Tax - Free Wealth by Tom Wheelwright pt 2

Reasonable Salary & Payroll Taxes

• Core idea: Tax authorities scrutinize salaries that deviate markedly from the norm for a given industry or position.

  • Paying too little:

  • Government may re-characterize all corporate profit as self-employment income → subject to employment taxes.

  • Dramatically increases audit risk.

  • Paying too much:

  • Unnecessary over-payment of payroll (employment) taxes.

• Target: A “reasonable” salary—what you would pay a third-party employee for identical responsibilities.

  • Use external data sources (e.g., salary.com) to benchmark.

  • Remember “salary” = cash + all forms of compensation (medical reimbursement plans, fringe benefits, etc.).

  • Benefits increase the value of compensation even when non-taxable to you; this usually lets you set a smaller cash wage.

  • Must be paid at least monthly to satisfy payroll-tax rules.

• Quantified savings: Properly sizing salary can save over 4,500 per year in employment taxes.

• Action steps:

  • Document the wage study in writing.

  • Revisit annually as job duties or market rates change.

  • Consult your tax advisor about the best entity type to minimize employment taxes (e.g., S-Corp vs. C-Corp).

Sales Tax Compliance & Exposure

• General rule (“When in doubt, collect”):

  • If unsure whether a sale is taxable, collect, remit, and file—the incremental cost is trivial compared with potential assessments.

  • Ask: “If a state auditor walked in today, can I confidently prove I charged sales tax on every taxable sale?”

• Customer perspective: Once owners know who owes sales tax, customers routinely pay; confusion is the main barrier.

• Unreported sales taxes:

  • Liability silently compounds for years; an audit can demand all prior uncollected tax + penalties & interest—often business-ending.

  • Have a sales-tax professional review nexus & collection requirements every few years.

• Nexus triggers (typical): property, an office, employees, independent contractors.

• Product taxes & bottom line: If you fail to collect, the tax burden shifts from customers to you at audit time.

• Risk-mitigation: Consider a full sales-tax nexus study by a qualified CPA when selling into multiple states.

Property Taxes (Real & Personal)

Real-Estate Property Tax

• Calculated as a percentage of assessed value.

• Key reduction tactic: Challenge the assessment.

  1. Commission an independent appraisal showing lower value.

  2. Demonstrate over-valuation relative to comparable properties.

• Watch statutory appeal windows on the bill; missing the deadline forfeits your right to dispute.

Personal Property Tax

• Applies primarily to business-use assets.

• Two common tax-favored categories:

  • Property used in research & development.

  • Property used in high-tech manufacturing.

• Depreciation schedules for property-tax purposes are independent of income-tax depreciation.

Estate Planning Fundamentals

• Purpose: (1) Smooth financial transition for heirs, (2) Transfer maximum wealth to family/charities and not the government.

• Three-step framework:

  1. Place assets in trusts.

  2. Draft a will.

  3. Avoid or minimize estate tax.

• Probate pitfalls:

  • Public, court-supervised transfer of title.

  • Expensive (lawyers, courts) and exposes heirs to scammers (“financial pirates”).

  • Solution: Retitle assets into a trust; only assets inside the trust bypass probate.

• Trust vs. Will

  • Trust: Controls assets after death, avoids probate, maintains privacy.

  • Will: Names guardians, dictates specific bequests, covers assets outside trust.

• Charitable giving strategy: Charitable trusts let you give assets now but retain income, thereby removing principal from the taxable estate while keeping cash flow.

Estate-Tax Reduction Techniques

• Rule 1: Lower asset value → lower estate tax.

• Rule 2: Each person gets an exemption; use it strategically.

• Main tactic: Transfer assets expected to appreciate (real estate, business interests) out of estate early.

  • Goal: Give away value without surrendering control.

• Limited Partnership (LP):

  • Give limited units to heirs; you stay general partner.

  • You may draw a salary for management.

