Anyone who pays attention to their finances is aware of the power taxes have to impede their growth.
For W2 wage earners, you see how taxes eat into your income with every paycheck you receive. The gap between your gross pay on the top line and your net pay on the bottom line can be quite substantial.
For business owners, taxes can nearly wipe out an entire year’s income if you’re not diligent with your planning. I have a friend who was absolutely shocked when this happened to him. He had a good year… until the tax bill came.
And for investors, taxes can eat into returns significantly. An old experiment on exponential growth demonstrates this…
Let’s say you start with a penny – $0.01 – and you’re such a good investor that you’re able to double it every day. That’s a 100% investment gain each day.
If you keep at this for 30 days, that one penny will grow to a mind-blowing $10,737,418. That’s the power of exponential growth.
But what happens if your performance is subjected to capital gains tax every time you hit a double?
The standard capital gains tax rate is 15% here in the US. That sounds innocent enough… but the math lays out how insidious it is.
Getting back to our penny example…
If each day’s doubling required you to sell your investment to capture the gains, that’s a taxable event. You would have to pay 15% of your gain in taxes. That would reduce the amount of capital you would have available to double the next day.
At first, your capital gains taxes would be so small that they would seem immaterial. But if you had to pay 15% capital gains tax each day when the penny doubled, you would have $13,613 at the end of 30 days.
That’s $10,723,805 less than you would have had without taxes… because the taxes impeded the compounding process.
Obviously this is an extreme example. No one is going to double their money routinely like this.
But the same principle applies to investments stretched out over a longer period of time. Taxes impede your ability to grow your capital.
As frustrating as this is, the tax code is riddled with ways to reduce your tax liability with smart tax strategies—if you know how to use it. Here’s what I learned…
Most people think the tax code’s about paying taxes. Turns out it’s not. Something like 95% of the code – over 70,000 pages – is about how to legally avoid paying the taxes that the other 5% says you owe.
America’s wealthiest families have known this for generations. And here’s the thing – the tax code is not exclusive. The same tax strategies that the “old money” families have used for decades can work for us also.
We spent last week talking about a comprehensive investment approach to bulletproof your money and generate consistent income streams. Tax planning and smart tax strategies are a major part of that.
It starts with leveraging LLCs and maximizing deductions. And some folks are surprised to learn that it’s possible to convert some of your personal expenses into business expenses to reduce your tax liability.
We utilize an Accountables plan that enables us to write-off at least a portion of a wide range of expenses that we would otherwise incur personally.
For example, we were able to deduct a portion of our whole home generator as a business expense – because it also powers the home office. We can deduct certain wellness expenses per our Accountables plan as well. And we even write-off several dinners out each month – because they serve as business meetings.
Not to mention, we run a number of subscriptions and membership fees through the business. The rule is that they must be ordinary and serve a business purpose… which they do.
These are all items that we would pay for no matter what. By leveraging the tax code, we can convert them from personal expenses to tax-deductible business expenses.
And this is just scratching the surface of what’s possible when you put robust tax strategies in place. With the right approach, you can side-step much of what the tax man tries to throw at you.
The key is to simply follow the tax code. It’s all there… it’s just not advertised.
Pair this with a comprehensive approach to investing and you have a recipe for true financial security and ultimately financial independence. More to come tomorrow…
-Joe Withrow
P.S. Everything we’ve been discussing is about laying the foundation for a modern Permanent Portfolio – one that can protect and grow your savings and generate extra income for you at the same time.
We’re going to talk more about this approach at our webinar on Wednesday. We’re calling it The Strategic Investor’s Playbook: Bulletproof Money, Consistent Cash Flow.
If you’re interested, I’d love for you to join us.
The webinar will start at 3:00 pm Eastern. The main presentation will run for an hour or so. Then we’ll open it up to Q&A… and I mean a real Q&A where folks can submit anonymous questions and get a real, unfiltered answer. No question is off limits.
You can register for the event at: The Strategic Investor’s Playbook Webinar Registration
See you Wednesday!