In my tax presentations one of the first things I cover is why and how saving taxes can make you richer, faster. Well, here it is.
If you take $1.00 and double it tax-free for 20 days it’s worth $1,048,576 (over a million dollars). Take that that same $1.00, taxed every year at 30%, it will be worth only about $40,640 — A LOSS of a MILLION DOLLARS. Why is this so? Because with tax-free compounding, earnings accumulate not only on the principal amount of money but also accumulate on the tax-free earnings as well ("Earnings on Earnings"). Thus compounding combines earning power on principal and earning power on interest. Compounding has been called the "8th wonder of the world", a "miracle". Compounding is a silent powerful wealth building force that without notice can make you wealthier & wealthier. It is a money-growing-cycle that begins when each one of your investment dollars starts earning more dollars. Those earnings in turn join forces with invested dollars to keep repeating the money-making process. Compounding money at high rates of tax-free return is a definite advantage of real estate, especially with a great tax plan.
The wealthy know that taxes are a primary factor in determining whether you get rich or stay poor. Suppose you’re able to save a mere $2,000 a year. That’s $50,000 over the next 25 years! Imagine what you could do with an extra $50,000.
Taxes take more of your income than many of your other expenses combined. The average American saves only about 4% of their income? Not just because of lack of dedication to saving, but because that’s all that’s left. The government gets to take a lot of what you earn. You get the leftovers. Let’s say, for example, you’re able to save just $2,000 annually on your tax bill (with a good tax plan it will be much higher). You invest the $2,000 annually in an IRA that earns a tax-free annual return of 10%. After 20 years, you’ll have over $114,000! If you can save $10,000 annually on your tax bill and invest it in a Simple IRA for 20 years, you’ll end up with almost $573,000.
With $2,000 in taxes you can also buy a bargain property that you quickly flip for a $10,000 clear profit, or a nice 500% return on the use of the tax savings.
$5,000 in tax savings (which is found money) as a 10% down payment can allow you to buy an additional $50,000 in real estate. With $10,000 tax savings, it would be a $100,000. Assuming a 20% yearly return you would earn $10,000 or $20,000 respectively.
You can use the tax savings to upgrade your rental properties for more monthly cash flow. One of my students, Richard, used $2000 of tax savings (like found money) to employ the Mr. Landlord technique of adding optional upgrades to his apartments and increased his cash flow by $200 a month or a yearly total of $2400 which divided by $2000 = 120% return. But because the $2,000 in tax savings is found money, the return is really infinite.
So, does Saving Taxes Makes You Wealthy? What would you say now?
Al Aiello is a national speaker specializing in Wealth Protection teaching dynamic strategies on tax reduction, IRS audit-proofing, entity structuring and asset protection targeted for real estate investors and business owners. Al Aiello is a regular guest speaker at CT REIA. Go here for the current list of upcoming real estate investing seminars in Connecticut.