In my last post on taxes, “Why Tax Refunds Are ONLY For The Financially Uneducated“, I shared with you a little known tax strategy that could very easily increase your take home pay by $200-$1,000 per month, depending on your individual tax situation by merely adjusting your withholdings to negate a tax refund.
Presently, people who actually get tax refunds are in a mad rush to get a tax refund advance through a phenomenal marketing strategy that is called a “Rapid Refund”. A “Rapid Refund” is what is technically called a refund anticipation loan, or R.A.L. In my next post on taxes, I am going to show you what a ripoff these are and why financially educated people NEVER use them.
But, I digress. Ok, today’s tip is on how you can LEGALLY increase your take home pay with a simple rent to own strategy. Increasing your take home pay sounds good, doesn’t it? Let me show you how with these personal tax planing tips.
As we have previously discussed, the road to wealth has two lanes and you need to drive down the middle of both of them. Those two lanes are:
1. Make More Money
2. Keep More Of The Money You Make
As it relates to how to make more money, check out our site devoted solely to helping you increase your income by starting your own businesses at Imagine Being Free Today
With respect to keeping more of the money you make, that requires:
Tax Planning (…..yawn)
Sad, but true. Year end tax planning can be an extremely dry and boring subject that is no fun at all. What I find even less fun is giving the “government” free money that you have to work hard for because you have never been financially educated. While income tax planning can be dry and boring, fortunately, it doesn’t take that much time and the results can be staggering. Put another way, if, by using a little tax planning strategy that will take you less than 3 minutes I could show you how to increase your take home income by $400 per month, would it be worth those 3 minutes? Of course it would. It’s like getting a $7,000 raise (before taxes). Would you like to get a $7,000 raise for something that will only take you 3 minutes?
If so, read on and learn a little more about proper tax planning as it relates to rent to own deals and then take the 3 minute challenge.
We just did a deal for a client in St. Louis who, from a mortgage payment perspective based on his income and debt to income ratio, could easily qualify for a mortgage in the $3200 per month range. This client, like me, had experienced some of life’s painful lessons and was more focused on liquidity and cash flow (and the ability to sleep at night) than he was on being “house poor”. I was very proud of this client because he wasn’t trying to bite off more than he could chew and he was trying to ensure that if there was any type of cash flow interruption, he wouldn’t be at risk of missing his house payment. As a result, though combined household income was over $100,000, he was looking for a home with a modest payment of only $1200.
At the same time, as it relates to the house, he definitely wanted what he wanted. We found his dream home, which unbeknownst to us, coincidentally just happened to be 200 feet from a home he had previously had a contract on. Unfortunately, the other contract had fallen through because his loan jockey couldn’t get him approved for a mortgage due to his credit score and never once told him what to do to fix it. And this was after working with him for 8 months!!! And, unlike a standard lease to own deal, he was able to take full advantage of the tax credit.
How is that possible?
Unfortunately, as is the case with most people, the loan jockey simply didn’t know anything about credit restoration though he deals in credit everyday. This is why we try to illustrate the importance of empowering yourself with a Credit Repair College membership so you have the knowledge, tools and resources necessary. On a funny side note, the same client they couldn’t get qualified for a mortgage will be qualified in less than 30 days using some of our extremely basic and advanced strategies at Credit Repair College.
Anyway, we found his dream home and got it under contract. The only challenge was that the payment on his dream home was $1600, not the $1200 he was looking for. One thing I have learned over the years is that people know what they are comfortable paying and we never try to bump people up in payment. It is a recipe for disaster. In this case, this particular client was looking for a way to make the home make sense. After all, it was a nice 4 bedroom home with a full basement, nice yard, great features, all in a gorgeous subdivision. So, we introduced him to one of the little known benefits of our contract structure and that is,
YOU GET TO WRITE OFF YOUR MONTHLY PAYMENT!!!
What does that mean?
For those of you who are unaware of this, there are tax incentives for homeowners. Homeowners can legally write off the interest from their mortgage payment AND their property taxes against their income on their tax return on a primary and secondary residence with combined lien amounts up to $1.2 million dollars. What does that mean? Simply put, homeowners get tax deductions that renters don’t. Homeowners pay less for the same home than renters do. Or, in this situation, if he were to rent a home for $1200, because he wouldn’t have received the tax deduction, he would actually pay $1600 per month because he would have additional tax liability of about $400 per month. In his situation, getting a home using our program, he was able to get a home that cost $1600 per month and because of the tax deduction get an additional $400 per month in their take home pay thereby making the actual payment feel like the $1200 he originally wanted. In other words, yes his payment was $400 per month more than what he wanted but he was able to increase his monthly income by that same $400 using our program and a simple tax strategy to adjust his withholdings.
