Tom's Blog

As we approach Tax Season, I wonder how many people understand the potentially vast differences in the quality of tax return preparation? Are tax returns really the commodity that they seem to be? Is a tax return prepared by the tax service in the mall of the same quality as that prepared by a major CPA firm? What does it mean to have a "quality" tax return? In fact, can a tax return be prepared in such a way as to reduce income taxes?

As someone who has been involved in the tax return preparation process for almost 30 years, let me share some thoughts on this subject. As many of you know, I spent several years working on the tax staff at Ernst & Young. And you probably also know that I spent 4 years as the in-house tax advisor for Pinnacle West Capital, one of the largest companies based in Arizona.

What you may not know is that I started my career preparing tax returns for a couple of different small, local CPA firms in Salt Lake City, Utah and in Austin, Texas while I was attending the university in each of these cities. For the past 11 years, I have had my own firm, now called ProVision Wealth Strategists. So, I have a pretty diverse experience when it comes to tax return preparation.

In all the firms and companies at which I have worked, the basic accuracy of tax return preparation was excellent. There was always a good review process and I don't believe there were major mistakes on very many returns produced by these firms. I find this also to be the case on returns that I see from clients who are new to ProVision. It's rare that I find a flagrant error in a return.

But does that mean that these firms all produce the same quality of tax return? The clear answer in my experience is a resounding "NO!" Let me explain.

Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the BEST way it could have been prepared. In fact, I RARELY see a tax return from a new client that was prepared the way we would prepare it at ProVision.

Let me give you some examples. Suppose you have some expenses that could either qualify as investment expenses or business expenses. Either classification would be "deductible" on the tax return. BUT, a business expense is MORE DEDUCTIBLE than an investment expense. How is that possible? An investment expense is deducted on Schedule A and is classified as a "Miscellaneous Itemized Deduction." There are several limitations on a miscellaneous itemized deduction. First, you only get to deduct these type of expenses to the extent they exceed 2% of your income. So, if you have $300,000 of income and $7,000 of investment expenses, you only get to deduct $1,000. What's worse is that if you are in the Alternative Minimum Tax like millions of taxpayers, you don't get any benefit for your investment expenses.

On the other hand, if you were able to deduct these same expense on your Schedule C or your Schedule E, you would be able to deduct 100% of the expenses. In addition, the expenses would reduce your self-employment income from your business. That's another 15.3% tax benefit on top of the income tax benefit.

Another example of less than stellar tax return preparation relates to depreciation. Depreciation is the government's gift back to investors, especially real estate investors, for investing in long-term assets such as equipment and buildings. What most tax preparers don't understand is the idea of a cost segregation or chattel appraisal. The whole goal with depreciation is to get more of it sooner. This provides the investor with a terrific tax benefit in the early years of property ownership. And under the important wealth creation principles of leverage and velocity, the sooner we have cash, the sooner we can invest it and obtain major returns from our investment. The problem appears to be a lack of knowledge from many tax preparers and CPAs about the rules surrounding cost segregation.

The one area where I do see mistakes relates to those taxpayers who file returns in multiple states. This is a specialty area of mine, which I teach at Arizona State University. Even in the major firms, there is a lack of understanding by the Federal tax departments of the many opportunities for tax savings when preparing multistate tax returns.

What it comes down to is whether your tax preparer/CPA has the knowledge and creativity necessary to prepare the BEST return possible. And is it worth it to you to pay a little more to get the better result? Are you focused on the amount you pay your advisors or are you focused on the return they provide you on your investment? Let me give you an example.

Suppose you have a choice of paying $750 for your tax return to a small CPA firm or $2,000 to an innovative, knowledgeable firm. All things being equal, anyone would choose to pay the lesser amount. But what if all things are not equal? What if the $750 gets you an adequate, accurate return but the $2,000 would get you a return where you pay $5,000 less in tax? Which is the better deal? In one, you are out $750 with no return on your investment. In the other, you are net ahead $3,000. Clearly, the $2,000 fee returns a greater value.

This tax season, review your own tax situation and the advice you are receiving from your tax preparer/CPA. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are your taxes going down or do they continue to increase? Taxes are such a major part of your wealth creation that you cannot afford to ignore one of the most important part of the tax planning process - tax return preparation.

Warmest regards,

Tom

Recently, I received the following question about the tax benefits of investing in real estate:

Hello, I had a question for you guys. I just want to make sure I understand. It is about tax benefits. I have a business right now and I have to pay full taxes! If I had real estate like family home, commercial etc...i could take the depreciation of this properties and apply it towards my business income is that right? Can i do that even if I make money on it every month? Could I really reduce or even eliminate my tax payment?? thanks HARRY.

