Million Dollar Problems... Taxes

Million Dollar Problems Podcast: How the Wealthy Legally Pay Less in Taxes, Episode #4

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Digging into the Podcast"… The Wealthy Don’t “Avoid” Taxes — They Understand the Rules

There’s a phrase you hear all the time:

“The wealthy don’t pay taxes.”

It makes for a great headline. But it misses a much bigger point.

The wealthy often pay a tremendous amount in taxes. What they tend to do differently is plan around the tax code instead of simply accepting whatever tax bill shows up.

And here’s the controversial part:

There is no such thing as a “tax loophole” when you’re following the law.

There are tax deductions. Tax credits. Tax deferral strategies. Different tax rates. Different types of income. Tax-advantaged accounts. Business deductions. Estate-planning strategies.

Congress wrote these provisions into the tax code for a reason. The IRS itself provides extensive guidance on credits and deductions available to individuals and businesses.

The wealthy simply tend to have the resources and professional advice necessary to take advantage of them.

You’re taxed on what the tax code says is taxable

One of the biggest misconceptions about wealth and taxes is that your net worth is the same thing as your taxable income.

It isn’t.

Imagine someone owns $20 million of stock and that stock increases to $25 million.

They just became $5 million wealthier.

But they didn’t necessarily receive $5 million of taxable income.

That distinction is incredibly important.

The tax code generally distinguishes between wealth and realized income. This is one reason someone with a very large net worth can have a relatively modest taxable income in a particular year.

The question shouldn’t necessarily be:

“How do I pay no taxes?”

The better question is:

“How do I structure my financial life so I don’t pay more taxes than the law requires?”

Those are two completely different mindsets.

The tax code is an incentive system

Here’s something I wish more people understood:

The tax code isn’t just designed to collect money. It’s also designed to influence behavior.

Want to encourage retirement savings?

There are tax-advantaged retirement accounts.

Want to encourage charitable giving?

There are charitable deductions and other strategies. The IRS, for example, allows qualifying charitable contributions of money or property to potentially be deductible, subject to specific rules and limitations.

Want to encourage investment in businesses and economic development?

There are provisions in the tax code designed around those activities.

Want to encourage homeownership, education, healthcare savings, or business investment?

There are tax provisions for those too.

The government is essentially saying:

“If you do certain things we want to encourage, we’ll give you a tax incentive.”

Why wouldn’t you take advantage of it?

The wealthy think about taxes before the transaction

This is where financial planning becomes incredibly important.

Most people think about taxes after something happens.

They sell an investment and then ask their accountant how much tax they owe.

They retire and then figure out how to withdraw money from their retirement accounts.

They sell a business and then start thinking about the tax consequences.

They inherit money and then ask what they should do with it.

Wealthy families tend to approach things differently.

They ask:

“What will the tax consequences be before we do this?”

That simple change in timing can be enormously valuable.

Should you sell appreciated stock this year or next year?

Should you contribute cash to charity or appreciated securities?

Should you convert some traditional IRA money to a Roth?

Should you accelerate or defer income?

Should you purchase an investment through a particular business structure?

Should you use a 1031 exchange?

Should you make gifts during your lifetime?

Should you establish a trust?

Should you harvest investment losses?

These aren’t magic tricks.

They’re financial planning decisions.

And many of them are specifically contemplated by the tax code.

“Write-offs” aren’t free money

There’s another misconception worth clearing up.

A deduction doesn’t mean the government gives you the money back.

If you spend $10,000 on something that’s legitimately deductible, you don’t get a $10,000 check from the government.

You simply reduce the amount of income subject to tax, assuming you qualify for the deduction and meet all applicable rules.

That’s an important distinction.

The goal isn’t to spend money just to get a deduction.

That’s usually terrible financial planning.

The goal is to make smart economic decisions and then structure those decisions as efficiently as possible from a tax perspective.

There’s a difference between tax planning and tax evasion

This distinction matters.

Tax planning is legal. Tax evasion isn’t.

The IRS specifically warns taxpayers about abusive tax shelters and schemes where purported tax benefits are wildly disproportionate to the underlying economics.

That’s not what I’m talking about.

I’m talking about understanding the rules and using the provisions that Congress actually created.

If Congress gives you the ability to defer income, why wouldn’t you consider deferring it?

If you can legally reduce taxable income through a legitimate deduction, why wouldn’t you?

If you can choose between realizing a gain this year or next year, why wouldn’t you consider the timing?

If you can use tax-advantaged accounts, why wouldn’t you?

That’s not cheating. That’s planning.

Stop trying to beat the tax code. Start understanding it.

You don’t need to be a billionaire to think this way.

Someone earning $100,000 should be thinking about taxes.

Someone earning $500,000 should be thinking about taxes.

A business owner should absolutely be thinking about taxes.

Someone approaching retirement should be thinking about taxes.

Someone with $5 million of investments should definitely be thinking about taxes.

The objective isn’t to pay zero.

The objective is to pay the right amount.

And sometimes the right amount is lower than what you initially assumed because you didn’t understand all of the options available to you.

The wealthy didn’t necessarily get rich because they discovered some secret loophole.

In many cases, they simply learned how the game works.

You don’t have to like the tax code. You don’t have to agree with every provision in it. But if you’re legally allowed to use the rules to your advantage, you should.

Because taxes are one of the largest expenses most successful people will ever face.

And ignoring them isn’t a badge of honor.

It’s expensive.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

CPI was exactly as expected, at 0.1% m/m for the headline and 0.2% for Core CPI. This does bring the Y/Y number down to 3.4% from 3.5%. That gave bonds and stocks a little boost.

Japan’s inflation remains high, with PPI at 7.2% Y/Y but below the 7.4% expectation.

Korea’s Kospi index re-entered a technical bull market as it’s up over 20% from the recent low.

AAII Investor Sentiment shows bearish sentiment remains above bullish sentiment.

Cisco (CSCO) moved guidance substantially higher, largely on hyperscaler business. Shares are down -6% anyway probably due to flat services revenue and a gross margin decline. It was also up 61% on the year.

Anthropic is expected to float a valuation of $2T or more for October.

PPI and jobless claims today.

Bottom line: Korea is back and we get a second look at inflation with PPI

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

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