The government uses incentives to get people to do what they want them to do. For example, if the government wants more affordable housing, then it will provide some great incentive to get you (an investor) or developers to invest in affordable housing.
My goal is to get you to have a different perspective on taxes. I want you to start seeing taxes as our government’s way of incentivizing people to help them accomplish their economic and social agendas through tax breaks.
Over the next several posts, I will be writing a guide on how to lower your taxes permanently and the legal way!
Who Receives the Most Tax Breaks?
Business owners and investors receive tax breaks because they provide jobs, housing, products, and services.
Starting your own business can be risky, as only 1 out of 10 make it. This is why the government gives incentives to entrepreneurs so that the model of, “with greater risk, comes greater reward” motivates people to take chances.
In a prior post, I write about how there are 3 streams of income (earned, passive, and portfolio).
Earned income is taxed at the highest tax rates, while passive and portfolio income is taxed at capital gains rates.
The reason why you pay less in taxes on investments (passive and portfolio income), is because you have already paid earned income taxes on this money. You needed to earn the money prior to being able to invest it.
Moreover, when you invest in real estate or a company (through the purchase of a company’s stock) you are supporting the economy.
You will see that the two areas that the government gives the most incentives are in the area of owning a business and in real estate. This is because they want you (private industry and entrepreneurs) to employ and house the public.
Why? So they don’t have to do it…
Because we live in a free-market and semi-capitalist society. I say that we live in a semi-capitalist society because the government does intervene with stimulus packages, subsidies, and tax breaks.
If the government did all of the employment and housing of the public… Then, by definition, we would live in a communist economic model. History has taught us that the communistic model is not truly equal and is one of the most wasteful and inefficient uses of time and natural resources.
How to Reduce your Taxes Through Real Estate and Owning Stock
A Private Residence:
When you purchase a home, you typically need to take out a loan. This loan is generated by a mortgage lending officer. You probably used the help of a real estate agent, who also gets paid. Then, you purchase furniture for your new home and hire a handyman to make a few improvements. Suddenly, your kitchen faucet springs a leak and you decide that you want to plant an edible organic carbon sequestering garden. This requires you to run to the nearest home improvement store to buy maintenance and gardening tools.
Please note, there is no “income or cash flow” because you are living in the home. Your tax incentive in this situation is that you get to write off the interest that you pay on the mortgage of your home.
The government wants you to own your own home because owners take better care of their properties. This, in turn, increases the curb appeal and boosts the neighborhood appeal. Moreover, homeowners support local handymen, contractors, and electricians.
What’s more is that you likely had to save enough money for a downpayment, meaning that you are making enough money so that the government isn’t having to support or provide you with low-income housing.
An Investment Property:
When you purchase a rental property, you basically help the economy in all of the same ways that you help it by buying a personal residence… You most likely provided income to a lender by taking out a loan and generated revenue for a bank. Used the help of a real estate agent, appraiser, and purchased a home inspection. Except for this time, you are providing housing.
Tax Breaks for Rental Properties:
You can deduct the following expense…
- Mortgage interest payments on loans used to acquire or improve rental property
- Interest on credit cards for goods or services used in rental activity
- Depreciate a portion of the cost of the property over several years (27.5 years for residential property)
- The cost to repair the rental property
- Pass-through tax deduction
- Travel to check up on your rental or to provide/meet a maintenance person
- Home office (write off a portion of your primary residence that is used as a home office)
- Employees and independent contractors
- Legal and professional services
To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel and other write-off expenses that you deduct.
Owning Stock in a Company:
Most tax breaks are given to business owners.
By owning stock in a company, you get to pay capital gains tax (15%-20%) on any dividends you receive or on the profits when you sell your shares.
Moreover, should you need to liquidate your shares and happen to lose money from the sale of your stock, you can roll the losses forward to the next tax year. This means that you can offset your gains (up to $3,000), and roll any residual losses to be applied to the following year.
One of my favorite books is by Tom Wheelwright, who is the author of Tax-Free Wealth. In his book, he helps you learn tax planning concepts in simple to understand terms.
He teaches you how to use your country’s tax laws to your benefit. Tom Wheelwright tells you how the tax laws work, and how they are designed to reduce your taxes, not to increase them.
This guide has been written and is to be used as general information. This is not professional or financial advice that is specific to you. In other words, I am not A CPA or lawyer and the opinions/representations on this site are my own.
While I have a B.S. in International Business and an MBA with an Emphasis in Renewable Technology, I am not providing financial or legal advice that is specific to any one person.
The Take Away:
The government uses incentives to get the free-market (entrepreneurs and investors like you and me) to focus on projects that it wants them to invest in, build, and/or fund. When we do want the government wants, the government rewards us with tax breaks!
By learning the tax code you can make more money, or at the very least, reduce your tax liability.
Think about your financial IQ, your financial report card, and your financial freedom like it is a game. Once you shift your perspective, you will love learning about how to win the Financial Freedom Game of Life.
One of the keys to building massive wealth is by permanently lowering your taxes. Economic policymakers know that the public responds to tax incentives, which is why they have created them.
Taxes are apart of everyone’s life, and they are here to stay. Instead of complaining about them, use them to your benefit!
Treat the tax law as if it were a treasure map. As you follow the map, your taxes will go down. In turn, your profits and return on investment will increase.
The Financial Freedom Game of Life is exactly that… A Game, so use all of the tools you can to ensure that you have the best chances of winning.
By learning the rules you will start to enjoy the game and the treasure hunt. Especially when you start to see your wealth accumulate.
Be a Life-Long Learner:
Want to learn about how you can grow your retirement account by investing in commodities and skip paying the 28% capital gains tax legally? Read my prior article called, “Tax-Free Money: The Secret of Buying Gold Inside of a Roth IRA”
So how can you start saving money today?
Become minimalist, which will inherently help you save more money. This, in turn, will allow you to invest more. The zero-waste lifestyle has many health and budget benefits.
Eco Economics was created to help you learn more about personal finance while creating a more sustainable future.
Like what you see? Stay a while!
- How to Defer Taxes Forever with a 1031 Exchange
- Sustainable Investing: How to Diversify and Perform Well in Any Market
- Financial Planning: Why You Need Long Term Care
- Tax-Free Money: The Secret of Buying Gold Inside of a Roth IRA
Feedback is always welcome, so feel free to comment below!