Raymond Jewell: [00:00] Why tax breaks matter. Stay tuned.
Announcer: [00:06] From Philadelphia, the home of the Liberty Bell, Financial Freedom Radio starts now. Here’s your host, Raymond Jewell!
Raymond Jewell: [00:17] Hi my name is Dr. Raymond Jewell and I’m gonna be your host on Financial Freedom Radio. We’re gonna talk about why tax breaks matter, but first let’s have a little chat with our producer/engineer, Steve. Good morning, Steve.
Steve Bailey: [00:34] Good morning Dr. Ray. How are you today?
Raymond Jewell: [00:36] I’m great. How was your weekend?
Steve Bailey: [00:40] It was good. I had a nice, quiet, peaceful weekend. Lisa was out of town, so it was just me and my boy hanging out this weekend.
Raymond Jewell: [00:49] Oh boy, lots of Cheetos around there and crumbs.
Steve Bailey: [00:52] We watched the fight Saturday night, hung out at Buffalo Wild Wings, had a good time.
Raymond Jewell: [00:59] Oh boy. Well that’s great. Let’s dig into this and talk about why tax breaks matter. It’s a business building secret that many don’t understand and we’re going to get into this. We got into it a little bit last week, about use and growth simultaneously. I’m going to touch on that in a second, but let’s bring up slide number one.
[01:30] Why do people get tax breaks? Tax break means the government is offering you a reduction in your taxes. When the government offers you a tax break, it means you’re getting a reduction in your taxes. It can come in a variety of ways, such as claiming deductions, excluding income, that kind of thing. We’re gonna talk about the difference between deductions and tax breaks as we go through this episode but what’s important to understand is why businesses fail.The secret we touched upon is having a business plan and we talked about this last week. Well let’s go back to our use and growth simultaneously test. When we understand this and if you watched the episodes, the last one and the one before that, you will understand how this works. But I want to go through this again because it’s very critical in understanding business building, and understanding wealth creation, and understanding how to capitalize in a business, capitalize on these various things we’re talking about in a business.
[02:51] So whenever you have anything of substance, you want to use it and grow it at the same time. You want to ask the test, am I getting use, am I getting growth, and am I getting use and growth simultaneously. If you get three yeses to those questions then you’re hitting a home run. We talked about real estate, asking the questions when you own your own real estate or you’ve got rental property. Am I getting use? Yes. Am I getting growth? Yes. Am I getting use and growth simultaneously? Yes, whether you live in it or you read it. If you have art hanging on the wall, and I don’t mean anybody name art, but if you have art hanging on the wall and you look at that piece of art are you getting use? Are you getting growth? Are you getting use and growth simultaneously? The answer is yes. We looked at art and how people are even developing funds around art. So it’s becoming an investment strategy that is popping up. Gold, silver, precious metals. Are you getting use? Yeah if you have a piece of gold and you’ve got it in your hand, you can touch it. You’re getting use. You can look at it, you can enjoy it, you can Scrooge McDuck it if you want to. For those of you who don’t know who Scrooge McDuck is, he was the guy that used to bathe in his wealth. You know who he is, don’t you laughing Steve?
Steve Bailey: [04:38] Yeah, I thought it was a good reference. I got it.
Raymond Jewell: [04:40] So when you have precious metals, gold, silver, you can use it. It’ll go up in value. So you get growth and you get use and growth simultaneously at the same time. Antiques, same thing. When you have a business, you use it and you grow it at the same time. Excuse me getting a little parched here.
Steve Bailey: [05:12] You get excited.
Raymond Jewell: [05:13] I do, I get passionate it’s crazy. So when you have a business, you’re getting use because you’re using the business to build wealth. You’re using it to get an income from it, you’re using it to employ people, you’re using it to sell a commodity that somebody else wants. Does it go up in value? It goes up in value the more sales you get. So you get growth and do you get use and growth simultaneously? Yes. So how’s that for bouncing back from a krabby throat? So you look at the wealth creators back in history. What was their main vehicle for building wealth? Their main vehicle for building wealth was a business. Use and growth simultaneously. Andrew Carnegie, Rockefeller, all these guys built businesses. They maintained the use and growth simultaneously philosophy as they went through life. They would do things that would give them use and growth, art, silver, antiques, real estate. They knew that if they had anything of substance, they wanted to go up in value and if they converted it to cash, it would go down in value through inflation eating up the value. So back then, they had no taxes. The country made its revenue from tariffs. They would charge tariffs on products that were sold to other countries and other countries would charge them tariffs. So these countries were making money off the tariffs.
[07:10] It wasn’t until 1914 until taxes came about to fund World War One. They were supposed to be temporary, but the government, in its infinite wisdom effort, took them away.
Steve Bailey: [07:24] Nothing’s temporary.
