Tom's Blog

Alfonso asks the following question:

This past year I paid to my children for helping my business. I did not have an LLC. I just operated as a sole proprietor. Are these payments deductible for me? Are they taxable to my children? If so, how?

A: I have good news for you, Alfonso. Not only do you get to deduct your payments to your children, they may not have to pay tax on them. And, you don't have to withhold any payroll taxes.

Paying children can be a great way to shelter income from tax not just for you, but for your children as well. At ProVision, this is such an important part of our clients' tax strategies, that we have developed an entire education product called, "Getting Your Children in the Game." This product is about to be released for the first time ever at http://www.provisionwealth.com/products.

Getting your children in the game can save you $5,000 - $12,000 in taxes EVERY YEAR. Don't miss out on this critical part of your tax strategy. In tomorrow's blog, I'm going to tell you how I used this strategy to get my 18-year old a house of his own.

Warmest regards,

Tom

Yesterday, my son, Sam, closed on his first home. Sam is a senior in high school and will attend the university next year. Several months ago, after reading Rich Dad Poor Dad, he asked me if he could get started in real estate. He especially wanted his own house where he could live and his buddies could rent rooms from him to help pay the mortgage.

Little did Sam realize that I had started planning for this years ago. I arranged my business structure in such a way that Sam is an owner in my business and shows income from my business on his tax returns. Not only has this saved significant income taxes for me, it has enabled Sam to begin his real estate investing at a very young age. His older brother, Max, is also an owner of this new house. Max has been investing in real estate now for several years (and has an excellent credit score).

With the help of my Arizona real estate agent, Brian Matlock, we found a nice little house that is convenient to the University (and to our house so Sam can bring his laundry home or can come for a good meal). Between Sam and Max, they were able to purchase the house and get a great rate on their financing. And, we bought the house at more than $30,000 under market value.

So start planning now with your children. It's never too early to get them in the game. For more information on this topic, go to Wealth Strategy U on our website at http://www.provisionwealth.com/wealthu.

Warmest regards,

Tom

Alonzo asks the following question: I made some business payments via wire transfers from my bank account to their bank account. Can I deduct this? I don't have a receipt for it.

In today's business world, we frequently make payments to vendors using online banking or wire transfers. Alonzo's question about documenting these transfers is critical to making sure the IRS allows a deduction for such payments. After all, documentation this the number one key to convincing the IRS to allow your deductions.

There are two simple ways to document these payments. First is good bookkeeping. If your books properly reflect the payments and properly categorize them to the right accounts, the IRS is likely to allow the deductions. Having a full set of books is a critical part of this. So, don't just use a checkbook accounting program such as Quicken. You need to use a full accounting program that has a balance sheet and income statement (i.e., dual-entry accounting) such as Quickbooks.

Second, you do need to have backup documentation. This can be in the form of an invoice from the vendor, a HUD-1 in the case of a property purchase, or a contract. You can keep these in scanned form if you do not want to maintain paper files (scanned copies are actually safer and last longer than paper copies).

Don't be afraid of using wire transfers or online banking. Just be sure to maintain proper accounting and backup documentation and you should be fine.

Thanks for the question, Alonzo. I'm sure a lot of people are wondering the same thing.

For more information on documentation, go to http://www.provisionwealth.com/wealthu.

Be financially free now!

Tom

One of our School of Tax Strategy participants recently asked me the following question: Last year, I opened a trade name for a Marketing company. After that, I was paying individuals for their services, such as delivering fliers, helping on presentations, etc. How do I deduct these payments and are their any filing requirements with the IRS in this regard?

The first question we have to answer is whether these folks are employees or independent contractors. The IRS has a list of factors that help determine this. For more information, visit ProVision's Wealth Strategy U at http://www.provisionwealth.com/wealthu.

For now, let's assume these are independent contractors. As such, you do not need to withhold any taxes or file quarterly reports. You do, however, need to file a form 1099-MISC for each of them no later than January 31st of each year if you paid them more than $600 for the year.

Since you did not have a separate entity, your Marketing company is a sole proprietorship. As such, you should deduct the expenses of the company against the income on Schedule C of your personal tax return.

Remember that to get the greatest tax benefits from your business and investments, YOU MUST LEARN THE RULES! My company, ProVision, has recently produced some marvelous education modules on a wide variety of tax planning topics. Visit http://www.provisionwealth.com/products
for more information.

One of the better books about the current state of the economy that I have read lately is Charles Morris' book, The Trillion Dollar Meltdown. Morris gives a history of the U.S. economy from Kennedy through today to explain why we are in for a bigger hit to the economy than most people are expecting.

