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One Million Dollars or $22,000? Tax Planning May Be the Difference

Apr 11, 2008
Donald Trump says that if you want to be a millionaire, you must get your tax affairs down to the legal minimum.

Money Mastery is a book written by a gentleman named Alan Williams, who said the exact same thing.

There are a lot of reasons for that, but Donald Trump used a slide in a presentation that he allowed my friend Sandy Botkin to use that inspired this article. It's a very interesting slide. It shows what happens if you've got a dollar that doubles every year.

Ok, you start with $1. At the end of year one, it becomes $2. At the end of year two, that doubles and becomes $4. At the end of year three, it becomes $8. At the end of year four, it becomes $16. At the end of year five, it becomes $32. It just keeps doubling.

When you get to 20 years, it is $1,048,576. That $1 bill doubled for 20 years is now worth over $1-million.

Now, watch this. Same dollar doubling, but let's assume you're in the 35% bracket. You pay 35% of what you make in taxes, and you add all of the income taxes, the state income taxes, the capital gains taxes, the sales taxes, the transfer taxes, the property taxes, I can go on and on, the hotel taxes, the internet taxes, and gasoline taxes. And 35% is actually conservative.

This time take taxes out of the doubling effect, take that dollar and double it, instead of it being $2, like in the other example, it's only worth $1.65 because you've got to pay at least 35% of that in taxes. And the $1.65 doubling isn't $3.30, because you've got to pay part of that in taxes. It's only worth $2.70.

Even though it is the same dollar doubling, but now with taxes, take a guess how much that's worth at the end of 20 years. Remember, the other one was $1,048,000 without taxes. Take a guess how much it's worth with taxes each year?

Would say probably around $600,000?

Try again. Maybe you'd guess $400,000?

Nope, $400,000 is too high, go ahead give it another shot and try again.

Can't be less than $300,000 can it?

Much less!

Is it $200,000, less? You've got to be kidding! How about $150,000?

Not yet, keep going, one more guess...Less than $100,000?

Yes, much less. You're never going to get it. It's $22,370.

That is amazing.

People, you may think I'm crazy so go try it out on your calculator or accounting program and you'll find its true.

The reason it's true is not only do you lose 35% on everything you make, but here's the important point, you also lose all of the interest, all of the compounding year after year.

That is why it's worth only $22,370. There is nothing more important than tax planning, absolutely nothing. It's better than a raise. It's after-tax money.
About the Author
Scott Letourneau is the CEO of NCP,Inc. and an authority in helping people form entities,grow their business,and protect the assets of that business. For more info contact: Scott Letourneau at 702-367-7373 or http://www.nvinc.com/save.htm
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