One of the common misconceptions about taxes is that it is there to punish us. Guest, Tom Wheelwright, a leading expert and the bestselling author of the Rich Dad Advisors book, begs to disagree. For him, the number one goal of taxes is to incentivize you to do what the government wants you to do; and he sits down with host, Marco Santarelli, to explain why this is so and update us of the current state of real estate tax incentives—from the state to local tax laws and more. He then shares the importance of being accountable and responsible for your tax situations, emphasizing how you build your wealth determines how much tax you have to pay.
Hey, thank you, Marco. It’s always good to be with you. As we were talking before we started I just, you know, we’re both fans of financial education. We both believe that that is one of the cures to what ails the world right now. So I really appreciate what you’re doing.
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I love the quote, “Way more money, way fewer taxes.” If I was smart enough, I would have trademarked that saying, but I wasn’t smart enough to do it. My good friend and someone who I respect and admire is my guest on the show. This is his saying. He always likes to say, “Get way more money and pay way fewer taxes.” My guest is Tom Wheelwright. He’s been on the show before. Tom is the visionary guy behind multiple companies that specialize in wealth and tax strategy. He loves to show entrepreneurs and investors on how to build massive amounts of wealth through practical and strategic ways to permanently reduce your taxes. He’s also a leading expert and the bestselling author of the Rich Dad Advisor book, Tax-Free Wealth, which I highly recommend and it is in its second edition. With that, Tom, welcome to the show.
Thank you, Marco. It’s always good to be with you. We’re both fans of financial education. We both believe that is one of the cures to what ails the world. I appreciate what you’re doing.
Thanks for coming on the show. It seems like we could talk for hours about taxes and all kinds of stuff. I’m intrigued by the pivot you made to your new business and the service you provide to investors and what you can do to help them. Let’s start with that. For those people who don’t know what you do, give us a short overview of what you do in the service you provide.
For those who don’t know me, I can give a little bit of my background too. I grew up in Salt Lake City, Utah. I am a good Mormon boy. I have spent two years as a Mormon missionary in Paris, France, where I learned all about rejection. I loved the French people. One of the things I miss most is being able to go to Paris because Paris is my favorite place on Earth. When I came back, I went to the University of Utah where I got my undergraduate in accounting. I then went from there to the University of Texas, where I received my Master’s degree in Professional Accounting, specifically with tax. I spent seven years with one of the largest CPA firms in the world, Ernst & Young, including three years in their National Tax Office.
In fact, when I was there, the last major Tax Act was 1986. I was in Washington DC following that Act and teaching our clients and our CPAs what that was all about. I’ve been in the heart of the legislation. After I left Ernst & Young, I spent four years as an in-house tax advisor for what was then a Fortune 500 company with a specialty in real estate. They hired me because they bought a big real estate developer and they needed somebody to handle all the real estate side of things and that was my specialty. I also did a lot of legislative work as well as testifying and we came up with some new laws. I have a law on the books that I wrote in Arizona tax law.
I then spent another short period of time with another big firm. It didn’t work out. They fired me after nine months and I started my own firm. I’m going, “How hard can this be?” I had two clients. I thought, “This can’t be that hard.” I worked really hard and nine months later, I doubled my business. I had four. I found out that you can buy a CPA firm and things took off from there, but what I learned was I was one of the few CPAs ever to do cold calling. I started learning about sales and marketing and how to build a firm. We grew quickly. While I was doing that, I was an adjunct professor at Arizona State University.
I created a course on multistate taxation for them and taught that for fourteen years. I built and sold CPA firms for about many years. I started traveling a lot with a fellow by the name of Robert Kiyosaki, which everybody in the real estate business knows as the author of Rich Dad Poor Dad. Robert and I became good friends. I became one of his tax advisors. He traveled the world many times. We talked about tax incentives and tax benefits and helping people understand that the tax law is a series of incentives. It’s not there to punish you. It’s number one goal is to incentivize you to do what the government wants you to do.
