Tax time is almost here, so let's lay it all out there....
Taxes usually cause stress and evoke some-not-so-nice feelings. It's a labyrinth, right? But let's simplify it. That's what we do at Lincoln; simplify.
First off, understand how taxes work. And considering the code is tens of thousands of pages in length, that's not easy to do.
It's shocking how many people, even tax practitioners, are clueless.
And there's a big difference between preparers and advisors.
The former prep your return after the fact; the latter minimize your liability contemporaneously.
But to simplify, there are three types of taxes. Yes, just three.
First, we have active income. The absolute worst kind.
Because it's subject to ordinary rates plus social security.
In fact, it accounts for over 88% of all taxes collected annually in the U.S. That, by the way, is a massive number.
Yeah, it's that bad. Even if you make next to nothing, you're still getting hit with SS tax.
Then comes portfolio income. This includes royalties, interest, dividends, and capital gains.
The cool thing? No social security tax. You heard that right.
And dividends and long-term capital gains? They're taxed at zero, 15, or 20%.
So if you're smart enough to accumulate a portfolio, you might not pay tax on your dividends at all. Or maybe just 15% if you're making a few hundred grand a year.
If you're making millions, it's taxed at 20%.
And then there's the third type, passive income.
You know, that sweet deal where money just flows into your pocket while you're chilling on the beach? Or so they say.
Let's break it down:
Rental Properties: You buy a house, people pay you rent. Simple. But the fun part? You can deduct your mortgage interest, property tax, and repair costs from your taxes.
Stock Dividends: You get a slice of a company's profits. But here's the kicker: If you play your cards right, you could be taxed at the capital gains rate, which is usually lower than your income tax rate.
Savings Account Interest: It's like finding change in your couch, only better. You earn interest and it's taxed like regular income.
And the golden rule to minimize taxes? Focus on long-term capital gains.
It's the secret sauce that could get you taxed at 0%, 15%, or 20% depending on your income.
So, are you ready to join the passive income club and beat the taxman at his own game?
Get started, with Lincoln.
P.S. And remember, it's not what you make, it's what you keep.