In order to accelerate your movement along the wealth building curve, you absolutely must have your own business. I don't care if its real estate investing, a sales company or a service business. But you must own it yourself or with a partner. Why, because the tax laws are tilted in favor of people who are in business for themselves. Let's take a closer look. If you are not in business for yourself, you are earning your money as a W-2 employee. Unfortunately, this is the highest tax form of income that there is. In fact, the average American gives up between 42% and 55% of his or her income in the form of taxes. Sound high?
Well, consider this: Currently we have a Federal tax rate of approximately 39%. States can charge as much as 9.6% and some of us even have to pay a City income tax as high as 3%. Then, there is the Invisible Killer tax known as FICA or Social Security. Why do I say that it's the Invisible Killer? Please let me explain. Social Security tax is broken down into two components. The first component of 7.65% is paid directly by the employee. It's taken directly from your paycheck before you even touch it.
In addition to that, your employer must “match” your contribution by paying another 7.65%. And this all happens before you see a nickel of your paycheck. Its like the government is playing a game of now you see it, now you don't with your money. And isn't it true that if your employer has to pay that money to Uncle Sam, its less money that he can pay to you? That's over 15% of your hard-earned money that you are losing right off the top! Can you see how hard it is to get ahead when you are paying out roughly half of your earnings in taxes?
Decades ago, a Supreme Court Justice named Learned Hand made the following observation: To paraphrase, he said “there are two income tax systems in this Country; one for the educated and one for the uneducated”. Here's your chance to get a powerful education. The following two diagrams hold the secret to tilting the tax laws in your favor. The first one illustrates the tax system for the Uneducated: Earn – Pay Taxes – Spend.
Both systems start, of course, with earning income. However, in the uneducated tax system, your taxes are immediately deducted from your paycheck – before you ever see it. Then, you have to live on what's left over. Let's apply some numbers to this:
- $100,000 Income
- $50,000 Taxes
- $50,000 What You Have Left
Now, contrast this with the educated system. Earn – Spend – Taxes. Again, we start with earning income. But look closely at the next line. In the educated system, you get to spend your money before you pay taxes. Can you see how this could have a huge impact on your financial well-being? This is the first step. This is one of the strategies that people like Ross Perot, Donald Trump and Bill Gates use to reduce their taxes from the 50% that the average American pays all the way down to 4%-5%! That's right: 4% – 5%. Now you know the first step, you must have your own business. So, get ready for the next article where I'll provide you with the list of 300 deductions that are available to our business.
That's all the time I've got for today. Be sure to read the next article, when we'll discuss putting some of the 300 business deductions to work to dramatically reduce your taxes!