Income is taxed by the federal government as well as the majority of states. Governments use income taxes to provide goods and services that benefit the American people.
The three largest categories of expenditures from federal tax are:
- Medicare and Medicaid
- Social security
- Defense and security
Other significant categories of income expenditures include interest on the national debt, social safety-net programs for Americans caught in low-income and emergency situations, and infrastructure. In contrast, states spend the majority of their available tax dollars on education.
Looking for tax relief, some people focus on non-taxable income streams, which include disability payouts, inheritance money, or long-term retirement vehicles such as the Roth IRA. However, more productive pursuit of wealth will focus on generating taxable income, rather than avoiding taxes or generating non-taxable income.
Did you know, for example, that the average millionaire has 7 income streams? Wealth accumulation is less about minimizing taxes and more about generating income. People who accumulate wealth don’t usually rely on one income stream such as a salary. They diversify and expand their economic potential until they have, on average, 7 income streams. As one income stream expands, another may contract, but the 7 streams form a braided river of economic stability and strength.
Common income streams:
- Primary wage. The most common type of income stream for the average millionaire remains the most basic: a salary. Getting a job and earning a paycheck is where most people start. Besides paying the bills and putting a roof over your head, a full-time wage will often provide other financial benefits such as health insurance.
- Partner’s wage. Having a spouse that brings home a wage is an important secondary source of income for many Americans and a significant advantage for the wealth potential of couples filing jointly. Single parents and their children, often deprived of this income stream, are disadvantaged in an economy in which a dual-income is still considered standard.
- Investments. Whether it’s a work-sponsored 401K or private investments, many Americans invest in savings for retirement. However, many of these investments are tax-protected and don’t generate an income in the here and now. For wealth accrual and diversification, consider investing more than the minimum amount needed for retirement. Invest enough to generate an income now. Investing is about accruing enough capital to generate an income stream. Interest from CDs, bonds, and other lending activities are another type of income-generating investment that diversify and strengthen your portfolio, even if they generate a low-to-average rate of return.
- Rental property. Everyone who’s played Monopoly knows that the only way to win the game is to charge rent from the other players. Wealth accumulation in real life often relies, at least partly, on the accumulation of real estate. Real estate that generates monthly rent can cover management costs and provide a monthly paycheck for the owner as well. Investing in real estate either takes a large amount of initial capital or the savvy to find group real estate investment platforms that leverage multiple investors’ money.
- Side business. Side businesses, sometimes called hobby businesses, are usually secondary to a primary wage in time invested. Some side businesses are started as a passion project; other side businesses are started out of necessity. In the current market, many side businesses are online businesses.
- Royalty income. Many millionaires earn a royalty stipend for selling the rights for something they’ve written or invented. Many millionaires accumulate wealth by starting and selling multiple businesses, rather than pouring all of their energy into one. Publishing an e-book has become another fairly common source of royalty income, along with the more traditional publishing of a printed book.
- Capital gains from selling appreciated assets. Selling art, thoroughbreds, real estate, specialty cars, grand pianos, antiques, or undeveloped property generates income for some of the most wealthy among us.
Non-taxable income streams, such as disability payments, inheritance, and financial gifts, might be considered an important safety net (in the case of a disability payment) or a welcome bonus (in the case of inheritance money), but one certainly shouldn’t aspire to become disabled or to have a rich relative die. Tax avoidance is not the key to wealth accumulation. Rather, wealth accumulation relies on developing taxable or tax-deferred income streams.
Worth noting is the fact that no number of income streams will lead to financial accumulation if spending outpaces earning. According to one expert, the key to accumulating wealth is uncomplicated:
- Sell your time for money
- Spend less than you earn
- Invest your savings so it will grow without your active intervention
If you sell your time for money (step #1) by getting your first job and earning a salary, then spend less than you earn (step #2) and use the excess to invest in multiple income streams (step #3). Use your time and energy to invest in nurturing and developing a diverse set of income streams rather than avoiding taxes.
Most millionaires hire tax professionals to manage their taxes. If you have multiple income streams, your taxes are likely complex and getting more complex with every year. Hiring a tax relief lawyer is an important component of financial health for many Americans, particularly if they have unresolved tax debt that they need help sorting out.
Whether you’re a millionaire or simply hope to be one, it’s important that you deal with any unfiled tax returns, tax debt, payroll tax issues, etc. Our experienced tax resolution specialists are extremely well-versed in IRS policies. They know how intimidating the IRS can be and will shield and advise you at every step to help you resolve tax issues in the most financially advantageous way possible. With a clean slate, you’ll be ready to press forward with the income opportunities that will help you prosper.