There are actually several subtexts within this question. The first is concerning taxes on business earnings. I'm always concerned when I hear a business owner complain about their high taxes. This tells me that they are not getting good tax advice. The best tax benefits in the Internal Revenue Code belong to businesses and business owners. But many business owners are just like Harry - they don't know how to structure there business to obtain the greatest tax benefits. So number one is to work with a CPA who can help you take full advantage of business tax benefits.

The second question is whether real estate can really give you deductions against other income even when the real estate in question provides positive cash flow. The answer to this is a resounding "YES." As remarkable as it may seem, the IRS actually allows you to take a loss on appreciating real estate even when you have positive cash flow from the property. This is the magic of depreciation. Depreciation is a non-cash deduction that can easily be more than the cash flow from your rental property. The result is a loss that you may be able to use to offset income from your business or salary. There are several limitations, of course, most or all of which can be overcome with the proper planning. Be sure to talk to your Tax Coach about this amazing benefit and how it can apply to you.

The final question of Harry's is whether real estate tax benefits can actually be great enough to reduce a person's income tax to zero? Hard to believe? It's true, though. We have several clients who have substantial positive cash flow but pay no income tax due to the tax benefits from their rental real estate.

Thanks for asking such a great question, Harry.

Warmest regards,

Tom

One of the most common questions I get regards "tax-favored" investment vehicles such as Self-employed Retirement Plans (SEP's), IRA's, 401(k)'s, and, in Canada, RRSP's. With the exception of the Roth IRA and Roth 401(k), these vehicles primarily rely on the time-honored tradition that paying taxes later is better than paying taxes today. In each of these (except Roth's), the taxpayer receives a deduction today for their contribution to the plan, the investments grow tax-deferred while in the plan, and are taxed at ordinary income rates when withdrawn fromt he plan.

Sounds like a great plan, right? Wrong!!! Let me briefly outline my complaints about these types of investment vehicles.

1. The tax benefits rely on the premise that when you retire, you will be in a lower tax bracket than you are now. Unfortunately, this is true for many people who use these vehicles, because they will retire poor. However, if, like all of our ProVision clients, you want to retire rich, you will likely be in a much higher tax bracket than you are now. Why? You will have fewer deductions. No business deductions (remember, you are retired), no dependent exemptions, no home mortgage interest. And you probably want to have more income available when you retire than when you are working because you have places to go and things to see.

Let me tell you a story about a client of mine. He was a very successful businessman for many years. He set up a very nice pension plan to which he contributed faithfully every year. Then he retired. While he was in business, he paid very few taxes and was actually in a very low tax bracket. When he retired, though, he no longer had all of these deductions. Immediately, he was in the highest tax bracket possible. He complained to me constantly about his high taxes. But, given that he was retired and all of his income was coming as distributions from his pension plan, there was nothing I could do for him. He just had to pay the tax.

2. You have very little control over the funds. Who has control? The government. They control what you can invest in, how much you can add to your investment and when you can take it out. I find that this lack of control normally results in lower returns.

3. You can't take advantage of other tax-advantaged investments. For example, you cannot receive the tax advantages (e.g., depreciation) from real estate to produce lower taxes from your other income. You don't receive capital gains treatment from dividends and long-term stock gains. And, if you do invest in a business (a very complicated matter within a tax-deferred plan), you are severely restricted as to your operating entity.

There are times when these arrangements can be very profitable. I know several options traders who use their self-directed IRA's for option trading. Since there are no current tax benefits for option trading, why not defer the tax? The same goes with hard money loans.

My gripe with SEP's, IRA's, 401(k)'s and RRSP's is that the financial institutions and the government push them so hard that people think they are the ONLY alternative. There are many other ways to save taxes that are much better for many people. One of our primary goals at ProVision is to educate the public about the other tax advantages available. Please visit us at www.ProVisionWealth.com and join our Wealth Strategy U (WSU) for FREE information about serious tax saving opportunities.

Warmest regards,

Tom

At ProVision, we recently announced our new School of Tax Strategy as part of our Wealth Strategy U. Welcome to all those who have signed up for this extraordinary opportunity. Let's kick this off by answering a few of the questions already asked by some of our students.

Q. What happens to mortgage deductions after the 1,000,000 base mortgage and 100,000 HELOC? Does it go to nothing? Is there a way to get a tax benefit for over those amounts?

A. I was speaking at an AZREIA (Arizona Real Estate Investors Association) meeting the other night and was asked this exact same question. Most people know that home mortgage interest is limited to $1,000,000 of acquisition indebtedness and $100,000 second mortgage. But does that mean that interest on amounts in excess of these limits are automatically nondeductible?

The answer is NO. The general rule for interest of any kind is that it's character depends on the use of the loan funds. If the use of the funds are for business, the interest is business. If the use of the funds is real estate investing, the interest is attributed to the real estate investment. The same holds true for excess home mortgage borrowing. If the excess borrowings are used for your personal residence, then the excess interest is nondeductible, personal interest. However, if the excess could be traced to a business or investment use, the interest will be business or investment interest.

