What the Wealthy Know About Taxes That Most People Don’t – Episode 682

This transcript was auto-generated and may contain errors.

[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We’re going to be talking about taxes. Now, what we’re going to cover are what the wealthy know that most people don’t. And Kem, this is an interesting topic because one, you have a lot of experience around this. You’ve worked with people like Tom Wilwright, you’ve worked with a variety of families, and most of the time they’re focused on typical. You focus on traditional. There is an importance in that language. Let’s take it from there. Awesome. Yes. Well, I’ll quote Tom Wilwright actually. And that is that taxes are a roadmap or I should say the rules behind taxes are a roadmap for how to deal with our country, the United States

[00:57] of America, and us as humans living in it. And so, yeah, we all want to have roads and police and that type of thing. And so we pay taxes and yet it is so important that we only pay what we will pay based on our situation. Well, our situation is determined by the facts, FACTS, of your finances. And so Tom says this as well. If you want to change your taxes, you need to change your facts, FACTS. Now that means that for a lot of W2 people, basically there’s not much that can be done yet for anybody that has 1099 income or investment income or owns a business or has real estate, there is a entire roadmap of things that can be done. And so this is where we’ll have our discussion today, because this is

[02:02] where we can focus on what we can control and I want to just open the door with that and let you give me some feedback and there is one specific thing that I want to address for the W2s before we dive too deep into the 1099s and the business owners. Perfect. So you use the language a roadmap, whereas a lot of people, they put it as something called a loophole. And the difference between those two can often get people lost. Can you explain why that you’re looking at it like a roadmap versus a loophole? Absolutely. Well, it’s interesting because long ago, when Robert Kiyosaki first came out with his Rich Dad Poor Dad book, and of course, at that time, Diane Kennedy was Robert’s CPA and the book that she wrote is called

[02:52] Loopholes of the Rich or something like that. And when Tom Wheelwright took over and has now been Robert’s CPA for many years, he made it very clear the distinction, which I have always found valuable and I’m glad you brought it up because a loophole does imply that you’re getting away with something or that it’s possibly only open for a period of time or that you have to be a little gray in your application of the law. And we don’t want to be gray. We don’t want the IRS showing up on our door. We don’t want an audit. Although, you know, if you’re a business owner or worse, if you’re self-employed, you’re probably going to get audited at some point. I have been twice at, you know, that’s not the end of the world,

[03:34] but the loophole language just indicates something that’s very typical. It’s us Americans wanting something for nothing. And, you know, I get that. But if you want to be healthy, you eat properly. And if you want to have good muscles, you go to the gym. Neither of those things are going to happen with something for nothing. Right. So our taxes are the same. It’s so, so valuable for us to learn about the roadmap that is there and then be very black and white and following that roadmap. And there’s a very famous quote. I don’t know if I can get it right by a judge from eons ago that literally says, you should not pay more taxes than what you should legally pay. Like you should do everything that you can to reduce the taxes,

[04:27] but do it legally. Don’t take cash in your business and not report it. Don’t do the myriad of other things that people do that are and should be called loopholes, just use the roadmap and use it properly. And again, use it with black and white effort and expect black and white results. Yes, absolutely. I wish that we could control the IRS results, but we can’t. Okay. So I have a couple of bullet points regarding this. So the first one is this, the tax planning versus tax preparation. What’s the difference between those two? Well, our listeners know that I absolutely detest the word planning, but with taxes and with estate planning, I have to kind of give that up because you truly do want to get in a space with your taxes now, right?

[05:26] We’re in July of this year where you are thinking ahead, which is kind of the definition of planning about your taxes. Taxes are not, absolutely not something to be dealt with in December. And they’re even more importantly, not something to be dealt with in January, February, March, or April. Because if you are talking about the 2026 tax year, you cannot scramble around in December and make some changes. I be okay, maybe a little bit, but even worse, you absolutely cannot do anything once you’re into 2027. And that’s when most people start to look at their taxes is February when all their 1099s and their schedule B investment income and that kind of thing show up. Now let’s be clear. I’m not a CPA.

[06:09] I don’t do taxes for a living. But like you said at the beginning of our talk time today, Spencer, I have been a business owner and paid taxes and dealt with what all the positives are of tax planning for years and years. I’m a personal friend of Tom Whale Wright’s and Diane Kennedy’s. I love them both. They both have very good ideas and have been immensely helpful to me over the years. And holy cow, are there some specific things that we can help with that will legally reduce the taxes that you pay? Okay, perfect. So my second bullet point is one that may apply to some of the W-2s. It will apply more to the self-employed and business owners, which is why your CPA isn’t always your tax strategist.

[06:58] Do you agree with that or disagree with that? And how do you back it up? Yeah, great question on both accounts. So I agree that your CPA may or may not be your tax strategist. And if they are, this is a good thing. And they’re definitely doing tax planning with you, meaning they are getting with you now, July, August, September, as you navigate the end of 2026 and a tax planner or a tax strategist, I love the word strategist, obviously, and you know, these are marketing names, like they’re going to call themselves whatever they call themselves, is very proactive and helpful in that realm. However, unfortunately, most CPAs are not. Most CPAs are historians. They report what happened in the past.

