In one of my earlier posts, The Book That Changed Everything, I mentioned a book that changed how I think, which fueled me with what I needed to chase after investment properties. In this article, I am going to go over the four different tax brackets that are mentioned in detail in the book Rich Dad Poor Dad.
The Overview
The four different tax brackets that are broken up in the book are employee, business owner, self-employed, and investor. Each one pays different amounts in taxes. If this is your first time hearing about this, it is surprising to think about the amount of taxes each category pays in taxes.
Most people are employees who work every day building someone else’s dream and who hope to one day be able to retire with an IRA, or some kind of pension. This is most people in America. The employee pays approximately 40% of their wages in taxes.
Business owner is really for big business. This person has a dream and goes for it, they probably want to build a legacy for their family or not have to rely on someone else to take care of their family. They can leverage other people’s time for money. This group of people only pay 20% of taxes.
Self-employed people are the boss and the employee. They have the freedom to work when they want and take off when they want. An example is a massage therapist or someone who makes their own hours. This group of people pays approximately 60% in taxes.
The last group is the Investor. These people can leverage debt and abide by the tax codes to make their income. The investor pays 0% in taxes.
Employees and self-employed trade their time for money. The business owner trades other people’s time for money, and the investor trades debt for money.
Real Life Example
Here is something to think about…imagine if you are an employee making $100,000 a year according to this bracket, you are only taking home $60,000 a year. The self-employed have it even worse. If they are making $100,000, they are only taking home $40,000. Over half of the population doesn’t even make $100,000 a year. The Business owner and the investor are able to make their money and reinvest it in other assets.
Most people know about State Taxes and Federal Taxes because these are taken out of our pay. Remember the money we are taxed on is also taxed when we go to the grocery store or make purchases. Not to mention there is a death tax, inheritance tax, vehicle registration taxes, property taxes, and the list goes on. Then there is Medicare and Medicaid. It’s also interesting we are paying into social security, which they have been talking about for years that it will become obsolete soon. All of this money we have paid, we will never get back as an employee or self-employed.
When someone decides to start a business, purchases for the business can be written off, and there are tax deductions. Company vehicles, when placed under the company can be depreciated, and properties under the business can be depreciated. There are a lot of opportunities for business owners. You should consult a CPA who helps investors if you have questions.
What makes the investors so unique is they have the skill of leveraging debt. How do they do it? Let’s say for example I see a 17-door apartment building for sale. I decided to buy it and I placed the property under my LLC. I am going to get a 30-year loan. I may use a private money lender for the down payment or I could use my money, but why would I use my money if someone else is willing to give me their money? Before buying the apartment, I am going to want to make sure I can add value to it and the numbers allow me to make a profit. Maybe I can upgrade the rooms by modernizing them and improving the outward appearance to add value to the property, and once updated, I’ll increase the rent.
Once I’m done in 3-5 years, I am going to do a cash-out refinance, pay off my private lender, pay myself a portion, and reinvest the rest. The money that I refinanced cannot be taxed because I am paying myself with debt. Debt cannot be taxed. This is an example of how the investors pay 0% tax.
DISCLAIMER: I am not providing financial or legal advice. Investing when not done properly is risky and only should be done with the proper education and guidance along the way.