Let's take an example. Suppose you have a home that cost $1,000,000. Suppose the home appreciates to $2,000,000. You take out a line of credit of $600,000 on the home and use that in your business. The interest on the line of credit is business interest.

Q. Do you recommend TurboTax or other software for tax prep and planning?

A. I don't. I recommend using your Tax Strategist to prepare your tax returns. The reason is that how you prepare your return can be just as important as the tax planning you do. Why? Simply because there are many options for how to report income and deductions on a tax return. The person/firm who created and helped you implement your tax strategy would be the best person/firm to prepare your tax returns.

Look for more answers to more questions next week.

Warmest regards,

Tom

People frequently ask what is the number one tax question I get? Inevitably, whenever I speak at a seminar or to any group, the requested topic is "How do I structure my business and/or investments?" Not only is this the most common question, but it is also the most important for any business owner or investor. Why? Because it is the foundation of any good tax strategy.

The other evening, I was speaking at an AZREIA seminar for people who fix and flip real estate. AZREIA is a terrific organization that provides a wealth of education for Arizona real estate investors. Go to http://www.azreia.org. I began the presentation by asking what topics they would like to discuss. As usual, the first response was about how to structure their investments.

So, here is the answer. IT DEPENDS. I know it sounds like a bit of a cop out, but it's true. Every investor has different objectives and needs an entity structure that is specific to their needs and goals. Of course, there are three primary types of tax entities - Sole Proprietorships (which really are not entities at all and should only be used in extremely limited situations due to the usually negative tax consequences), Partnerships (both general and limited), and corporations (both S corporations and C corporations). As I explained at AZREIA, there is no such thing as an LLC, or limited liability company, in the Internal Revenue Code. Instead, taxpayers are allowed to elect the tax treatment of an LLC. (I'm constantly amazed at how many tax professionals and attorneys do not understand this rule.)

My advice? See your Tax Coach to determine the right entities for you based on your personal income tax strategy. No Tax Coach? Call us at 480.467.4400 or contact us at http://www.ProVisionWealth.com and we will get you to the right tax professional.

Warmest regards,

Tom

It's October 16th, the day after the final due date for 2006 tax returns. Yesterday, the ProVision office was scurrying about getting many tax returns to the IRS for our clients who waited until the last minute to give us their tax return information.

So I started wondering - Why do so many people wait until the last minute to get their tax return information to their preparers? We experience the same frantic rush twice a year, in April and in October. How could we reduce the stress we feel each year when we scramble to get our tax return info together for our CPA's?

The key is DOCUMENTATION. The problem is that most people do not have a good system for maintaining the documentation for their tax returns. It's bad enough that we have to deal with taxes, but add in bookkeeping and logs and receipts and it's no wonder so many people put off doing their taxes.

So, here are a few hints to simple documentation and making life easier for tax time. First, HIRE A BOOKKEEPER!!! This is some of the best leverage available. If you need a referral, please feel free to call our office at 866.467.5809.

Second, buy a bunch of manilla folders. Then, go to http://www.irs.gov and pull a copy of Schedule C from their 1040 forms file. At the top of each folder, write one of the expense categories from the Schedule C. Then, as you have receipts for deductible items, put them in the appropriate manilla folder. Then, when tax time comes, simple add up all of the receipts in each category and give the totals to your CPA (they don't really need the receipts and it will save you considerable professional fees if you do the addition yourself).

Third, set a date when you will get all of your tax information to your CPA. Even if you want to extend your tax return, get your information in early and then simply as your CPA to file an extension.

Fourth, meet with your CPA/Tax Coach in November to figure out what you might owe in April and what might need to be done to ensure a lower tax bill the following year. Your Tax Coach can give you additional ideas for documentation.

Don't let tax return time stress you out. Get your documentation done early and get it to your Tax Coach early so you can get your return done in plenty of time for the deadlines.

Warmest regards,

Tom

Last week, the Senate passed the Mortgage Relief Act (MRA). Now it goes back to the House for a vote. Since the Senate made some changes, there likely will be a Conference Committee (members of both the House and Senate) go through it before it gets finally passed. Today, I want to give you an overview of this legislation as initially proposed and the portion that has been voted on and approved by both the House and the Senate (and which will surely be included in the final bill). Tomorrow, I will comment on the new provisions put in by the Senate, as they are significant for a wide range of people.

As originally proposed, the MRA was intended to provide tax relief to people who receive debt forgiveness as a result of foreclosure or renegotiating their loan. There are three primary provisions of this act.

Tax Treatment of Debt Forgiveness: Currently, if a person receives debt relief, the amount of the relief normally is included in their income for tax purposes. Under the MRA, if the debt relief related to their home mortgage, and the mortgage interest on that debt is deductible, then the debt relief IS NOT included in their income for tax purposes.

