Transcription
If you and your spouse earned a combined $100,000 in 2023, then you ended up paying $8,000.32 to the government in federal income tax. But it doesn't stop there, because you also paid state income tax, and depending on the state, that came out to around $2,000.
The federal government wasn't done yet. They came around for a second take and grabbed their Social Security tax from you, amounting to a total of $6,200. And then they decided to swing around a third time to collect their Medicare tax from you, which amounted to $1,450. In total, you paid $17,450 just in taxes.
Now, if it stopped there, it would have been bad enough, but it didn't. Because the money you're left over with, you decided to go to the grocery store and buy food because you have to live. And guess what? You paid sales tax on that food. And by the way, when you drove to the grocery store and drove to work every day in order to earn that money, you had to fill up your car with gas. And on that gas, you paid a gas tax. And because you're working so hard to earn this money that just falls right out of your pocket again, you were sad on the weekends. And so you decided to drink. And when you drank that alcohol, you had to pay a sin tax.
But by the way, you were still really good with your money. You budgeted well, and you saved and you invested some of that leftover money that you had, of which you had a profit on. And because you had a profit, because you were acting responsibly and saving and spending less, less than you earned, the government swung around for a fourth time and took a share of your profits on those investments with capital gains tax. And whether you are renting or owning, you are paying a property tax in that home that you are crying yourself to sleep at night because you're so depressed about all these taxes that you're paying.
After all is said and done, for most families, this leaves you with about 50% of the money that you earn going to various taxes, which means you're working about half the year just to pay the government. But it wasn't always this way. Despite the fact that that's what life is like for many Americans right now, this situation is actually relatively new, historically speaking.
If we rewind the clock and go all the way back to the founding of our nation, there was no income tax at all. In fact, many people, including the founding fathers, and people who wrote the Constitution, and judges in the courts, and legislators, all believed that an individual income tax was actually unconstitutional. There was a brief period of time during the Civil War when Abraham Lincoln did impose an income tax on the nation in order to fund the war, and as soon as the Civil War ended, that tax ended as well.
The individual income tax as we know it today didn't begin until 1913 with the passage of the 16th Amendment to the United States Constitution. This meant that not only did America survive from 1776 all the way through 1913 without an income tax, but actually thrived and became a global superpower during that time.
Now, the way they got the income tax passed was the same way they try and get new taxes passed today. They say it's only going to be a tax on the richest people, and it's only going to be a small amount of their money. It's the same playbook today as it was in the beginning. Because when they passed the 16th Amendment to start the income tax in 1913, it was only a tax on less than the top 1% of income earners, and it only took 1% of their income, quite literally a 1% tax.
Yet, once the government has their foot in the door, they're never going to retreat. They're just going to take more and more and more, to the point where we are today, where the government is taking about half of everybody's annual income in the form of all sorts of involuntary taxes.
But what are taxes really? Because today, people are so used to paying taxes and think it's so normal that they never stop to think about what's actually happening. When you boil it down, there is a man with a gun to your head telling you to give him something that belongs to you. In other words, theft. You're born into the system, opted in by default. You cannot opt out and say, "I would like to not pay for these services, and I also would like to not use these services." No choice.
You also cannot leave to stop paying taxes. The United States is the only country on Earth where if you go live somewhere else, you still have to pay income taxes to your own country. That is unique. Again, you can't opt out. And even if you expatriate, number one, you have to be a citizen of another country, which if you're not already, you have to buy, which is very expensive. But also, you have to pay an exit tax on the wealth that you already have. Again, there's no way to opt out. And if you try, the man with the gun puts you in prison for life.
But naive lovers of the government will say, "But taxes are still good anyway, even if they are involuntary. Without that, how would we have roads? How would a private company figure out how to buy land and lay asphalt? It's preposterous that that could happen without force." And they'll also say, "It goes to take care of people who are in need, which is a very important thing to do." But if you boil it down and actually look at where the tax money goes, you'll see very, very little of it goes to actually helping people who need it. The vast majority of your tax dollars go to large pharmaceutical corporations, the military-industrial complex, lining the pockets of corrupt politicians and lazy bureaucrats.