We’ll travel the world and somebody always says, “That’s great in the US but that doesn’t work here. I even have people when I went to Texas and they said, “That’s great in Arizona, but that doesn’t work in Dallas.” I’m like, “As a matter of fact, it works everywhere in the world.” We’re talking about principles like Rich Dad Poor Dad talks about financial principles. We’re talking about basic tax and wealth-building principles. What we did a few years ago is we started a new company. The idea behind it as opposed to Wall Street, which says, “You’re too stupid to handle your money and you should turn it over to them.”
We believe that you’re the smartest and best person to handle your money. You’re going to make the most money with the least amount of risk if you create your own ability to build wealth, but the number one issue with building wealth is a tax because it is a major drain on wealth. I’ve made my life study tax law and how does the tax law work? What I learned over the years is that the tax law is a system of rewards and punishments, but primarily rewards. I’ll come back to WealthAbility, but I’m going to put up Robert Kiyosaki’s Cashflow Quadrant because we can do everything from here, which is why I’ve spent the last several years traveling with him.
His book, Cashflow Quadrant, is a must-read book.
It is. We have four primary ways to make money, as an employee, self-employed, big business owner or as a professional investor. I know, Marco, you emphasized professional investors. If you’re an employee, it doesn’t matter where you are in the world. If you make a good income, you’re going to pay 40% in tax. If you’re self-employed and you make a good income, you’re going to probably pay 60% because you’re not just paying your side of the tax, you’re also paying the employer side of the tax. Your both sides of the tax. Your tax goes up when you buy your job. As a big business, all of a sudden it drops down because you’re making your money with the corporate tax rate, which is 21% or through capital gains, which is 20%.
The big business owner or dividends or capital gains tend to be around 20%. The magic of what you’re teaching, Marco, is that the professional investor easily within a few years can get to zero, even though they’re making more money than over here. The reason is simple. It’s because the government looks at where we are since the 2017 Act. We are looking at are we a consumer or a producer? The more we produce, the less tax we pay because the government said in 2017, “It doesn’t matter where you make your income, but if you take your income and put it into production, business, agriculture, energy, real estate, we’re not going to tax you on it. We’re not going to tax you until you consume it or until you store it.”
You can store it in an insurance policy, in gold and silver, or in a savings account. It doesn’t matter. It’s still storage and storage of wealth and consumption are taxable. Production is nontaxable. You can make millions of dollars, for example, Robert Kiyosaki who makes millions of dollars from writing books. If he takes that money and then he’s putting into an investment, then that investment assets this. Here’s somebody else that we saw. In 2016, we’re back into an election year. We had Hillary Clinton, who was an attorney and his father was a small business owner. She was used to a 60% tax.
We then had Donald Trump over here. He’s a big business owner and a professional investor. When she asked him in that famous interview, that famous debate, “You don’t pay any taxes.” His best answer ever in a debate is, “That’s because I’m smart.” He is not denying it, but it is not. It’s because of the way he makes his money and because of what the government says. This was before the 2017 Act. It’s just gotten better since 2017. The purpose of WealthAbility, what we’ve done is we’ve taken all of these concepts. We’ve done something unique and created a system for reducing your taxes. We can honestly say to any investor business owner that, “We can show you how to reduce your taxes by 10% to 40% in three months or less.”
We can do it every time because we have a replicatable system. We know it can be replicated. What we’ve done is we’ve trained people to be the guides and the logical people to be the guides are other tax advisors and CPAs. We created the system, we brought together CPAs and other tax advisors to be the guides for the system, and then we put it all together. When you come to WealthAbility, most people think, “I’m going to go to a CPA. How do I find the right CPA?” It’s a little like saying, “Is this flip chart deductible?” That’s the wrong question. The better question is, “How do I make this flip chart deductible? What’s a systematic approach to reducing my taxes on a daily basis?” Not, “Can I find the right tax advisor?” You’ve heard me say that dozens of times.
