Tax Planning is all about mindset – either you’re going to be proactive about taxes, or you won’t! Sometimes it’s not that easy – it’s also about changing the beliefs we have ingrained about how we handle finances and transactions altogether!
Have you ever heard of good debt vs bad debt? No, good doesn’t mean you bought something really cool with your money, although sometimes that’s a good reason to go into debt (kidding..kind of!). Good debt, for us accounting folk, is something you can write off!!
If there’s no tax write-off we call it a bad debt! So the key is always be thinking tax write offs! This often requires a mindset shift through tax planning.
One of the most challenging aspects of our role as a tax specialist and financial advisor is working with mindset. The technical stuff…easy! But reassuring clients that the beliefs they’ve had for so long need to be altered for a strategy to work is the hardest part of the job.
Case Study 1:
Sally is working full time and starts a business. She has saved up $10,000 and decides to quit her job and focus on her business full time. Her start up investment is $10,000 but she also wants to go on a vacation+ has monthly expenses totally $10,000. Question: Should she use her $10,000 on her business or for her personal needs?
Normal Model: most people have no problem putting their personal life on credit cards and line of credits, but they don’t want to go into debt for their business. Yet, those personal expenses offer no tax write off! It’s the mindset – I’m already taking a risk in this business, I don’t want to add debt to it!
DharnaCPA Strategy: Using the $10,000 to keep your personal life afloat, while you borrow for business leaves you with the same amount spent & probably borrowed – $10,000. However, borrowing for business also gives you a tax deduction, which reduces taxes owing… so which is really the better option?
So why do people resist the tax beneficial options? Mindset! Let’s look at a bigger example, shall we?
Case Study 2:
Neil recently came into some inheritance money and wants to know what to do with it. He has a mortgage worth about $650,000 and about $500,000 inherited. His financial advisor (through his bank) is saying to invest it. But is that the best tax strategy here?
Normal situation: invest it in the market.
DharnaCPA Strategy: Pay off your mortgage, get a HELOC, and borrow against house $500,000 to invest it.
Did you see what we did there?
Tax Strategy is: when you borrow for business you can write off the interest.
BUT WHY WOULD I PAY OFF MY HOUSE TO BORROW AGAINST IT?
Well, when you have a mortgage, you don’t really own your house anyways. The interest on the mortgage is not a write off either. This way, the money you “borrow” to put into the market becomes a tax writeoff. Either way you are investing $500,000 into the market – one just creates a tax writoff too which is added bonus!
Isn’t that extra risky? I could LOSE MY HOUSE!!!
This is where MINDSET comes in.
Most people perceive their houses as their safety net. Which is fair. No one goes into investments thinking they’re going to lose it all. That would be poor life planning. Losing $500,000 in any circumstance would be painful. However, if you’re trusting your advisor the risk is the same whether you have a mortgage tied to investments or a traditional mortgage. You are still responsible to make your payments in both scenarios – your mortgage is the full $650K either way! One just feels scarier because you’re “borrowing against your home” but if you calmly think about it, the risk is always there of default when you have a mortgage. Is there really an additional risk with the tax strategy?
Mindset. Tax Planning, and financial planning, is more helping our clients navigate the mindset shift required for tax planning than actual performing the technical stuff!
So how do you get this kind of tax advice?
We have a basic complimentary assessment to review your situation. Book that here
If we think there are options we will then advise we move into a full financial assessment which starts from $750+HST. This is ideal for entrepreneurs as there are so many tax set ups to consider!! What are we waiting for?