According to CNBC and Statista, 57% of Americans didn’t pay federal income tax in 2021.
Initially, you may be thinking that number sounds inaccurate given the lack of business acumen and financial logic Americans have; however when you evaluate the breakdown of the variety of income sources available today, the immense opportunities out there in this heated tight labor market, the increasing number of millionaires, self-employment tick, and slow yet steady financial literacy education adoption, this number isn’t as high as it really should be in 2022.
Let’s see how high it’ll jump in my lifetime. For better or for worse.
There’s no secret to this number although majority of Americans still rely on their W2 income to support themselves. Not only that, they only rely on mainly 1 or 2 sources with no real financial buffer on the side.
As W2 income rises, so does your tax liability so the only reason why this number is increasing is due to several key trends the economy has pushed over the past few years:
-Embrace the American Dream: Own some sort of business (rental, podcast, influencer, writer, e-commerce owner, etc.) — profitable or not and depreciate it as it appreciates
-Immense federal and monetary stimulus pumped into economy to save businesses and give Americans extra cash
-Rely on passive income- investments, rental, or business income
-Earning when one is still too young and or old to qualify for marginal tax rate
-Out of the workforce entirely — thankfully unemployment has dropped to all-time lows in a record time since 2020 peak
-Retired or as many are now following: unretirement
Save Yourself
No matter how wealthy you may be, you might have discovered that it’s never too early to start pondering all the ways in which you can get a tax deduction.
From donating goods to giving away a portion of your lump sum before tax, there’s always a way to reduce your tax liability legally and fairly.
When we say, more money, more problems, we mean it. I’m sure you’ve felt the burden of owning more in some capacity whether it be from a large liability to tenant mishap, there’s no shortage of problems the more you manage, equally an asset or liability.
Although not having to penny crunch is a relief, managing an enormous inheritance, lump sum, equity-based compensation, insurance settlement, or unexpected gift aren’t always wonderful as they sound since there’s more trouble and headache dealing with them than without.
But considering both sides, having to deal with more than struggle with less is certainly a more favorable problem to have if you had to choose.
I guess it’s part of the game and well worth it in the ned. You must sacrifice something in return and presumably need to deal with some sort of pain and trouble along the way to get to this very point. Don’t blame anyone then!
Or possibly you were born into a dynasty and got lucky with a fortune. It may seem rosy on the outside, but inside, remember, there’s always turmoil brewing. Look at the Disney, Koch, or the Royal family as examples.
Being able to witness and go on the journey of self-discovery to see what you are capable of is one of the most thrilling parts of life. Eventually, we would all be miserable if we already knew our limits and given everything. Be grateful you are able to discover more about yourself and use that lump sum that can be divided in thousands of ways to feed, support, and serve others who only need a fraction of what you have to thrive.
Stepping Stone
As tax hikes are looming, corporate profits are flattening, and the step-up-basis for inheritance is in talks to be eliminated, many households are already contemplating how they can minimize their hefty tax liability on gains for next year. And no, a wash sale or tax-loss harvesting aren’t always going to cut it.
Since it’s never too early to start planning for tax season for the following year, understanding the breakdown of key metrics is essential.
Evaluate:
-Moves/changes within your portfolio — any selling or rebalancing plans coming up?
-The amount of individual/household income and its marginal tax rate for each
-Lifestyle inflation habits need to break?
-What you + your loved ones really need to stay comfortable while also being strategic as hard-working Americans about how much you are giving back to Uncle Sam while the top .0001% keep virtually everything
-5+ additional income sources?
-Expectation of some sort of ‘economic hurricane’ in the near future
Splitting up your assets accordingly earlier than later is ideal to make sure you have a steady buffer in case you need to rely on your investments and emergency fund for the foreseeable future.
For your mental sanity and future financial health, you are better off letting those earnings vest, split the inheritance to report less income, and investment grow for as long as it can, especially if more than 10% of your capital is invested in 1 asset can be risky.
Donations for All
We will never truly know others’ motives for donating funds to charity or to a DAF (donor-advised fund). I hope it is mainly for a good cause even in this capitalistic society. The best gift is giving after all and no feeling of winning the lottery can replace it.
If you work hard, hopefully, you will have a kind enough heart to share it with those that didn’t get the chance to sit in the seat you were once in. After all, there’s no point in earning so much if you don’t know how to allocate it efficiently in the end! That would be a waste of your sweat and tears.
What tends to happen is when we see someone else benefit from something, others will follow, especially those with a lower net worth to catch up initially. A DAF is in line with this strategy that can pay off handsomely.
Compared to keeping a record of all your rental’s expenses and its receipts to send to your accountant for tax day next year, there’s only one reason a landlord does this: to deduct expenses off the property’s value as real estate is one of the few assets one can depreciate as it appreciates.
Compared to donating to charity, everyone’s reasons for donating are not so clear yet deductions are a leading incentive for many.
Since over 50%+ of Americans report not paying any federal income tax and that number increases each year, I presume donations to charities and DAFs rise steadily as well. At least we know both parties benefit, just like in a transaction nearing the concept of economies of scale — increasing production (output — donations), to lower one’s cost later on.
What A DAF Entails and Why It Can Work For You
Those reading aren’t typical Americans. You have taken the initiative to strengthen your financial knowledge and want your money to work for you not against you. You want to give back to Uncle Sam but know there are others that can give away millions without feeling the punch. There are far too many Americans who work incredibly hard trying to make ends meet that pay more in taxes than those in the top decile.
The tax system is known to be backward and donations are a key resource for those who are looking to lower their bill each year.
A donor-advised fund (DAF) is a charitable investment account that is a tax-advantageous way to donate to charities of your choice by contributing your assets, i.e. stocks, bonds, and cash.
The fair market value (FMV) of the assets donated are then tax-deductible, with no deadline or timeline for the assets to mature.
Unlike donating used goods or a check to charity or a non-profit, in order to confirm your contributions actually help you with your itemized deductions, a DAF requires a minimum deposit of 0 — $250k.
Private foundations on the other hand have annual targets that need to be met.
In order to survive, it is natural we look out for ourselves to serve others.
Thankfully donations are a financially healthy, legal, mood-boosting, economically sustainable way towards benefiting the world. If you’re a true giver, you would do it all anonymously but no one is looking.
If you can’t or don’t feel like donating billions to save the world, you’ll still feel over the moon helping others this way while reducing your reported income.
Although avoiding obscene short-term capital gains taxes and avoiding portfolio rebalancing don’t feel as great as inheriting the assets themselves, long-term, you’ll feel an irreplaceable feeling of accomplishment and relief.