DO TAXES FAVOR THE WEALTHY?
In this current political cycle we have heard a lot of discussion on the tax code being unfairly weighted to benefit the wealthy. The mantra of “Tax the Rich” and the belief that it will fix all of our countries economic woes, that it will fund all the programs that our politicians want to give us, in an attempt to buy our votes. It all sounds so great, but it begs the question do the rich really pay less in taxes?
Here is the reality, there are actually three different, primary tax codes. One is for W-2 employees, two is for business owners and the third is for investors. The tax code does not care how much money you make and it doesn’t have different rules for different incomes. It does have different rules for these three categories, regardless of how much you make. Lets take a look at them.
(This article in no way should be considered tax advice from me to you and I highly recommend you talk to a tax advisor to determine how this information can affect you directly.)
W-2 Employees Pays The Most Taxes, Because They Have Less Deductions!
The tax code is a simple concept, made unbelievable difficult by thousand upon thousands of pages of exceptions, deductions and rules.
The concept is you make “X” per hour, per week or per month, etc, you then deduct certain and specific items from your gross income. Your “adjusted gross income” is what you get taxed on.
Here is where W-2 employees LOSE BIG TIME with the tax code. You are allowed very few deductions from you gross income. This simply means that you pay your percentage of taxes on a high percentage of your total income. THAT REALLY SUCKS!! This is the same no matter how much you make as a W-2 employee and as you can see the more you make the higher your percentage and total taxes you pay.
This break down of the tax rate you will pay based on your adjusted gross income is correct for the 2012 tax code..
|Tax rate||Single filers||Married filing
jointly or qualifying
|10%||Up to $8,700||Up to $17,400||Up to $8,700||Up to $12,400|
|15%||$8,701 – $35,550||$17,401 – $70,700||$8,701 – $35,350||$12,401 – $47,350|
|25%||$35,351 – $85,650||$70,701 – $142,700||$35,351 – $71,350||$47,351 – $122,300|
|28%||$85,651 – $178,650||$142,701 – $217,450||$71,351 – $108,725||$122,301 – $198,050|
|33%||$178,651 – $388,350||$217,451 – $388,350||$108,726 – $194,175||$198,051 – $388,350|
|35%||$388,351 or more||$388,351 or more||$194,175 or more||$388,351 or more|
Business Owner Pay Less In Taxes and Keep More Of Their Money
First let me make this very clear business owners pay the exact same percentage rates on their adjusted gross income as W-2 employees do, but here is the HUGELY IMPORTANT DIFFERENCE. Business owner get to deduct many more things from their gross income the W-2 employees do. This means as a business owner, with the additional tax deductions, you will pay taxes on a smaller amount of adjusted gross income than a W-2 employee who makes the exact same amount of “Gross Income” as you do.
Many of the deductions that you can take are on expenses that the W-2 employee also have, but they are not able to deduct. Watch the video below for some examples of this.
The reason our government gives these incentives for people to have businesses is because small business employee a majority of our countries population. The tax code doesn’t care if you are rich or poor it just cares HOW YOU MAKE MONEY.
Investment Income Has The Lowest Taxes
This is income that is earned through investments. This income is actually taxed at a lower percentage rate, it is also the income talked about in the much discussed “Buffet Rule”. Some consider this tax a second bite at the apple because the money invested was already taxed when the money was made. Others disagree, because only the profit on the investment is taxed.
The bottom line is this type income pays the least amount of taxes, but it is difficult to ever keep enough money as a W-2 employee to acquire enough investments to take advantage of this benefit. The trick is to take advantage of the tax benefits and extra income potential of having a part time home based business to make enough money to start investing.
In this video I interview and enrolled agent with the IRS and small business tax specialist. We discuss the tax code for employees and small business owners.
There are several deductions that we did not have a chance to talk about, but are very important. Including deducting your medical insurance and paying your kids for working in your business tax free. To take advantage of these types of deduction you need have three things.
#1 You need a good small business accountant. I highly recommend Kim Rossenbach with Computek Financial Services. She can be reached at (602)493-7947 or on her website www.computekfinancial.com
#2 You need a good way to track legitimate business expenses. Keeping good records is extremely important so I recommend and use a program called TAXBOT. You can find out more about this program at http://www.taxbot.com.
#3 You need a business with an intent to make a profit. There are a lot of options on how to do this, but if you would like to find out about the business I recommend filling out the form on the bottom of this blog for immediate access to information on my company.
Make it a great day,
PS I promised you a free gift, so here it is. Best selling author of the “Rich Dad, Poor Dad” series, Robert Kiyosaki, has recently wrote another book called “The Business of the 21st Century”. In this book he covers the best industry for starting a business. I will mail you the audio cd of this program when you fill out the form below.
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