Where Do You Start?
Think about planning a vacation. Let’s say you are going to Hawaii. When you go to book your ticket, you need to know where you are departing from, right? This is your starting point. It is impossible for you to get to Hawaii unless you know where you are starting.
The same applies to a tax strategy. You must know where you are starting. In your tax strategy, this means you must know your current financial position.
Your current financial position includes:
Your Current Balance Sheet
Your current balance sheet tells you your current net worth. It’s calculated as follows:
Your Assets (what you own) – Your Liabilities (what you owe) = Your Net Worth
When you know your current net worth, you know the exact resources available to you to use in your tax strategy. Your specific assets and liabilities help create the best path for you in your tax strategy.
Your Current Statement of Cash Flows
Your current statement of cash flows tells you your net cash flow. It’s calculated as follows:
Your Income – Your Expenses = Your Net Cash Flow
Identifying your sources of income is the starting point of identifying how to reduce the tax on that income.
Identifying your expenses is the starting point of maximizing your deductions.