THE Key to Lower Taxes

Hello Contenders!

I’m back again after the slog of the fall tax busy season. I guess missing a couple of weeks is what happens when you try to start a newsletter halfway through the busiest time of year, but hey, we all gotta roll with the punches sometimes in life, right?

No worries though, we’re through it and ready for the next few months which includes some fun new things here at Contender Financial and the birth of a new baby girl in our family, so we’re all very excited.

This week’s topic is something that I’ve been thinking about for many many years and I’ve tried to teach in many different ways. 

In fact, I’d argue that my newsletter topic a few weeks back about the tax code being an incentive system is a branch off of this topic.

And if you understand AND apply what we’ll talk about today, your taxes will immediately start to go down.

Are you ready for it? Ok, here it is….

The types of taxable income.

(I can hear the let down sound effects now…)

But seriously, I mean it! 

There are actually 4 types of income in the tax code and if you understand how each is taxed and which kind you currently have in your tax return, then you can change it to lower your taxes.

With that, let’s jump into the 4 types of income.

#1 - Wages/Employment Income

This is unfortunately the worst type of income to have because it’s taxed for income tax purposes at the highest possible ordinary tax rates (currently a max rate of 37%), but it also has your half of the employment taxes (currently 7.3%). 

Woof! 

And that’s before we even start to consider state taxes! 

So if you’re a California resident and all of your income is considered wages, you could be taxed as much as 57.6%!!!! (37% + 7.3% + 13.3%)

Ouch!

This is why I said a couple of weeks back that the whole tax code is an incentive system.

If all your income is wage income, then you’re being beaten with the proverbial tax stick to try and change your ways.

Let’s move on to some of those other ways Congress wants us to make our money.

#2 - Earned Income

Now for all you technical tax accountants and engineers out there, technically, wage income is a subset of earned income.

But the other types of earned income (income from a business or farm you own and other activities you might work in but not be an employee of), comes with a couple of immediate tax benefits.

First, you don’t have to pay the employment taxes on that income so that immediately saves you 7.3% right off the bat.

You still pay the ordinary tax rates, but it get’s a nice hair cut by not having to pay the employment taxes.

Second, as you often are an owner of the business or operation in this situation, you get to deduct the expenses of that operation from the income it generates.

Therefore your tax formula goes from this….

Income - Taxes = Expenses

To this…

Income - Expenses = Taxes

It’s a small difference with huge tax implications.

#3 - Portfolio Income

This type of income includes things like interest, dividends, capital gains, royalties etc.

There are a whole host of rules around this type of income which we couldn't and shouldn’t get into here, but for our purposes just know that there are a myriad of ways in which you can pay significantly less taxes on your portfolio income than you do on your wage income.

For example, long-term capital gains (investments held for more than a year and then sold) maximum tax rate is only 20%.

And for most people, it’s likely closer to 15%. 

That means, that just by earning your income from capital gains instead of wages, you instantly save yourself 24-29%!!

Talk about some serious tax savings.

#4 - Tax Free Income

Now once again, for those technical minds out there, technically tax free income is a bit of a misnomer.

Technically, there are various strategies and tactics that people can use to generate the first 3 types of income that then are given tax free treatment in the tax code.

An example may be helpful.

Let’s use municipal bond interest. 

Technically, interest income is a form of portfolio income that is normally taxed at normal ordinary tax rates. 

However, according to the US tax code interest earned from municipalities is tax free income at the federal level.

And in certain states if you’re getting interest income from a local municipality, then that income is state tax free as well.

Double tax free! Woo Woo!

And there’s tons of ways to do this.

Here’s a list of just a few examples from multiple different potential areas of your life:

• 1031 exchanges

• 1202 Stock

• Depreciation paper losses (used by lots of business owners and real estate investors)

• Step up in basis rules

• Fringe benefits

• Various charitable donation tactics

• Low costs loans as a form of income

• Etc.

There are literally dozens of potential ways, to get tax free income, it just depends on your unique situation.

Conclusion

The beautiful part of all of this is that at the end of the day, I sincerely believe anyone can lower their taxes. 

You just have to restructure your life in a way to generate more of the favorable types of income.

But, until you do that restructuring of your life, you’ll continue to pay tons of taxes and be beaten with that proverbial tax stick.

When you’re ready to pay less and restructure your life, hit me up and we can find a way to make it happen.

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Whenever you’re ready, here are a couple of ways in which I can help you save money on your taxes:

1. Book a free Strategy Call: Provide me with some financial information before the call and in 45 min to an hour I’ll give you every strategy, tactic, tool, and adjustment I’d make to your financial life to help you pay thousands less in taxes and build wealth faster.

2. Book me as a Keynote Speak: In my talks I share the practical strategies, principles, and rules anyone can adopt to save them thousands of dollars a year on taxes and build wealth more quickly.  

3. ​Start working together: Feel like you've read enough and are ready to get some help implementing the things we talk about here in this newsletter? Respond to this email letting me know and we can talk about next steps.