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What's Your Tax IQ?

Discussion in 'Asset Protection/Taxes/Legal' started by Diane Kennedy, Sep 15, 2007.

  1. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    I had everyone complete this little quiz at the beginning of my last seminar. I thought you might enjoy this.

    Please note all that apply to you.

    (1) I couldn’t get a current personal net worth statement within 1 hour of reaching home.
    (2) I do not have a personal budget.
    (3) I struggle understanding what should be on a personal net worth statement, and then interpreting the story when I do.
    (4) I am not regularly able to put money away for investments.
    (5) I don’t yet have a business or real estate investments.
    (6) My business is in its infancy.
    (7) I feel like I’m spending all my time in my business just trying to juggle too many balls in the air.
    (8) I do everything (or almost everything) in my real estate investment business.
    (9) I don’t have time to think about business structures yet, or if I have them, I haven’t kept them up to date with annual filings and minutes.
    (10) I do my own bookkeeping or wait until year-end to hand it off to my accountant.
    (11) I don’t have a personal banker.
    (12) I don’t have a CPA who understands Pre-emptive Tax Strategies.
    (13) I feel like I know more than my CPA does about tax strategies.
    (14) My business is stable, but if I don’t work, I don’t get paid.
    (15) I’m paying way too much in taxes now.
    (16) My real estate investments aren’t creating the cash flow I need or had expected.
    (17) I am investing – but it’s all from after tax income.
    (18) My business is getting boring to me.
    (19) My net worth is okay, but my R Scoreâ„¢ is way too low.
    (20) I invest mainly with self-directed funds.
    (21) I regularly receive income that I don’t have to pay any tax on.

    Your Tax IQ Level has NOTHING to do with the amount of money you make.
     
    andviv and yveskleinsky like this.
  2. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    From this, you can determine what level you currently are at regarding your tax planning.

    Questions 1 - 6 all had to do with Level 1.
    Questions 2 - 17 were Level 2.
    Question 18 - 21 were Level 3.

    One of the problems I've seen again and again in my CPA practice and at seminars is that people are in Level 1 Denial. They want to be at Level 3 and maybe have even started a business or investing, putting them at Level 2, but their habits are still Level 1 habits.

    Remember: Money doesn't solve money problems. UNDERSTANDING money solves money problems.

    I'm going to use a Robert Kiyosaki quote here that I thought was brilliant, "If you're looking for no money down deals, the question is really why don't you have any money?"

    The problem occurs when people who have Level 1 habits suddenly win, inherit or make (like with a big sports or music deal) a lot of money. They can't keep it unless they quickly get their skills up to speed.
     
  3. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    Great post, Diane. :)

    What an R Scoreâ„¢?

    -Russ H.
     
  4. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Thanks for the question Russ.

    R Score is your passive income divided by your total net worth.

    So, if you have a net worth of $100,000 and have passive income (net) of $10,000 per year, you have an R Score of 10%. BTW, that would be a high R Score.

    The issue is that as people get more net worth and more assets, they start appreciating without any real work on the part of the person owning them. As net worth goes up, passive income also needs to go up - or your R Score drops. This is the biggest issue for someone at Level 3 - getting their cash flow to keep up with their Net Worth increases.
     
  5. TNT
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    TNT New Contributor

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    Diane

    How do you recommend that someone increase their 'Tax IQ'? Do you recommend a specific book. or web sites? I find that I understand my Tax IQ Is not that great but where do I find the info to make it better?

    Thanks
    Talmadge
     
  6. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    What level are you at currently? that's probably the best place to start.

    I'm going to be posting more on all three levels here - so stay tuned here at this forum and then through my website. That's the stuff I teach. There's a lot of free information that I add to every couple of days on my blog (accessible through the home page of my website) and there is other tax education available for sale there as well.

    Thanks for taking the test, though, and discovering what it is you need to concentrate on. It's not enough to just make a lot of money - you have to hang on to it as well!
     
  7. TNT
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    TNT New Contributor

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    Diane

    Thanks for everything you bring to this site and to all of us. I hope you get as much from some of us as we get from you. You are a great insperation and all you do here and on your site is appreciated.

    Thanks
    Talmadge
     
  8. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Thank you Talmadge.

    The forums fulfills a few things for me - (1) I get a chance to interact and see what people are thinking. It's a place for me to test out ways to communicate tax-saving ideas and get immediate feedback. (2) I am still in a learning curve on eBusinesses. There are some very smart people on this forum and I am grateful to learn from them. (3) Restores my faith in the future. Sometimes I get beaten down by the "no you can'ts", not because they make me think I can't (because I know that is wrong) but because there are times when I think I need to go buy an island and move there. Our civilization is doomed if everyone is afraid to do anything and just expects the government and other people to take care of them! But then I see people out there, going out and making a difference and starting business and investing smart...and I'm optimistic again.

    For me, that's why it's worth it. My purpose in life, I believe, is to be a resource for others as they are doing all they can to maximize the potential of their abilities and skills. Bet that's more of an answer than you expected!
     
  9. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    Just to be clear. When you say "net" worth are you talking value-liabilities= net worth? Or as in total value of assets held, no matter the amount owed?
     
  10. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Thanks for the question Easy Money.

    Net worth = Assets - Liabilities

    So it would be the equity you have in property, plus the value (less liability) of everything else.
     
  11. Wolfgang5150
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    Wolfgang5150 New Contributor

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    Easy - Pretty funny. I asked Diane the same question in her succes story thread:
    Originally Posted by Wolfgang5150

    Question regarding net worth - when you have investment properties do you subtract the amount owed on them when calculating net worth? (example; a $1m in investment properties, with $400K in equity; $600K debt).