We’ve had an experience Marco, where somebody comes to us and we’re trying to explain to them the system and how the system works. They find out which guide we’re going to send to and they’ll go behind our backs. It’s not ethical, but they do it anyway. They’ll go straight to the guide. They’ll hire the guide without ever telling the guide that they have been working with us. This is a true story. We had somebody who did that. They came back to three months later to complain. Their complaint was, “They didn’t do what you said they would do.” We then said, “We didn’t say, ‘They would do it,’ we said, ‘The system would do it.’ You chose not to be part of the system.”
There’s a lot of things you can learn with an encyclopedia, but without that iPhone, computer or that system, it’s going to be hard. You’ve talked about googling it, that’s a complex system. I remember the days. I’m elderly and that’s what I learned from the crisis. What I’ve learned is that there was a time when I had to do it all by hand. I did tax returns and computations by hand. Once you bring in a system, it makes it a lot easier. What if you had a system to reduce your taxes? I love giving the education, but the reality is until you put wealth and tax strategy into a comprehensive plan of action, you’re going to be in a rifle approach. It’s going to be difficult to get much that you want to get because you’re looking at piecemeal. That’s the mistake that most people make with their advisors is they look at it as, “I’m going to ask you a question, you’re going to give me an answer,” when what you want is, “Let’s look at a comprehensive system so that we’re never paying tax.” We don’t want to just not pay the tax this year, but even next year, the year after or the year after that. At the same time, we want to be building wealth and the way we do that is with the tax reduction and wealth-building system.
That’s all beautiful. Two takeaways that I have from that to boil it down is number one, you’re saying you need to be accountable and responsible for your own tax situation. You need a tax advisor and a professional to help you, but you can’t throw everything onto their shoulders. You need to understand it yourself and have that system in place. The second thing I hear you saying is and I’m going to quote you, “If you change your facts, you change your tax.” That’s the bottom line.
Let’s say I’m your tax advisor. I can’t change your tax nor your facts. I can tell you what facts to change, but you have to change them. That’s why it’s your ability, not mine. That’s what I love about what you’re doing, Marco. I know I went a little longer, but I want to give people a baseline to go from before we get into what’s going on.
That not only answers my question thoroughly, but it sets the stage for what we’re going to talk about at the heart of all this. That’s the state of real estate tax incentives as they are now. This all started long ago, but a major change was in 2017 with the Tax Cuts and Jobs Act that Trump signed into law back then, which was significant. If you want you, we can start there. We can talk a little bit about that, but what’s significant is the CARES Act that came about this year.
The 2017 Act set the stage for the CARES Act. If you think about it, what are the 2017 Act do? It used to be that employees got deductions outside of charitable contributions and a little bit of home mortgage interest and a minor amount of real estate tax. You don’t get a lot of deductions anymore as an individual. It shifted the emphasis as Robert would say, “If you want to be on the B and the I side, you don’t want to be on the E and the S side.” Everybody’s going to be on one side, but you want to also be on the other side. I have and run a CPA firm. I still have a small group of clients, but I’m in one quadrant as I build my network, and as I do my real estate investing.
You don’t have to be in one quadrant, but what you have to recognize is that it takes two things. One is it takes understanding how to behave over on one side. If you’re going to have what they have, you have to behave as they do. You don’t have to be big. Second of all, you have to understand that you need a system and guide in order to do that. What happened in 2017 was it was a bigger shift. We always got great benefits from real estate. We have bonus depreciation and opportunities on, but we were doing cost segregations long before that because we still had five-year property versus the 40-year property.
