I'm big on education. With education, your knowledge increases and your risk decreases.
Taxes are a great example of this. As a person's knowledge about taxes increases, their risk of overpaying their tax decreases as does the risk of incurring penalties and interest.
Let's say someone increases their knowledge through my session on How to Increase Deductions of Travel, Meals and Entertainment. In this session, they learn what expenses qualify and exactly how to document those expenses.
Now, let's say this person is audited. Many audits result in travel, meals & entertainment expenses being disallowed because the taxpayer didn't follow the rules. The result is an increase in taxes, plus penalties and interest.
The person who has the proper education knows the exact documentation they need to provide to the auditor in order to protect their deductions. If they applied what they learned, they won't have audit adjustments and they have protected their tax savings.
Same concept applies to investing. As your knowledge about a particular investment increases, your risk decreases.
This is why I say there are no bad investments, just bad investors. Bad investing comes from a lack of education and a lack of strategy.
The Cost of Education
I find many people pass up the education because of the cost. Their perception is the education is too expensive and they would rather use their funds to invest.
Bad investing is much more expensive than any education you could take. Overpaying your taxes is also much more expensive.
Is It Deductible?
There are tons of options for education: seminars, online courses, home study courses, hiring a professional for one-on-one training.
For those who choose to increase their education, they often ask if they can deduct these expenses.
While I'm addressing this from a U.S. tax standpoint, the concept applies to tax planning in most developed countries.
The General Rule
There are certain sections of the tax law that specifically disallow these types of deductions taken for investment purposes. An auditor typically goes straight to these sections when these types of expenses are found during an audit and proposes to disallow the expenses. The burden is on the taxpayer to prove an expense is legitimately deductible.
Exception to the General Rule
The wonderful thing about the tax law is there is almost always an exception to the general rule. The general rule for these types of expenses doesn't apply if the expense can be claimed under another area of the tax law.
There is another area of the tax law that allows a deduction for all “ordinary and necessary” expenses carried on in a trade or business. The key is to qualify these types of expenses under this area of the tax law. This means being able to support that the expense specifically relates to your business and is ordinary and necessary in your line of business.
Depending on the line of business, there can be numerous reasons as to why these expenses meet the ordinary and necessary requirements – all of them depend on the specific line of business.
By making sure these types of expenses qualify under this area of the tax law, the expenses become a legal tax deduction. Of course, documentation is crucial.
Exception to the Exception
Keep the following in mind if you are claiming that these types of expenses are for work-related education. Education is a legitimate expense, but it is specifically disallowed if it is to meet pre-existing minimum educational requirements for your business or profession or if you receive training in a new line of business.
If your business has not started, then your expenses fall into a category called “start up costs” which means they are still deductible but not until your business starts. When your business starts, your start up costs can be deducted. The deduction is either taken all at once or over a period of years depending on the amount of start up costs.
Focus on the Outcome
It's easy to focus on the cost of education. If you want to become wealthy, however, you have think and act like a wealthy person. Wealthy individuals focus less on the cost of the investment and more on the outcome, or return on the investment.