4 Main Drivers of Tax Savings

• How you make money

• How you save money

• How you invest money

• How you leverage money

Understanding these 4 key drivers will help you make tax-smart decisions over time. By the end of this article, you will see the case to move money into tax smart investments and create liquidity via debt financing.

How you MAKE money

This is the biggest driver of your ability to save money on taxes. If you primarily make money from a W2 job, you will always struggle to reduce income tax.

If you earn money as a business owner, you have more options to create tax efficiency.

For example, if you need a new laptop that costs $2500, a W2 earner just buys the new laptop. But a business owner can buy the laptop and claim a tax deduction for it.

But ultimate tax efficiency comes when your income is primarily from investments.

Imagine earning $300,000 in cash flow per year and 90% of it is sheltered from tax thanks to depreciation. Your after-tax income would be roughly the equivalent of earning $500,000 as a W2 employee.

How you SAVE money

You will never optimize for taxes unless you commit to saving money.

You can save money (get a tax deduction) via tax-efficient accounts like a 401(k), IRA, or HSA. You can further optimize with Roth options and backdoor IRA rollovers.

And saving money gives you the ability to choose where you invest capital.

How you INVEST money

Show me your balance sheet and I'll tell you how tax efficient you are.

If a large portion of your investable assets are parked in real estate deals, you are highly tax optimized (even if you don't deploy REPS or the STR Loophole).

But you can also invest in business infrastructure.

Maybe you need new equipment, vehicles, and office space. All of these investments offer tax savings opportunities which ultimately makes it less costly for you to store and grow your wealth. 

How you LEVERAGE your money

Do you know how the super-rich avoid income tax on their billions?

They take out loans/lines of credit and collateralize their business stock.

Why?

Because debt proceeds are not taxable.

Real estate investors can accomplish the same with cash out refinances. Rehab your property, force appreciation, get a new appraisal, and obtain new financing. The new loan pays off the old loan and anything left over goes into your pocket. 

And you still own the property.

And the loan proceeds are not taxed. 

Source: Brandon Hall, CPA