That was the shift. If you buy equipment or you buy property, you get an immediate deduction instead of having to take it over a period of time. What the CARES Act did was it shifted even more than that, because one of the things, they have to look at how much they decided like, “We’re going to allow $1.5 trillion of deficit spending here.” I’m not a big fan of that. That’s what they decided in 2017, it’s $1.5 trillion and they add another $3 trillion to $4 trillion in the CARES Act. They’re saying, “We need to put money into it. At $1.5 trillion, they still have limits. The reason we don’t have a deal yet between the Republicans and the Democrats is that the Republican Senate wants less of this wild spending and the Democrat house wants more. That’s the conflict and it’s good to have two sides and because of that, they had to do some things to raise revenue. One thing they did was eliminated the net operating loss carryback. We used to be able to carry back losses. Let’s say we had a big real estate deal. If we created this big loss, we could carry it back for two years and carry it forward for twenty years.
The CARES Act brought it back on steroids and said, “If you had a loss in 2018, 2019 or 2020, you can carry that loss back five years.” On top of that, they made a change to the real estate law. With the real estate law, there was an issue called qualified improvement property. This doesn’t apply to residential real estate. This only applies to commercial real estate. When I say commercial, for tax purposes, that means it is office industrial business. If it is a commercial loan, it doesn’t mean it is commercial property. Qualified improvement property is like tenant improvements to an office. There was a mistake made in the 2017 law and qualified improvements got this horrible depreciation rate in 2017. It should have gotten bonus depreciation, which is a 100% first year.
What they did wasn’t the CARES Act. They fixed it. Think about this. You do a real estate deal in 2020 with bonus depreciation creates a loss and then you go, “I also rented an office and I’ve got qualified improvement property. Now, I get to deduct that or I did it in 2018 and I can deduct it in 2020 or 2019. I can take this loss. I got into additional loss and I can carry it back five years.” They did one more thing.
That was broken in the 2017 Act, then they fixed it.
In the 2017 ACT, where they were looking was here as an investor they said, “If you have losses, they can’t offset non-business income.” They can offset your wages and your business, but they can’t offset dividends, interest, retirement, etc., except for $500,000. That was a big deal. The whole point of the CARES Act was putting money back into the economy. They said, “We’re going to take away that $500,000 limitation so now, what do you have?” You have three things going on. You have the NOL carryback, the qualified improvement property, and the $500,000 limit, which is gone.
Now, you have a gigantic NOL carryback. You could carry that back and carry it forward. That’s a huge deal, but a lot of people still haven’t taken advantage of it. Remember that under a House proposal called HEROES Act, they restrict this carryback. This is something that ought to be looking especially as tax returns are getting finished for some people. Let’s make sure we look at that. If we’ve got an NOL, maybe we need to carry it back and see, does it work better to carry it back? Are we going to be better using it in 2020? That’s an option we have. Another big thing that happened, especially for a lot of people is we have this new rule that I lovingly referred to as a $100,000 rule.
Is that related to access to funds in your retirement account?
That’s what that is. What it says is that if you were damaged by the pandemic, either because you or a family member got the virus, you had your hours reduced because of the virus or your business had to reduce its hours because of the virus. You then can pull up to a $100,000 out of any retirement account or a combination of retirement accounts, pay no tax in 2020 and 2021. In 2022, put the money back in and pay no tax at all. You could use it for three years and not have to pay tax, or you can pay a third of the tax in 2020, 2021 and in 2022 and spread it out that way. You have a choice. You can use the money for anything and there are no penalties at all.
Tom, a lot of people have been asking me the question and I’ve been answering it on my Ask Marco episodes about borrowing money from a line of credit or a HELOC or even credit cards with zero interest. This sounds like a better option to use towards a down payment and investment real estate than using a line of credit.
It can be, but you have to run the numbers. I’ll give you the two worst pieces of tax advice. The one I hear the most often, which is, “You’re paying so much tax because you’re making too much money. You need to reduce the amount of money you make if you want to pay less tax.” We are not in a 120% tax rate bracket here. That’s a terrible idea. The second worst idea is, “Let’s invest in real estate through my IRA or self-directed 401(k).” The reason that’s a bad idea is that real estate is the best tax shelter on the planet. When you put it into an IRA, you lose all the tax benefits of it. If you invest through an IRA, you’re still building it up, but don’t think that you’re not going to pay tax because you will eventually pay tax when you pull it out.
