Are any of you barbeque lovers or meat lovers?
Cause, uh, uh, the episode I'm gonna go over today is about some different
categories of things and I just started to think about meat and barbeque and
like different qualities and different levels of it.
So I went, and when I was in my early 20's I lived in
Argentina. I went and did a church mission and I served this mission down
in Argentina. I was there for two years.
And one of the things that Argentina is known for,
it's known for a lot of things. It's an amazing country.
But one of the things that it's known for is amazing beef. you know,
if you know beef, if you're a meat lover, you know that you can't,
you don't just go pick up any type of meat.
Like if you go to the grocery store, you don't just pick up like
any type of meat off the, off the rack of meat.
Like, it's gotta be a certain type of cut and age.
And especially the cut, the cut is huge.
But it's also like the area that it's from,
like meat and beef from Argentina is really good beef.
Like I, I experienced it in just some amazing ways.
They slow cook it. It's just really good beef.
It's up there like with Japan, the Wagyu beef,
but it's grass fed. They've just got some,
and I was in this specific area where they grew most,
where they had most of the beef. Just these vast,
just farmlands, grasslands,
just perfect for, for having the cattle and the weather is just amazing.
Uhm,
but in the same way that there's different levels of beef,
different quality of beef. I, I am not, like,
I'm a meat lover and I cook a lot of beef and of course
I hunt. And so I'm very interested in the types of cuts and things,
but I, I'm not, like, super scientific with it or like,
I don't know all the exact names. I know there's prime and there's choice
and there's select and the different grades.
There's different of beef. Uhm,
but in the same way there's different grades of beef,
there's different types or different grades of income that I'm going to talk about
in today's episode. Like all income is not equal and
all income is not taxed equal. So one of the main things we will
learn to talk about is the type of tax that goes along
with different types of income. Because really in the end what we care about
is how much we're keeping, right? How much wealth we're creating,
how much after tax dollars we can keep.
And there are some huge differences I'm going to explain today,
like, some huge differences in how some of this income is taxed.
And it might impact some of the decisions you're making on how you're earning
your income, how you're saving your income, how you're investing your income and your
cash. So we'll go over some of these options.
There's, there's more, well, I I'm going to cover four today.
There's probably more. And there's some that are like,
I'm not going to go into all the like crazy details and cover like
a hundred different types of income. There are, I'm going to bulk them or
just kind of bunch them together in four different main categories.
So the first one, I'm going to start the first,
I'm going to save the best for last, but the first is the worst
one. And by worst,
and when I'm, um, what I'm talking about today is, is the way that
it's taxed. That that's how I'm grading it.
So we're starting at the worst, and this is earned wage income.
So earned wage income,
so you pay, you're really paying two main types of tax on it.
You're paying your ordinary income tax rates,
and you're paying your payroll taxes on top of that.
And this depends, this is the income, this falls in those typical tax brackets,
and we're not even going to get into tax brackets today,
but these tax brackets, they start at 10 or 12 percent,
they can go up to 37 percent. These are the ordinary tax rates,
and depending on how much you earn, and how much all your collective income
is, this earned wage income,
you're paying the ordinary tax rate. And then,
then you add your payroll taxes on top of that,
which is like seven and a half percent on top of the ordinary rates.
So it's crazy. Like, you can have, you can have some income that's taxed,
and then if you had state on top of that, you can have some
income that's taxed at over 50 percent, depending on your income level.
So that's, that's pretty earned income.
Earned wage income is the worst because you pay ordinary rates plus you're paying
wage rates. Okay. Then we've got ordinary income.
So ordinary income, these are the ordinary tax rates.
So between 12 and 37 percent.
So it's like wage income. Earned income, but you just take off the paral
tax portion. So ordinary tax rates, this is like business income.
This is business income that comes from the,
or like businesses that you own, you're getting a K one,
you're paying these ordinary tax rates on that if it's positive taxable income.
And it's not, if it's not Fs, I'm offset with other deductions.
And then you've got like interest income in here as well.
