Maximize Wealth Using The 5 Tax Environments (Correctly)

Using the right tax environments at the right time can have a dramatic effect on your success. The personal tax environment, this is Uncle Sam's favorite. You've heard of 401k accounts, IRA and even annuities. Well, all of those are part of the tax deferred environment, but you're going to pay the piper later.

As a sole proprietor of your business, you get a tax referred to as the self-employment tax. It's equal to 15.3%. Distributions are not subject to the self-employment tax. Saving taxes like that, it's like having another job, except you don't have to work for it.

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Hi everyone, welcome to another edition of We're Talking Money. I'm your host, Phil Clark, and today we're talking taxes. Now, before you click away, trust me, this is information that you need. Did you have any idea that knowing the right environments to use as it relates to taxes can greatly affect your ability to grow wealth? Stay tuned. You're going to be making some changes as soon as we finish this video. Let's get into it.

I'll kick things off with the simplest of the environments. It's the personal tax environment. This is where most of us start our tax journey. It covers shelter, food, clothing. Those are the normal things that almost everyone needs, and those come through the personal tax environment. Now, this is the least efficient of those environments, and that's because everything here is an after-tax expense. Without action, all of your income is going to flow to the personal tax environment. This is Uncle Sam's favorite of the environments.

Next, let's talk about the tax deferred environment. This one is all about delaying your tax bill. You've heard of 401k accounts, IRAs and even annuities. Well, all of those are part of the tax deferred environment. Basically, you contribute money before tax, except for the annuity, those are after-tax dollars. Once the money is in these accounts, it grows tax-free, but you'll pay tax on these monies when you begin to withdraw. That's normally around retirement. Think of it as giving yourself a tax break now, but you're going to pay the piper later. If you have retirement accounts or annuities, a good rule of thumb is Uncle Sam happens to be A3 % partner on all of these accounts.

Now let's talk about the tax advantaged environment. For most people, this would include things like home mortgage interest, charitable contributions and residential property taxes. These things, when they exceed your standard deduction, can be very useful on your tax return. They can lower your taxes by a significant amount.

Next is the Holy Grail of tax environments: tax-free. Yes, you heard that right, tax-free. These are investments or accounts that you don't pay taxes on, ever. Think about municipal investments, 529 college savings plans, health savings accounts, and probably the most popular of them all is the Roth IRA or the Roth 401k. You put your money in after tax, it grows without tax, and when you start withdrawing, it's all yours, baby, all yours. Even when you leave it to heirs, there is no tax. So no matter where you fall on the financial scale, get into this environment.

Finally, the last of our environments, it's the corporate environment. Now, this one's not for everyone, but if you're self-employed or a 1099 contractor, keep listening. As a sole proprietor of your business, which many people are, you get a tax referred to as the self-employment tax. It's equal to 15.3% of your earnings. That is a pretty big tax as for Social Security and Medicare. On the other hand, you could set up an LLC, have it taxed as an S corporation, pay yourself a reasonable salary and take the rest of your profits as a distribution. Distributions are not subject to the self-employment tax.

Let's consider this example. Suppose you made $250,000 of profit in your business. Now, the self-employment tax for Medicare and Social Security would cost about $ 38,2 1550. On the other hand, if you set up an LLC taxed as an S corporation and paid yourself a reasonable salary, say $100,000, that means the rest of your profit, in this case $150,000, would be paid as a distribution. And that means no Medicare and Social Security tax, no self-employment tax. That means a savings of more than $22,000. Saving taxes like that, it's like having another job, except you don't have to work for it.

Being self-employed absolutely delivers a lot of freedom, but it also comes with a lot of blind spots. Our job is to help you illuminate those so you can save taxes like I just shared in the example.

So there you have it, our five tax environments, and you can see each plays an important role in your financial journey. The more you understand these environments, the better decisions you can make, and that means keeping more of your hard-earned money in your pocket. That's how you grow wealth.

If you found this video helpful, please give us a thumbs up, and don't forget to subscribe to our channel for more financial insights that are designed to help you make better financial decisions. Now go out there and save some taxes and grow your wealth, and I'll see you next time on We're Talking Money.