Let’s say, you are doing it in a Roth IRA, but you lose your leverage. You don’t get the leverage as much in a Roth because you can’t personally guarantee that. You don’t get the losses like NOL if it’s stuck in a Roth. There are limited situations where it makes sense, but it’s limited. If you’re buying single-family homes, for example, I would never do that in what we call a qualified IRA, 401(k), pension plan ever. Here’s an opportunity to get money out but you have to justify and certify that you had an actual need to get this money out. If you can certify that and that’s millions of people, then why wouldn’t you take it out? The worst thing that can happen is you put it back. You’ve got markets at the highest they’ve ever been, yet, you’re going, “This thing scares me.” “That’s great. Here’s your opportunity. Let’s put it into something a little more stable. Let’s put it in something that produces cashflow.”
To be clear, are you saying not to use it as down payment money towards investment property outside of your retirement account?
No. I’m saying the opposite. You pull it out of the retirement account and then use it as the down payment.
We’re on the same page.
Don’t do it within your retirement accounts, pull it out of the retirement if you can possibly pull it out. What’ll happen is you’ll get that bonus depreciation that you wouldn’t get if you left it in retirement. If you put $100,000 on a $400,000 property, you’re going to get a $100,000 deduction.
That is if you’re a high-income owner.
You have a choice. You might hold onto it for three years and then pay it back. Let’s say three years down the road, you refinance and you pay the money back, that’s great. You borrowed money, which is not taxable. You put it back in your IRA and you’ve done deals that you could never have done, or you pay a third of it now, but let’s say you have $90,000. You pick up $30,000 of income and get $100,000 or $90,000 deduction. That’s a good deal for me.
This is the type of knowledge that a lot of people are not aware of that’s there. People like you are sharing this and teaching people how to use it. I don’t think many CPAs fully understand how to take advantage of these new Acts. Education is critically important and then putting into play what you’re teaching is that much more important. That’s where you create wealth and minimize or reduce your tax impact.
That’s part of the reason you want to follow a system because the system needs to include education. If you’ve got a CPA, who’s just telling you the answer, you’re never getting educated. Remember, you’re the one who has to change your facts to reduce your tax. I’m not the one who does that so you need to know how to do it, which is why education is a critical part of that system if you’re going to do this. The other part is CPAs tend to be a linear thought process. The laws are not linear. The law wasn’t written by CPAs. It was written by attorneys and Congress people. It was written by more nonlinear or right brain people.
What happens is that CPAs tend to go, “This is the rule or I heard this as the rule.” They don’t look at the rest of the law. I’m a nonlinear person. I don’t do well with the linear. I’ve taken that long linear thought process and with the help of my team, who’s a lot of linear people, we’ve put it into a linear system so that the CPAs we train can guide you through it. Normally, you wonder why can’t a CPA pull this together? It’s because it’s outside of what they’ve learned. Part of the magic of what we did is we brought all these CPAs together and say, “We’ll show you how this works.” We do training on a constant basis. We have a three-day training in October and November. We’re doing online training every single month. This is not something that you do casually. You’ve got to have a system to put you through it.
Let me ask you another thing about the CARES Act. This was put into play on March 27th, 2020 by President Trump. He signed it into law and it was the largest stimulus bill in US history. Initially, it was $2.2 trillion that they were pumping back into the economy. It was a massive bill with a lot of implications. You mentioned NOL or Net Operating Losses multiple times. We can get deep on this and I don’t want to go down that road, but at a high level, how can residential real estate investors take advantage of that when they’re sitting there saying, “That sounds great but how do I use that?”
