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Infographic: Why Two People Earning the Same Pay Very Different Taxes
The Financial System Is Rigged – Here’s How to Join the Top 1%
What I’m about to show you might make you think the financial system is broken – it’s actually working exactly how it was designed to: helping the 1%.
I’ll show you how to stop being a victim of the system and start joining the people who own it.
Same Income, Very Different Taxes
Picture two people doing their taxes. Both made $300,000 last year.
Jane is a surgeon who’s gone through fifteen years of school and works sixty-hour weeks saving lives. Dave is a guy who owns a stock portfolio, whose most stressful Tuesday involves choosing a new podcast.
Jane owes about $90,000 in federal taxes, while Dave owes around $40,000 on that same income. Dave keeps an extra 50 grand just because of how that money was earned.
And here’s the thing: Dave isn’t smarter than the surgeon. He’s just playing by a different set of rules – rules that are completely legal and publicly known, but almost entirely ignored by the majority of Americans.
I passed the CFP® exam at 16 and have helped millions improve their finances. One thing I’ve learned is that high earners who build wealth deliberately structure their income around assets – like stocks, real estate, and businesses – instead of salaries.
The IRS treats those two types of income very differently, and wealthy people know how to benefit from this.
When your money comes from a paycheck, it gets hit with federal income tax plus an extra 7.65% taken for Social Security and Medicare.
But when your money comes from assets you’ve owned for more than a year, what the IRS calls long-term capital gains, payroll tax disappears completely. Most people just pay 15% capital gains tax, and some don’t pay any tax at all.
Back to Jane and Dave. Jane’s $300,000 in wages gets taxed at high ordinary income rates with payroll tax on top.
Dave’s $300,000 in investment proceeds gets taxed at a 15% capital gains rate with no payroll tax, and that’s exactly where the $50,000 gap comes from.
Most people who earn a salary see the taxes come out automatically and assume that’s just how it works. And honestly, for most of your early career, it kind of is. But you can change that.
Every dollar you invest into index funds, or maybe even a rental property, is a dollar that will eventually be taxed at much lower rates than your paycheck.
Even investing $100 a month is setting yourself up to pay taxes like the rich – and that’s ignoring the huge upside of your investment growing exponentially over time.
This works better if you’re wealthy, but the next strategy is designed for regular people.
The Big Break That’s Designed for Regular People
When you sell your primary home, you can exclude up to $250,000 in gains if you’re single, or $500,000 if you’re married.
There are no income limits, and the only requirement is that you must have lived there for at least 2 of the last 5 years. And this is not a once in a lifetime offer: you can use it any number of times.
Most people own a home for twenty years, sell it, and find out about this at the sale instead of planning around it intentionally.
If you’re thinking of moving and your home has appreciated a lot, run the numbers before assuming staying is the better choice.
The tax-free gain might make moving – whether you’re upsizing, downsizing, or just relocating – a better deal than it looks on the surface.
The next one might be a little morbid, but it’s one of the most powerful provisions in the entire US tax code.
Why Rich Families Hold Their Best Assets Until They Die
Wealthy people borrow against their appreciated assets instead of selling them. A loan isn’t taxable income, so they don’t pay any tax. But they still get the cash they need, and their assets keep growing.
While studying for the CFP® exam, I discovered this: after they pass away, something remarkable happens thanks to something in our tax code called step-up in basis.
Let me explain. When you inherit an appreciated asset, the IRS resets its cost basis to whatever it’s worth on the date of death.
Say your grandfather bought stock for $10,000 and it’s worth $2 million when you inherit it. If you sell the next day, you’d owe no capital gains tax: that $1.99 million in profit just disappears from the tax calculation.
Most people sell appreciated investments when they need money, pay the capital gains tax, and never think about what that same asset might have meant to their kids.
But if you have a taxable brokerage account with investments that have grown a lot since you bought them, think carefully before selling.
If you’re already retired, talk to a financial planner about what to sell first, since drawing from cash or bonds first while leaving appreciated stock to your kids can significantly reduce the total tax burden.
As you can see, the rich are playing an entirely different financial game than you and me. The good news: their strategies aren’t a secret.
Check this out to find out the 3 proven money rules they use to build real wealth: Money Management Secrets: 3 Proven Personal Finance Tips to Build Wealth