Pillar I: Tax Optimization

Pillar I: Tax Optimization (38% of the marginal median American gross income)

Many people believe they fall into a set, fixed, infallible, unmovable tax bracket based on their income level. While that is what the masses are cooed into believing, that could not be further from the truth or at least not the conclusion of the matter. The reality is that companies like GE and people like Donald Trump actually get tax credits rather than making tax payments. It is not because they are acting illegally. This is because they take advantage of many of the thousands of legal tax credits, write-offs, subsidies, and exemptions that exist in the 73,954 pages (according to Business Insider)  of the IRS tax code.

Your tax rate starts with your gross (total) income then deducts customary and obvious deduction to arrive at your Modified Adjusted Gross Income (MAGI) and that value determines your tax bracket. This can be calculated in minutes for 98% of Americans and has the highest return for the time invested. That is where the average tax advisor stops and collects their fee and moves on the next tax client. After all, they have to do 90% of their work in a few short months of the year before the tax filing deadline.

The average tax advisor has read a fraction of the IRS tax code. The average person reads a page in 2 minutes (according to ExecuRead) so I would take you a mere 2,465 hours to master the tax code with perfect memory and retention (73,954 pages *2min/60min/hour.) Sounds daunting, doesn’t it? I hear you. Lucky for us people have gone before us and put together consolidate resources to help us focus on the most commonly applicable and advantageous portion and rules of the tax code. Such as the MadFientist and Tax-Free Wealth.

With these resources, it is much more achievable to drop from the 22% marginal federal tax bracket to the 12% bracket for example. That’s 10% of your income just in federal savings, did you get that much in your raise last year? Your specific tax situation will vary but that is a lot of loot to keep on your side of the ledger and thus, it earns its spot as the first pillar of FI. Consider that if you land in the 22% federal bracket (annual income over $38,701 single, $77,401 Married or $51,801 Head of Household in 2019) there is also 6.2% Social Security tax, 1.45% Medicare tax and for example, let’s choose a state tax of 6% and local tax of 2%. That totals 37.65% tax…ouch.

Thinking critically, with 73,954 pages of tax code don’t you think you could find a dozen tax credits, write-offs, subsidies, and exemptions that apply to your specific scenario that you could take advantage of? If you are silly enough to say “No,” let’s pretend for a second that you work for Elon Musk in some strange Martian location outside the US, earning foreign “Mars Bars” income that was not taxable in US dollars and you have aliens babies that do not qualify for the child tax credit. Then you cannot take advantage of any of the tax reductions… You still have savings rate and tax-advantaged accounts to max out, such as the 401k, IRA, 403b, 457, self-employed retirement plans, etc. You still have lots of option to reduce your MAGI on your path to Financial Independence so you can save up for Martian University for all those little aliens of yours.

You have a choice, give your hard earned dollars over to government or learn a little about tax law and evoke your rights within the tax law to simply keep your hard-earned dollars as soldiers on a mission to earn you more money for your future wealth through investing. All you have to do is listen to a podcast or read a book or a blog to save, most likely, a double-digit percentage of your income for yourself.