There’s a magic term down here and it is cost segregation. It means that what you’re going to do on your residential real estate is you’re going to break down the cost between the land, the building, the land improvements, and all the contents of the building. The land improvements and the contents of the building are going to end up being somewhere between 20% and 30% of the cost. That’s my experience. Don’t use those numbers though. You have to do professional cost segregation. There are some inexpensive ways to do that as long as you’ve got a CPA, who’s willing to walk you through it because it is required that you have a CPA sign off on it by the IRS, but it doesn’t have to be expensive. That’s my point.
What cost segregation does is those last two things. We know that land doesn’t wear out. It doesn’t get written off at all. The building wears out over a long period of time. It gets written off a little bit at a time, but the land improvements, that include the fencing, landscaping, the outdoor waving, all of the things that are inside the house, the flooring and the ceiling fan and the window covering. That all can be written off the year you buy the property. You place it in service. If you buy a $1 million property and that’s 25%, that’s a $250,000 deduction. A little bit of warning for everybody, you will have CPA say, “You can’t use that because you’re a passive investor.”
Passive losses would only apply to passive income.
Here’s the key. This is where the system is important. You have to have a system for turning active income into passive income. Some people can be a real estate professional because they’re doing this so much and they’re going to be a professional. This is a professional side, but there are other people that they’re investing a little bit, like my wife and me. Neither one of us is ever going to be a real estate professional. She’s a full-time CPA. She has her own practice. I’m a full-time business owner. I do my own stuff. We’re never going to be real estate professionals. That doesn’t mean I can’t use my losses. It means that I have to do it in a different way. That’s where that system again comes into play.
It always makes me wonder how many people can qualify their active income as passive income legitimately especially if they’re in the E quadrant as employees.
If you’re over here and you’re only over here, you’re done. There’s nothing I can do for you. If you’re on these three quadrants, we can passive income almost 100% of the time. If you’re here and then you’re buying a couple of properties over here, it’s going to be passive. That’s the way it is. Maybe you want to start to take some of the money and invest in an income-generating passive activity that won’t have any tax because you’ve got past the losses from your real estate. This is why we do wealth and tax strategies. You can’t do the tax strategy. You have to do the wealth piece because we need to work with you on how you’re going to build your wealth because it determines how much tax you pay. It has to be done in conjunction. That’s why we do it the way we do it.
It’s an overall game plan. If you don’t have a game plan, you don’t have rules to follow to win the game. That’s what it’s about. For those people reading and not seeing what Tom is pointing at, in the Cashflow Quadrant, he’s referring to the person that’s in the top left in the E quadrant who is an employee. You have a few ways to minimize and reduce your taxes. If you’re self-employed or you’re on the right side of that quadrant and the business and investment category, you have a lot of options. In fact, the whole Tax Code is your playbook. You learn how to use it. Let’s shift to the SALT, State And Local Taxes was anything in the act to address that because in my understanding, that goes away in 2025. Do you know the SALT deductions or the State And Local Taxes?
Do you mean the $10,000?
For guys like me in California, it’s painful here to lose those state and local tax deductions on your taxes.
The individual tax provisions are permanent. Most of them are permanent. For example, the elimination of miscellaneous itemized deductions, like your brokerage fee, that’s permanent. A lot of things are permanent, but here’s a great thing. First of all, multi-state taxes and real estate state taxes are my two specialties. Technically, there’s a lot you can do to reduce your state taxes. It shouldn’t be ignored, especially when you’re in the people’s republic of California. Don’t ignore the state tax. Thank you for that. There’s nothing to CARES Act to deal with that at all. It’s not going to happen. Frankly, it shouldn’t happen. It’s that tax policy to allow that deduction because you are benefiting those states that reduce that spend more money at the cost of the states that don’t.
Believe it or not, that’s been on the chopping block since I was in Washington DC in 1986. This is not a new idea to eliminate the state and local tax deduction. What they ought to do is eliminate it entirely, and we ought to add a value-added tax. I am a proponent of a value-added tax. If you’re going to raise revenue, if you need revenue for something for example, I will be totally forthright. I’m a big believer that everybody ought to have healthcare. I’m not a big fan of Medicare for all because that’s a terrible idea, but should everybody have access to healthcare? I think so. I think those of us who have money owe that to those who don’t.
