10 Sep Taxes are High… But Real Estate Investing Boosts Income
Many of you might not know this, but I was reared in a blue-collar home down in Texas. My parents were amazing and I’ll always appreciate the love and training they gave me. My dad worked really hard for us—he worked harder than anyone I knew! And he was able to provide a decent living for my family.
Because he worked as a pipe fitter, he either worked on building or repairing oil and chemical refineries. I can still remember some of our dinner table conversations like it was yesterday.
I remember one time specifically, where my dad told my mom that by September of that year, he would no longer have to pay Social Security Tax. In September, he would have hit the limit of income that could be taxed for Social Security. He proudly handed my Mother his check so she could see the check stub that had his total income and taxes withdrawn for the year. That year, limit on income for Social Security Tax was $68,000.
Being a curious teenager, I asked to see the check and was flabbergasted to see that he was paying nearly half of his income in payroll taxes, union dues and health insurance! I was just a kid back then, but even then that seemed like a lot to me.
But here’s the thing: In 2013, the average American was paying 59.7% of their income in taxes. That means if you make $1,000 per week in earned income, you only actually receive about $400 dollars a week to actually control yourself. Ouch!
Here’s a list of some taxes that we pay:
- Capital Gains Tax
- Corporate Income Tax
- Federal Income Tax
- Federal Unemployment Tax (FUTA)
- Gasoline Tax
- Inheritance Tax Interest expense (tax on the money)
- Inventory tax IRS Interest Charges (tax on top of tax)
- IRS Penalties (tax on top of tax)
- Local Income Tax
- Marriage License Tax
- Medicare Tax
- Property Tax
- Service Charge Taxes
- Social Security Tax
- Sales Taxes
- Road Toll Booth Taxes
- School Tax
- State Income Tax
- State Unemployment Tax (SUTA)
- Telephone federal universal service fee tax
- Telephone recurring and non-recurring charges tax
- Utility Taxes
- Vehicle License Registration Tax
Okay, so that seems like a lot. But thankfully, there are a lot of ways in which real estate investing can supercharge your income! This is because through real estate investing you can convert your earned income,which is taxed the highest, into passive income or capital gains income! The type of income that you make matters when it comes to taxes.
- Passive Income: Rents from real estate are considered passive income and are taxed at a much lower rate than earned income (which you make from a job). Real estate investing income in the form of rents put approximately 30% more income in your pocket than income from your job. And guess what. No social security tax has to be paid on passive income!
- Capital Gains Income: This income is made from selling real estate for a profit after you have owned it for 12 months or more. (Please note that when you sell real estate as an investor that you have owned less than 12 months it counts as earned income and is taxed at the higher rates.)
Both of these income streams are taxed so much lower than your regular job. Of course there are other ways to boost your income through real estate investing, such as depreciation, interest and other costs, the 1031 Exchange (no Capital Gains taxes!), and Cash-Out Refinance (No taxes!).
Real estate investing is my favorite way to build wealth. And if you do it right, operating in wisdom, then you can actually get to a point where you replace your earned income entirely! We call that financial independence.
What inspires you to reach financial independence?
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