Just regular interest income that the bank pays you or non
qualified dividends are lumped in here as well.
These are higher tax rates, short term capital gains.
Like it sounds like Oh, a capital gain. That's great,
right? It's not short term gains.
If you hold it for less than a year are taxed in this ordinary
bucket. So, so far we have, remember the wage income that you earned?
Ordinary income is the second worst. And then this third one is
capital gain income. And this is where we start getting into some tax brackets
or some. It is brackets,
but it's a different type of tax bracket. And they're, they're in these lower
rates. So, uh,
capital gain tax brackets, like they do start a couple episodes ago.
We did an episode on just capital gains specifically,
but long-term, these are long-term capital gains.
So you, you've owned them more than a year,
but these rates, they start at 0% actually.
So if you're, if you fall in the right tax brackets and it's about,
if it's like a hundred thousand dollars. A hundred thousand dollars of total income.
And that includes, that'd be like wage income,
other income, plus your capital gains. But capital gains,
if with your capital gains, you're less than about,
it's about a hundred. So actually about 120,000 that you can earn if you're
less than that. The capital gains can be tax-free on the federal side.
So if you had zero, like all your income was zero except capital gains,
you could earn $120,000 completely tax-free.
And that that's the long-term capital gain that would be tax-free.
But say you earn. $60,000 of wage income.
So you have W2 wages of 60,000,
and then you had a $60,000 long-term capital gain.
That additional 60,000 is tax-free as well.
So it falls under that 0% capital gain threshold.
And that's. The technical, the technical part of it is when you're in the
10 and 12% federal tax brackets for ordinary rates,
your capital gains are in that 0% rate.
It's a really weird, just the tax laws are just weird in general,
but that's, that's how it works for that. Uh,
so long-term capital gains when you earn more.
So I'm going with that 120 threshold. So when you get above the 120,000,
when it's with capital gains, then you start paying a 15% rate.
And then when you get, when you're married, if you file a joint return,
you're above 400,000, then you're paying a 20% capital gains rate.
But remember these, like a 15% rate is likely less than
the ordinary income tax rate you're paying.
Even when you get over 400,000, a 20% rate isn't that bad compared to
like the 30, 32% ordinary rate that you're paying.
I know I'm getting into some of the details,
but so, so far we've got wage income.
You're paying ordinary rates plus payroll rates and you've got ordinary just,
uh, yeah, not wage income, but ordinary income.
You're just paying those ordinary tax bracket rates.
We've talked about tax brackets in the past and it's.
And we talk about capital gain income,
which is tax in a different tier. It's a little less.
And what I'm trying to get out here and I want you to be
aware of this because are there ways as part of the strategic,
like strategic tax planning. Um,
when we're meeting with people just in a lot of. of education,
a lot of what we're doing is trying to help people figure out ways
how they can change their facts and circumstance to start moving their income the
way they earn their income to move it down this list,
move it, move it away from the earned wage income,
which. That isn't bad. Like, that's not bad.
There's just not as many opportunities and that's the highest tax rate.
So now this fourth one is tax-free income.
So for moving along,
our ultimate goal is tax-free income.
How could we have tax-free income?
That's what I'm trying to get at here. Like that, that's how you can
multiply your net worth. That's how your investments can grow.
If they're growing tax-free, your rate of return is just so much better than
if you're just getting dragged down by taxes. So this tax-free income,
it's kind of- I'm going to be- I'll tell you some ways.
Like, some of it is tax-free cash flow.
You know, I'm going to use it interchangeably for this.
Like, have you got really technical input on your- your nerdy glasses and say,
well, technically, that's, uh, not category.
You need to this as income and you could be right but we're just
talking about you live off of cash,
right? So if we want to live off of like whatever we need to
live off of, which is cash, how can we get that tax-free?
So those are some ideas I'm going to give you. So one of these
a couple years ago is really popular with,
People refinancing houses, a lot of it could be personal houses,
could be investment houses or like rental houses,
when rates were really low, people were getting cash out refinances.