I found his discussion to be direct and to the point. He adds a perspective to the effects of tax reductions and government intervention that I have not found anywhere else. It's critical for everyone who relies on the U.S. economy to understand it and where it might be headed. Morris adds a very well thought out perspective to this discussion that is well worth your read.

While most people see the state of economy as something to fear, I see it as a wonderful opportunity. Wealth people make most of their money in a down market. This is the time to buy, not the time to sell. If you have a strong knowledge of the financial, real estate and business markets and have developed a solid strategy for long-term wealth, you should be excited about the current state of the economy.

So get knowledge and develop your strategy now. For more on developing a wealth strategy, go to ProVision's Wealth Strategy U at http://www.provisionwealth.com/wealthu or download our introduction to Wealth Strategy called "Financial Freedom Now! Home Study Kit" at http://www.provisionwealth.com/products.

Don't let this economy pass you buy. We may not see another opportunity like this in our lifetime.

Yours for financial freedom now.

Tom Wheelwright

We received an interesting email from a long-time client today. She asked to be removed from our email list (though stay as a client) because she does not like our emphasis on reducing taxes. She feels that by helping you lower your taxes, we "help eviscerate the social safety net in America."

As you might imagine, I have a little different take on this, having spent a 30-year career helping people lower their taxes by 10-40% or more. Let me explain by giving a little history lesson on one of my favorite subjects - the U.S. income tax system.

When the income tax was first introduced in the early 20th century, it was a flat rate on high-income taxpayers. As the Government needed more money, the rate increased and the tax base broadened to include more and more people. If this were the end of the story, I would not be writing this blog and would not spend my time helping people lower their taxes.

The Government soon learned that taxes were an excellent way to stimulate the economy. It started using the Internal Revenue Code to effect not only economic policy, but also social and energy policy. The primary tools it used (and continues to use) were tax deductions, exemptions and credits aimed at encouraging certain investment behavior among the American people.

For example, to encourage home ownership, a provision was enacted whereby homeowners could deduct interest and property taxes. To encourage charitable giving, a provision was enacted to allow a deduction for gifts to qualified charities. These are deductions that the average American now sees as their right and if they were taken away, people would scream. In fact, it is these very deductions that have prevented Congress from enacting a Flat Tax. And I would bet that my friend who is worried about us "evicerating the revenues of the U.S. government" would be very unhappy if we did not claim their home mortgage interest, real estate taxes and charitable deductions on their tax return. In fact, they would probably fire us and rightfully so.

But are all tax deductions as justified as these? In fact, I would argue that the business and investment deductions and credits are even more justified. Why? Because they help create jobs and housing by getting more money put back into business and real estate.

I was talking to a good friend of mine just the other day. He was telling me that he puts all of his money back into business and into real estate so he doesn't have to pay so much in tax. Here is at least one person who is doing EXACTLY WHAT CONGRESS WANTS HIM TO DO and by so doing is helping to build the U.S. economy.

To be sure, I am all for eliminating loopholes that affect a very small part of the economy and sometimes only help a single company (yes, these are still passed on a regular basis). And if Congress wants to change the laws and eliminate some deductions and credits, that is entirely their right. However, I have never met a single person who VOLUNTARILY pays the government more than is required.

As Judge Learned Hand of the Second Circuit Court of Appeals once said, ""Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister
in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

For more on how to lower your taxes LEGALLY by 10-50%, check out our tax education products at http://www.provisionwealth.com/products or call us at toll-free 1-866-467-5809.

Warmest regards,

Tom

On Tuesday (Tax Day), John McCain announced his idea for how to simplify the tax filings for mllions of people. Finally, a workable idea!!! His idea is quite simple and would solve many problems. For those of you who didn't hear about it, here it is in a nutshell.

Create an alternative tax that is optional (not mandatory like the AMT). The alternative tax would be a flat tax, with two tax rates, a generous standard deduction, and nothing else. Taxpayers would have the choice of filing under the regular tax system or the alternative system.

This solves many problems without creating the remarkable complexity that comes from a consumption tax (e.g., national sales tax) or other "flat tax" proposals. Because you have a choice, you would be able to take the complex route of the regular tax, using a firm like ProVision to handle your tax filing. If, on the other hand, simplicity is most important to you, you can simply use the flat tax and file a postcard-type return.

