Tax-Free Wealth summary

Did you use to earn pocket money as a kid? Maybe you got money from your parents for shoveling snow, or cleaning the windows. Chances are, you didn’t really care where the money came from – you were just happy to have it and spend it.

Well, you’re not a kid anymore, and you’re probably looking to earn a lot more than pocket change. There are different ways you can get money, and they are not taxed equally.

There are four types of earners: employees working for a salary, the self-employed, big business owners, and investors. It’s these last two – businesses and investors – that are taxed at the lowest rate.

Think about it. What does the government want? More jobs are good for the economy. New jobs are created by businesses and entrepreneurs, so the government rewards these people by lowering their taxes.

What else does the government want? Affordable housing. Once again, governments offer huge tax breaks to real estate investors, because they want to encourage that sort of behavior.

You may be thinking, That’s great, but what if you’re on the employee or self-employed side of the spectrum? It’s simple: if you want to get the tax benefits, you’re going to have to shift your income into one of the other areas. It’s not as hard as it seems – thousands of people all over the world take courses in business or investment and change the way they earn.

Now let’s look at the different ways you can receive income. Think of your income as if it were filling up one of five buckets – each with a different amount of holes through which money can be lost to tax.

The first bucket is earned income. This one has the most holes in it – you're going to lose a lot of money to income and employment taxes. Try to stay away from this bucket.

Let’s call the next one your ordinary income bucket. This is income you might be getting from your pension or retirement plan, or whatever income won’t fit into the other buckets. This still receives the highest income tax, but it doesn’t get the employment tax like the first bucket.

The next bucket is for investment income – things like capital gains, interest, and dividends. This income is taxed at a much lower rate, and in some cases, not at all!

The fourth bucket is for gifts or inheritance. In most countries, the tax is paid on the side of the person giving the money, so nothing is lost when it lands in your bucket.

Finally, you have the passive income bucket. This is money that you receive from a business or investment which isn’t managed by you personally. This is taxed at a regular rate, but there are many ways to reduce this amount.

That brings us to the topic of the next section – how to patch the holes in those buckets using a miraculous little thing called deductions.