TAXES

Your Biggest Expense? Taxes!

by Bill Cook February 3, 2010

Far too many Americans fail to realize that taxes are their biggest expense. In addition, many Americans fail to do adequate, heck, any tax planning.

For example, did you know that two married couples can each earn $70,000 in a given year but, because of how the money was earned, one couple only gets to keep $55,000 while the other couple gets to keep almost the entire $70,000?

Youíre probably thinking that this isnít fair. Brother, fair has got nothing to do with taxes! Remember: The government uses the tax code as more than a revenue-raising device. It also uses it as a mechanism to encourage or to discourage economic and social behavior. This is why the tax code is so complicated and why tax planning is so critical.

How complicated is the tax code? When Doug Shulman, the IRS Commissioner, was interviewed on C-Spanís Newsmakers program, he said, I donít file my own taxes because the tax code is so complex.Ě If the head of the IRS uses a tax preparer, shouldnít you?

For a better understanding, letís look at the two couples mentioned above. Notice that HOW they earn their money plays a HUGE role in determining the amount of taxes they pay.

Our first couple owns a small business and earns a combined salary of $70,000 a year. Their self-employment taxes, combined with their income taxes, total $16,165. This means the government (including deductions) lets them keep $55,035 of the $70,000 they earned.

Our second couple also earns $70,000 per year. One big difference: They are real estate investors whose income is generated from rental property. Because of this, the government gives them GIGANTIC tax breaks! For example, they get to depreciate their properties, plus they donít pay self-employment tax on rental income. Also, because rental income is considered investment income, not earned income, the tax rate is much lower!

All told, of the $70,000 they make, their total tax bill is only $13.00. Yep, thirteen whole U.S. dollars. In other words, they get to keep $69,987 of the $70,000 they earned-about $15,000 MORE than the first couple.

Why does the government encourage folks to own rental property? Simple answer. If the government didnít give tax breaks to investors, do you think investors would continue to own rental property and experience the joys (and expenses) of property management?

If investors sold their rental properties, where would tenants live? Government housing?

If you think keeping more of your familyís paycheck is a good idea, make the commitment to learn about real estate investing and owning rental property.

But, I donít have the time, you say. A friend of mine, Travis Prather, recently shared some of his dadís wisdom: Your living is made between 9 AM and 5 PM. Your fortune is made from 5 PM to 10 PM. Thereís time to learn if you really want to!† Bill and Kim Cook live in Adairsville, Georgia and have been successfully investing in real estate since 1995. Theyíve been writing their weekly real estate investing newspaper column since 2003. Reprinted by Permission. †Copyright © 2004-2014 BiggerPockets Inc. All Rights Reserved.