Hi, I’m Randall Klein. Many of you know me as a tax advisor that knows all about our wonderfully complex tax code. But, you know, it wasn’t always this way. Today, I’d like to tell you a little bit about how I got interested in taxes, and why I didn’t give it much consideration as important at first.
A little over 30 years ago, I was actually a marketing professional in corporate America. And I was making a pretty-fair wage for my age at the time. But I did notice that there was just a huge portion of my salary that was going to Uncle Sam and not me. At the time, I was single, lived in an apartment, had no investments, and a spiffy new sports car. Didn’t know what a retirement account was or why I needed one. But I did know that there had to be some way to reduce the amount the government was getting and increase my portion.
Now, mind you, this was years before the internet existed, because, you know, I’m like a dinosaur, and so I had to find out about taxes myself somehow. So, I literally drove to the nearest IRS office and grabbed a copy of every single tax form and their instructions to see if I could figure out which of these pages had the secret to reducing my taxes. I was amazed at all the Credits and Deductions you could use to reduce your tax, but as I delved into what information went on the tax form lines, I realized, well, I can’t use these forms because I don’t have the deduction or income that goes on these forms! All I have is this salary and a W-2 at the end of the year. Even the most common form, Schedule A for itemized deductions, was of no use to me because I didn’t have any medical expenses, mortgage interest or property taxes. And I certainly had no money leftover to donate much to charity. So, all these forms were rather useless. But I still figured that these forms had the secrets to lowering my tax bill.
A few years later, I moved to Texas for a yet higher-paying job. That is, until the company decided to shut down a few months after I got there. Suddenly, everything changed, as they say. Now I could collect some unemployment benefits while I searched for a new job. But, as the year ended, I found myself having to face a new reality. I hadn’t earned nearly as much as I expected and I needed to file my tax return myself. So I figured this new software called Turbo Tax could help me. Now Turbo Tax 30 years ago wasn’t as nearly as user-friendly as it is today. It was a new software and it required some basic knowledge of tax to make it work right. But, I didn’t know that. So on the first pass, I calculated my simple tax return of 1 W-2 and my unemployment. And guess what? I got a nasty surprise that showed I owed over $1,000! I just didn’t have $1,000 at that time, so I had to figure out some way to lower my tax bill. Hey, maybe if I used some of those additional forms I learned about a few years earlier, I could cut my taxes! But, hey this electronic tax filing thing was pretty neat. I started playing around with some ideas....
So, a year into my move to Texas, I started my own little business. Although the first year was a disaster, the second year, things started to improve. We started making some money but then came the big tax bills to match. There had to be a way to reduce this tax burden, I thought. But my accountant wasn’t much help. He basically just filled out my tax forms with the information that I gave him from my spreadsheets. And he charged me $100 to file an extension and $500 more for what looked like a tax return that I practically did myself. Wow, what a ripoff!
It was at this point that I started to wonder if, indeed, there was a better way. So, I started studying the tax code.
I read and I read. I studied the tax forms again, and I read the instructions. I started to figure out what you needed to do to start to build wealth and pay less taxes. And, then, one late night, it hit me.
I could buy rental houses with NO MONEY out of my pocket! Yeah, right! All I had to do was send $99 to this infomercial company and I could learn the secrets. I figured I didn’t have too much to lose, so I called them up and ordered my books and tapes. A few days later, I got my package and started reading.
It only took me about 60 days to find my first property. Not only was I able to buy this house that was twice the size of the place I lived in, but at the closing, they wrote me a check for almost $5,000. No money down? How about that? They paid me instead! Now I was a landlord and all I had to do was find some tenants. So, I followed the instructions in the book and less than 30 days later, we had our first rent check.
Now, my tax situation got a little more complicated. A rental property, mortgage interest, property taxes, and even depreciation and more could finally go on my tax return. I had a small cash profit each month and I had a loss on my tax return that reduced our taxable income. I could get a refund again, even though I was putting money in the bank. I liked how this was working out! Oh, and by the way, by this time, I didn’t need an accountant anymore as I could fill out my own tax return, even though it was somewhat complicated (for a relative novice).
I didn’t stop there. Over the years, my business grew and I bought more real estate. I was determined to learn more and more how the tax code could be my friend. As I started managing my real estate and making friends with various contractors – the plumbers, electricians, HVAC specialists—I found out that they had the same problem in feeling like their accountants were not really helping them cut their tax bills.
So as I studied, I discovered the good, the bad, and of course, the ugly parts of the tax code. I learned why Passive Activity losses aren’t so good for reducing your current taxes and what the heck the Alternative Minimum Tax is all about and why you need to avoid it. I learned which deductions I could take and which deductions I had to set up in advance so I could use throughout the year. I found out that I could hire my kids, for example, to do basic office tasks, and I learned that I should not hire my wife (OK, so that’s not really a tax reason behind that one)!
Now, I finally had a path for finding out how to manipulate a business to pay the least amount of tax you legally can. Or, in fact, a path for paying literally no income tax (and still have money to eat!) if you want to arrange your business affairs in a certain way.
Now here’s the good news. You don’t have to spend years studying the tax code. Not just because it’s too confusing, but it reads like a dictionary and is truly the most sleep-inducing thing you could read. OK, so maybe if you have insomnia you’ll find it an interesting read. But I’ve been able to reduce the thousands of pages of tax code down to about 58 or so really useful things a small business owner can use and take advantage of. These are all things right in black-and-white yet your typical CPA or tax accountant won’t tell you in a timely fashion so you can use these tips to lower your tax bills. Oh, they’ll tell you that these are legal strategies IF you ask them, but they still may not tell you how to implement these ideas. So what use is your accountant if he or she keeps all the best ideas for themselves?
I’ll be the first to admit that you probably can’t use ALL 58 of these strategies. Some require certain situations that you may not have, such as having a child that you can employ in your business. But other strategies apply almost anyone, like having the right legal entity to hold your business or assets.