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Balance Sheet Bars pt 2 "What's Free?"

Meek Mill Ft Rick Ross and Jay Z - What Free

“My Account so good i'm practically living tax free”

Sean Carter Jay Z is not a businessman he's a Business MAN! As one of the most prolific rappers of all time Jay has continually paired his braggadocious bars as a compliment to his business acumen. With a net worth over a billion dollars, who can argue that Jigga is not only a master of the booth but the boardroom as well. In this song featuring Meek Mill and Rick Ross he playfully alludes that with the assistance of his accountant he barely pays any taxes. But how is this possible? As a billionaire Jay Z is in the highest tax bracket and must surely pay a king's ransom in taxes on an annual basis. So then how could he be barely paying anything in taxes. Like Jeff Bezos, Mitt Romney and even Warren Buffet, wealthy individuals have learned to take advantage of the tax code of not just America but international countries to reduce their overall tax burden. In today's edition of balance sheet bars were gonna talk about taxes, brackets, and deductions.’’

First thing, what are taxes? The dictionary defines them as a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. Basically the government puts a surcharge on its citizens for everything from soda to stocks and uses the funds to pay for public services and infrastructure. In America how much money you make determines your tax bracket. There are seven federal tax brackets for the 2022 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status. At the top if as a single person you're making just $523,601 or more then apporx 37% or 193k at min of your income goes to the government. Ouch!

Let's face facts: taxes in America are built for people who own real estate, have their own business and have families. The idea is that if you own a business and you're paying employees not only are you spurring the economy but you're also providing innovation in your market. If you own real estate you're a part of community building and if you’re married then you’re apart of generation building. All of these things are critical for a society to survive and thrive so if you're taking part then you can get a discount vs those who don't contribute. Basically If you're a single high earning renter you’re getting screwed. The government calls these discounts deductions. Depending on what you qualify for you can deduct or write off certain expenses against your income. With a lower income level you would be placed in a lower tax bracket and therefore subject to pay less tax.

On every tax level there are write offs that you can claim. Typically the higher the tax bracket the more creative the ways people go about writing things off. Some of the most popular deductions come from things like retirement accounts. Each year the government will allow you to write off up to six thousand dollars (7K if you're over 50) if you put that money in a retirement savings vehicle like a traditional IRA (not a roth ira though) or 401k. As I mentioned before, owning real estate, a business or having a family qualify you for additional deductions as well. In Real estate property owners can deduct the costs of owning, maintaining, and operating a property. Similarly in business to be a deductible expense, the expense must be “ordinary and necessary” per the IRS. What are some of the things people have written off that are considered ordinary and necessary? Health Insurance, Startup cost, education and training, if you have a home office there are additional deductions. Even travel and entertainment are some expenses that can be written off against your overall income in order to reduce your tax liability.

At the top of the world the billionaires who run the most profitable business and control the world's raw materials don’t look for tax deductions. They look for ways to eliminate their tax liability completely. Some do it by taking out tax free loans against their stock holdings. Since there are no taxes on taking a loan they take a loan at a low interest rate against the assets they own. (Sometimes even growing in a tax deferred account) Then use those funds to purchase more assets at a higher investment return than the cheaper interest loan they borrowed against. Some go about moving their business to an offshore tax haven. Smaller countries that don’t necessarily have goods to export lure tourist tax dollars to their countries by offering attractive tax rates and often privacy on their accounts from outside scrutiny. As they say when there’s a will(sometimes an actual Will and testament) there’s a way.

When a wealthy individual gets hit with a tax bill they can either pay that money to the IRS or donate it to charity. What most have figured out however is that the regulation behind what qualifies as a charity and what work they’re obligated to do is basically non-existent. I’m not saying all charities are for the purpose of tax funneling, but imagine they let you give the money you’re supposed to owe to the government to an organization that you could control instead. You hire the people who can be children or friends. You control the expenses whatever perks and fringe benefits those may be. Maybe you’ll do some good for humanity as well but what qualifies as good is also up for debate.

I’ll leave you with this. Warren buffet as a billionaire collects a salary of zero dollars and doesn’t own a jet. As the CEO of the portfolio company Berkshire Hathaway which owns a percentage of a charter jet company (NetJets) he automatically gets elite status which is sweet enough but additionally since he just holds the stock long term that subjects him to the long term capital gains of only 15% and peep this because he's collecting a zero dollar salary he’s technically considered to be in the lowest income tax bracket.

Remember I may be a financial advisor but I’m not your financial advisor. Nothing in this blog post should be considered financial advice. If you have any questions or would just like to discuss how to improve your financial wellness please feel free to contact me.

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