Raymond Jewell: [07:26] That’s right. So when we look at a business, the secret is a business plan. Last week we talked about it. One out of 10 businesses will survive five years and the same statistic keeps rolling, it’s an awful statistic. The business that survives has a business plan. Any business that doesn’t have a business plan will fail after you get tired of it because you have no direction or you get tired of spending money to keep it going. You’re gonna walk away from it. I see it all the time with clients. A business plan is critical. Now when you have a business plan, many times you get tax benefits. Tax breaks are something that’s key to allow you to put more money back in your business. Tax deductions are key, but I want you to understand the difference between tax deductions and tax credits.
[08:37] So tax breaks allow an owner to put more money back into their business. When you create a corporation, whether it’s an LLC, whether it’s a C Corp, whether it’s an S Corp. Whatever it is, that becomes a living breathing entity. It becomes a person and it gets benefits as an entity that you would not normally get as an individual. So when we look at that small business and a home-based business, great tax breaks are essential. Got a video here. We’re gonna take a look at video number one. Steve, could you play that please?
Narrator 1: [09:22] Debates about tax reform often focus on who will pay more and who will pay less. These distributional questions obscure a crucial issue. How do changes to the tax code impact the economy? Tax rates change behavior, they affect how much we work, save and invest, whether we start businesses and how we run them, and it’s the marginal tax rate. How much you’re taxed on the next dollar you earn that guides these decisions. If you can choose whether to work overtime or not, your decision doesn’t depend on how much in taxes you pay overall. It will depend on how much you’re taxed on every additional new dollar you earn. You’re more likely to work an hour of overtime if your marginal tax rate is low and you’re able to keep most of what you earn then if you have a high marginal rate and more of your extra earnings goes towards taxes. Since higher marginal tax rates ultimately make it less profitable to work higher or invest more, they lead to slower economic growth. Over the years, investments not made, schooling not pursued, or businesses not started, all cumulatively add up to a lower quality of life for everyone.
Raymond Jewell: [10:31] So as you can see, when you have lower taxes, and there’s a lot of other variables that go into this, when you have lower taxes, you have more growth in the economy because people are spending more, they’re working harder, they’re spending more when you have high taxes. The tax the rich schemes, people stopped working, they start hoarding and their quality of life will actually go down. So currently, as of 2020 in the U.S., we have reduced taxes on businesses and individuals. So you’ve got people working harder and spending more, living better quality of life. So tax deductions versus tax breaks is critical. So we’re going to look at some numbers here and delve into the difference between tax deductions and tax breaks. I think this next video that we’re going to take a peek at is talking about tax deductions.
Narrator 2: [11:38] In this video, I now want to cover one of the other most misunderstood ideas when people think about taxes and that’s the idea of deductions. So one of the most common tax deductions is the deduction you get on interest on your mortgage. So let’s say that this year, on my mortgage, of the part of my mortgage that is interest, let’s say it’s $10,000. It is $10,000 on my interest on my mortgage. You’ll either already know or someone might tell you that this is tax deductible. The misconception that I’ve seen many many times is that people think that, since this is a tax deduction, that this $10,000 should be deducted from their taxes. So in the previous example, we showed this is the scenario where this person making $100,000 would have to pay $21,720 in taxes. So based on that misconception, they would say, “Okay, I get a $10,000 tax deduction. Now I would pay $11,720.” That is wrong. The deduction doesn’t happen from the taxes you pay. The deduction happens from your stated income. So if I have this person right here had a $10,000 tax deduction, instead of saying that they made $100,000 that year, they would say that they made $90,000. So once again, the deduction does not come directly from the taxes. That would be a tax credit. The deduction comes from the reported income.
Raymond Jewell: [13:26] So you can see that when you have deductions, the more deductions you have, the lower the taxes you pay. So you could put more money back into your business. Tax breaks are different and we’ll look at that in just a second. When you’re able to deduct items like travel, cars, office, clothes I guess if you’re wearing them for business, products that you’re buying, overhead employees, all sorts of things as a corporation whether you’re an LLC, an S Corp, C Corp. You want to check with your accountant as to the best ways to do this, but you want to make sure that you’ve got that corporation. It doesn’t cost a lot of money to set it up, but you want to make sure you’ve got that corporation so that it can act as an individual. Plus, if you ever get sued for whatever reason, they have to sue the corporation, not you personally. So it shields you from your personal wealth and family and anything else that you might have at risk.
[14:45] So with a tax deduction, it all is reducing down the taxes that you pay and the tax credit comes in after that. Now this is kind of a long video. Stay with me as we watch it because it’s going to go through the tax deduction and tax credit once again just to drive this point home and then we’ll come back. So let’s play video number three.
Narrator 3: [15:20] In this video, I’m going to explain the difference between a tax deduction and a tax credit. So conceptually, tax deductions are going to reduce taxable income and credits are going to reduce the actual tax dollars that are due, that are owed to the government, right. So that might seem like a very subtle difference or it might be a little too abstract for you. So let’s just jump into an example and it’ll make it a little bit easier for you to understand. So let’s say, in our example, that you have taxable income for a year of $14,000, all right? And your tax rate, there’s just 10%, right? We’re not gonna get into progressive tax rates here. Let’s make it simple and so we just say well how much tax is due? How much is owed by you to the government? Well we just take the 14,000 and multiply it by 10% and that gives us $1400 tax due. Now I want to introduce a $500 deduction, right. So let’s just say that you have a $500 deduction, and let’s see how that changes things.
