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Do you like Uncle Sam so much?


60% - that's what you are paying in taxes - 3 days per week you are working for the government.
Taxes are your biggest expense - bigger than the cost of cars you buy, bigger than the mortgage on your house.
We tend to forget how much the government takes - as the Barbara Streisand song goes "...what's too painful to remember, we simply choose to forget..." - unfortunately, when it comes to taxes, forgetfulness can be very expensive:

The numbers we provide are specific to the United States, but you will find equivalent categories of taxes in your own country - if you find less - thank your good fortune.

Federal Income tax 20%
State Income tax 5%
Social Security 15.6% ( remember - your employer matches what you pay )
Unemployment tax 1%
State disability 0.5%
Property tax 3% (on average, property tax works out to about 3% of income)
Sales tax 3% (you are paying it with money that was already taxed 40%)

Adds up to 48.1% - and these are only the major ones, easily calculated.

We haven't started counting gasoline tax, telephone tax, car tax, various state and county "fees", airport tax, airline tax, tax for the hearing impaired, and countless other taxes.

And we have not started counting the increased cost of everything you buy because the corporations also pay taxes - income, unemployment, property, fuel, etc, etc, etc - and they pass on the costs to you through higher prices.

So what can you do about it? Change the composition of income you receive.
It may be a happy coincidence, but the income that you are not directly involved in earning tends to be least taxed .
* Income you earn from your employer is subject to highest taxes - for most people it's 40% or more.
* Stock market income is taxed less - you don't have to pay social security taxes ( savings of 15.6%)
* Commodities trading income, by IRS rule, is partially considered long term capital gains - for a blended tax rate of around 20% or so.
* If you hold stocks long term ( currently longer than 1 year), Federal income tax drops to 15%.
* If you have a business - you can shelter a lot of income from taxes through business expenses.
* If you have a C corporation, after writing off cost of doing business, the first $50,000 of profit is taxed at only 15%.
* If you get your income from rental real estate, you not only get to deduct the cost of operations, and the cost of financing, but also depreciation - a "phantom loss", which is used to lower the taxable income.

BOTTOM LINE: your goal should be to arrange your affairs so that most of your income comes from real estate, business, and long term capital gains - this gives you greater control over your income ( as opposed to a job), and you will save anywhere from 15%-40% in taxes. When was the last time you got a 40% pay raise?
However, please do not feel that you have to fix all your tax issues right now. It's a complex area - take the time to think about it. Come back to this page in a couple of weeks - read it again. Ponder some more. Then start to look into various strategies that would let you lower your taxes - max out your 401K or IRA, learn what deductions you could take as an employee, what deductions you could take if you ran a small business, what could you do if you owned income producing real estate. Over time, you will natuarally find that some solutions fit you more than others - those are the ones to implement. And please, do not forget to consult with professionals - accountants, real estae brokers, tax professionals - the fees they charge are very small compared to the amount of trouble and time and money they save you.

 

 


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