  • Facilitates valuation discounts → BIG tax savings.

• Valuation Discounts

  • Minority Discount: Transferring <$50\%$ ownership often appraises at a lower per-unit value.

  • Partial-Ownership Discount: Similar concept for fractional interests in real estate.

  • Requires a qualified valuation expert experienced in gift/estate work.

• Ultimate principle: Control assets; don’t own them.

Charitable Trust Structures

• Charitable Remainder Trust (CRT):

  • You receive income for life; charity receives assets at death.

  • Immediate income-tax deduction for present value of charitable remainder.

  • Full estate-tax deduction for asset value when you die.

• Charitable Lead Trust (CLT):

  • Charity receives income now; heirs get assets later.

  • Up-front income-tax deduction; potential estate deduction depending on structure.

• Both avoid probate because trust owns the property.

Multi-State & International Taxation

• Nexus fundamentals: Taxed where you have property, office, employees, possibly contractors.

• "Benefit" standard (US states): If you enjoy state benefits, the state can tax you.

• Rule 11: Multiple jurisdictions can lower total tax.

  • Income from jurisdictions with no nexus may become “nowhere income” → escapes state tax.

  • Same principle internationally when structured with proper foreign-tax credits.

• Double taxation guard:

  • Foreign Tax Credit: The same taxpayer/entity must both pay the foreign tax and report the income domestically.

  • Essential to align legal entities across borders; involve attorney, tax advisor, banker.

Location-Based Incentives & Long-Term Strategy

• Every jurisdiction offers industry-specific incentives; research which locale aligns with your business.

• Rule 13: Flexible, long-term tax strategies always outperform ad-hoc tactics.

• Caution on retirement accounts (401(k), IRA, pension):

  • Future withdrawals taxed at potentially higher ordinary-income rates (e.g., 15\% capital gain becomes 35\%+ ordinary income).

  • Lose real-estate or business tax benefits inside traditional plans.

  • Inflation may bump you into even higher brackets.

• Guideline: Build overall wealth plan first; use retirement plans only when synergistic.

Trust Mechanics & Best Practices

• Three roles:

  1. Settlor/Grantor – establishes and funds trust.

  2. Trustee – legal owner; manages assets.

  3. Beneficiary – receives economic benefits.

• Universal tool for wealth transfer and asset protection.

• S-Corp partner tip: Form an entity taxed as an S-Corporation to be the partner rather than holding partnership interest personally → reduces self-employment tax and boosts flexibility.

Holistic Tax-Planning Framework

1. Know where you’re starting. Gather current financials, entities, assets.

2. Know your destination. Set life & business goals first; don’t let “tax tail wag the dog.”

3. Build flexibility. Anticipate law changes, life events; avoid rigid structures.

4. See the big picture. Integrate income, estate, asset protection, and business planning.

• Rule 14: Maintain control of your assets under all circumstances.

Asset Protection Integration

• Objectives:

  1. Prevent lawsuits.

  2. Stay inconspicuous to reduce likelihood of being sued.

  3. Win any suits that occur.

• Entity choices:

  • Trusts – top-tier protection for personal/investment assets.

  • LLC – excellent shield for operating businesses & properties.

  • Corporation – good protection for business-level liabilities.

• Insurance (e.g., umbrella policy) is necessary but insufficient; pair with legal structures.

• Best practice: Develop asset-protection simultaneously with tax planning.

• Rule 15: Never place a tax-sheltered investment inside another shelter (e.g., don’t buy municipal bonds inside an IRA). Evaluate exceptions like Roth IRA on a case-by-case basis.

Leverage, Debt & Retirement Plans

• Leverage (using debt) differentiates substantial wealth building from mediocre growth—especially in real estate.

• Caution inside retirement plans: Debt-financed income in qualified plans can trigger Unrelated Business Taxable Income (UBTI) in the US and similar taxes elsewhere; consult your advisor before borrowing within a retirement vehicle.