I completely believe in and support taking care of those who can't take care of themselves, those who are in need. That's why I personally choose to give thousands of dollars a month to charities that are food pantries and homeless shelters and halfway houses, places that I know are actually doing good things with the money that they're given. But this is not what taxes are. And even if they did take a little bit of your tax money and do something that ended up being good with it later, it doesn't matter. It doesn't change the fact that theft can never equal charity. The ends never justify the means.
At this point, I'm sure it seems hopeless. You're opted in by default to a system where a man with a gun takes half of your earned money throughout the entire year and uses that money for things that you don't believe in. Unless you're happy about dropping bombs on kids in the Middle East, I'm sure that's the position you feel like you're in, and you have no choice.
However, there actually is hope. And the reason why is because the man that's holding the gun to your head actually has the same tax laws applying to him as apply to you. And he doesn't like paying taxes either. And so he put loopholes, if you want to call them that, into the tax code. Things that you can do in order to be able to pay less in taxes. Rules that the government has said, "We want to incentivize these behaviors because we think they're good for our country." And the way we're going to incentivize these behaviors is by giving you a tax deduction. So we hope that everybody participates in these because they are good for our country. Which means there are legal and moral ways to avoid paying taxes. And the best part is, literally anybody can take advantage of these rules. You just have to know the rules, and then you can play the game to win.
But first, real quick, if you've been watching my video for a while now and you've been wondering how you can actually profit from the ideas that we talk about on this channel, I want you to save a date on the calendar: April 25th at 7:00 p.m. Eastern Time. I'm going to be hosting a live master class where I'm going to cover one of the best-kept secrets in all of finance: the inner workings of the asymmetric trade. This strategy is the way that the best investors and best traders throughout history have traded and invested their money. People like Michael Burry of The Big Short fame, people like Nassim Taleb, author of Black Swan and Antifragile, Skin in the Game, billionaire hedge fund managers like Bill Ackman, Ray Dalio, even Warren Buffett. And I've personally been testing and using this strategy to take home some big returns in my own portfolio over the last eight months. And I'm going to reveal everything I know at this event.
We'll cover things like:
1. Why I believe 2024 is the year of the asymmetric trade, and that if you want to profit from that, you probably should start getting your portfolio in position right now.
2. A simple and easy-to-follow protocol that I use in order to spot these asymmetric trades. It's helped me take home some massive gains in my personal account, and how you can use it in your own portfolio to shoot for massive returns.
3. The exact techniques that I've used to help a small group of beta testers spot some of their own asymmetric trades over the last few months, and how you can use these trades to beat volatility instead of being hurt by it.
This event is completely free. And especially considering that this year we've got things like the Fed teasing interest rate cuts, small banks on the verge of collapse from the commercial real estate crisis, got an election year this year, geopolitical instability, this is an event that you don't want to miss. All you have to do is click on the link that's in the description below, enter your email, and I'll see you there.
All right, so here's the plan. No matter your income level, what you can do to reduce or eliminate your tax bill.
Number one, the basics for the low-income earners. If you look at a low-income earner, and I'm just going to say $50,000 per year here, you're already paying very little in taxes: two grand for federal, a couple hundred for state, three grand for Social Security, and an extra $700 for Medicare. Basic things like:
1. Being married. You get better tax treatment.
2. Throw a couple kids in the mix. Besides all the other amazing advantages and how kids will change your life for the better, you can't deny the tax benefits as well.
In addition to those basics, you can contribute to a retirement account, whether it's a 401(k), traditional or Roth, through your job, or an IRA, an individual retirement account, that's traditional or Roth through your broker. It doesn't matter. These all have tax advantages. Traditional accounts, you're going to defer the taxes on those dollars until later when you retire and take the money out. But a Roth, if you're young, if you have a long time to invest, is going to be even better because that growth that you have in that account is going to be tax-free later on. So contributing to a retirement account is a very easy, basic way to reduce your tax bill today.