Deduction for Private Mortgage Insurance (PMI): Currently, PMI is deductible, subject to phase out for adjusted gross income in excess of $100,000. This provision is scheduled to sunset (go away) after December 31, 2007. The MRA extends this deduction through 2014.

Exclusion of Gain on Sale of Residence: Currently, gain on the sale of a personal residence is excluded from Gross Income up to $250,000 for a single individual and $500,000 for a joint return if the property is used as a primary residence for any two of five years prior to the sale. The MRA modifies this provision to tax gain from “nonqualified use.” Under the bill, any time that the property was not used as a primary residence (e.g., rented) prior to the taxpayer moving into the house does not qualify for gain exclusion. This means that if you purchased a property, rented it for three years, moved into it and lived in it for two years, and then sold it, only a part of the gain would be excluded. In this instance, only 40% of the gain could be excluded.

HOWEVER, you do not get punished if you turned your residence into a rental property and then sold it. So, in our example, if you lived in the house for two years, then turned it into a rental property and held it for three years and then sold it, ALL OF THE GAIN would be excludable up to the normal limits.

Stay tuned tomorrow for the important amendments made by the Senate to this legislation.

Warmest regards,

Tom

P.S. – For those of you following my weight loss, I will give you an update on Wednesday.

President Bush signed into law the Mortgage Relief Act of 2007. I mentioned the major provisions of this legislation in my blog on Monday entitled "Mortgage Relief Act Passed by Senate." The House left he Senate's version unchanged. He also expected to sign the AMT relief bill.

What does the MRA mean to you? Simply, if your primary residence is foreclosed upon or you do a short sale of your primary residence, then the debt forgiveness (up to $2 million) will not be included in your taxable income. This provision is retroactive to the beginning of 2007.

For real estate investors, this is very good news. It takes away one big barrier that sellers might have to doing a short sale. What's a short sale? Effectively, it's a sale of a house by means of someone (you or the buyer) negotiating a reduction in the note with the lender(s) prior to the sale. The buyer purchases the note(s) from the lender(s) and then buys the house from the seller for an amount equal to the note(s). This prevents the homeowner from the negative effects of a foreclosure and the investor gets the property at a good price.

As I mentioned last Monday, the other major provision of this law is to increase the late filing penalties for partnerships and S corporations. In effect, Congress is giving a gift to one set of taxpayers who were unwise and penalizing other taxpayers who are unwise. All in all, very bad tax policy. Penalty provisions should never be used as revenue raisers. I understand the public policy behind the bailout, but I don't agree with using tax penalties to raise the revenue to pay for it. Just remember to get your partnership and S corp returns filed on time this year (fortunately, the penalty provisions are NOT retroactive).

As for the AMT relief, Congress raised the exemption amount to $66,250 for joint filers. This new exemption is good for one year. They only did this for one year because they did not have a revenue raiser to offset the decrease and the House wanted the bill to be revenue neutral.

I hope you all have a wonderful Christmas. I'm looking forward to spending it with my wife and two grown sons.

Merry Christmas!

Tom

P.S. - I'm still at 173 lbs. At least I haven't gained anything so far during the holidays. More on this later this week.

In our School of Tax Strategy call last week, I was asked the question, "What constitutes travel away from home and why is it important?"

In order for certain business travel expenses to be deductible, you must be traveling "away from home." There are actually two parts to this question. The first is, "Where is my tax home?" The second is, "What constitutes being 'away' from home?"

Your tax home is a facts and circumstances question. That is, each person's tax home will be different, not just depending on location of the person's residence, but depending on the person's circumstances. For most of us, our tax home is where we live full time. But there are many circumstances where this is not clear. For example, where is a full-time student's tax home? Is it his permanent address with his parents or his temporary address while at school nine months during the year?

Or, what happens if you don't really have a permanent residence? This was the situation in a case several years back where a traveling salesman traveled so much that the IRS and the court concluded that he did not even have a tax home.

Then, we have the question of how far do we have to travel to be "away" from our tax home? Is an hour across town sufficient? What about going 50 miles away to a neighboring town? There are many court cases discussing this question. One court suggested that a taxpayer had to go beyond the metropolitan area in which he lived in order to be "away." Another court said that the taxpayer had to go into another county.

Finally, how long do you have to be away in order to qualify as "away" for tax purposes? The courts and the IRS generally have held that if you need to stay overnight to rest because of the work and the distance, then you are "away." But, if you can reasonably go to and from the location in a single day without rest, you are not away from home.

Why is this important? If you are away from home, your meals and lodging are deductible so long as they are ordinary and necessary to your business. Meals are always deductible if you have a business purpose for the meal, specifically if you are eating with a business associate or client. But what if you are eating alone? Then, you have to be traveling away from home for the meal to be deductible. Even lodging is only deductible if you are away from home.