[07:42] They’re dealing with you in March or April of 2027 for 2026 information when at that point there’s not a dang thing that you can do about it. And so this is a problem. And of course, we have the AI space that’s taking over this realm because truly for a lot of people filing taxes are, especially now with the higher, unlimited, not unlimited, the higher standard deduction. Filing taxes for a lot of people are a piece of cake. But again, if you want some opportunities to reduce your taxes, then your tax situation is going to be a little bit more complex. And AI is not at this stage anyway, really not the best match to do the creative work that is necessary to legally reduce your taxes if you have real estate or a business.

[08:34] OK, so that opens the door for the point that you made earlier about W-2 employees. So most W-2, it’s pretty easy. It’s very standard because it’s so easy and standard, meaning to do the taxes. They’re getting hit the hardest because there’s not a lot of deductions. So you’ve talked about owning real estate businesses, things like that. Can you go into that so that it at least gets people to start thinking ahead and preparing? Absolutely. And just before we head there, there is one very specific thing that W-2 people can do before they open the business. Right. So, yes, having a sole proprietor, 1099 income is super valuable. But if you’re just W-2, your whole family’s W-2, you do not see that changing.

[09:24] There’s a very critical step that you can do that will serve you the rest of your life, no matter whether you open a business someday in the future or not. And that is stop paying taxes on your emergency and opportunity money. So the typical W-2, really, the only thing that they’re focused on is 401k deductions. OK, a contribution to a 401k. And then so many people have switched to Roths. So you’re not even really getting well, you’re not, period. You’re not getting a deduction with the Roth IRA. And so separate from the retirement dollars, most people have emergency money, right? Money market, a savings account. It might be money in the mattress, but typically it’s in some environment like a CD or a money market or a savings account that is taxed.

[10:18] And so for a lot of people, it’s five or 10 grand. And, you know, the interest is 100 bucks and it really doesn’t matter. But if your emergency money is 20 grand, 200 grand, two million. Right. It’s just zeros. Then you absolutely positively want to have that emergency money. And ideally, you have other money that’s opportunity money not be taxed. And the simplest way to solve that problem is to move the bulk of that emergency and opportunity money. Maybe not all of it, but the bulk of it into a life insurance policy that is held at a mutual life insurance company so that you are not taxed on the growth. The equivalent interest rate will be about the same. Today’s marketplace, four percent, give or take.

[11:04] And it’s not taxed inside a life insurance company, whereas it is taxed in a savings account or a money market or a CD. So that is the single thing that a W-2 person can do. Do we have questions on that? No, I think the question that we often hear, because that’s really clear what you’re talking about as far as moving that money, what they’re often thinking is, OK, well, what does that look like for my emergency and opportunity fund? Can I use it? Is it something that’s locked up? Is this something that I’m going to have to pay taxes on when I retire? Because those are the most common questions. Yep. And so this is another time we’ll write, quote, by making that shift, you are transitioning an expense

[11:55] into an asset. So what most people do, especially on the W-2 side, is they have their emergency and opportunity fund. I’m going to collapse those for ease of our discussion. Emergency slash opportunity. And then they have term insurance, term life insurance that is protecting their family in the event that they die. And that’s a good thing. And they should have lots of it. And if they want to shift that term insurance, which is a cost or an expense to an asset, then they will collapse those two things and put the emergency opportunity fund inside the life insurance. And the additions that they were making to that emergency opportunity fund will be as the premium is to whole life insurance, shifting premium from a cost term insurance

[12:39] to premium from building an asset whole life insurance. That is completely liquid. You can withdraw from it. You can borrow against it to about a seven day time frame. And it will not be taxed. So, again, and you’re right, a lot of people do not understand this. Whole life insurance cash value, that’s what the asset is called. Line item on your balance sheet is completely liquid. And if you withdraw from it, you can withdraw up to basis at no tax, no fee, no charge, no interest, no nothing. Or you can borrow against it, which you can go above basis, meaning into the growth and you are borrowing against it, meaning it keeps on growing. So there is an interest cost because you’re literally using

[13:28] the life insurance company’s money and then you pay it back and you bargains again and pay it back again. And that has been my lifelong work. So if you have questions about that, go poke around in previous podcasts or if you learn best on video, get to the YouTube channel. Or if you like to read, grab my live your life insurance book on Amazon. All of those ways you can learn a little bit more about this space. And then Spencer to answer the last part of your question, even in the retirement years, it can be completely tax free. Now, that’s a whole nother discussion. Sometimes it’s actually worth paying some taxes. You know, sometimes we should not be letting the tax tail wag the financial dog.

[14:11] However, we are human. We want to seek out that tax free if we possibly can. And in many cases, that’s very doable. Yeah, absolutely. I’ve seen so many people wreck a good situation just because they’re like, wow, I don’t want to pay those taxes in the future or whatever that would be. Of course, we’re trying to optimize. And then you get to a point where you’ve over optimized everything. For all of you listeners, send an email to hello at ProsperityThinkers.com. That is a special email for podcast listeners. If you’re a W2 and every single year you realize maybe you’re paying too much, there may be opportunity there to get things with a proper strategy. If you’re a business owner, there’s probably holes

[15:01] that can still be filled there. So hello or emails best, books, but let’s go email. Hello at ProsperityThinkers.com. Yeah, dive in and get the personal help, right? Absolutely. Keep the books. Yeah, absolutely. Thanks for sharing that today. We have some more related topics that are happening right now. This month, make sure you’re subscribed to the podcast. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.