Enemy Of Your Money #4 - Taxes

Paul K. Dunn
Jun 16, 2017
5 min read

Taxes - The Government's Cash Cow

Taxes are another one of the most misunderstood phenomenons of the world. Along with compound interest schemes Banks and Government systems love to use financial tools that allow them to profit with little effort. This is called leverage. One definition of leverage is to use (something) to maximum advantage. And this is exactly what's being done to those who have lower financial intelligence. Taxes in some states can add up to as much as %50. The first three months of each year is JUST to pay taxes in many working households. Ordinary tax is the highest taxed income in the tax code and that is the very income that 95% of America considers its primary income. Capital Gains Tax is the lowest tax income and used to represent the other Wealthy 5% of America. We will break them down further to help you understand a little better HOW they work. Capital Gains tax by definition is a tax levied on profit from the sale of property or of an investment. Even though there are a bunch of confusing jargon and other numbers thrown around, Capital gains tax range between 0, 15 and 20%. Most savvy investors never pay more than 15% and the extreme cases of wealth get away with paying 0! What happens is that large lump sums of money are created for the investor, giving them a huge amount of capital to divide up. They can live for several years on one good deal while being able to invest large amounts of money into high compound interest investments. These investments spit out more large lump sums of cash and the cycle repeats. Since the investor is using the tax code to keep the investments registered as Capital Gains, they never get hit with tax penalties larger than 20%. This is how true investors maintain and grow their wealth. The government does this by partner with other countries. They take the ordinary tax money and invest it for capital gains profit using compound interest to grow their money. The bad part about this is that the profit the Government makes is not being financially managed appropriately so we are going further into debt rather than becoming a debt free country. This in a nutshell is Capital Gains. There will be plenty more examples in our blog so stay tuned to continue your education. Next is Ordinary Tax. Ordinary income is usually characterized as income other than (long-term) capital gain. Ordinary income can consist of income from wages, salaries, tips, commissions, bonuses, and other types of compensation from employment, interest, dividends, or net income from a sole proprietorship, partnership or LLC. This is the tax you see when you go to work that is taken out before you get paid. This is also the tax you see when you profit without having a properly set up company. It's also the tax you pay when you pass away. No matter what you do, you are taxed, the question is which one will you pay? We are here to help you pay NO MORE TAX than you need to. We don't give tax advice, instead we give you practical knowledge as to how to Shift your income back into your pocket. Ordinary Tax is the highest tax you can pay and it is known that more than 80% of Americans pay too much of it due to lack of information and education. Learn more about Income Shifting >>> HERE

The other side of taxes that I must make you aware of has to do with how you SAVE or INVEST your money. If you work, you've probably heard of Pension Plans, Social Security, 401(k), 403(b), IRA's, Roth IRA's, Cash Value Life Insurance and Annuities. All of these plans have different tax structures and where you chose to save your money can determine how much or how little you will have over you lifetime of saving or investing. Investment Real Estate is also in this category as it falls under a retirement vehicle that allows you to save or invest over a long period of time. There are 3 different categories you need understand:

Tax Now - The tax now category includes your bank, stocks and bonds. If you put your money in this type of vehicle you get taxed immediately upon earning profit. If you make money from your CD, the interest is liable to pay tax once your profit is received. If your stocks or bonds make money your are liable to pay taxes once your profits are realized. These are the considered Tax Now investment or savings vehicles. The good side is that usually this money is liquid and easy to access. These type of accounts are good for Emergency savings plans & short term investments
Tax Later - Tax Later accounts are often called tax deferred. A tax deferred account means that you are not liable to pay tax now. You pay the tax later in the future when you begin to withdraw money from the account. These type of accounts are generally your 401k's 403b's IRA's and Real Estate. In these type of accounts, aside from the real estate, you agree to keep your money tied up for the long term, generally until you reach 59 1/2, in exchange for not having to pay the penalty. You can be penalized for early withdrawal and in some cases penalized up to 50% for not withdrawing by a certain age. These accounts are generally used to build a nest egg for retirement and if not structured correctly can leave you with too little to remain in retirement. Another catch to the tax later category is you don't know where taxes will be at the time you chose to begin drawing down on your money. You will accumulate a large nest egg and THEN get taxed on the larger amount when the better thing to do is be taxed on the smaller piece. Would you like to pay tax on $500,000 or $5,000? Let's do the math. If taxes are 50% and you get taxed on $500,000 you pay $250,000. If you get taxed on $5,000 you pay $2500. It is best that if you use this vehicle you ONLY use it where absolutely necessary and you get advice from a FIDUCIARY advisor. A fiduciary advisor looks out for your best interest and not his/her commission or fees. Have them show you the money you will put in your pocket and make sure to consult with more than one.
Tax Advantaged - The tax advantaged category means you have the possibility of avoiding tax all together. A tax advantaged vehicle is a long term savings/investment account that also builds a nest egg. Real Estate can be structured as a tax advantaged vehicle by transferring the profits from one investment the next. Doing this correctly can avoid triggering capital gains tax because the investor never collects the profit as INCOME. Another good tax advantaged vehicle is Cash Value Indexed Universal Life Insurance. This vehicle can save money over the long term and structure the draw-down of its income as a loan to avoid ever triggering capital gains tax. You take the money out tax free and agree to pay it back but without the obligation to do so. Wealthy jewish families would use cash value life insurance to create born millionaires because of how they would structure the passing on of wealth. This process is called Generational Wealth. Your generational wealth can be passed to your next generation tax free by using the correct cash value life insurance policy.

If you are on the track to being wealthy, tax advantaged accounts should be your primary long term investing vehicles. Here are 3 types of accounts to look into