CT REIA Articles: Saving Taxes Makes You Wealthy - Yes or No? | Article by Al Aiello

Saving Taxes Makes You Wealthy - Yes or No?

Albert Aiello, CPA, MS Taxation

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 will be speaking at the Connecticut Real Estate Investors Association, or CT REIA, Monthly Meeting on April 19, 2010 in Cromwell, CT.