It’s not what you make, it’s what you keep.
I stumbled upon this old adage many years ago. It’s a simple thing. But it’s always kept me focused on what’s truly important when it comes to money and investing—the bottom line.
This saying means that financial success isn’t just about how much money you earn. It’s about how much of it you are able to keep after taxes and other expenses.
If you want to build wealth over time, you must maximize your after-tax income. That’s the name of the game.
Fortunately, the U.S. tax code makes this easy to do. There are endless deductions we can take. That is, if we’re investing in the right assets and doing things the right way.
Deductions, also known as tax write-offs, reduce our taxable income. They enable us to lower our tax bill by subtracting eligible expenses from our total income. The more deductions we can qualify for, the less taxes we’ll owe.
For example, suppose you earn $100,000 this year. Given current tax rates, you’ll owe $17,400 in federal income taxes. Ignoring state and local taxes for simplicity, this gives you a net income of $82,600. That’s what you keep.
Now, let’s suppose you can qualify for $35,000 in tax write-offs.
You still made $100,000 this year. But those write-offs reduce your taxable income to $65,000. Given current tax rates, you’ll owe $7,068 in federal income taxes. This gives you a net income of $92,932. You keep $10,000 more in this example.
Of course, these are just hypothetical examples. And they are overly simplistic for demonstration purposes. But they do illustrate the power of smart tax planning. I think that’s critical in today’s economy.
And here’s the thing – this example is conservative. If we structure our investments correctly, it’s possible to eradicate our taxable income entirely.
In my new book Beyond the Nest Egg, I wrote about an investment that made $31,339 for me last year. But utilizing all the deductions available to me, we were able to write-off over $40,000 against that income.
As such, I didn’t have to pay any taxes on that money. And that’s simply using the U.S. tax code as it’s written. No exotic loopholes or tax avoidance schemes necessary.
If you’d like to learn more about how this all works in much greater detail, Beyond the Nest Egg is available on Amazon right here.
-Joe Withrow