Alright, we are on number six of eight of the tax strategy framework
that I recommend every single person should go through at least once a year.
Just go through one through eight and just see if there's anything new that
changed for you for the year. And at a minimum,
understand the concepts of them and they might not apply to you this year,
but look at them every year. And there's something that could come up potentially
in future years, but this one,
so number six, we're gonna be talking about income types.
I know we've talked about entity types and the way that income flows through
to you as a business owner or an individual,
how taxes are calculated, how to use brackets and deductions and credits.
If, if, if this feels like a course on taxes,
you're probably not alone because there's so much underlying.
There's so many things that can hold up our tax system in the United
States, but the more you know, the more you can do,
the more, the more you can do to change your facts and circumstances.
If you're not willing to change any of your facts and circumstances,
you're not willing to learn about it or take some additional steps.
A lot of times you might just end up in the same situation.
So that's. Why I'm here. I want to educate you to work with you
to brainstorm with you on how to potentially lower your taxes.
And sometimes it's not going to happen in the current year,
but there's, there's, there's some hope in the future years,
potentially. So this. One, this number six is converting
income types. And I'm going to talk about the worst type of income that
the worst type of income. And by worst, I mean,
typically has the highest associated taxes.
With it. And then on the extreme end,
on the other end, the best type of income,
the 100% completely tax-free income that we'd love.
And so what's the worst? I'll start with the worst. so the worst.
Well, there, there's two types of worst.
And this is where, because you're getting hit with multiple types of taxes all
at once, these are wage income.
So this is like a typical W-2 income.
If you look at, if you have. If you've got a W-2 or like
a pay stub, just look at all the taxes that you're hit with on
that. So you're hit with, IRS income tax,
state income tax. So the federal income tax,
state income tax, and all the taxes. All the payroll taxes.
And this is partly, partially why this is one of the worst types of
income. It's because of the payroll taxes.
Not only are you paying income taxes, which as you know in the last
one we talked about tax brackets, can go up to 37%,
then you're paying income taxes, you're an extra 7.65% on top of that.
It can get pretty crazy. So that's why I'm putting it on that side
of it, because you're getting hit with two types of tax.
And then the other one that's really in that same department is.
If you're self-employed and you're paying self-employment tax.
So if you're paying, if you're self-employed and you're not filing as an S
corporation and you're an active owner,
you've got material participation, you're also paying an extra tax
on that. But when you're self-employed, the extra tax is 15.3%.
So if you were in the high-tax bracket,
37%, and then you tacked on,
what's it Well, on the first about $150,000 of your
income, you're paying an extra 15.3% of that on top
of your income. So what is that? Another almost $25,000 of tax on
that $150,000 of income. So your overall,
your tax, your tax rate is more than 37%.
So it gets pretty crazy. So then why is this part of the strategy
framework? And I'll tell you why.
The reason is we want,
want you to like, see the types of tax that you're paying and then
look at like, see what types of taxes or rates that you could be
paying on that same income. And it's not always easy,
but I'll talk about some examples. Here, in just a second,
but first I'll talk about the other end of this. the other end of
this is completely like 100% tax-free income.
So this was like five or 10 years ago. It had a couple of
come to me. They were in like, I think they were like 40,
maybe high thirties, early forties, and they were ready to retire.
And they had come up with a tax plan and they were talking with
me and their financial advisor and they had,
they had figured it out. They had figured out a plan that they really
liked. They just had a set amount of income that they wanted to,
they wanted to retire off of each year, or they wanted to retire off
of. And they had over the years,
they had both been putting into retirement plans. So they had worked almost 20
years. Putting into retirement plans,
and they were ready to do an early retirement. Their key strategy,
which I loved it, which, which is awesome.
Their key strategy was to retire off of,
it wasn't wage income, it wasn't business income. It wasn't-employment income.
It was going to be 100% tax-free income,
and this tax-free income was going to be capital gains and qualified
dividends on their portfolio income.
