How Do Taxes Work?
“You should diversify your tax income streams because having multiple means you could control it.”
– Eric Elam (11:39-11:48)
How do taxes work in America? Let’s break it down simply. Taxes might not seem like
an exciting subject, but most people don’t know how taxes work. Financial advisors are
most guilty of this. It’s about time for the facts on different investing you can do.
We’ll learn about savings, various tax brackets, and all that cool stuff. In this week’s
episode, Angela Sticca Synder talks about Tax Brackets & Income Buckets, together
with her special guest, Eric Elam.
Part One of ‘How Taxes Work’
There’s a thing called a progressive tax system. When you break into the next tax
bracket, if you go $5 over, that means only five of your dollars are tapped at that next
tax bracket. That’s why there’s also an effective tax. When it comes to savings, there
are ways the IRS allows us to save money.
You may refer to these savings as buckets. The first bucket that will enable us to save is
called the taxable bucket. It just takes it straight out of your checks now. They allow you
to put it somewhere. And when you put it somewhere, any growth you get on it, it’s
taxable.
Then you invest in stocks, mutual funds, bond brokerage accounts, or any market
investments that aren’t tax-protected. You get multiple 1099s. It sounds like a tax
document. It’s like a love note from the financial institution. They’re sending you the best
greetings for making money. You know that someone else is investing with you when
you are in this bucket. Financial advisors all disagree about a lot of different things, but
one thing they could all agree on is the correct amount to keep in this taxable bucket.
But at the same time, you can have little in this bucket.
“In order to be truly tax free, you have to be free from federal tax,
state tax and capital gains tax.” – Eric Elam(12:08-12:13)
The tax-deferred bucket is the most well-known bucket in the American populace right
now. If you have a job, a traditional job, or you’re with the government or school system
you’re used to a 401k. If you’re the owner of a company, highly compensated and
making a lot of money, it might be something to look at. At least in place of a 401k.
Those are some great things that are out there.
Now, all of these accounts have very different IRS tax codes, but they have three areas
in which they overlap. First, when you put money into these accounts, you get a
deduction. It’s a deduction, so you don’t have to pay the income tax on the amount
you’re putting in.
Let’s count your IRA, 401k, whatever it is. You’re then able to pay taxes on $90,000. So,
it reduces the reportable income. Work with your tax professional when putting away
money. You want to make sure that you stay on that straight and narrow path.
You’re going to want to pay attention to that. It’s going to be relevant to how you save
money in these buckets. The IRS has a particular word for the money you take out of
these accounts. It’s treated as ordinary income because you originally earned it working.
You didn’t pay income tax on it.
Now, you are going to pay income tax on it. You’re still receiving that money as income
just at a later date. What this means is that you enter a business partnership. The
problem with this business partnership is the fact that someone can vote every year on
the percentage of your business profits he gets to keep.
Unless you accurately predict your future taxes, you don’t know how much money you
have. You’ve saved 1 million bucks, with 30% taxes you’ve only got 700,000. If taxes go
up higher, you have less available to you.
The last thing all of these accounts overlap on is that eventually, you will be taxed. That
means you have a little bit longer before you have to pull money out of your taxable
investments. Do you think taxes will be higher for you in the future or lower for you in
the future? Now, if we did know the day taxes were going to be higher, would that be an
essential thing to remember?
Part Two of ‘How Taxes Work’
It would be best if you diversified your investments through tax-free and tax-deferred,
including your tax income streams. As things change, it may be more beneficial to have
one than the other. Having multiple means you have control. There are two rules you
have to pass to be a tax reinvestment in a qualified fitness bucket.
The first thing is that you must be tax-free. This is confusing to a lot of people cause
that’s the name of the bucket. But in order to be truly tax-free, you have to be free from
federal tax, state tax, and capital gains tax. Something that pretends to be tax-free is a
municipal bond.
We’re often told on TV, these are significant tax-free investments, and they are always
free from federal tax. But are they always free from state debt? No, they’re not. It
depends on the scenario; that’s why you need to work with somebody who understands
taxes.
“There are ways to be able to shift the money between buckets
and minimize that tax bill over your lifetime.” – Eric Elam (18:20-18:25)
How many people do you know that don’t know a thing about social security? For one, it
is taxable if you have other income on your tax return. It’s imperative to come up with a
great plan at the end of your life. Have money in different buckets. If you have a lot of
tax-free money, you can pull that money out, and it doesn’t affect the taxability of your
social security.
If you properly distribute your money among the three buckets, you can pay zero tax on
your social security, and that can mean hundreds of thousands of dollars to you in retirement not having to pay that tax bill. So, money coming out of this bucket, it cannot affect your provisional income. Make sure you understand what’s truly tax-free. The only other thing that even qualifies under the IRS guidelines for tax-free is life insurance. Still, it only makes sense in certain situations to also consider that as an option.
For the three buckets, we have the taxable bucket, the tax-deferred bucket, and the tax-
free bucket. Think about where your money is currently. Regardless of where it is, there
might be an optimal way to shift your money into the correct buckets to take advantage
of a tax sale.
Many people are talking about the seed and the harvest. Would you rather pay if taxes
never change? If taxes stay precisely the same, it doesn’t matter. If taxes are identical,
you put it in either. Your tax bill will be similar to the amount you have.
However, if tax has changed 1% up or down, one bucket is better than the other. If taxes go up 1%, then you’re better off being in the tax-free bucket. If taxes go down 1%
for you personally or for the country, it makes sense for you to be in the tax-deferred
bucket. You should be working with somebody who can help you understand what that’s
going to be.
How to Get Involved
Every investment firm has principles and a mission statement, and they usually sound
exactly the same. CalChoice Financial is different in almost every way, understanding
different isn’t always better but being better is very different. Their principles were
deliberately created with you in mind. At CalChoice Financial, they utilize relevant and
modern solutions to create personalized plans for our clients which are as unique as they
are. http://www.calchoicefinancial.com/
Taxanista is a leading certified public accountant who offers reliable, professional tax
and accounting services. She is a consummate strategist. She loves listening,
analyzing, and developing strategic plans. Do you have more significant issues?
Taxanista can help you fight off the IRS. Angela knows how unsettling some of your
struggles may be; that’s why she offers private consultations for your business and tax
matters. Increase your profit by knowing your numbers. Reach out to her now.
https://www.taxanista.com/
