Loopholes of the Rich — Book Review

How the Rich Legally Make More Money and Pay Less Tax by Diane Kennedy

loopholes of the rich book cover

Loopholes of the Rich — Description

Loopholes of the Rich helps Americans from all walks of life use the same tax loopholes that the wealthy use to lower their tax bill. With this handy guide, you won’t need an accountant to find quick and easy ways to pay less. And there’s nothing unethical about these tax loopholes. In fact, the government wants you to take advantage of them!

These tax-reducing tactics and strategies can give you the freedom to save for your family’s future or for your own financial independence. Plus, you’ll find a handy checklist of more than 300 business deductions, real-life tax strategy examples, useful sample forms, explanations of IRS codes and rules, and much more.

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Loopholes of the Rich — Book Review

The Loopholes of the Rich is a clearly written book that offers a handy guide to tax strategy for the rich and for those who hope to be rich themselves. Diane Kennedy is a CPA provides basic information on common tax risks and opportunities.

Almost jargon-free, she managed to explain the fundamentals of financial reports and record keeping in layman terms. Which I find to be incredibly helpful. Her commonsense and straightforward approach is welcomed without any outrageous promises or exotic impractical recommendations.

However, you might need to know that the title might be slightly misleading — the book might not really be about loopholes but rather more on sound planning and management — especially if you’re business owners. It does get into the minutiae of tax law, which is subject to change, so some of the details may have a short shelf life, and much of the advice will have little applicability outside of the United States.

Hence, I’m not interested to go into details of the book since it is not applicable to me. I’m not from the United States.

Rating

I would rate the book at 4★ and the book rating in Goodreads stands strong at 4.05 ★  (836 ratings by Goodreads). A worthwhile reading especially for Americans.

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Loopholes of the Rich — Book Summary

The STEPS Cycle of Financial Independence

Using the STEPS cycle of financial planning can help you become more aware of your financial assets and increase your wealth.

It consists of the following stages: “Starting point,” make a thorough inventory of your financial position; “Team,” form a group of trustworthy advisers; “Evaluation,” map the path to your goals; “Plan,” create your tactics; and finally, a return to the “Starting point” for a progress report and re-evaluation.

Step One: Calculating Your Starting Point

Determine your financial standing, your starting point. Your non-American, I would suggest you read Get a Financial Life instead. Try to use a financial statement to outline your monetary flows and net worth.

The following three statements will give anyone a comprehensive picture of their budgetary position —

1. Income Statement

Lists income and expenses.

The income statement shall include three kinds of income:

  1. Earned income: the money you receive in exchange for your labour, time or services – in other words, your pay. Earned income is taxed at the highest rate, which is sometimes more than 40%, depending on how much you earn.
  2. Portfolio income: the money you make from interest, capital gains and dividends – “the money your money makes for you.” The federal tax on portfolio income is generally no higher than 15%.
  3. Passive income: the money you make from investments, such as real estate. With proper tax management, you can pay no tax whatsoever on passive income.
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2. Balance sheet

A balance sheet will detail out your liabilities, assets and net worth. While the income statement shows your progress over a period of time, the balance sheet is a snapshot of the moment. When you draw up a balance sheet, avoid these five common mistakes: overstating asset values; counting illiquid assets (those you can’t convert into cash right away, such as your home); ignoring liabilities; counting possessions that do not build wealth; and failing to differentiate between “good debt,” which finances an appreciating asset, and “bad debt,” which finances a depreciating one.

This will show how much bad and good debt you have.

3. Statement of cash flows

Shows your actual cash position, independent of your income and balance sheet positions. The income statement and the balance sheet depend on accounting conventions and technicalities, and your net income is not the same thing as cash. For example, passive income may not be cash income. In the final analysis, “cash is king.” Small businesses and individuals rarely prepare cash flow statements – a serious omission.

Honest financial statements can clearly define your current financial position.

Step Two: Forming a Team of Advisers

As we learned from The Richest Man in Babylon and the Millionaire Teacher, remember to always seek competent advice.

Instead, assemble a team of knowledgeable advisers whom you trust. Depending on your business, they may include specialists in insurance, accounting, corporate structure, law or finance. Cast a wide net. Ask other business owners for advice, ask advisers whom you already trust to recommend advisers in other areas, and check with local licensing and certification boards.

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The following points in key when you work with your team:

✔ Trust the trustworthy – If you have picked a good group of advisers, do the logical thing and allow them to do their jobs.

Learn the language – Lawyers and accountants speak a technical language in which words have very specific meanings. Learn their jargon so you can make sense of the advice they give you.

✔ Ask the right questions – Ask your advisers about your actual situation. Don’t ask hypothetical questions and don’t ask questions that are so specific that they limit the answers. Ask people questions in their area of expertise. That means ask your attorney legal questions, ask your accountant accounting questions, and so on.

✔ Keep your advisers informed – Give them the information they request. When your advisers ask you questions, your job is to answer them.

✔ Clean up after yourself – When you make a mistake, don’t point the finger or make excuses. Accept responsibility.

Step Three: Evaluating Your Strategy

Step three deals primarily on your most important avenue to reducing tax payable — legally.

Business

Starting a business can reduce the amount of tax you pay – but because some people have used “sham businesses” to create losses they can offset against earned income from other sources, the U.S. Internal Revenue Service (IRS) has a fairly strict definition of “business.”

You must have the appropriate experience; operate in a businesslike manner, with a bank account, records and filing systems; document reasonable losses; and, at some point, make a profit. The appropriate business structure can minimize your taxes.

For example, a corporation, which limits liabilities and offers tax advantages, is often preferable to a sole proprietorship. Meet your business tax obligations on time, because penalties are costly and the IRS has enforcement powers that other creditors lack.

Real estate

Investing in real estate has numerous tax advantages, particularly because you are allowed to use depreciation to offset the income you receive from a property. Depreciation is a “phantom expense” that does not cost you actual cash.

Home

If you want your home to provide you with a tax advantage, you must structure the purchase properly. Protect your home equity by using the homestead exemption, hold your home in a limited liability company and use debt strategically.

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Step Four: Following Your Path

Implement your plan. No matter what plan you choose to follow or what actions you choose to take, always prioritize on keeping good business records.

Typically, a good business record comes in three categories:

  1. “Temporary files” – Records of annual income and expense items. When you pay an invoice, record the date, check number and amount. Accountants call these records “temporary” because they apply only to a particular tax year. But “temporary” does not mean “discard.”
  2. “Permanent files” – These document your business’s assets, property, debts and structure. Keep these records in good order; if the IRS audits you, your ability to produce them quickly will show that you have run your business responsibly.
  3. “Financial statement files” – Many business owners use programs such as Quickbooks to generate financial statements.

Step Five: Re-evaluating Your Starting Point

Re-evaluate your financial standing at least quarterly. Make prompt adjustments to your strategy, plan and actions when required.

Keep track of what works and what doesn’t. Add them to your life principle.

You read other book summary and book review on personal finance here.

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Author: Muhamad Aarif

A notorious book addict by night and an oil and gas executive by day. As Mark Twain said, "The man who doesn't read good books has no advantage over the man who can't read them." So, read, read, and read some more.

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