To do that, you’re going to have to raise revenue. To me, the logical thing to do, the reason I got into the state and local area is that I thought we would get a value-added tax before now. You’d call it a national sales tax, but a value-added tax makes more sense. In a little policy sidelight, we’re at a huge disadvantage than the rest of the world because we don’t have a value-added tax. For example, if Airbus sells an airplane into American Airlines, American Airlines pays a big value-added tax. Whereas if Airbus doesn’t pay any value-added tax but if Boeing sells to Air France, they do pay a value-added tax. It’s a big problem. They tried to do this with the border tax adjustment and everything, but it didn’t work. What we have to do is we have to pay a lot of attention to it in the new tax law. Let’s say we have a change in administration in January, which looks more likely than not. Mr. Biden has said that there are going to be a lot of changes in the tax law, so you need to pay attention to it.
Before we get to that, I want to say that I’m familiar with the GST tax that they implemented in Canada. In principle, I agree with everything you said. I can see where the benefit would come in if it was properly administered and properly run. When the GST came in, there were all these promises and people ended up calling it and loosely labeled the gouge-and-screw tax in Canada. It did nothing to help healthcare. In fact, if anything, it got worse. It’s one thing to have the money to put into health programs. If you don’t have competent people to run it without milking the system, it doesn’t work.
That’s the big challenge with it. The reason that you’re always hesitant to see any new tax is that it’s easy for them to raise the rates and waste the money. Look at the HEROES Act, there’s so much pork in that and the CARES Act, it is a pork bill. There were some important things in that bill, like the stimulus money, the PPP loan, the evictions, but there was also a lot of pork. I read that law and you have to read it to find out where the pork was, but there’s a lot of pork in there. The HEROES Act is rife with pork. That’s always the challenge is the money being spent the way it should be spent and typically the government doesn’t spend the money the best way.
We’ve been talking about tax incentives and we can go all over the place with that, we have elections coming up here in November 2020. Who knows what’s going to happen, but we need to talk about it or at least bring it up. What do you think about Joe Biden’s proposed tax plan? I think I know what you’re going to say.
You may be surprised. My job is to explain the incentives and then help people utilize those incentives. Joe Biden’s plan is to change the incentives. That’s a policy issue. Where do the incentives go? I want to make sure that everybody understands the incentives and goes, “The incentives now are heavy over here.” Some of the incentives will come back to the employee side and he’ll be encouraging people to be employees for some of the incentives are coming back to. He’ll also discourage a lot of the business owners. His proposal to raise the corporate tax rate of 28% is a huge discouragement to big business. His proposal to eliminate the 20% deduction for small businesses is a huge disincentive to be a small business owner.
His proposal to tax capital gains at over $1 million at ordinary income rates is a huge disincentive. There’s hope there because he proposes tax on capital gains, that doesn’t mean real estate is going to be taxed at that rate because real estate has its own category called 1231. We may escape that real estate in business and capital gains tax. He wants to put more emphasis on social programs. It’s going to be a rearrangement of incentives and then that’s a matter of looking at those incentives and you’re going to have to be able to adapt to those different incentives. You’ve got to start adapting in any way because one thing that he has proposed is a massive reduction of that state tax exclusion and elimination of the step-up in basis.
When you combine those two, you’re looking at a state tax and the effective state tax rate is somewhere in the neighborhood of 80%. You want to be working now to be taken care of that. Don’t wait until next year because if you do it now, and then Trump’s still president, you’ve done your planning ahead of time. If you do it now and get ready to pull the trigger and you see. On December 1st when you got a new president, don’t pull the trigger and tell them. Don’t sign the papers until December 1st, but when you get the work done now, it’s going to be worth it to you because you’re talking about millions and millions of dollars in tax liability.
