How is our income taxed by law? MASTER INVESTOR | FINANCIAL EDUCATION

The Myth of the Rich Doctor

Read the entire blog here: https://www.masterinvestor.education/pages/blog?p=how-our-income-is-taxed

But the reality is that many doctors are not rich. They struggle financially because being rich is about how much money you keep, not how much money you make. How our income is taxed?

We want to share with all the three types of income and the different ways those incomes are taxed.

For most people, they believe paying taxes is simply a part of living in a civilized society. And while that’s true, not everyone is taxed the same.

Below, we will explain how the three different types of income are taxed and why.

1. OrdinaryIncome

As we discussed earlier, ordinary earned income is money you make from your job such as wages, tips, and your salary.

In an attempt to make things even between the different tiers of society, the government has set up varying levels of how much people will pay in taxes.

Tax brackets, as they are called, tax people within each bracket at different percentages. For example, in the United States, if you make under $9,525 per year, your tax rate is 10% of your taxable income. If you make between $9,526 and $38,700 per year, your tax rate is 12%. There are varying tax brackets all the way up to individuals that make up to $500,000 per year, who are taxed at a high 37%.

2. PortfolioIncome

Portfolio income is made through capital gains.

Unlike ordinary earned income, portfolio income is a tax on how much money you made on the sale of your asset. The tax rate is determined by how long you held the investment and how much income you made during the tax year.

For instance, if anyone owned a rental property for more than a year and decided to sell it, the owner would be taxed anywhere from 0% to 20%. This would be called a long-term capital gains tax.

There are also short-term capital gains tax (taxes applied to profits from selling an asset you held for less than a year) and property sales tax which are governed by their own set of rules.

3. PassiveIncome

Passive income is money that comes in consistently from an asset.

One of the reasons we encouraged all to invest for passive income is because of the amazing tax benefits it provides.

Passive income is taxed at the lowest rate of the three types of income.

For example, if we own a rental property, we make passive income every month. Not only do we make money through rent, but the passive income we put in our pocket is taxed at a very low rate, if at all.

RETIRE YOUNG, RETIRE RICH

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Ultimately, any personal finance philosophy would be incomplete without discussing retirement.

THE RICH DON’T WORK FOR MONEY

This statement probably comes as no surprise based on what we’ve talked about so far, but it’s very important to understand that a secure retirement is one where money works for you via cash-flowing assets. There is nothing quite as comforting as knowing money will come in each month whether you are working or not.

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