How To Make The Federal Income Tax Code Work In Your Favor!

"The purpose of a tax cut is to leave more money where it belongs: in the hands of the working men and working women who earned it in the first place"    Robert Dole

The federal income tax rate means different things to different people.  In this page we'll look at both sides of the equation.  To be truly successful you'll need to be able to analyze both sides of an opportunity.  To do this, visualize yourself as being on the edge of a coin so you can get a good look at both possibilities.  We touched on this concept in the page about how to define intelligence.

This idea of looking at concepts from all sides came from "Why "A" Students Work For "C" Students And "B" Students Work For The Government".  This book written by Robert Kiyosaki will be a reference source for our discussion of the contrasting viewpoints of the federal tax code as well.

We posted a beginners guide to investing a while back.  This will be part two of that page.  Understanding taxes is vital to building assets within any investment plan.  A normal wage earner considers taxes to be a burden.  The other side of the coin shows how well informed investors consider taxes to be forms of incentive.  So you'll need to stand on the edge to decide for your self.

Income Tax Isn't The Same For All Types Of Income

As we mentioned in previous pages, hourly or salaried wage earners and self employed people pay the highest percentage of their earned compensation in taxes.  We have a progressive taxing system.  So the more you make, the more you pay if all you have is ordinary income. 

Business owners and investors pay less in taxes because they look for tax incentives.  The government provides tax incentives for things they need done.  They need jobs to be created so more people can pay income tax at the ordinary rate.  Business owners who hire people receive some of those incentives.

They need better and safer housing because the federal government has proven repeatedly that they are total failures in the housing business.  So tremendous income tax deductions are available to private entrepreneurs who are willing to improve the housing  situation.

Our country needs food and fuel, so people willing to invest in those areas qualify again for tax reduction incentives.  We wrote it once, but it bears repeating.  Employees and self employed people work for ordinary income.  Robert Kiyosaki tells us there are three things a person can "bring to market." 

* Personal Labor

* Property

*Investment Capital

People who pay the highest income tax rates trade their own labor for money.  Successful investors provide either property or capital.  And for that skill set, they pay less in taxes. 

Acquiring A Working Knowledge Of The Tax System

This is another area where I fear that younger people are placed at a significant disadvantage.  It didn't just happen however.  The problem has been around for multiple generations. 

I think we need to explain the ideas of basic tax preparation to our teenagers along with how different types of income are effected by IRS codes.  This would give them a huge advantage as they begin their working life.

We all laugh when a teenager comes home with that first pay check and notices how much has been siphoned off for various reasons.  Sadly, I see too often that the lesson is never fully absorbed.

During my time in the mortgage business I listened to people tell me about buying a big ticket item with their tax return.  They didn't understand that an income tax refund is merely an advance overpayment.  

But that can still be a good thing.  This forced savings plan could provide the means for someone to move into that magical side of the tax code where income is taxed at lower levels and deductions can be found for providing valuable services.

At least it would be a way to add to a self directed individual retirement account.  Which by the way also provides an income tax deduction.

I should mention here that newer laws have put ceilings on certain tax breaks.  Among those are IRA contributions.  There are more restrictions when household incomes get around that $250,000 level.  Below that mark, there are still excellent options available to move to the lower side of the scale.

If you find yourself in that group coming up short at tax time, please do all you can to avoid raiding your IRA or 401k to pay income tax.  The penalty and the fact that the money you pull out is also taxed at the highest level makes it far too expensive. 

If you have no other choice, please begin right away in this new year to add more each month into your emergency fund.  You have started that account, haven't you?  As we learned from Dave Ramsey, we need to get at least $1000 into that fund.  And then work to get it up to 6 months of job pay.  Just in case.

Anyone Can Move Into A More Favorable Tax Category

The good news is that anyone can move from the side of highest tax rate to lowest.  It can be a little at a time.  It begins with a mindset of looking at ways to use your income to put assets in your account instead of buying things that wear out.

I already mentioned the self directed IRA.  This is a great vehicle to move into that lower income tax rate club.  Rental real estate can be held in your IRA.  As can precious metals.  And there is not immediate tax in this case if everything stays within your IRA.

You will also have to step away from the "tax the rich" mentality.  Tax increases target earned income.  As "revenue" rates go up, the pain is always felt more by middle and low income people because a bigger percentage of their disposable money is affected.  Soaking the rich is a great political talking point.  But it never spurs growth.  Never.

Truly savvy investors have little earned income.  They have passive income.  The federal government will always offer tax incentives to those willing and able to do things that benefit the entire country. 

Rental real estate is one such example.  If you don't want the hands on part, there are real estate trusts that enable you to put in cash but not be involved in the daily upkeep.  As with any investment there is risk.  Be sure to gain the knowledge ahead of writing the check.

As you begin the process of learning to invest wisely, knowledge of the federal income tax rate will play a large role in your strategy.  Do the things that the federal government needs to be done and they will reward you with the same tax incentives that anyone else who does the work is able to get.

Teach your children well to look at the income tax scenario from all sides.  Moving over from the ordinary income side to the passive income side of the equation could be a great idea.

The Impact Of The (Un)Affordable Care Act

How will "Obamacare" affect the income tax rate?  No one knows for sure.  There are several reasons for this quandary.

* The bill has too many variables and unknowns

* Not every state handles it the same way.  It isn't their fault.  See the first bullet point.

* The mechanics are far from being worked out.  As I write this, a fundamental underpin of the law is being debated in front of the U.S. Supreme Court.  They could leave it alone, gut it or suggest adjustments.

You'll read many opinions.  We just don't know the impact right now.  Here is a link to some expected tax hikes to pay for this gargantuan federal program.  Some of this could easily be changed with the outcome of the high court decision.

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Just below is a quote from "Don't Sweat The Small Stuff" by Richard Carlson.  The chapter title is "Open Your Heart To Compassion." 

"Every day we are given hundreds of opportunities to practice compassion in action.  We can learn to be less reactive and live with more patience.

We can smile when others are serious.  We can drive our cars more carefully, pick up litter on the streets, recycle, and reduce our consumption.

We can resolve conflicts rather than create them, and we can become less judgemental and more inclusive.  When someone is aggressive, we can teach them to be more peaceful.  Instead of waiting for an example, we can be the example.

The more compassion that enters your heart, the happier and more peaceful you will become.  By knowing that you are doing your part to create a better world-whatever form that takes-you will fill any void that exists in your life, and you will begin to find the peace you are looking for."

What's New?

Just below is an article from Peter Schiff about passing the buck from one administration to the next.

Owning The Bubble

Just below is a link to look up your congressional representatives.   Let them know you expect accountability.

Congressional Representative Look Up