Since everyone's situation is different, if you have a question about whether your trip is away from home, I suggest you contact your tax coach to get help. If you don't have a tax coach or would like to find someone new, please feel free to contact us at info@provisionwealth.com or toll free at 1-866-467-5809. We serve tax clients through the U.S. and wealth and business clients throughout the world.

Warmest regards,

Tom

The other day, a client asked about how to handle receipts. And in our School of Tax Strategy group coaching call last week, we were talking about documenting meals and entertainment expenses. So, I thought now would be a perfect time to address this issue.

The IRS requires receipts to be saved for expenses in excess of $25. This can become a burden for our filing systems, particularly when it comes to little receipts for meals and miscellaneous expenses. And, these receipts tend to fade over time (especially the yellow copies of credit card receipts) so that by the time the IRS audits you, the receipt is illegible.

I think the best answer to this dilemma is to purchase one of the many scanning products that are available. You can get a scanner that is specifically for your receipts or you can use a normal scanner. The advantage of the receipt scanners is that they come with software to organize your receipts electronically. Kind of an electronic filing system. Some even maintain that they can download your receipts directly into Quickbooks.

I haven't personally used the scanning software, but I maintain all of my receipts electronically. My partner won't even let me bring any hard copy receipts to her office. She insists that they all be scanned and emailed to her. Since the IRS accepts scanned copies, there really is no reason for keeping hard copy receipts any more.

I encourage everyone to take advantage of this technology and to get your tax documentation in order. If you are a client of ours, we are very happy to accept scanned copies of any documentation you need to provide us to do your tax returns. In fact, our website is set up specifically so you can scan your documents and upload them to our secure site. For more information about this, please contact your Tax Coach or call us toll free at 1-866-467-5809.

Warmest regards,

Tom

Corey listened to our teleseminar with Doug Lodmell and asks the following question:

Q: Tom, Thanks for the great information on Asset protection. It seems the more I read though the more confused I become. In the Rich Dad series Garrett Sutton talks about Nevada and Wyoming LLC's and Nevada Asset Protection trusts being great for asset protection. Douglas Lodmell listed these as poor when it comes to asset protection in his teleseminar. I guess the question is who is correct or are they both correct and I am misunderstanding the presentation?

A: As Doug pointed out in his teleseminar last week, there are several levels of asset protection. Doug showed a scale of poor, good, better and best types of asset protection. I don't think there is any question that the offshore asset protection Doug advises is the ultimate in asset protection. But that doesn't mean that you don't want to do at least some of the other pieces as well. As Doug suggested, most of your investments and business interests you want to be held in an LLC. This is what Garrett is talking about. This is good asset protection and is the minimum anyone should do.

The next level beyond LLC's would be a domestic asset protection trust (DAPT). I don't believe Doug addressed these during his presentation. Here is how the DAPT works. In most states, a self-settled trust (i.e., one in which the person who puts the assets into the trust is also the beneficiary) does not protect you against lawsuits. However, a few states have enacted DAPT statutes that do protect you in a self-settled trust. Wyoming, Alaska, Nevada and Utah are a few of the states with these laws in place.

So why go to the trouble and expense of an offshore asset protection trust when you can just form a DAPT? There are two reasons I can think of. First, these trusts have not been tested in the courts. So, we don't really know what will happen when they are tested. More importantly, however, is the situation where you don't live in one of these states or your assets are located in a state other than the state in which your trust was formed. When you are sued, which state's law is going to apply? If I were a plaintiff, I would sue in the state where the property is owned if it is not a DAPT state. Will a court in a state without the DAPT statute protect you? This is a big unknown.

What we do know is that offshore APT's have been tested for over 20 years and have proven to work. Hopefully there will come a day when all of the states have DAPT statutes and we don't have to go offshore. In the meantime, though, if you want maximum asset protection, especially if you own property or live in a non-DAPT state, you should consider an offshore APT as suggested by Douglass Lodmell.

Let me know if you have any other questions about this. Hope it helps.

Warmest regards,

Tom

This is the time of year when all Americans think about their tax situation and what they might do differently to reduce their heavy tax burden. There is a record of an ancient civilization that was required to pay 50% of their earnings to their captors. They considered themselves in bondage. And yet, many Americans who earn over $100,000 per year pay far more than that in federal and state income tax, sales tax, social security tax, property tax and excise taxes.

I'm not against paying taxes for necessary government services. To the contrary. What I am opposed to is paying a dime more than I have to. But MOST OF YOU are paying far more than you have to. Why? In most cases, it's simply because you are getting poor tax advice.

