Tax - Free Wealth by Tom Wheelwright pt 2

Vocabulary flashcards covering key terms and concepts from the video notes on audits, estate planning, taxes, trusts, and asset protection.

Audit

A government review to ensure salary practices align with industry norms; an unreasonably low or high salary can trigger an audit and reclassify income as self-employment income.

Reasonable salary

The salary you would pay someone else to perform your job; required for corporations and affects employment taxes.

Employment taxes

Payroll taxes on wages (e.g., Social Security, Medicare); amount influenced by how you pay yourself.

Earned income

Income received from labor or services; investment income (like dividends) is not considered earned income.

Self-employment income

Income taxed as self-employment when it’s not treated as wages; can increase employment tax burden if salary is too low.

S corporation (S corp)

A corporate structure taxed as a pass-through entity; may reduce self-employment taxes when owner takes a salary and distributions.

Medical Expense Reimbursement Plan (MERP)

A benefit plan included in compensation that reimburses medical expenses; can affect how compensation is taxed.

Salary (including benefits)

Compensation that includes cash wages plus benefits (e.g., medical benefits) counted as part of pay.

Sales tax

Tax on taxable sales collected at the point of sale and remitted to the state; collect in doubt, remit, and file to reduce exposure.

Sales tax study

CPA-led review to determine where and how sales tax should be collected for a business.

Real estate property tax

Tax based on the value of real estate; calculated as a percentage of property value; protest or appeal can reduce it.

Personal property tax

Tax on business property other than real estate; separate from real estate tax.

Property tax depreciation (real estate)

Depreciation considerations for property tax purposes are not the same as depreciation for income tax.

Probate

Court-supervised transfer of assets after death; often costly, public, and time-consuming; avoid with proper titling to a trust.

Trust

A legal arrangement where assets are placed under a trustee for the benefit of beneficiaries; helps transfer assets and avoid probate.

Settlor/Grantor

Person who creates the trust and transfers assets into it.

Trustee

Person or entity responsible for managing the trust and its assets.

Beneficiary

Person(s) who receive the benefits from the trust assets.

Will

A legal document that appoints guardians, directs asset distribution, and specifies bequests.

Charitable remainder trust (CRT)

A trust that pays income to the donor during life and gifts the remainder to charity; yields income tax deduction and can avoid estate tax.

Charitable lead trust (CLT)

A trust that pays income to charity during the donor’s life, with the remainder eventually going to heirs; may provide estate tax deduction.

Estate tax

Tax on the value of a person’s estate at death.

Exemption (estate tax)

Portion of assets that are not subject to estate tax; used to reduce taxable estate.

Limited partnership

A partnership with limited partners and a general partner; can transfer assets while preserving control and offer tax planning opportunities.

Minority discount

Valuation discount for lack of control in a minority ownership interest.

Partial ownership discount

Discount applied when valuing a partial ownership interest, reflecting reduced control or marketability.

Valuation expert

Professional who values assets for gifts and estate tax valuations and discounts.

Roth IRA

A retirement account with tax-free growth and tax-free withdrawals in some cases; recommended within a broader wealth strategy and not to be nested inside another tax shelter.

Foreign tax credit

Tax credit to avoid double taxation when income is taxed in a foreign country; requires reporting foreign income in the home country.