Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax

333 Pages·2004·2.79 MB·english

by  Diane Kennedy

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LOOPHOLES
OF THE RICH
How the Rich Legally
Make More Money
& Pay Less Tax
REVISED EDITION
D K , CPA
IANE ENNEDY
John Wiley & Sons, Inc.
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Copyright © 2005 by Diane Kennedy. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Kennedy, Diane., 1956-
[Loop-holes of the rich]
Loopholes of the rich : how the rich legally make more money and pay less tax
/ Diane Kennedy—Rev. ed.
p. cm.
Published simultaneously in Canada.
Includes index.
ISBN 0-471-71178-0 (pbk. : alk. paper)
1. Corporations—Taxation—United States. 2. Tax planning—United States.
I. Title.
HJ4653.C7K46 2004
658.15'3—dc22 2004058889
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
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Contents
Foreword by Mark Victor Hansen vii
Introduction: The Rules Have Changed ix
PART I The Five STEPS to Financial Freedom 1
CHAPTER1 Starting Point—Understanding Your
Financial Story 3
CHAPTER2 Team—Building a Team That Supports You 22
CHAPTER3 Evaluation—Constructing a Tax
Loopholes Strategy 39
CHAPTER4 Path—Creating an Action Plan 54
CHAPTER5 Starting Point—What Worked, What
Didn’t Work 61
PART II Jump Start! Your Wealth 69
CHAPTER6 Jump Start! Principles for Tax-Advantaged
Wealth Building 71
CHAPTER7 Creating Income with Less Tax 81
CHAPTER8 Using Business Structures to Create Legal
Tax Loopholes 96
CHAPTER9 Discover Your Hidden Tax Loopholes 132
CHAPTER10 Control When and How Much You Pay
in Taxes 146
CHAPTER11 Smart Real Estate Investing 167
CHAPTER12 Real Estate Loopholes to Take Money out
of Your Property 178
CHAPTER13 Buying a Home the Right Way 186
CHAPTER14 Home Loopholes So Your Home Pays You 195
PART III New Tax Strategies for C Corporations 203
CHAPTER15 Avoid C Corporation Pitfalls 205
CHAPTER16 New C Corporation Tax Loopholes Strategies 214
v
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vi CONTENTS
PART IV Take Your Loopholes and Still Sleep at Night 221
CHAPTER17 Eliminate IRS Red Flags 223
CHAPTER18 How to Have a Painless IRS Audit 227
Appendix A Tax Loopholes Strategy Success Stories 237
Appendix B 300+ Business Deductions 248
Appendix C IRS Principal Business and Professional
Activity Codes 261
Appendix D Sample Forms 281
Index 307
Meet Diane Kennedy 311
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Foreword
There are two parts to making a whole lot of money. The first is
earning it and the other is keeping it. The hard part is keeping it.
In this book, Loopholes of the Rich, you are going to legally learn
how to make more, keep a whole lot more, and pay less tax. One of
the things I teach is “The best thing you can do for the poor is not be one
of them.”
What you want to do is build a financial fortress around yourself,
your family, and your businesses. Do what the rich do by having a plan
and a path. You need an effortless strategy that is easy to understand.
This book takes you through it step-by-step-by-step. Diane gives you not
only a wealth creation system, but a wealth preservation and protection
system that is invincible, unstoppable, and resolute, and works for you
now and works for the future. What you want to do is create a residual,
philanthropic future income that makes your church, temple, mosque, or
charity of your choice infinitely better off than they were before you
came. So now you have lasting value, because you knew the Loopholes of
the Rich.
You deserve to know this information, and now Diane has written it
in such an easy-to-understand way that you can make it, keep it, and
have it grow. As John Wesley said, “You want to earn all you can, save all
you can, invest all you can,” and let me add protect all you can, so then
you can give all you can.
—Mark Victor Hansen
Co-creator, #1 New York Timesbest-
selling series Chicken Soup for the Soul®
Co-author, The One Minute Millionaire
vii
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Introduction
THE RULES
HAVE CHANGED
Are You Living Your Dream . . .
or Your Nightmare?
Are you one of the millions today who keep working harder and
harder and receive less and less in return for their effort? Just
where does that money seem to go? And, even more frightening,
where does all your time go? Many today are waking up to the re-
alization that they have somehow gotten old, and their lives so far have
only been about striving—with nothing to show for all the years of work.
Where Did It All Go Wrong?
The biggest expenses for the average American are interest and taxes.
Both of these expenses put your money in someone else’s pocket. The in-
terest that you pay on your home mortgage, car loan, credit cards, and
the like is income to someone else. The taxes you pay go to support the
government without much input from you. In other words, the typical
middle-class wage earner works to pay other people. And, worse yet, the
average American seemingly has no say in how the money is spent. No
wonder you feel out of control sometimes!
The middle-class dream has become a nightmare. You can’t work
harder at your job and expect to get ahead. And, even worse, you might
not know this until it’s too late. You might find out that you have no fu-
ture just as you’re ready to retire and enjoy your golden years. That’s
ix
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x INTRODUCTION
when you find out the pension you hoped for is gone. That’s when you
find out your house costs you more in property tax and insurance than
you can afford. And, too late, you find out you now have outdated skills
for the job market. This is one nightmare that doesn’t end when you
wake up. You don’t even know you’re in the nightmare until you wake up
and find out you have no money and no future.
The good news is that there still is a dream possible for you. And
that future is possible no matter where you are today. It doesn’t matter
where you live. It doesn’t matter how much money you have now.
It doesn’t matter how much debt you have. But the way to realize
the dream, and end the nightmare, is not the way your parents
taught you.
The plan of your parents—work hard, save your money, and col-
lect your retirement—was effective for them, but it doesn’t work now.