The reality is that the Internal Revenue Code is full of opportunities to reduce your taxes. I have spent almost 30 years pouring through the Code and learning all of these opportunities. And I am continually learning new ways to reduce taxes. It's all a matter of understanding the law and applying it the way Congress intended. That's right, Congress intended to provide tax benefits to individuals and companies who behave a certain way. Why? Simply because Congress has long used the Internal Revenue Code as a way to promote social, energy and economic policies.

But how do you know if your tax advisor is giving you the best advice? Unless you are legally paying no taxes, you really don't. The answer, quite frankly, is to have another, experienced tax advisor review your tax returns from prior years and your current tax situation. It may be that when you were a simple wage earner that there were few ways to reduce your taxes. But now you are in business or you are investing in real estate. What's happened is that YOU HAVE OUTGROWN YOUR TAX ADVISOR!

Before you commit to another advisor, have them review your situation. Don't expect that they will give you free advice. But find out if they think they can do something different. Just the other day while reviewing a tax return I found $60,000 of taxes that a prospective client was paying that we could easily eliminate. What would you do if I found $60,000 of ANNUAL tax savings for you? I hope you would jump on this opportunity and hire me.

Whatever you do, remember that "if you always do what you have always done, you will always get what you have always got!" Come join us at ProVision for a free teleseminar tomorrow night to learn 5 Tax Mistakes That Cost Business Owners $20,000 or More http://www.provisionwealth.com/seminars/Details.asp?Seminar_ID=19.

Stop paying so much tax that you feel you are in bondage to the government. Don't waste any time. Let me help you. You can reach me at cs@ProVisionWealth.com or 866.467.5809.

Warmest regards,

Tom

Here we are less than a month from the due date of tax returns. Most of you are scrambling to get your information together for your accountant. You hope the tax bite is not too big this year - that you won't have a big tax payment due on April 15th. You wonder, "Is there anything that can be done on my tax return to lower my taxes?" After all, it's a little late to "plan."

I have great news for you. There are literally hundreds of things you can do in preparing your tax return that will both reduce your taxes AND reduce your change of being audited by the IRS. The other day, we were doing our weekly training of our tax professionals. I asked them to get together and list everything we do at ProVision for clients DURING the tax return preparation process that either reduced taxes or reduced audit risk.

Even I was amazed by the resulting list. We came up with over 60 categories of ways we help our clients reduce taxes/audit risk during the tax return preparation process. Specific items of savings number in the hundreds. And all of these savings are PERMANENT! I'm going over some of these ideas during our FREE! teleseminar tonight. You can join us by registering at http://www.provisionwealth.com/seminars/Details.asp?Seminar_ID=19.

So the question you should be asking yourself right now is whether your tax return preparer knows enough of the law and how to apply it that they can produce the best result for you. If you are like most people, you are leaving THOUSANDS OF DOLLARS on the table. Your tax preparer may not charge a lot, but WHAT ARE THEY COSTING YOU???

My analysis, as illustrated in our free cd, "What Your Financial Planner Will Never Tell You" (go to http://www.ProVisionWealth.com/wealthcd), proves that if you take the tax savings from good tax advice and reinvest it, you can double the amount of wealth you might otherwise accumulate.

So don't be thinking that you are saving money by using an inexpensive tax preparation service. Over 95% of the tax returns I see prepared by other preparers overstate the client's tax. It's not too late to make a change. So do something now. At least have another advisor look at your taxes from last year. You can reach us at cs@ProVisionWealth.com or call us toll free at 866.467.5809.

Warmest regards,

Tom

Corey asks the following question:

A partner and I have an LLC with 50% ownership each. We both plan to transfer title via a Quick Claim Deed for both of our current homes to our LLC. We then plan to move out of these homes and rent them. We will then keep the new homes that we purchased in our own personal names. Both of the homes that we plan to put into the LLC have been lived in for more than 2 years. Is the transfer of our homes into the LLC a taxable event? Also is there anything else besides the Quick Claim Deed that needs to happen in order to fully transfer the new properties into the LLC and protect us from legal liability of our new rentals?

A: Like most tax questions, this one prompts another question. How is the LLC being taxed? If you are taxing it as a partnership (my recommendation), there probably is no tax consequence to tranferring the houses into the LLC. However, you may want this to be a taxable event. If it is a taxable event, then you will receive a basis in the property (for depreciation and subsequent sale purposes) equal to the fair market value of the property at the time of the transfer. And as long as the fair market value is not more than $250,000 greater than what you paid for the house, there should be no tax on the transaction. This is a tremendous benefit, but you need to make sure you handle the transaction properly. I recommend you sit down with your tax advisor to make sure you do this right.

There is another issue regarding this transaction and that is the use of a quit claim deed. You should speak to your title company about this. They may recommend that you use a warranty deed instead so you don't lose the benefit of your title insurance. Be sure you also speak to your regular insurance agent to make sure your houses maintain the appropriate coverage for property and casualty insurance purposes.