Allow me to illustrate the exact breakdown I showed my client via email:
“As it relates to your income going forward, if you are married filing jointly, based on your income, you are in the 25% tax bracket. You indicated that you presently have no deductions. Here’s what happens with the tax deductibility of the payment:
Current Income: $103,000
25% Tax Liability: $ 25,750
Net Income: $ 77,250
After this deal:
Current Income: $103,000
Interest Deduction: $ 19,200 ($1600 monthly payment X 12 months)
Taxable Income: $ 83,800
25% Tax Liability: $ 20,950
Taxes Before Deal: $25,750
Taxes After Deal: $20,950
Difference $ 4,800 or $400/mo more in your monthly income if withholdings are adjusted to zero out (which is why I said that structured properly $1600 would feel like $1200)
Current Income: $103,000
New Tax Liability: $ 20,950
New Net Income: $ 82,050
Again, this assumes no other tax deductions and is a simplified example to illustrate in writing what I was explaining on the phone. Essentially, net net there is a $4800 annual difference or $400 per month more that you can increase your take home pay by. As an example, if you go rent something for $1200/mo, because you lose the tax deduction, you get to pay an additional $4800 per year or $400 per month in taxes. OUCH! So the $1200 rental actually costs $1600/mo but it is broken up into a $1200 payment and $400 stripped from your monthly income in taxes. So, while you think you are paying $1200, you really aren’t. You are paying $1600, have no ownership interest, gain no equity, can’t do what you want with the home, etc.
How is this possible?
When we had our owner finance contracts prepared, we had them prepared to be in compliance with the IRS installment sales contract guidelines. Effectively, this achieves the following:
- For those who qualify, they can obtain the Federal First Time Home Buyer Tax Credit of up to $8,000. This is a refundable tax credit which means that it comes back to you in cash versus being applied as a credit against future taxes. If you owe money for 2009, the tax credit would go to offset that amount and then you would get the difference.
- Because the contract is considered to be a bona fide sale in the eyes of the IRS, buyers that qualify have the ability to legally write off the interest payments and taxes that they are paying on the property against their income to reduce tax liability. This is done in the same way that it is for people with a mortgage who get a 1098 back from the lender except it is done on a different line on your return. This has the net effect of minimizing your tax liability since you will be taxed on a lower amount. As explained, there are two different methodologies for how to handle this deductibility. People who don’t know any better realize a bigger refund at tax time. The financially educated modify their existing tax withholdings to increase and maximize income every payday and get zero for a refund. At the end of the day, how you handle it is entirely up to you. Though I know a great deal more about taxation than many CPAs, I am required by federal law to inform you that (as you already know) I am NOT a CPA or tax attorney and it is always wise to consult a tax professional. As I mentioned in a recent email newsletter to our readers, there are more than 90,000 pages in the current tax code, only a fool does his own taxes!”
And that, my friends, is how you can LEGALLY increase your take home pay using a very simple rent to own strategy. What’s required? The correct contracts that are in compliance with the IRS installment sales contract guidelines and adjusting your withholdings to account for the tax deductibility of your new payment.
So, presently, you can get back $8000 in cash and increase your monthly take home pay. Is that a great deal or what?
Now, it is important to note that lease option and lease purchase contracts do NOT qualify you for this. It is also important to note that everyone’s tax situation is completely different. Though we endeavor to provide you with solid information, some people may not qualify for this because they simply make too much money (a good problem to have). When considering any type of tax planning strategy, it is always important to consult a qualified tax professional as it relates to your own personal situation.
The 3 Minute Challenge- once you have executed a contract that is in compliance with the IRS installment sales contract guidelines, all you have to do to implement these tax planning strategies is simply adjust your withholdings. If you are a glutton for punishment and want to read the IRS publication on how to do this, simply click on the link for IRS PUB 919, download it and let the cure for insomnia begin. Personally, I would save the time and make a quick call to your tax professional, provide him with the monthly payment or portion of interest and taxes you are paying and ask him or her to calculate how many withholdings you should claim to zero out your tax refund. That call will take about 30 seconds to a minute. Once he or she provides you the number, simply fill out a new W-4 and provide it to your human resources or payroll department. Done!
Ok, next up on taxes, to coin a phrase by Tom Cruise in the movie, “A Few Good Men”, I am going to show you why a tax refund advance, “Rapid Refund” and rapid advance loans are only for the “galactically stupid”.
If you have any questions or comments, please use the Comment link below.
{ 2 trackbacks }