Two Easy Strategies to Pay Less Taxes
Two Easy Strategies to Pay Less Taxes by Robert Kiyosaki for Daily Reckoning
Editor’s note: We hate to bear poor tidings this Saturday, but tax season is just around the corner. How can you reduce your tax bite? Today, “Rich Dad” Robert Kiyosaki shows you two strategies. Hint: the rich use them to take advantage of the tax code.
In the big picture of personal finance, there are four financial forces that cause most people to work hard and yet struggle financially. They are:
Take a moment and reflect briefly on how much these four forces affect you personally. For example, how much do you pay in taxes?
Not only do we pay income tax, but also sales taxes, gasoline taxes, real estate taxes, and so forth. More important, to whom do our tax dollars go and for what causes?
Many years ago, I was asked by a newspaper reporter how much money I’d made in the last year. I told him that I made about a million dollars that year.
The reporter’s follow-up question was, “How much did you pay in taxes?”
To his surprise, I said that I paid nothing.“How could that be?” he asked.
I then went on to explain that I had sold three pieces of property and was able to defer my income by placing the proceeds into what’s called a 1031 exchange. The money was never technically income but instead reinvested into new, larger properties.
Later, when the reporter published his article, the headline read, “Rich Man Makes $1 Million and Admits to Paying Nothing in Taxes.”
While he had the facts right — I did pay nothing in taxes — he got the spirit all wrong.
The reality is that the IRS tax code is written to encourage and reward certain types of behaviors.
At a high level, the IRS wants people doing activities that spur growth and that provide jobs.
Thus, they have many tax breaks for entrepreneurs and investors.
On the other hand, the IRS has little value for people who make a lot of money but don’t create anything for the economy in terms of growth or jobs.
So, it is not surprising that the top 1% of earners pay the largest share of taxes rather than the top 0.01%. Why?
Because most of those in the top 1% are not entrepreneurs or investors. They are high-paid employees who earn the highest-taxed type of income: earned income.
The ultra-rich, on the other hand, are those whose wealth is often built on starting a company or investing professionally.
These activities are rewarded by the IRS and so they have many more tax breaks than even those making hundreds of thousands of dollars a year. The ultra-rich know how to limit their earned income and instead make most of their money via passive income vehicles like their companies and investments.
Thus, they pay a substantially lower tax percentage than high-income earners.
High-income employees, and the ultra-rich is the mindset. And the good news is that you can start thinking like the ultra-rich when it comes to taxes and money, and your wealth will grow.
First, stop looking for a high-paying job and start thinking about how you can create them instead. The IRS will reward you if you take entrepreneurial risks.
Second, invest your earned income into assets that produce passive income via cash flow every month. The IRS will also reward you for that.
By this, I do not mean your 401(k), which is taxed at an earned income level. You have to find true assets like rental properties, businesses, and commodities that are taxed at the passive income level.