For more about this, visit our Tax Mastery section of Wealth Strategy U at http://www.ProVisionWealth.com/wealthu.

Warmest regards,

Tom

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.

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

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

My friend, Dave Sullivan, asks the following question about "component" depreciation:

I was wondering if rental real estate held in an LLC can use component depreciation for accelerated paper losses, and a resulting higher monthly cash on cash return? I read component depreciation could be used in Robert Kiyosaki's real estate book, but then saw this online:

"Component depreciation
At the end of a seminar to a religious group, he says he (Robert Kiyosaki) recently did a real estate deal where he got a 17% cash-on-cash return and that "there's 24% component depreciation on the property." Really? Gee, and I thought component depreciation was explicitly outlawed by the Economic Recovery Tax Act of 1981. Actually, I'm sure of it. It's right there in Section 168(f)(2) of the Internal Revenue Code."

A: I'm not sure where Dave read this comment about component depreciation, but the person making the comment is simply misunderstanding the difference between component depreciation and cost segregation. While it is true that "component" depreciation was eliminated with ERTA (the 1981 tax act), we can still do what we now call "cost segregation." After the 1986 Act, the IRS initially believed that cost segregations were still outlawed. However, this position by the IRS was overturned by the courts, notably in the Health Corporation of America (HCA) case in 1993. With this case, the IRS finally gave in and formally announced that it would allow cost segregations for property placed in service after 1986. There is even an IRS audit guide that specifies how a cost segregation must be done in order to be allowed by the IRS.

A cost segregation, while technically not component depreciation, has the same effect as component depreciation, just under the "new" (i.e., post-ERTA) depreciation tables. This means that we can segregate the costs of the building, the building fixtures (e.g., cabinets, ceiling fans, window coverings), and land improvements and depreciate them under the appropriate rates for those types of items. Typically, a cost segregation will result in much more depreciation in the early years of building ownership which can put a lot more money in the pockets of the owners through lower taxes.

At ProVision, we recently developed a home-study course about how to maximize your depreciation deductions. Look for it's release in the coming weeks at http://www.provisionwealth.com/products.

So when you are buying a building, consider performing a cost segregation following the IRS guidelines. IRS guidelines require an outside professional, such as ProVision, to do the cost segregation. Contact us at 866.467.5809 or cs@provisionwealth.com for more information on how we can help you maximize your depreciation deductions.

Warmest regards,

Tom

Alphonso asks the following question: Hi Tom, thanks for keep in touch with me. Your Information is so valuable and very welcome. At this time, I have some questions about income. How can I split my income as a 1099? I understand we need to manage and organize every penny, so I am splitting in this way: 10% Tith 15% Tax Savings 15% Advertising 30% Personal Income 30% Business Expenses Any suggestion? My other question is about my wife. She is W2. How you suggest to split her income? Thanks

A: I'm not exactly sure what Alphonso is asking, but let me suggest there could be two different questions here. The first is the best allocation of income to various expenses. I think that is a question for your Wealth Strategist. At ProVision, we believe that each investor should develop their own personal wealth strategy that is unique for them. Visit http://www.provisionwealth.com/wealthstrategies.asp for more information or see our wonderful Wealth Strategy home study course, Financial Freedom Now! at http://www.provisionwealth.com/products.

The other possible answer to the question has a tax angle to it. Could a person split their 1099 income between multiple companies to lower tax brackets? The answer very well could be "yes." If different companies perform different tasks for a client, then the client could pay each company for that service rendered. This could be especially beneficial if one of the companies were a "C" corporation. C corporations have their own tax brackets and the first $50,000 is ordinarily taxed at a 15% tax rate. Look for more on this strategy when we release our home study course on using C corporations. It will be released in the next few months, so be sure to keep a look out for it. We recently included it with the package we released to the Rich Dad Forum participants and it was very well received.

Remember that permanent tax savings, such as lowering tax brackets, are one of the key secrets to a successful tax strategy.

Warmest regards,

Tom

Thanks to David for giving the following feedback to our recent email entitled, "The HUGE difference between tax and legal terms and how it impacts your tax strategy."

Good point Tom.

Even though we have to consider taxes, and asset protection together, we also need to remember it's a joint effort by the CPA, and Attorney. It's good that a CPA find the best tax advantages, and consult with the Attorney for the best asset protection for the individual situation. A CPA that keeps an eye on the big picture is a bonus, but one that ignores tax advantages because of well known legal advice is a drawback.