[16:28] Okay so, $500 deduction, now remember, we said that deductions reduce taxable income, right. So because we’ve got a $500 deduction now, we’re gonna take 14,000 and subtract 500, right. Subtract the deduction and that’s gonna give us $13,500, right. Now the tax rate is the same, right. That hasn’t changed. So that’s 10%. So now what is our tax due? Well we just say 13,500 times 10%. So that’s gonna give us tax due $1,350. So you see our tax is lower than it was originally because of the deduction, right. Now let’s say that we want to talk about a $500 tax credit and I think this is gonna show you rather than me just telling you the difference between deductions and credits. So now, let me just change colors here to try orange, so now credits reduce tax due, right. They don’t affect taxable income, all right. So taxable income is gonna stay the same. It’s gonna be $14,000, right. The tax rate is gonna stay the same of 10%. So the tax is going to be initially, before we factor in the credit, we’re gonna say that we’re still at $1,400. But now what happens is after you get this initial tax due, we should say, now you deduct that credit, right. That credit comes out from the tax due. So we’ll say, and I’ll just put it in parentheses here so that you know that it’s being deducted, 500 means it’s being subtracted. That’s going to give us an actual tax due, $900. So let me just really highlight this so you can see the changes in tax due, because this is really what matters, right. Ultimately, what you pay to the government is what you care about the most.
Raymond Jewell: [18:40] So we saw the difference between tax credit and tax deduction. I hope it’s clearer, because that $500 goes right into your business. When you have a corporation, you can get some tax credits. You’ve heard them say that childcare gives you a tax credit so that’s right off the bottom. You can get tax credits as a corporation. It’s important to understand the difference between deduction and credits because when we pull our business plan together that’s part of your business plan. If we could see slide number two, we looked at this last week. We saw that business plans take into consideration lots of areas to probe into. When you have an organized business plan, it will be involved. It is your roadmap that you take before you get it to reality because, let me tell you, if you put together a plan incorporating lots of these things, you will still have unforeseen situations that occur that will get in your way. Unknown variables always exist in the real world. They are there, and even if you have a business plan, you will run into them. I’ve seen it. I have it happen to me all the time. So always remember the secret to survival in business is a business plan which I will drive this point home. It is a secret that is not used by people at all. It is ignored by probably 98% of the people that start a business. It’s mind boggling. Sometimes when you go to the bank, they’ll ask for a business plan. They don’t get as involved as in that slide. So when we see that, we want to make sure that we have a good guide and a business plan is that. Because you’re not hopping all over the place. I mean I’ve done it both ways. We got a situation right now that we’re trying to solve because we didn’t have a good plan. We’re saying we’ll try this, we’ll try that, we’ll try that. We didn’t get the plan together at first and shame on us, but with a good plan and understanding, the tax situations and check with your accountant, please. I’m not an accountant, I’m an economist, but check with your accountant for tax information.
[21:58] So I hope this has helped you today. We’re gonna delve into it, but next week I want you to know we’re gonna go a little political here, but I will tie it into the business areas. We’re gonna look at all these. In the U.S. right now, they’re having an election and all these people run out promising all these things. Is there enough money around or enough businesses around for them to tax, to pay for them? We’re gonna talk about that next week. I want to thank you all. It’s a sensitive topic.
Steve Bailey: [22:40] It’s something you’re very passionate about. So folks are going to be in for a treat.
Raymond Jewell: [22:42] Yeah thanks I appreciate the promo. I want to thank you all for coming and please like, share and subscribe to our podcast on YouTube. Go to Financial Freedom Radio and you can go over to financialfreedomradio.com. I don’t know if there’s a link on financialfreedomradio.com that takes you to the YouTube channel. Is there, Steve?
Steve Bailey: [23:09] Yep, I got it covered.
Raymond Jewell: [23:10] Okay and so please like and share because we want to get this information out. We do it for free, we just want everybody to be able to expand their mind. As I’ve said before, the mind that opens to a new idea never comes back to its original size. Albert Einstein said it. Some people take issue with him saying it, but I’m giving him credit anyway. That’s my right because I’m the host of the show. So I want to thank you all for coming and we’ll see you here next week at financialfreedomradio.com. Thanks, Steve.
Announcer: [23:48] Thanks for listening! Please remember to subscribe to the podcast. If you want to learn how to create real sustainable wealth like the extremely rich people do, or maybe you just want to sustain the wealth you already have, you need to check out Dr. Ray’s new book “Why the Rich are Rich”. Ray’s been coaching clients for 35 years and has completely unlocked the secret strategies that rich people use day in and day out to grow and sustain their wealth, regardless of what’s going on in the economy. His book is completely free, and you can get it by going to https://whythericharerich.com and entering in your email address. Again, that’s https://whythericharerich.com. Head over there now.