The next thing you can do is contribute to a Health Savings Account (HSA). If your healthcare plan is a high-deductible healthcare plan, and by the way, even if you don't have healthcare through your work, if you have it through Obamacare, healthcare.gov, you can still get a high-deductible healthcare plan through there. Then you qualify for a Health Savings Account. This has triple tax treatment, meaning when you put the money in, you get a tax deduction. It grows tax-free, and when you take the money out of the account, as long as you're using it for healthcare, it comes out tax-free as well. The Health Savings Account is unreal in terms of its tax benefits.
And then number three, as always, we can give to charity. But I usually don't bring this up as the number one method because, as is, basically just saying, "Hey, you're giving the money away." So obviously, you're not going to pay taxes on money that you don't keep.
All right, now let's step it up to medium difficulty. And this is going to be the mid- to upper-income earner as an employee, because employees have the highest taxes. And once you get up into that mid-upper range, you know, low six figures, it's going to be difficult to get all of your tax liability reduced or eliminated by just doing the basic things we just covered.
And by the way, before we keep going forward, I have to give you the disclaimer. Obviously, I am not a tax professional. I'm not an accountant. I'm not a CPA. I'm not a tax attorney. I'm not a lawyer. I'm not a tax advisor. This is not advice. I'm just sick of paying taxes myself, so I've done a lot of research on all the things that anybody can do to reduce or eliminate their tax bill. This is what I found, but I could be completely wrong. So don't take my advice. Because if you do something wrong and you get audited, the IRS isn't going to come after me, they're going to come after you. So make sure if you implement anything we talk about in this video, that you know what you're doing and you talk to a professional and make sure you're doing things by the book. Getting audited? No fun. Paying back taxes, fines, penalties, jail time? No fun. Don't risk it.
So, if you're in that mid- to upper-income level as an employee, the first thing to consider is see if you can become a contractor instead of being a W-2 wage earner at your job. See if you can do the same job for your company as a contractor. You have a lot more flexibility being able to treat yourself as a contractor or a small business than you do as an employee.
If that's not an option, consider starting a side hustle, a side business. And here's why: expenses for a business are tax-deductible. Employees, if you make $100,000, you're taxed on the whole $100,000, and you get to spend what is left over. But a business, if you make $100,000, you get to spend as much money as you need on your business expenses, and then you're only taxed on what's left over. And so the individual who makes $100,000 might have to pay $17,000 in taxes, but the individual who operates as a business and makes $100,000 has a bunch of business expenses, and after those business expenses, might only have $70,000 left over. That means at the same tax rate, you might only be paying $10,000 in taxes.
And there are a lot more things that are deductible as an expense for a business than you might think:
1. Miles
2. Equipment
3. Marketing
4. Supplies
You can even start a business that is in some way related to something that you already want to do with your life. Sometimes this is called a lifestyle business. For instance, let's say you really enjoy fishing. Example number one: you make some money during the year, you pay taxes on it, and then you can use what's left over to pay all your expenses and use some of that for your hobby, fishing. In our second example, let's say you start a fishing business where you're making custom lures. Well, in order to run this business, you're going to have to buy fishing supplies, you're going to have to make these lures, you're going to have to buy bait, and you're going to have to buy fishing poles, and you're going to have to rent a boat, you're going to have to drive to the lake, you're going to have to test these things out, you're going to have to do all of the things that you were already doing for fun before. But now, because you're doing it as a business to try and make money, those are business expenses.
Big caveat here, big warning, red flag: watch out for the hobby loss rule. You can't just use this and take those losses to reduce your income in perpetuity. If you start a business that never makes money, the IRS will eventually say, "Hey, you have a hobby here, you don't have a business. You actually owe taxes on all that money." So you do actually have to try and make money. You actually have to be selling these things, and eventually, usually in about two, three years, you actually have to turn a profit. So make sure you look out for the hobby loss rule. You can't just lose money forever.
