Tax Deductions Are Dumb!
A tax deduction allows you to lower your taxable income, reducing the amount of taxes you owe. It sounds like a smart move, right? Wrong! You’re gaining a tax benefit now in exchange for a tax cost later. And if taxes are low now and likely to be higher later, why would you take a smaller tax saving now in exchange for a bigger cost in the future? Consider this scenario again: as a farmer preparing to plant your seeds, would you rather pay taxes on the value of your seeds and have a tax-free harvest, or avoid taxes on your seeds but have your entire harvest taxed? Of course, you’d prefer to be taxed on your seeds and have a bountiful, tax-free harvest!
A Misguided Tax Deduction: Depreciation.
Depreciation allows you to deduct the total cost of something expensive you bought for your business, like equipment, vehicles, or computers. This common practice is done to realize tax savings now, which conventional wisdom says is smart. But it rarely is! We live in a consumer-driven economy where we’re encouraged to spend, not save, and the tax code plays directly into this. We’re encouraged to spend a dollar to save $0.37, but we’re spending that dollar on liabilities that decrease in value, taking us further from tax freedom. Robert Kiyosaki, the famous author of Rich Dad Poor Dad, says, “Assets put money in your pocket, whether you work or not, and liabilities take money from your pocket.”
The only time a business owner should spend that dollar on a liability that takes money from their pocket is if it’s needed to help the business grow and turn a larger profit. In other words, you can leverage it to put money back into your pocket. Sometimes these purchases are necessary, and you receive the added benefit of depreciation. But note that the tax savings alone do not justify the purchase of a liability. If you don’t need it to help put money back in your pocket, don’t buy it! Ensure the purchase is a need, not just a want. We’ve all seen the construction company owner who buys a new truck every year to depreciate it and reduce their tax liability. They’re stuck in the doom loop of spending money on something that loses value to save tax while missing the opportunity to build tax freedom. If building tax freedom is our goal, we should instead pay the $0.37 in tax, take the remaining $0.63, and invest it in the right types of tax-free assets, never to be taxed again.
The Trap of Tax Deferral.
Kicking the tax can down the road might feel good now, but it will cost you dearly in the end. Contributions to tax-deductible investment accounts, often the largest tax deduction for taxpayers today, fall into this category. These accounts include IRAs, 401ks, 403bs, SEP IRAs, SIMPLE IRAs, and 457 deferred compensation arrangements. You receive a deduction for your contributions, but you’ll be taxed on that money when you withdraw it. Conventional financial advice says these tax-deductible contributions are smart retirement savings vehicles. But they’re wrong! Pre-tax investment accounts are terrible places to save and invest for your future. Famed Certified Public Accountant Ed Slott describes IRAs (and other pre-tax accounts) as “IOUs with the IRS.” Think of them as joint accounts with the government. By deferring the tax on these contributions, you’re chained to the IRS, who will eventually tax you at an unknown rate in the future. And as I’ve said, we can safely assume that taxes will be higher in the future.
A Better Approach to Reducing Future Taxes.
This is the wrong approach. Take control of your financial destiny! Instead of focusing on how to save taxes now (only to pay more taxes in the long run), we must pay our taxes now (at historically low rates) to build tax freedom. Tax-deductible accounts can be a conduit for positioning assets but are the worst places to save for retirement long term. Remember, real and lasting wealth is built with after-tax dollars, not pre-tax ones.
Tax deferral allows your investments to grow without paying tax until they are withdrawn, which can seem like a good idea. The growth and compounding are often touted as the keys to creating large sums of wealth. But remember that it’s the growth, compounding, and the eventual tax bill that you’re deferring. You are not saving tax; you are simply delaying it. By doing this, you’re effectively growing the IRS’s cut of your money. Do you think tax deferral is such a great idea now? Why would you want to defer tax to an unknown future tax rate, especially when current rates are at historic lows? Conventional wisdom will tell you to defer tax to be tax-smart, but that couldn’t be further from the truth. True freedom requires us to understand that taxes must be paid, so let’s pay them now at a known, historically low rate and then place our after-tax wealth in investment vehicles where the compounding effect results in returns that are safe from future taxation.
It All Starts with Paying Taxes At YOUR Discretion. (Give them power)
As an entrepreneur, it’s essential to understand that your high-income level likely makes you a target for higher taxes in the future. The top 1% of income earners often fund government spending initiatives with tax increases, and this is unlikely to change. I know you probably don’t want to hear that you need to pay more tax, and I completely understand. You might feel like the taxes you already pay are way too high, and it’s frustrating to watch the government continue to spend recklessly. But the reality is the government is going to spend this money regardless of how you feel about it, and we are going to have to pay taxes. The key to achieving tax freedom is paying your taxes now to protect our wealth from future government overreach.
You’ve been taxed once when you earned your money, so don’t be fooled twice. Pay your taxes now to stop the IRS from sticking their hands back into your pockets later. As entrepreneurs, we’ve made peace with the fact that taxes are a toll we must pay on the highway to tax-freedom. We must stay the course by shifting our focus to reducing our lifetime tax liability rather than our annual tax bill. In doing so, we can achieve true tax freedom and build a legacy for our families.
An Investment in Income Tax, Is It Right For You?
At Tax Freedom Builders, we help entrepreneurs like you rethink how they approach paying taxes and building wealth. Our mission is to show you that focusing on lifetime tax liability, rather than the annual tax bill, is key to building true and lasting wealth. We do this by guiding you on how to build tax freedom by paying taxes now and investing after-tax dollars in tax-free vehicles.
Don’t let the IRS chain you to a lifetime of taxes! Break free by paying your taxes now, so you never have to pay them again. We’re here to help you navigate this journey to tax freedom, ensuring your hard-earned wealth is safe from future taxation.
Ready to start building tax-free wealth? Click the link below to apply for your personalized Tax Freedom Blueprint.