What I like about this proposal is that it should eliminate many of the complainers about the current system being too complex. They would have the opportunity to use the simple form. At the same time, it's not a massive overhaul of the current system and so is politically doable, as no one loses. It should allow the IRS to reduce it's audit staff (especially office audits). Finally, it allows the government to continue using the tax system to encourage investment in real estate and business. (Personally, I'm not sure I care whether the government uses the tax system for economic, social and energy policy. The government sure seems to like it, though.)

The only downside I can see is that it would take the pressure off the government to do a massive overhaul of the current system. At this point in history, though, it seems almost impossible to undo decades of complicating the tax system. The tax system is woven throughout our entire economy. So I think that Mr. McCain's proposal is a very good step in the right direction.

One other aspect of John McCain's proposal that I really like. With a flat tax, any time the government wanted to raise or lower taxes, it would be very obvious, since it would have to include a rate change or a change to the standard deduction. It couldn't be hidden like the haircuts we have on Schedule A (itemized deductions) or the income limits on certain tax benefits or the alternative minimum tax.

There are still many issues that would have to be ironed out, such as which income is taxable, but let's give Mr. McCain a round of applause for coming up with a reasonable step in the right direction towards tax filing simplicity for the average, middle-class American.

Warmest regards,

Tom

The great question of the world is, "How do I find happiness?" Some people seem to think happiness comes from material possessions. Others seem to think it comes from fame. Still others believe it comes from love and family. While there can be very happy moments from any of these and particularly from love and family, true and lasting happiness can only come from gratitude.

Gratitude cures a multitude of ills. When I was a missionary in Paris, I spent several months in the suburbs south of Paris. This has never been a very well-to-do part of the city. Interestingly, I found both very happy and very miserable people there. Those who were miserable tended to blame others for their misfortunes and were angry at the world for not giving them more.

On the other hand, there were several people I met who were extraordinarily happy, though they had very little. These people were very thankful for what they did have. They were thankful for their family, their friends, their health. They did not complain. They were at peace.

How is it that I found two such completely oppositite attitudes int he same place among people in the exact same circumstances?

It became clear to me that the difference between the two groups related primarily to their attitude about life. On the one hand, there were those who were angry at life and felt they had been cheated. On the other hand were those who were grateful for what they did have.

I have found this situation over and over in my life. People who are truly happy tend also to be those who are the most thankful for their blessings, regardless of their current station in life. Those who were unhappy were jealous our upset because they didn't have something they wanted.

I notice this in my own life as well. When I focus on how much I have been given, I am less worried about what I don't have. I also tend to focus more on how I can help others. And helping others is where true peace and contentment are derived.

What does this have to do with wealth? Everything! Wealth includes not only monetary success, but also spiritual, emotional and physical success. And we tnd to be so much more successful in these areas when we are grateful. Interestingly, I also find that my financial wealth grows as well when I am most grateful. When I can get ouside of myself and focus on helping others, giving back, is when the money seems to flow.

So don't be afraid to say a prayer of thanksgiving from time to time or to tell your spouse or your children how much you appreciate them. It will have a tremendous impact on your life.

Thank you for letting me share with you.

Warmest regards,

Tom

Chris asks the following excellent question about the consequences of qualifying for real estate professional status:

If I elect aggregation for RE professional status for 2 rentals, what are the implications when I sell? One possible scenario in this current market would be that I incur a loss on one property (even with recapturing depreciation!) and a gain on the other, presuming I sell both in the same tax year.

A: As with most tax questions, the answer is "it depends." It depends on whether you have always qualified as a real estate professional. If so, then you simply have gain or loss in the year of sale and that gain or loss is treated as a Section 1231 gain or loss. See your tax coach for more on the consequences of Section 1231 gain or loss (generally positive).

If you have not always been a real estate professional, you may have unused passive losses relating to these properties. If you sell the properties in a fully taxable disposition (e.g., there is no gift or 1031 exchange involved), you will free up these unused passive losses to be available for use against other income (including any gain from the sale).

If you sell one, but not the other, you will not free up any passive losses. This is because you have not disposed of the entire property (which, because of your aggregation election now includes both properties). You will not free up the losses until you dispose of the other property. The result is that you could end up with these passive losses trapped and unused for years and years.

For this reason, I strongly recommend you consult with your tax coach to determine the best tax strategy even before you make the aggregation election for the first time.

For more information on how to be a real estate professional for tax purposes or the consequences of doing so, see our new ProVision education product, How to Uncover the Hidden Cash Flow from your Real Estate at http://www.provisionwealth.com/products.

Warmest regards,

Tom