And if you needed to live off of that, you can't fund your life
forever off of debt, of course. There's got to be some income,
like, some generation there, but getting cash out from a loan is
tax-free. So it's not income,
but it's cash flow. That is tax-free. So just be aware of that as
an opportunity if you've got, So one example of why you might want to
do that, is say you had a r- really high-income area,
you sold the business or sold something, you're w2's high,
and you're like, I need to pull money out of my retirement plan for
some reason. And, cause you needed like,
you have an immediate cash need. Like,
it might make sense to just delay that six months or just delay to
the next tax year. Get some tax-free cash out of a loan,
and delay it to the next tax year, then pull the money out of
your retirement account, and pay tax in that tax year,
cause your rates could be lower. So they're just kind of the timing,
some of the timing of when you pull money out,
you can use some of those tax-free, like,
draws on loan. So another type of tax-free income is,
remember, in that capital gain tax bracket,
I told you, if you make less than 120,000,
it's tax-free, or there is some planning, if you've got big losses in a
year, or if you didn't have a lot of income in a year,
if you've got qualified dividends, qualified dividends can be taxed.
Tax-free, if you're in those tax brackets, long-term capital gains can be tax-free,
and then even just kind of along those lines, uh,
municipal bonds, types of municipal bonds can be tax-free,
like, like with the IRS,
and there's, there's types of investments that can be tax-free to the state.
Um,
let's see, what other, well, another tax-free investment is if you have,
if you have an investment, like real estate,
which is a common topic, if you have an investment that has a lot
of like capital involved with it, like buildings.
Real estate, there's a depreciation expense.
So you could have an investment say like in,
in real estate, whether it's your own investment that you're managing or something else
that you're, you're invested in, you could be getting distributions from that investment,
like actual cash distributions coming from. But it's not taxable because there's
depreciation offsetting the income that you get back from.
So one of the greatest benefits of real estate are the tax benefits.
And that's one of them is the cash flow that you're getting from the
investment can be offset, can be offset with that.
This depreciation. And then, of course,
tax or another type of tax for you. And actually,
some of these get really in depth and I'm just gonna mention a couple
of them. Um, like if you do 10,
10, 31 exchange, that's a tax free way to sell a property
and get into another property.
And if you keep doing that until you die,
your heirs can inherit it tax free. And at that point,
it's completely tax free income to your heirs.
Uh, they could sell the property completely tax free.
Uh, there, there's ways it's called qualified small business stock.
If you invest in a certain type of business or you create a certain
type of business, the C corporation typically, uh,
and you keep it for at least five years, there's a 10 million dollar
gain exclusion. So a lot of you are a business,
if you're a business owner or you're looking to invest in businesses or start
a business, that's, that's an option to look at is starting a specific time.
If you want to sell it after five years,
you could do a tax-free sale. Like it's an insane amount of money that
you could save from a sale like that. So if it's, it's a lot,
but if it was a 10 million, if you max it out and there's
a 10 million dollar sale, you'd be saving about $% 25,
or 2.5 million dollars in taxes on the sale and you would just walk
away with 10 million dollars of cash completely tax-free.
It's amazing. So there's just think of ways.
So here's, I'm going to do a quick summary and then we'll end here,
but, uhm, so remember.
You've got wage income is the worst because you're getting taxed twice in two
ways. You've got ordinary income, you've got capital gain income,
you've got tax-free income. And I didn't cover everything.
There's a lot more. I've got the in the wealth game basics and wealth
game.io. I have the eight step.
Like that, the framework, the tax strategy framework,
which is eight steps. And I walk through a lot of these.
And I've got links to podcast episodes and tools and templates and things.
But that's the way that I think of it as if I'm personally planning
with somebody. Uh, but just think of ways it's.
. . Usually, there's usually steps you need to take.
There's things to implement. There's structures to set up.
And it might, this might be a bit of a heavy load or a
big, big lift initially to get it done.
But after that point, the opportunities for tax savings and wealth creation are just
so much greater. So that's all.