Now, let's say you've gotten beyond that, and you still have a good problem, which is way more income beyond that level. You can't just do normal lifestyle expenses. You can't do miles. You can't contribute to a 401(k). You can't do all of the basic stuff added up together to even make a dent on your total tax liability. That's a good problem to have because you have a good income. But writing those six-figure checks to the government, I can tell you, is just no fun.
And here is why: Real estate investors say that eventually, in business, all roads lead to real estate. And it's because it's the most heavily tax-advantaged asset class in the United States. A very big chunk of the Internal Revenue Code is written about real estate. And there are two main strategies that people can use here with two main bonuses we're going to go over that are going to give you the most scalability in reducing your taxes.
The first one is qualifying as a real estate professional and then buying rental properties. Because real estate can have paper losses that are bigger than the actual income that they produce. Meaning, on paper, it looks like you have a loss, even though they're actually paying you income. It would be nice if you could take that loss and apply it against your ordinary income. However, that only works if you are a real estate professional. If you're a doctor or a lawyer, you can't have losses on your rental properties apply to your earned income. But if you are a real estate professional, meaning you spend the majority of your hours in a real trade or business, and it's at least 750 hours a year, then you are a real estate professional, and all of that rental income, those paper losses from your real estate, can actually apply to your ordinary income.
Now, this is another big red flag to watch out for. Don't listen to the social media influencers. Don't listen to people making TikToks about this, because you're going to receive a lot of incorrect information that will land you in jail or audited or fined by the IRS. It's not good. To qualify as a real estate professional, you actually have to be a real estate professional. People have tried to get around the rules before and say that, "Hey, I was watching YouTube videos and reading books and education and traveling to cities all to research real estate." None of that counts towards real estate hours. Even if you have a ton of real estate, if you have property managers, those activities now are investor-level, not actually directly involved in the real estate. So to be a real estate professional and qualify for this, you actually have to be in a real estate trade or business for your full-time job, or at least 750 hours if it's the main thing you do. Which means if you already have a full-time job, you can't qualify for enough hours to do a real estate job as well. But the nice thing is, your spouse can qualify. And so if you are sitting there with a normal job and your spouse is a real estate professional, then you guys can buy rental properties, use those paper losses to offset your real income.
Now, for those of us who are not in a real estate trade or business, the next loophole is called the short-term rental loophole. The Internal Revenue Code Section 469 states that if your rental property has an average stay of seven days or less, then it's not a passive activity, meaning it can apply against your ordinary income. And so for any of us with professions and day jobs, and you spend the majority of your time doing something that is not a real estate trade or business, you can still buy rental properties and use those paper losses to offset your total earned income, as long as those rental properties have an average stay of seven days or less.
Now, there's two little bonus things you can do to make those paper losses on the real estate even larger. One of them is called cost segregation. Cost segregation is a study you pay a company to go in and do, and they basically separate the property into multiple parts, and it advances the amount of paper losses that you can take on the property in the early years. The second thing that is like the icing or the cherry on top of cost segregation is called bonus depreciation. Right now, it's unclear what the bonus depreciation will be for this year and last year because Congress is still deciding. But it essentially just takes that extra amount of depreciation, those paper losses you can take on your property, and it makes them bigger. And so if you are in the situation where you're a real estate professional or you're buying short-term rentals, then you definitely want to do cost segregation studies on those properties and use as much bonus depreciation as is allowable in the given year.
And that's it for this video. There are obviously way, way, way more strategies and tactics and tips and tricks and things that you can do that are specific and dependent on the industry that you're in in order to save more on taxes. And again, don't take my word for any of this. None of this is advice, and all of it could be wrong. Do your own research, work with professionals. But understand that whether you are making little money or a ton of money, the same tax rules apply to every United States citizen. Which means that if you learn the rules of the game, then you can play the game to win.
And finally, remember to sign up for my asymmetric trading master class. It's going to be on April 25th at 7:00 p.m. Eastern Time. You don't want to miss this completely free event. Click on the link in the description below, submit your email address, I'll see you there.