    Diane's response:
    The accountant's definition of net worth is what you own (asset) less what you owe (debt). So equity = net worth. If you refinance to pull cash out (which we do frequently), you reduce the equity in the property but you convert it to cash. So, at least in theory, there is no change in net worth.

    OK - need another beer. Done for tonight.
    Kevin
     
  12. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    Yeah I'm working on a double cosmopolitan so lets keep this light :D

    Looks like my rental real estate R? is 20% if my math is correct. hmmm...........
    not bad considering its all bank money. Now how do you take into consideration the money in the bank thats equity money making interest as well as the money that has bought the lots that I own (with equity $$) outright?
     
  13. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Hey Easy

    You've found the trick to this - use leverage to get your R factor up. But you start to get stuck as you put networth into non-cashflowing items.

    It's total net worth, not just the networth in your building unless that was all you had.

    Lots of people end up with equity in land, equity in their principal residence, checking accounts, etc... and those have little or no return available.
     
  14. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    But the accounts return 5.75%, doesn't that count? Especially when some of my last loans where at the same rate AND I get to write off that interest paid? there by reducing my actual interest paid thru mortgages? I understand that the lots are a value based # only and offer no cash flow value, but the money has to count for something. No?
     
  15. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Let's use some numbers just to make sure I understand what you mean:

    Building $1 mill value, $200,000 equity, cash flow of $20,000/year
    Other net worth (principal residence, etc) - $200,000

    Your total net worth is $400,000. Only cash flow comes from the building, so R Score is $20,000/$400,000 = 5%.

    You could, if you wanted, measure based on the total assets, but that is going to give you a completely different result, and wouldn't have the same meaning. For example, if you looked just at the building and the value, $20,000/$1,000,000 - you're looking at a return on investment (ROI is a little more involved in reality because you look at the present value of future income streams). ROI is very important - but it's a calculation of the investment itself.

    The R Factor is how you are doing personally and wholistically. The reason it becomes such a Level 3 issue is that people as they get more successful start diversifying - they typically have more personal assets, additional businesses, diverse real estate holdings and most likely some stock type holdings as well. Over all, how much return do you get on your net worth? That's the R Factor question.

    Easy, you have a great point - it's just a little different than what I'm talking about here.
     
  16. Wolfgang5150
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    Wolfgang5150 New Contributor

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    OK - i'm back.
    Diane - In regards to R factor - what percentage of $$ should be set aside for pure 'cash on hand' scenarios? Currently I have been re-investing into my properties (aside from our house); and am wondering how much should be set aside, to be left alone. I have read in the past anywhere from 3 months 'emergency fund' to 1 year etc. My savings fluctuates depending on my current projects, mood, desires, etc. (every time Steve Jobs holds a press conference I'm out at least $500)
    But I have never seen an actual percentage based on income/debt.
    Does that make sense?
    Thanks in advance.
    Kevin
     
  17. Diane Kennedy
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    Diane Kennedy Bronze Contributor

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    Wolfgang - great question. I'll do a separate post on the subject of emergency funds, security funds, etc..., it's one of my soap box issues. I think it's critical especially at Level 1 and beginning Level 2 as you start investing.
     
  18. EasyMoney_in_NC
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    EasyMoney_in_NC Contributor

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    D-
    Total net (at this moment, soon to change) on just SFR rentals (not incl lots, businesses or commercial props) $1 mil, cash flow 30K +/-, interest bearing C.O.H. 300K. Invested money from initial purchase that started everything (later monies were all generated and/or bank refi) 6K. Total net (incl all other RE) 1.7 mil (just over 2 w/current bus.)
     
  19. Russ H
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    Russ H Gold Contributor Read Millionaire Fastlane Speedway Pass

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    Great stuff.

    I like this a lot.

    Perhaps I'll write a children's story about the legendary island of "Can-do", where no nay-sayers are to be found. :)

    When you think about it, the fastlane forums are kind of like an island of can-dos.

    I come here to get inspiration and motivation.

    And I always find a bunch of "can-dos" here. :cheers:

    -Russ H.

    PS In reference to MJ's discussion the other day, I now own both "isleofcando.com" and "islandofcando.com" (hoping that is OK w/you Diane, since your comments inspired me to think of this). :)
     
  20. nomadjanet
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    nomadjanet Contributor

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    Diane I have printed your list and posted it in my home office.
    I took it to heart that we don't have a budget and don't update our personal net worth statement.
    The one part of our net worth that I struggle to have a handle on is our portfolio. I find it extremely confusing and therefore I ignore it until my annual revue before tax time. I know this is not a good way to do things but it has been a downfall of mine. Your list gave me the courage to face this issue. This morning I had a meeting with my broker and set forth to him that I want a one page statement of all our accounts with the updated information and rate of return sent to me monthly. He will be emailing me this consolidated information; I won't have to wade thought the file box full of documents that come in each month. Even better he is setting me up on full email documentation, no more 50 page prospectus mailed to me that I will never read. Every document will come by email and will include a condensed narrative written by my brokers top assistant in real English to I can face this instead of hiding from it. I am feeling the weight of the world go off of my shoulders as I type this. :)
    Just had to say thanks for bringing this up so I could see my problem and find a better way.

    Janet
     
  21. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    What a great time saver as well. Awesome!

    I am looking for ways to eliminate the clutter on my desk. The amount of paperwork that shows up here everyday is absurd... mail, fax, junk mail, yech. The amount of time just sorting through this crap is so wasteful! Congrats on finding a solution.
     

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