The Basic Rule of Taxation: How to Save Money on Tax
You can make money in two ways:
Making money with money
Making money with muscle
Making money with money means investing money to earn capital gains. Making money with muscles means making money by working.
If you make money with your money, you get tax at a very low rate, which is normally 15 percent or even less on your dividends and capital gains. You don’t payroll tax.
If you make money with muscle or hard work, you get a tax that could be somewhere between 15 and 25 percent on your payroll.
The Basic Rule of Taxation
Between 2014 and 2018, Jeff Bezos's wealth grew by $99 billion, his reported income was $4.22 billion but he paid just 0.98 percent tax (of his reported income). Sundar Pichai, Google’s CEO, on the other hand, is reported to have said, “We are the biggest taxpayers, we pay 20 percent tax on average.”
In order to understand why people like Bezos pay fewer taxes, you need to understand three different kinds of income, earned income, capital gain, and passive income
Rich people pay tax on passive income, which has the lowest tax rate; however, normal people pay tax on earned income, which has the highest tax.
How to Stop Paying Tax
The basic rule of taxation is you pay tax on the money you make. If you receive a salary you pay tax, if you earn profits you pay tax, you don’t pay tax on your asset. Elon Musk's net worth is $300 billion but he pays taxes only for the money he earns through salary or stock dividends.
Therefore, in order to avoid paying a lot of taxes, try to build your assets. Imagine you buy $1000 worth of stock, you don’t pay taxes on your stocks until you sell your sticks and earn profits. Therefore, in order to avoid paying tax, start investing.
The rich people pay less than 15 percent tax because they are making money with money. However, middle-class people pay 15-25 percent tax because they are making money with muscles. The middle class is really hard by the taxation system because they pay tax on payroll.
Therefore, if you do not want your government to take your hard-earned money, start making money with money and stop making money with your muscle.
How to Save Money on Tax
If you are a professional, you must have already realized that tax eats a large portion of your income. If most of your income is earned income, that is you make money by working for other people and companies (earn money through payroll), you will be paying 15-25 percent tax. This is a huge sum you are paying to the government and this can really affect your lifestyle. Therefore, you need to try applying strategies to save money on taxes.
Rich people do not pay a lot of taxes. Do you know why? Because they know how to save money on taxes.
Here are some simple strategies rich people use to save money on tax.
Donate: When they donate money, they save tax. For example, when they donate $100,000 they save tax on another $100,000. This is the reason why rich people often donate to charity.
Buy Paintings: Rich people buy paintings for an insane price. After they buy paintings, they keep them on display in a gallery. Due to publicity, the price will increase further. Let’s say they bought a painting for $100,000, and then the price goes up to $200,000. Now, they donate the painting to a gallery. Since they have donated $200,000 (the price of the painting), they will save tax on their $200,000.
How to Save Taxes On Your Capital Gains
Whenever you sell your stocks, you will have to pay taxes. The money you make by selling your stocks is referred to as capital gains, when you make this money you pay capital gain tax, which can be long-term as well as short-term. There is one method that will help you reduce your taxes on capital gains, you can even avoid paying this tax legally. The term used for this purpose is called tax harvesting.
If you have stocks that are at loss, you can sell these stocks at loss intentionally and register the loss in your financial year. The loss you made by selling your poor-performing stocks will negate the gains you make by selling stocks at profit. You will then have no tax obligations, which means you will be paying zero taxes.
When you sell your stocks at loss, you can again buy these stocks with the money you made by selling these stocks. By doing this you will have the same number of stocks in your portfolio but the capital gains will be zero or less than the amount eligible for taxation.