So this, this is a type of income. It typically could be taxable,
and it is, it is taxable.
Typically, it's better than wage income, better than self-employment income.
The tax rates can vary between 0%- I'll give an example here in a
second- between 0%- 1% and about 20% depending on your income,
but that's compared to 10% to 37%.
So, portfolio investment income can be better.
But what their strategy was, because,
because they f- out of the joint, married tax return,
and because the tax law allows 100% tax-free
long-term capital gains on up to a certain income amount,
and 100% tax-free qualified- dividends that you can receive
up to a certain income amount,
which right now, it's about $120,000.
So, this couple, they could earn up to $120,000 off
of their- investment accounts,
as long as those investment accounts were not kicking out short-term gains or interest
income, but if they were kicking out qualified dividends and long-term capital
gains, up to $120,000 of that,
had to- zero percent tax on the IRS website,
or on the IRS calculations, the federal income tax was zero up to about
$120,000 of income a year.
And that was their plan to retire on about $120,000 of income a year-
they were trying to strategically plan what was going to hit their tax return.
It was pretty amazing. And that's,
that's possible to have 100% tax on the free income.
So that is an example. So remember,
told you that some of the worst types of income, wage income,
self-employment income, if you've not, structured as an S corporation,
you're getting hit with two types of taxes. And then on the other end,
you've got long term capital gains and qualified dividends when you're in those lower
tax brackets, they can be 100% tax free.
So think of it, like, it's amazing.
Like, it's a huge difference. On one hand,
30 to 40% of your tack of your income could be going to taxes.
On the other hand, 0% could be going to taxes.
So it's pretty amazing. So I'll give you some other examples.
So in the middle between those two, I mentioned portfolio income.
So think of, like, interest. Income or ordinary dividends or
short term capital gains. Those are taxed at the income tax rates.
They're not like a preferred rate, like qualified dividends and capital gains.
But they're at the typical tax bracket rate.
And they're not hit with the second type of tax,
like self employment tax or payroll tax. So that's portfolio income.
And then really going to,
with the ultimate goal of getting your income over to the.
Tax-free side. there's a tax-free,
this is with me as like a real estate investor,
something I think about a lot and what we're strategizing with people a lot
sometimes is a surrounding debt.
And doing cash out refinances.
So this section, we're, we're not only talking about tax-free income,
but tax-free ways that we can get cash that's tax-free.
So if you, if you get a- loan,
a cash out refinance out of whether it's a primary home,
vacation home, rental property,
or even cash out of, investments that you've made,
like, into partnerships. if it, if it's coming from- debt,
you can, you can get cash out of those investments,
100% tax-free. The catch is that you've got to pay that debt back at
some point in the future, but if you reinvest in it,
it's increasing cash flow, there's definitely ways to get- tax-free cash,
if you- if you have those investments. but I think,
yeah, I'll stop there because that's the core of it.
Like, moving from recognizing the- high-
highest type- types of taxes in converting it to- or the highest type of
income, the income that's paying where you're paying the highest taxes,
converting that over to this- the low-income tax.
Types of income or the no-income tax types of income can just have
massive impacts on you. And if you are,
say you're in retirement or you're- you're already in a high-tax bracket and you
are doing some of these investments.
another thing to consider, things like municipal bonds.
actually in the next episode, seven of eight,
or the- yeah, the seven, I'm gonna talk about a whole slew of different
types of, Low tax, or no tax,
like completely tax exempt income and cash flow.
But number six is all about just converting,
focusing on, like, things that you can do,
whether it's entity structuring or other steps, that you can just move things- as
long the line from the worst type of income tax to no income tax.
And so this next one, seven of eight, we're gonna talk about,
I'm gonna give you probably ten or fifteen different examples of how you can
get one hundred percent, one hundred percent tax-free income.
Okay. Or tax-free cash flow.
So we'll cover that in the next episode. Talk to you soon.
See you.
