Who Pays the Most In Taxes? image

Who Pays the Most In Taxes?

When it comes to taxes, start thinking like the rich

This blog was originally posted on June 4, 2013.

It's getting to be mid-March, and that means one thing: tax season. With April 15th just about a month away, this is a time where a lot of people begin to panic. Most people are hoping for a refund, but secretly everyone fears the opposite: that they'll owe hundreds or even thousands of dollars to the IRS.

For this reason, most people dread tax time-especially employees and the self-employed. Why? Because they know they have no control over what they'll pay in taxes. They just have to suck it up and take it.

But what if there was a better way? What if you could actually look forward to tax season? I do. And so can you. It starts with thinking and acting like the rich do.

Two points of view

To further illustrate these two points of view regarding taxes, I'll share a story.

Many years ago, a newspaper reporter asked me how much I'd made during the year prior. I replied, "I made about a million dollars."

"And how much did you pay in taxes?" he asked.

"Nothing," I said. "That money was made by selling three pieces of property, and I was able to defer paying those taxes by using a Section 1031 exchange. I never touched the money. I just reinvested it into larger pieces of property."

A few days later, the newspaper ran the story with the following headline: "Rich Man Makes $1 Million and Admits to Paying Nothing in Taxes."

While I did say something like that, it was clear that the reporter didn't understand what I'd told him, or he purposely distorted the message by leaving out a few key words.

Whatever the reason, it was a perfect example of different points of view coming from different parts of the CASHFLOW® Quadrant. He was thinking like an employee (E) on the left side of the quadrant, but I was talking like an investor (I) on the right side of the quadrant.

Rich Dad's CASHFLOW Quadrant®
Rich Dad's CASHFLOW Quadrant illustration Employee, Small Business Owner, Big Business Owner, Investor

The worst advice to give your children

Most parents want their kids to go to school, get good grades, and find a safe, secure job. In reality, that is some of the worst advice we can give our kids. Why? The answer is found in taxes and debt. For people who earn their income from the E and S quadrants, there are virtually no tax breaks. Thus, those on the left side of the CASHFLOW Quadrant pay the most in taxes, often while making the least.

While it seems like a good idea to get a good education and a high-paying job, the reality is that most people with high-paying jobs aren't rich. Why? Because they have no financial education and have no idea how money actually works-and can work for you.

At the end of the day, remember this one cardinal rule: Being rich isn't about how much money you make-it's about how much money you keep.

Tax-free wealth

The rich pay very little in income taxes because they don't earn their money as employees do. They know that the best way to legally avoid taxes is by generating passive income out of the right side of the CASHFLOW Quadrant-the business (B) and investing (I) side.

If you earn your income on the left side of the quadrant, the only tax break you have is to buy a bigger house and go into greater debt. But the rich have scores of tax breaks offered to them by the government to encourage investing and business development-which generates more jobs. The rich can make millions of dollars and pay virtually nothing in taxes.

Not all income is created equal

The point is this: not all income is created equal. Passive income, the kind of income generated on the right side of the quadrant is much better than earned income, the kind earned on the left side of the quadrant. Passive income is taxed less, and it's also a result of cash-flowing assets, not selling your time as an employee.

But here's the catch, not just anyone can start making passive income on the right side of the CASHFLOW Quadrant. It takes financial intelligence to start a successful business and to make great investments. The good news is that anyone can increase his or her financial intelligence through financial education.

If you want to make more money, keep more money, have more time, and pay less in taxes, the first step is knowing how money works and how to make it work for you.

To learn more about the tax strategies of the rich, I highly recommend the book Tax-Free Wealth by my tax advisor, Tom Wheelwright. Also, take some classes, attend seminars, find a good coach, and a great tax advisor. You won't regret it.

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