Stop Robbing Yourself: How to Learn the Tax Game the Rich Play
Greetings, my astute pupils!
Today, we're going to talk about a topic that often evokes groans and glazed-over eyes, but trust me, this is important! We’re going to learn about taxes – not just how to pay them, but how to play the game the rich play.
Now, some of you might be thinking, "Taxes? Boring! Can't we talk about something more exciting, like how to get rich quick?" Believe me, understanding taxes is one of the biggest secrets to building lasting wealth. "The reason the middle class is so heavily taxed is because of the Robin Hood ideal." The truth is, the rich don’t just sit there and get fleeced by the taxman – they use their financial intelligence to minimize their tax burden legally. And you can, too!
The Robin Hood Myth
Let’s take a trip down history lane. "In England and America originally, there were no taxes." They were levied temporarily to pay for wars, and everyone was asked to "chip in." Then, in 1874, England made income tax a permanent fixture. "In 1913, an income tax became permanent in the United States with the adoption of the 16th Amendment to the Constitution." The idea was sold to the masses by painting it as a way to punish the rich. But here’s the catch: "Although it was intended to punish the rich, in reality it wound up punishing the very people who voted for it, the poor and middle class." "Once government got a taste of money, the appetite grew."
The Power of Corporations
So, how did the rich escape this tax trap? They used their knowledge of corporations. "The rich already knew about corporations, which became popular in the days of sailing ships." "The rich created the corporation as a vehicle to limit their risk to the assets of each voyage." Think of early sea voyages – wealthy investors would pool their money to fund expeditions. If the ship sank, they only lost their investment, not their entire fortune.
But the corporation is more than just a risk-management tool. It's a powerful legal structure that offers significant tax advantages. "The income-tax rate of the corporation was less than the individual income-tax rates. In addition, as described earlier, certain expenses could be paid with pre-tax dollars within the corporation." This isn't about cheating the system, it’s about playing by a different set of rules, rules that are available to everyone, but that most people don’t know about because they haven’t been taught.
The Rich Don't Work for Money, They Own the Corporation
See, when you work for a corporation, you trade your time for a paycheck, and the government takes a big bite out of your earnings before you even see them. "The harder you work, the more you pay the government." But when you own a corporation, your money works for you, and you can use the legal structure of the corporation to minimize your tax burden. "Your dad and I are exactly opposite. He's a government bureaucrat, and I am a capitalist. We get paid, and our success is measured on opposite behaviors. He gets paid to spend money and hire people. The more he spends and the more people he hires, the larger his organization becomes. In the government, the larger his organization, the more he is respected. On the other hand, within my organization, the fewer people I hire and the less money I spend, the more I am respected by my investors."
Think of it this way: “Job is an acronym for 'Just Over Broke.'” The average American works five to six months for the government each year just to cover their taxes. "In my opinion, that is a long time." But the rich understand that “Why not own the ladder?” They use corporations to protect their assets and keep more of their hard-earned money.
Knowledge is Power: Understanding the Rules
Now, I’m not suggesting you all go out and incorporate your lemonade stand tomorrow. But the lesson here is that financial intelligence includes understanding the tax code and how to use it legally to your advantage. It’s not about being a "lazy thief," as some might say about those who minimize their taxes. It's about being smart and using the same rules that the wealthy use to build and protect your wealth.
It's like this: "If you know you're right, you're not afraid of fighting back." The rich understand this principle, and they use their knowledge of the law to fight back against excessive taxation.
- "The Tax Code of the United States also allows other ways to save on taxes. Most of these vehicles are available to anyone, but it is the rich who usually look for them because they are minding their own business."
Real-World Examples: Leveraging the Tax Code
Here’s a concrete example. "For example, “1031” is jargon for Section 1031 of the Internal Revenue Code, which allows a seller to delay paying taxes on a piece of real estate; that is sold for a capital gain through an exchange for a more expensive piece of real estate." You buy a property, it appreciates in value, you sell it for a profit, and instead of paying taxes on that gain, you use the money to buy a more expensive property, deferring those taxes. "People who do not take advantage of these tax savings offered legally are missing a great opportunity to build their asset columns."
Take Action: Don't Be a Victim
The bottom line is this: "The investor should use his intelligence not only in formulating his financial policies but also in the associated details." That includes understanding how taxes work and how you can use the tax code to your advantage. You don't need to be a tax expert, but you do need to be financially literate enough to understand the basics and to know when to seek professional help.
I always tell my students: “Be smart and you won't be pushed around as much.” That applies to every aspect of your financial life, including taxes. Don't be a victim. Learn the rules of the game and start playing it smart!
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