Taxes and Types of Income

NOTE: the following is not to be construed as tax advice but is meant
as general educational information. Take any ideas that apply to you and
run them by your tax attorney or accountant before making any major
moves in life that could affect your taxes.

This is a very important matter because of the basic concept 'it's not
how much you earn but how much you keep that counts'.

This is a very real point and part of any wealth or income system setup
would benefit from reviewing this factor.

One can become wealthy without ever generating a huge taxable
income. This is important to know and will save you a lot of time
and energy over the rest of your life.

These are some common forms of income and how they are affected
by taxes (one of the biggest expenses most people have):

Earned job income is taxed at full rates depending on your
marginal tax bracket. This is the most 'expensive' income, tax-wise,
along with investment income.

Income from a self-employed business or partnership is normally
what is called 'flow-through' income, which means it ends up dollar for
dollar being added to your earned income. The advantage of such income
is that all business related expenses can be deducted from it BEFORE tax
is paid (a bigger factor than you might at first imagine).

This cannot be done as an employee, however if you are an employee
AND have a home business, the business expenses can be used to create
deductions from your earned job income (and even your car and home).

This factor alone makes a home business a good investment for someone
that is already working a job.

Capital gains are those amounts of income that are acquired from
the sale of assets that have appreciated. Only 50% of this income is taxed.

This means that if you sell an income property (usually a year or more after
purchase), stocks or shares, coins, art or any other investment type asset
and make a profit, you are legally obligated to pay tax on the profit (sale
price minus puchase price).

However, you are taxed on only 50% of that capital gain profit, thus making
this a more cost-effective type of income to have. In general terms, all other
factors being equal, you would pay the same amount of income tax on a
$50,000 capital gain as you would on $25,000 of regular earned taxable income.

Certainly something to think about when choosing careers.

Note: you can have a $1 million appreciation in a stock or real estate portfolio
without any tax consequence as long as you do not sell those shares or properties.
How and when to sell to minimize taxes is the main point.

You have control over when you might sell some shares and claim a capital gain.
Such a sale could be done for example to conincide with a capital loss from another
investment or stock that you are selling off at a loss.

Similarly a capital loss on unloading a bad real estate investment could help to legally
cancel out (tax-wise) a great capital gain on a winning real estate sale. This gives
some idea of when to sell investment real estate and when not to. Timing is important,
and an important part of investment is to have a tax pro on your side to advise you.

One other important note here is that when investing in real estate, you can maximize
use of the principal residence benefit. You can have considerable (U.S.) or even unlimited
(Canada) appreciation on your own home and when you sell it you will not pay any tax
on it. Owning a home and maximizing its value is one of the smartest and easiest ways
to building wealth.

So real estate investment for example gives careful consideration to when and what
to sell in terms of income properties or principal residence. Income properties are
taxed for capital gains upon their sale, but even this can be deferred in terms of a
taxable event if you do it right. More on that later.

Dividends are payments made to you when you own shares of a company,
usually a larger and more stable one that makes these types of payment on a
regular basis. Dividends are taxed at a lower rate than regular earned income,
the exact cacluation varying depending on whether it is a foreign dividend or
what type of company is paying it.

One big advantage of dividends is that in some cases, if they are your only source
of income, you can receive up to the $40,000 range in dividends before paying any
taxes.

Knowledge of types of income is important to the amount of your income you will
be able to keep in your life. Knowledge is Power and the better you know this, the
better you can plan to keep more of the future income you will be generating.

You can generate huge amounts of wealth (through equity increase) without ever
earning huge amounts of taxable income, especially in real estate and long term
share appreciation. It's a long term build.

The more you know, the more you can do. You will see a lot more about this here
in the forum.