small problems for my customers but maybe i'm not changing the world in solving bigger problems when you get into a place where you're solving large scale problems like some of these big business owners you're in a place where you're constantly doing two different things you're constantly doing research and you're constantly doing development and research and development lead to tax credits and tax credits guys i want you to think of as money anytime that you're doing qualified research and development that the government has deemed as qualified research and development the government is going to provide you tax credits for doing so which is turning around and giving you money for spending money on trying to make more money and guys this is the game that the big business owners have adopted now not every person is going to end up starting a amazon or google or microsoft which is completely fine but many people can go from the e quadrant to the s quadrant to the i quadrant and this squadron happens to be my favorite when you become a professional investor you have the ability to pay zero percent in taxes why because professional investors are spending time in real estate and when you spend time in real estate you are becoming a partner with the government time and real estate shows the government certain things it shows the government that you care about affordable housing guys if i decide to purchase an investment property and then i'm turning around and renting out that property guess what i'm doing i'm creating new tax dollars because rather than having the property myself and only paying property taxes now i have a tenant that pays me money and i have to pay taxes on the money my tenant pays me the government understands this and so i'm creating affordable housing and also i'm going to have taxes associated with this new rental income so when i am becoming a real estate investor the government allows for me to become a partner if i'm a partner with the government what the government is going to allow for me to do is they're going to allow for me to take a loan which means i have leverage on an investment property maybe i'm only between 20 or 25 down to get into an asset that i'm going to rent back out but the one thing that you have to understand is that when you get into real estate you are buying a big asset with a large ticket price sometimes these houses that we're buying maybe 500k 1 million maybe you're buying apartment buildings that are 10 20 million dollars the beautiful beautiful thing about real estate that you get is depreciation and depreciation is taken on the entire house the entire house that you purchased you get to take depreciation on the land that your house sits on you do not get to take depreciation on and this is where real estate really becomes fun because you're buying a huge asset you're putting a down payment down maybe twenty percent down a hundred thousand dollars down on a 500 000 property but you're getting to write off the entire building's amount those who focus on becoming professional real estate investors will leverage the depreciation and the losses that depreciation has these losses in return can offset your rental income your rental income from your tenant they can offset your w2 income from your other spouse's job if they're still working and you're in real estate you have to be in real estate it can offset your bitcoin income maybe you're someone who got into cryptocurrency and you have some bitcoin income they can offset social security income ooh social security income's taxed carlton wait don't we pay into social security by being in the e-quadrant guys employees pay into social security by being in the e-quadrant you pay into it and then when you receive it later in life it's also taxed what you mean to tell me that the social security that i pay into when i receive it later there's a chance that it could be taxed yes and this is one of the biggest reasons why the wealthy don't focus on earning a paycheck they focus on getting passive income because passive income is not subject to social security passive income is not subject to medicare passive income is not subject to unemployment disability income that is not passive income is not subject to those level of taxes your bitcoin income your social security income all income that's how powerful it is when you can spend a majority of your time in real estate to the point where you're considered a professional investor someone who is spending 750 hours out of the year and they qualify as a real estate professional i would be doing a lot of education on real estate professional status because it is the biz niz within the tax code as well as leveraging short-term rentals i look forward to seeing you guys on the next video where we'll discuss how the wealthy are doing exactly what the government wants them to do and how big business owners have been able to capitalize on paying zero percent taxes see in the next video [Music]

Channel: Karlton Dennis

Views: 37,495

Keywords: understanding your deductions, taxes made simple, tax strategy, tax expert, karlton dennis, taxes made simple karlton dennis, deductions in taxes, tax deductions, tax planning, easy tax tips, tax tips, taxes made easy, taxes explained simply, small business, how the rich avoid paying taxes legally part 1, how the rich avoid paying taxes, how rich avoid taxes, income tax return

Id: LUXhXKNb1qo

Length: 20min 1sec (1201 seconds)

Published: Fri Aug 06 2021