3. Shift to lower taxed or NEVER taxed brackets and buckets
"There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that." ~William H Rehnquist
You have the opportunity to make a million dollars, congratulations! Now, how would you like that to be paid?
Maybe you are a successful business owner AND you happen to live in a state that doesn’t have an income tax. Here is what you will net:
That’s right, over 36% of your income will go to federal income and FICA taxes.
Now what if you are paid $1 million dollars in dividends, either from stocks or a private business? Well instead of a top marginal tax rate of 37%, you will pay a top tax rate of 20%. And dividends are not subject to FICA taxes, an additional savings. So instead of over $360,000 going to taxes, that will be cut almost in half to only $200,000.
Finally, let’s say you earn a million dollars net combined in rental real estate income. Now not only is this income taxed at the lower rates such as which dividends are taxed and exempt from FICA, through use of tax incentives such as depreciation it is quite possible that you can set up your tax affairs accordingly so that every dollar of that income is TAX FREE!
Or you can do a combination of this. Let’s say you are self employed and make $100,000, certainly a respectable figure. But as we’ve shown, much will go to taxes ESPECIALLY the 15.3% FICA contribution. But did you know you can pay yourself a “reasonable” salary and then pay the rest in the form of a dividend? Now the IRS is very picky on what is considered a “reasonable” salary and you better have data to prove it and back it up. But let’s say your salary is $50,000 and then your business pays you $50,000 in dividends. Not only did you lower half your income to the lower tax on dividends versus wages but you just put $7,650 more in your pocket as dividends are not subject to FICA taxes!
For additional ways to shift money to lower taxed or never taxed brackets and buckets, I highly recommend Tom Wheelwright’s book, Tax-Free Wealth and David McKnight’s The Power Of Zero.
Read Next: Do what the government WANTS you to do
*Full disclosure I am NOT a CPA nor a certified financial advisor (or any other alphabet soup designation) and all of the information in this section is provided solely for educational purposes and does NOT constitute legal or tax advice. EVERYONE should consult their own financial advisors, CPAs and tax strategists to compile their own individualized plans.*
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