Tax deep dive
TLDR: Taxes are complicated, there are many subtle rules that could save you money. So use a tax filing app like TurboTax. Please. You can also look into ways to avoid taxes through legal means (aka loopholes).
Let’s see how income is affected by taxes before we start thinking about how to make money. In particular: How much are taxes, and does non-work income (say, stocks) get taxed at the same rate?
https://www.youtube.com/watch?v=Z2r_apNMTeM
Gross income - Total income that you made before any taxes or deductions • Wages, dividends, capital gains, everything • There is some income that isn’t taxed, but the chance that any of these categories apply to you is very very low (except for maybe workers’ compensation benefits)
Now come a few ways to “remove” money from being considered in taxes:
Adjusted gross income (AGI) - Gross income minus a few specific adjustments • Applies to specific groups: Self-employed, teachers, qualified artists • Not really anything that applies to us, so AGI ~ Gross income
Deductions - Two types: Standard deduction OR itemized deduction (choose 1!) • Standard deduction - Flat deduction amount, was $13,850 in 2023, should choose this if itemized deduction is low • Itemized deduction - Manually get deduction amount based on large deductible items like mortgage payments, donations, and health bills)
Taxable income - The amount of money that can be taxed by the IRS • This equals Adjusted gross income - Deductions
Tax credits - Things that lower your actual taxes due • Retirement savings contribution credit, child tax credit • EITC (Earned Income Tax Credit) that does actually apply to you if your income is below $20,000 - You’d get about $1,500 in tax credits
Taxes due - Calculated using federal tax brackets, pro-rated (to avoid issues with going to a new tax bracket) • If working, federal payroll taxes (Social security and medicare) apply • The tax brackets range from 10% (<$10,000) to 37% (>$540,000). So in general, the more you earn, the slower your actual earnings increase, but the average tax is about 20%.
The above is just federal taxes. Now let’s look at California state taxes…
General income tax in California • California’s taxes are based on the Federal Adjusted Gross Income (AGI from above). • Tax brackets range from 1% (<$9,000) to 12.3% (>$590,000). The average tax is about 6%. • The standard deduction (amount that is not subject to taxes) is $4,601. • Sales tax of ~9% exists, but only applies when you buy things like food and clothing (not including houses, insurance, some groceries!, education), and is charged at the time of purchase.
Net income - Take home pay, what you actually get after taxes and deductions
Taxes are due generally on April 15th.
Income is withheld by employees for taxes. Sometimes you can get these taxes refunded by filing a tax return, even if you don’t technicaly need to file (due to being below the income threshold).
Ok. Now we’re going to take a look at various ways to lower the amount of taxes that we need to pay.
How to (Legally) Never Pay Taxes Again
3 types of income • Earned income - Income from jobs • Passive income - Income from things you aren’t directly involved in • Portfolio income - Income from investments
Capital gains tax rates (income for dividends) that last long term have a significantly lower tax rate (0% for anything under $80,000)
Ways to lower tax: • Invest your earnings and slowly take them out at the special capital gains tax rate (0% if under $40,000) • Put earnings into special retirement accounts, and slowly take them out when needed • Find a way to mark your income as foreign earned income (has $120,000 exclusion) • Buy properties, like homes, as a way to store your
General article about tax (https://thehill.com/policy/finance/3785840-why-democrats-released-trumps-tax-returns/): Wealthy people use many tax maneuvers to avoid paying tax, from using bank loans backed by stock portfolios to obtain cash to combining trusts with annuities to keep money away from the government over the course of generations. Other common patterns include hundreds of partnership interests, highly-questionable deductions, and debts that can be shifted around to wipe out tax liabilities.
These are somewhat in-depth financial strategies, and one good idea might be to talk to a qualified tax manager to see how to exploit these legal loopholes.
But of course, it starts with actually making money…
Last updated: 27 December 2022