Loopholes of the Rich was written to provide the information you need
to operate in today’s world. In this book you will learn the new rules
that the wealthy play by. And you will learn how you can play by the
same rules.
What Does It Mean
to Be Average?
Five years ago, it was estimated that the average 50-year-old American
had a net worth of zero. Consider what that means. It means that
someone has worked for 25 or more years and has been able to accu-
mulate nothing. Of course, that’s an average; so for everyone who has
assets that exceed their debt, there is someone who owes more than
they own. At 50 years of age, they have another 15 years or so to work.
A lot has to change if they want to recover from where they are now.
They have to reverse the effects of 25 years of work in just 15 more
years of work.
Last year, a new study was done. It’s now estimated that an average
50-year-old American has a net worth of minus $7,000! It’s going the
wrong way!
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INTRODUCTION xi
The conventional wisdom for the average person just doesn’t work
anymore. If you aren’t average, or don’t want to get those average results
(owing more than you own), then it means that you’re ready to learn the
secrets of tax-advantaged wealth building that the rich know.
How to Improve the Odds
Avoid being average by creating balance between financial education
and proper financial action. No one person can have all of the answers.
A team makes you stronger. Your team should encourage and move you
in the right direction. This book will tell you how to find, evaluate, and
work with the right team. With their help and advice, you can succeed!
How to Put More Money
in Your Pocket Today
Taxes are the single biggest expense for the average American today.
One small change in the amount of tax that you pay can create a huge
change in how you and your family live your lives. This book will tell
you what small changes make the biggest impact.
Even better, you’ll learn strategies that can help you save taxes to-
day! But it takes more than just learning about them. You need to also
put the ideas into action. Loopholes of the Rich will show you how to do
that as you build a team that supports your goals. But, first, we start with
the basics of loopholes.
Loopholes Are
Government Incentives
Loopholes are government incentives to promote public policy. They
aren’t something shady or shifty. In fact, the government wants you to
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xii INTRODUCTION
take advantage of the legal tax loopholes that the tax law provides. So
where are the loopholes? You’ll find most of the loopholes in the two ar-
eas that most support the economy—businesses and real estate investing.
Businesses, and particularly small businesses, provide stimulus to the
economy. A growing business employs people, hires consultants, invests
in equipment, and just generally kick-starts a struggling economy. In
fact, look at recent tax legislation. Does it seem like the tax cuts are un-
fair? They are! That’s because the government wants to create a change
in the economy and knows that the best way to do that is by creating op-
portunities for businesses to grow.
Real estate loopholes are another important part of public
policy. Real estate investors provide housing for people who don’t cur-
rently own their own homes. The government has tried to provide
that same kind of housing (called public housing), and the result is
decaying tenements where no one wants to live. In fact, while prop-
erty values have generally appreciated (when taking the long-range
view), public housing values have generally gone down. The govern-
ment therefore provides the loopholes in order to encourage real es-
tate investors.
The first edition of Loopholes of the Rich was published in 2001.
Since then, I’ve heard from thousands of people about how they have
made more money and reduced their taxes by taking advantage of the
tax loopholes that the government wants you to use. The loopholes are
there! The government puts them there for us to use, but it’s up to us to
find them.
A Word of Caution
You will hear ideas and examples throughout the book that will excite
you. You will likely find that the people in the examples have situa-
tions very much like yours. You will want to do something—be moved
to take action. That’s great! The caution is that you must follow all
the steps closely. One of the fundamental, key steps is the need to
have a good team. Find advisors whom you can trust to give you the
best advice.
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INTRODUCTION xiii
The Do-It-Yourselfer
Every so often, as I speak at seminars, participants’ questions make
it clear that they intend to do it themselves in attempting to find
the right business structure for their businesses. I am reminded of a
medical school classmate of a friend of mine.
It had become evident who the top student in the class was by
the second year of medical school. In fact, this particular young man
was so far advanced that he had trouble communicating with any of
his fellow students and many of the professors. As his knowledge,
and his conceit, grew, he began to believe that he was more compe-
tent than anyoneelse in the medical profession. This was in spite of
the fact that he was only in his second year of medical school.
With that belief, he self-diagnosed a potential appendix prob-
lem for himself and determined that he should have an appendec-
tomy. Of course, he felt that no one was as good as he was, so he
also decided to remove the appendix himself.
He gave himself local anesthesia and rigged up mirrors on his
narrow dormitory bed so that he could view the operating site—his
own abdomen. His skill might have been top-notch, but he couldn’t
stanch the flow of blood quickly enough and soon passed out from
the blood loss. Luckily, he was discovered before he died from the
failed surgery attempt.
He was trained, he was competent, and
he almost died trying to do it himself!
The Bottom Line: Use trained professionals; don’t try this by yourself.
What You Will Learn in
Loopholes of the Rich
Loopholes of the Rich came about as a result of my years of experience
working with people who searched for ways to reduce their taxes and
increase their wealth. After talking to literally thousands of people