The specifics may be based on US IRS tax codes, but the principles are true in most countries. Research yours to find out how the tax codes apply to you and how you can get the most out of them.
As with retirement accounts, the government loves to tell you what to do with your money and will give you incentives to do what it wants you to do. When it comes to income, the government wants you to invest in opportunities that help boost the economy and create more jobs.
Because more jobs means more consuming and more tax dollars.
I am going to use Robert Kiyosaki’s Cash Flow Quadrant as a basis, since we just discussed this a few days ago.
Most people fall into the category of Employee. As an employee you have almost no tax incentives. Yes, your employer pays half to all of your payroll taxes, health, and dental, and you can contribute up to a certain amount tax-deferred for your retirement, but that is about it. There are a few tax deductions for very specific job-related expenses your employer does not reimburse you for, but not much else. You only get paid for the hours you work and your employer will demand a much greater sense of loyalty from you than you will ever receive in return.
Some people will decide to do their own thing and be self employed or sole proprietors. In this category you have some more tax incentives, including the ability to write off most business-related expenses, but you also have to pay more in taxes (remember those payroll taxes and insurance premiums we mentioned in the Employee section?). And, unless you have an evergreen course as part of your revenue stream, you are still basically trading your time for money.
The next step is to become a business owner. You may do this by starting from scratch with a brand new business, by purchasing a franchise, or maybe you find your solo gig has grown to the point where you have to hire. The IRS loves business owners. They get a better tax rate and can write off almost everything. Others can do the work that takes time but may not directly make you money, leaving you to do the things you like best and create even more revenue streams. Depending on how big you get you may find yourself with a board and shareholders to answer to, but even a small business owner can take advantage of some great tax incentives and funding opportunities.
Last we have Kiyosaki’s epitome, the Investor. He would have you use your business assets to invest, which sounds great because you are not risking your personal assets. If your investment(s) do not work out, the business takes the hit- and the tax write off. But, with great power comes great responsibility. Now your decisions will affect not only you but all of your employees. So if that bad investment makes your company insolvent, your employees will also pay the price.
Fortunately, there are other ways to be an investor. You can use your personal funds to create a business to hold your investment portfolio. Or you can just use your personal funds to invest. If you hold the investment for at least one year the IRS gives you a better tax rate on the gain. And if you lose you get to reduce your revenue by the total loss.
If you invest in real estate you can write off many of your purchases for your rentals and you can deduct depreciation on the building (the percentage of the original value the IRS determines based on the useful life). Ideally, you will be setting the depreciation aside in its own account for the day when you have to make a capital improvement (roof, furnace, windows, etc).
If you are super smart and purchase a multi-family and live in one unit, you can take advantage of better mortgage rates and have your tenants pay your mortgage, insurance, and maintenance expense. You can then purchase a second multi-family and do the same thing- live in one unit and rent the others. You can purchase stocks, precious metals, cryptocurrency, or any number of other investment tools that may give you passive income and increase in value. And, when you decide to sell you may be able to take advantage of that favorable capital gains tax rate that is less than your individual tax rate.
Here is the best part: You do not have to choose just one! You can be involved in as many as you like.