After reading the part "I find that those who have the most successful tax strategies are those who understand the basics thoroughly. And by that I mean they know enough to know when to ask questions and seek expert advice. " I agree totally. Will I have access to the "Fundamentals in the Entity Formation section of Tax Mastery in Wealth Strategy U"

A: There is a tremendous amount of free information in Wealth Strategy U under the Tax Mastery section. Just log in at http://www.provisionwealth.com/wealthu. For even more information about entity formation, you might want to try our recently released home study course entitled, "How to Create Your Own Tax Savings By Building the Perfect Tax Structure: 5 Strategies to Selecting Entities that Reduce Your Taxes." You can get this through our website at http://www.provisionwealth.com/products.

Warmest regards,

Tom

Craig asks a very interesting question about his automobile expenses:

Q: Presently I am taking the standard cents per mile deduction on my vehicle under my current occupation. Due to the AMT, my accountant tells me I net back only about 2% of ALL of my expenses. How can I use my C-corp or LLC more for these expenses.

A: The issue here is that if you are an employee and you have unreimbursed expenses, such as automobile, travel, meals or other, they are only deductible as miscellaneous itemized deductions (MID) on your Schedule A. The problem with this is twofold. First, they are subject to a 2% floor, i.e., you only get to deduct MID to the extent they EXCEED 2% of your adjusted gross income (AGI). Second, they are not deductible at all for AMT purposes.

The solution is to incur these expenses as a business, not as an employee. Let's say, for example, that you are in sales. Your company allows you to either be an employee or an independent contractor. As an employee, you lose the deductions. But as an independent contractor, all of a sudden these expenses become fully deductible, not subject to either the 2% or the AMT limitations.

Of course, there are other issues with becoming an independent contractor that you need to consider, including loss of benefits and Social Security taxes.

Just paying these expenses out of an LLC or corporation will not solve the problem, so long as you remain an employee. The reason is that they expenses relate to your employment and not to your LLC or corporation. You can only deduct expenses in your LLC or corporation that belong to that entity. Paying someone else's (in this case, your) expenses is not allowed as a deduction by the IRS.

Contact your ProVision Tax Coach for tax strategies to take advantage of the independent contractor status. There are ways to minimize the Social Security taxes and even the loss of benefits.

Warmest regards,

Tom

Aloha from the Big Island of Hawaii. I'm here on my annual trek to total relaxation. Normally I don't do work during this 2-week break, but I have a little break from activities (strenuous ones, you know, like golf and scuba - more about this in a later email).

Sheila L. asks the following question: Any thoughts on... a Self-directed IRA versus a Solo 401k as a better method for reducing taxes while maximizine investment opportunities for retirement funds?

As always, a question like this prompts an important additional question - What are you going to invest in?

What you invest in has a huge impact on whether you should contribute to either a 401(k) or an IRA. If you are investing in real estate, it is almost always better to invest OUTSIDE of your IRA or 401(k). For more on this, see our course about investing in real estate in an IRA at http://www.provisionwealth.com/products.

On the other hand, if you are doing option trading, an IRA or 401(k) can be great, so long as it is a Roth IRA or Roth 401(k). In this case a solo Roth 401(k) is probably better, since you may be able to contribute more than you could to your IRA.

If you are investing in a business, normally you are better off investing outside of your IRA or 401(k). However, there are siutations where investing through your Roth IRA or Roth 401(k) can be hugely beneficial. If this is your situation, I strongly suggest you call our office at 866.467.5809 and schedule an appointment with us so we can discuss how to best help you. We have developed some unusual techniques for investing in business through an IRA or 401(k) that I have not seen elsewhere (I'm not talking just about using a C corp for this - there are even better ways for those of you reading this who are aware of the C corp IRA strategy).

I realize you did not really ask the question of whether to invest through an IRA or 401(k) versus investing outside of an IRA/401(k) but I would be remiss in not mentioning that sometimes you just don't want either one.

Thanks for sending such a great question. Glad you are thinking about maximizing your tax benefits.

Warmest regards,

Tom

One of the central themes of the current presidential campaign that will gain even more notice as the compaign continues is taxes. The two candidates seem to have quite opposite viewpoints as to what should happen to the tax system. Currently, it appears that McCain is in favor of the status quo and perhaps even making the Bush tax cuts permanent while Obama wants to revert to the pre-Bush tax rates.

At this point, I am not going to comment on the specific proposals of the two candidates. As the compaign goes on, however, be sure to pay close attention to what each candidate is saying about what they would like to see happen with the tax laws. As we have seen in the past, changes in the tax law can have both a significant impact on our personal tax situation as well as on the economy as a whole.

One thing is for sure. No matter which candidate wins the election, tax planning is sure to be more important than ever. If McCain wins, planning under the current system will be critical to maximizing your after-tax dollars in a difficult economy. If Obama wins and succeeds in implementing his tax changes, even more planning will be required in order to offset his tax increases. Either way, a good Tax Strategy will make a huge difference in permanently reducing your income taxes. Be sure to contact one of our Tax Coaches/CPAs at 866.467.5809 to find out how you can permanently reduce your taxes under either candidate's propos