The Tax season is here and uncle Sam has collected or will be needing his payment soon. Taxes is one of our largest expenses. I’ve learned the tax law is a tool the government uses to shape the economy and promote social, agricultural and energy policy. Some accountants suggest monthly tax planning should be included in your budgeting as a wealth strategy throughout the year. They say the average person pays thirty to fifty percent or more in taxes yearly. That amount is paid through either, earned income, sales, value-added, payroll, estate or property taxes.
We are taxed in three ways; passive income is taxed from your business or real estate investments that you don’t personally manage. Earned income is taxed from your job, and lastly investment income is taxed through real estate, business, stocks, gifts or inheritance. In the book, “Tax Free Wealth”, by Tom Wheelwright, he explains the difference between tax credits and tax deductions.
1. Tax Credits, go against your tax dollar for dollar.
2. Tax Deductions, reduce your taxable income.
Here’s some tax credits that you can use; family, children, education, charity and investments. Business owners pay sales tax on two basic types of transactions. Items you buy for your business and products your company sells.
Key takeaways from the book “Tax Free Wealth”:
-Corporations pay tax on their income.
-Payments from one of your companies to another must be well documented.
-Two types of property taxes to remember. Real estate and personal property.
-Everything you do either increases or lower your taxes.
-If the purpose of the expense is to produce more income it can be deductible.
-Passive income, is income that derives from dividends. (Rent and Business)
-1031 Exchange/Tax Law Revenue (Code Section 1031). You’re not taxed on property you sell that was used in a business and replace it with a similar property, you will not be taxed until you sell the replacement property. “Tax Free Exchanges”
-Business owners should look into “Pass Through” entity. It’s a new deduction for S corporations.
-Everyone has to pay some type of taxes. The goal is to decrease the amount or not have to pay taxes at all. Remember everything you do either increases or lower your taxes.
-A good tax advisor is fully educated about the tax law.
-Three foundations of wealth building: compound interest, leverage, and velocity.
-It’s not how much you tax preparer charges you that matters, its how much your tax preparer cost you.
Anonymous: “A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.”