You can make money in two ways:
Making money with money
Making money with muscle
Making money with money means investing money to earn capital gains. Making money with muscles means making money by working.
If you make money with your money, you get tax at a very low rate, which is normally 15 percent or even less on your dividends and capital gains. You don’t payroll tax.
If you make money with muscle or hard work, you get a tax that could be somewhere between 15 and 25 percent on your payroll.
How to Understand Taxes
Generally speaking, you pay three different kinds of taxes. The money you earn by working actively, or earned income, has the highest taxes because you are trading your time for money. Portfolio income, also known as capital gains, is money you make by selling something. For example, if you buy a house for $100k and sell it for $200k, you've made a $100k capital gain. Capital gains have the second highest taxes. Passive income is money that keeps coming in whether you are working or not. For instance, if you get dividends from your stocks, that's passive income. This type of income has the lowest taxes. Income tax is a tax that you pay for the money you make my working. For example, if you received $10K to build a game, you will be paying tax on this money. Capital gain tax is the tax you pay when you profit by selling your assets. For example, if you made $100K by flipping your property, you will pay tax on the profit you made on this transaction. If you want to save money on tax, you need to switch from working to investment because income tax is higher than capital gain tax.
The Basic Rule of Taxation
Between 2014 and 2018, Jeff Bezos's wealth grew by $99 billion, his reported income was $4.22 billion but he paid just 0.98 percent tax (of his reported income). Sundar Pichai, Google’s CEO, on the other hand, is reported to have said, “We are the biggest taxpayers, we pay 20 percent tax on average.”
In order to understand why people like Bezos pay fewer taxes, you need to understand three different kinds of income, earned income, capital gain, and passive income
Rich people pay tax on passive income, which has the lowest tax rate; however, normal people pay tax on earned income, which has the highest tax.
Passive income is better than active income in many ways. When you have a passive income source, you do not have to work as much as when you are working with an active income. Active income requires you to work 9-5 or even longer period of time, however, passive income requires you to work just 3-4 hours in a day, some passive income methods do not even require work, you just can go to sleep and you will make money. This is the main benefit of passive income. Another major benefit of passive income is you pay less tax. When you are with active income, you are mainly earning earned income, which tends to have higher taxes, but passive income sources have lower taxes. However, before you can earn the passive income you will have to work hard, maybe 12 hours a day. It takes a lot of time to build passive income.
Passive income is of course taxable but you pay more taxes on your active income compared to passive income. If you are generating passive income through investment, you will be paying more taxes compared to passive income that you are generating by selling products and services. In most cases, passive income from real estate (rental income) also has comparatively smaller taxes. You can either invest to generate passive income or create your own products and services to generate passive income. It takes a long time to generate passive income.
How to Pay Less Taxes?
There are different kinds of taxes for businesses, however, an individual basically pays two different types of taxes, one, income taxes, and two, capital gain taxes. Interestingly, income tax is higher compared to capital gain taxes.
What is income tax?
Income tax is the tax payable to your income. In other words, the tax you pay on your earned income (income generated by working, payroll or salary, for example). Depending on your country’s taxation laws, certain amount of your income is tax free, any money you earn above the limit is taxable. How much amount is tax free depends on whether the person is single or married, whether the person has kids or no kids, etc. Higher the
What is capital gain tax?
The tax payable on your profits is capital gains. For example, if you bought stocks for $1 and sold for $2, you made a capital gain of $1, how this profit is taxable. Capital gain tax is applied for all individuals who are into investing and trading.
How to pay less tax?
In order to pay less tax, you need to shift your earning method. You need to stop making earned income and focus on capital gains. This is what rich people do. Higher the income higher is the tax, therefore, they pay themselves a small salary, thus pay less tax.
How to Stop Paying Tax
The basic rule of taxation is you pay tax on the money you make. If you receive a salary you pay tax, if you earn profits you pay tax, you don’t pay tax on your asset. Elon Musk's net worth is $300 billion but he pays taxes only for the money he earns through salary or stock dividends.
Therefore, in order to avoid paying a lot of taxes, try to build your assets. Imagine you buy $1000 worth of stock, you don’t pay taxes on your stocks until you sell your sticks and earn profits. Therefore, in order to avoid paying tax, start investing.
The rich people pay less than 15 percent tax because they are making money with money. However, middle-class people pay 15-25 percent tax because they are making money with muscles. The middle class is really hard by the taxation system because they pay tax on payroll.
Therefore, if you do not want your government to take your hard-earned money, start making money with money and stop making money with your muscle.
How to Save Money on Tax
If you are a professional, you must have already realized that tax eats a large portion of your income. If most of your income is earned income, that is you make money by working for other people and companies (earn money through payroll), you will be paying 15-25 percent tax. This is a huge sum you are paying to the government and this can really affect your lifestyle. Therefore, you need to try applying strategies to save money on taxes.
Rich people do not pay a lot of taxes. Do you know why? Because they know how to save money on taxes.
Here are some simple strategies rich people use to save money on tax.
Donate: When they donate money, they save tax. For example, when they donate $100,000 they save tax on another $100,000. This is the reason why rich people often donate to charity.
Buy Paintings: Rich people buy paintings for an insane price. After they buy paintings, they keep them on display in a gallery. Due to publicity, the price will increase further. Let’s say they bought a painting for $100,000, and then the price goes up to $200,000. Now, they donate the painting to a gallery. Since they have donated $200,000 (the price of the painting), they will save tax on their $200,000.
How to Save Taxes On Your Capital Gains
Whenever you sell your stocks, you will have to pay taxes. The money you make by selling your stocks is referred to as capital gains, when you make this money you pay capital gain tax, which can be long-term as well as short-term. There is one method that will help you reduce your taxes on capital gains, you can even avoid paying this tax legally. The term used for this purpose is called tax harvesting.
If you have stocks that are at loss, you can sell these stocks at loss intentionally and register the loss in your financial year. The loss you made by selling your poor-performing stocks will negate the gains you make by selling stocks at profit. You will then have no tax obligations, which means you will be paying zero taxes.
When you sell your stocks at loss, you can again buy these stocks with the money you made by selling these stocks. By doing this you will have the same number of stocks in your portfolio but the capital gains will be zero or less than the amount eligible for taxation.
