If financial freedom and building wealth are of any importance to you, then understanding tax structure is a non-negotiable. Your taxes, representing up to 50% of your lifetime’s income, is a required area of focus with regard to how wealth is created. Tax laws are not only set up as a governmental revenue stream, but also to incentivize individuals to contribute to what the government wants done: such as job creation, housing, and aligning with their social and environmental policies. This is why tax deductions for big business and investors are so prolific. But in order to take advantage of the tax laws as they exist, you first need to understand the ideology behind their structure.
Let’s take a look at the simple truth about taxes:
- The harder you work for money, the more you’ll pay in taxes.
- The harder your money works for you, the less you pay. But…
- When other people’s money works hard for you, then you’ve really hit the jackpot, and you’re taxed even less.
Unfortunately, most people are trained to work harder at their jobs in order to earn a bigger and better income. This widely accepted philosophy is flawed because, when you work for someone else, the more you make, the more you pay in taxes. In reality, the only way employees can legally pay less tax is to earn less. Sounds depressing doesn’t it?
It’s nothing a little knowledge won’t fix. Stick with me.
You’re going to need some vocabulary here. Robert Kiyosaki has made a huge impact on the world of financial education, and one of the most important ideas he’s introduced is the Cashflow Quadrant.
On the left live the E’s and the S’s.
- E stands for employee.
- S is for self-employed or small business owner.
On the right are the B’s and the I’s (how wealth is created by 95% of the wealthy).
- B is big business (>500 employees).
- I stands for investor.
Every position in this quadrant is necessary for the economy to function. I’m not telling you to be in any particular quadrant, but it’s important to understand what they are and the tax ramifications of them.
Here’s a significant bit of information – The quadrant decides the taxes, NOT the profession. A lawyer can be in all four quadrants, as can a house cleaner. The quadrants are determined by how money comes to you, not the service you provide.
The basic quadrant breakdown is this:
- E’s and S’s desire security and either work for someone else or for themselves.
- B’s and I’s want freedom and have other people, their own money, or other people’s money working for them.
If you want to know more about this philosophy, I recommend reading Rich Dad’s CASHFLOW Quadrant.
We’re talking about taxes and how wealth is created today, but in order to understand some of the principles I needed to familiarize you with the quadrant.
- If you’re an employee?
Whether you’re a CEO or a janitor, while you stay in that quadrant, there’s not much you can do. It’s the way tax laws are structured.
- If you’re a small business owner or self-employed.
Start thinking like a B. Hire employees, invest in equipment, and set up your company the way a big business would by using an entity such as a Limited Liability Corporation, S-Corp, or C-Corp. Most self-employed or small businesses are set up as sole proprietorships or partnerships. These entities pay the most tax possible.
Chances are you’re not yet in the B or the I quadrant, so let’s talk a little about what that means.
- If you’re a business owner?
As a business owner, success lies in grand ideas, hiring the best people, taking on a leadership role, and working with a team. The opportunities to reduce taxes here are limitless. The reason for this being that businesses invest directly in the economy, something the government cares very much about. In result, the government rewards business owners with significant tax deductions.
- If you’re an investor?
Investor, in this sense, does not mean taking your savings and putting them in retirement plans or trading on the stock market. An investor, as it qualifies here, is someone who has other people send them money to invest. When using other people’s money you’re able to receive tax deductions on the purchases you’ve made with it. For example, you can utilize someone else’s money to acquire real estate and you’re still allowed to claim the depreciation, a well-known tax benefit. Given that real estate is how wealth is created by 74% of the wealthiest people in the country, it’s the primary area I focus on in creating my own wealth, and I help others do the same here.
In addition to the four cashflow quadrants, which are determined by how money comes to you, there are three types of income. Each is taxed differently so it’s important to understand what they are.
Three Income Classes:
- Earned Income or Ordinary Income
The highest taxed income. It’s not uncommon for people to pay half of their earned income in taxes. Most people work for earned income, and then turn around and have their savings work for more earned income through interest or retirement plans.
- Portfolio Income or Capital Gains
The second highest taxed income. Capital gains occur when you buy low and sell high. It’s essentially trading and that’s why it’s taxed differently.
- Passive Income or Cash Flow
The least taxed of all incomes. Cash flow is the goal, and as it’s how wealth is created for the average person. Cash flow, also commonly referred to as passive income, is the result of an asset that puts money in your pocket as long as you hold onto it. One of the more popular cash flowing assets, because of its manageability, is rental real estate.
Lastly, if you are happy and successful as an employee or small business owner, stay there and make as much money as possible, but learn how to add another quadrant to your repertoire in the interest of reducing your tax liability. By becoming financially educated, you’ll have the best of all worlds; a job you love, and financial freedom, planning, and security.
Learn more about how wealth is created and how taxes (your biggest expense in life) can be virtually eliminated legally, ethically, morally and even with the government’s blessing by visiting EpicWealthSaver.com