Using the Tax Code To Create Abundance

  
              By Kalinda Rose Stevenson 

 

You know that old riddle.  "Which came first, the chicken or the egg?"  I have my own version of the riddle.  "Which comes first?  Taxes or expenses?"

 

Unlike the chicken or egg conundrum, this riddle has a clear answer.  And the answer is, "It depends on whether you are paying taxes as an individual or as a corporation."

We hear a lot of talk these days about the inherent unfairness of the tax system.  The claim is that "the rich" get tax breaks while middle and lower class taxpayers pay far more than their fair share. 

 

What gets lost in these comments is an even more fundamental imbalance in the tax system.   The tax system favors corporations vastly more than it favors individuals. 

 

The crucial difference between corporate taxes and personal taxes is the point at which taxes are calculated.   If you are taxed as an individual, your taxes come off the top of your income.   If you are taxed as a corporation, your taxes are calculated after expenses.

 

Consider how the taxation system works.  If you are an employee, you collect a paycheck.  Before you ever get your paycheck, there will be deductions.  Federal tax, FICA, maybe state tax, maybe medical insurance.  You will be left with your "take home pay."  Interesting concept, isn't it?  

What you "take home" will be less than what you earned. 

 

In other words, you get to use whatever is left over of your salary or wages after taxes.  Food, housing, clothing, transportation, medical, dental, recreation.  You need to pay for all of these expenses with your "after tax" money.

 

What happens if you set up a corporation?  You are the founder of a corporation and hire yourself as the employee of the corporation.  As the founder of the corporation, you are able to set up a health insurance plan with pretax dollars.  If there are insurance deductibles, you, as the founder, can write a resolution and put it in your corporate book.  Your generous corporation will cover all of the costs of medical care for its employees (that means you,) including deductibles, and any medical costs that most insurance policies will not cover.

 

Your corporation can provide generous pensions, annuities, life insurance policies, and other benefits to you as an employee.  It can even donate generously to nonprofit corporations, schools, and churches, if it chooses.  And after it has paid all of these expenses, and made all of these charitable donations, it can then calculate tax on the wee bit of profit left over.   Or maybe the corporation will not have any profit at all, and then it will not pay taxes at all.

 

I feel compelled to point out that it has not always been this way.   Corporate America used to pay a much higher portion of taxes than it pays now.   This is the real unfairness of the tax system.  The discrepancy between tax rules for corporations and tax rules for individuals means that the tax burden has shifted from corporations to individuals.

 

Why are "the rich" getting richer?   At the heart of the matter, "the rich" understand the tax system and know how to set up corporate entities to make the most of the favorable tax laws available. 

 

Setting up a corporation allows you to use your income to provide benefits you cannot afford with your after-tax dollars.  The corporate tax code allows you to create wealth in ways that you will never be able to accomplish as long as your taxes come off the top of your income.  In addition, corporate tax rates are lower than personal tax rates.  

 

If you have not set up a corporation, I encourage you to consider doing so.   People are afraid that incorporating means a lot of extra work and trouble. Yes, incorporating involves time, effort, and expense.   And keeping your corporate records up to date also takes time, effort, and expense.  You will also need to have increased knowledge of taxes and accounting.  The reward for this extra work and effort is that you will be able to use corporate tax rules for your own benefit, and the benefit of those you choose to support with your money. 

 

To answer my own riddle, "Which comes first?   Taxes or expenses?"   If you are paying taxes as an individual, the taxes come first.  If you are paying as a corporation, the expenses come first.  

 

This difference is enormous.  When you understand this distinction, you have one of the most powerful means to transform your economic life from struggle to abundance.  Knowing how to use the corporate tax code legally and ethically will allow you to create an abundant life far beyond anything you will be able to create with the personal tax code. 

 

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Kalinda Rose Stevenson, Ph.D. WARNING:  BEFORE YOU INVEST IN REAL ESTATE... FREE "No Money Limits Consumer Guide to Real Estate Investor Training."  http://www.nomoneylimits.com