There’s a lot of stuff that people ought to be looking at to plan for that eventuality. We know we’re not going to know the results until December. If we don’t know the results until December or maybe not until January, depending on what fights there are. You well remember George W. That was into December before we knew, then what happens? You can’t plan it. That’s why there is an urgency to start planning now. On top of that, at the end of the year, you can’t do tax planning for the previous year. You’ve got to do that tax planning to prepare so that you’re reducing your taxes now.
I guess what you’re saying is work with your tax advisor and continue to educate yourself so you know what’s coming and you’re prepared for what potentially is coming.
Better yet, working in a system of tax reduction. Develop this strategy so you’ve got a system for reducing your taxes so that every single dollar you spend can be deductible. Every dollar you earn can be non-taxable. It’s a systematic approach to reducing your taxes and building wealth. We all know that’s how people build massive amounts of wealth. It’s typically not a home run.
As a reminder to everybody, real estate has been one of the most tax-favored assets to invest in up until 2017. In 2017, it became the most tax-favored asset to invest in pushing oil and gas in second. With the CARES Act, it has put everything on steroids. Invest in more real estate and work with guys like Tom.
It’s all about being productive, doing what the government wants you to do. You’ll be successful if you do it. Frankly, the tax laws are the roadmap for reducing taxes and building wealth so why not have your own tax-free wealth roadmap?
I can’t tell you how much I appreciate all the great content and education you put out there to help people save on taxes and keep more of what they make. Thank you so much for that. Let’s wrap it up with you by telling us how they can get a hold of you or your team, learn more about what you’re doing and find WealthAbility.
Go to WealthAbility.com. There is one on the front page that says Schedule A Call and we’ll figure out. The system that we use, does it make sense to you? Does it make sense to go through it? Marco, you were asking me, “Who’s the logical person?” It’s somebody who’s willing to build their own wealth and who doesn’t want to turn it over to somebody else. If you want to turn it over to somebody else, we’re not the right place to come. We have people that make $4 million or $5 million a year that we turned down because they want us to do it. We don’t do that. If you want to participate, if you want to create your own ability to build wealth, your own ability to reduce taxes, we don’t care how much money you make. If you make $10,000 or $100 million a year, that doesn’t matter. We want you to know if you’re going to change your tax, you have to change your facts. Our job is to create a system to show you how.
I see no reason why someone shouldn’t learn ways to reduce their taxes. You’re one great viable way to do that. If you like paying taxes, that’s great, then pay taxes. The IRS will take a check from you if you want to pay a little extra.
Here’s the good news, the IRS doesn’t care where you are. If you want to pay 40% or 60% of tax, they are happy to take your money. There’s even a box and you can mark that you can contribute more to the federal government. I’ve never seen anybody who checked that box, but you can do that. If you’d like to reduce your taxes, you have to be in the S quadrant, the B quadrant, and the I quadrant.
It would be interesting to know if Bernie Sanders checked that box.
I’ve talked to people who are big proponents of millionaires paying more taxes. I always ask them, “Did you donate?” Everyone says, “No. I’m not going to donate if everybody else doesn’t have to donate.” That would be like saying, “I’m not going to donate to the Red Cross if everybody doesn’t donate.” What it means is that you don’t believe that the federal government is going to use the money the way you want it to be used. You’d rather have the money than give it to the federal government. You’d rather have the choice of where to put the money and you’re not willing to give it to the federal government unless everybody has to do it. It’s disingenuous.
Tom, thank you for your time. I appreciate it anytime. Tom is a super smart guy and he’s generous with his time and with his knowledge. For everybody, if you are new to the show, remember to subscribe, click the subscribe button. Help us spread the word, share this with your friends and family. We love like-minded people learning from what we talk about. Visit us on iTunes, leave us a rating and review. Thank you for reading. We will see you all on our next episode.
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