LIVING OFF DIVIDENDS & PASSIVE INCOME

Here’s an interesting infographic regarding the history of US taxes.

President Lincoln enacted the first taxes in 1862 to pay for the civil war. The lowest tax bracket was 3%, while the highest was 5%. It was later repealed in 1872 until 1894 when it reintroduced again.

In 1913, the highest tax bracket was 7%.

In 1945, the highest tax bracket was a whopping 94%. Why do politicians love other peoples money?

Click on the graphic to make it larger.

This is an interesting rant on the equality of paying taxes by newsletter editor Porter Stansberry:

According to the federales themselves, the top 1% of wage earners in the United States earned more than $388,806 in 2006.

There were 1.65 million citizens in this category. As a group, they paid $488 billion in income taxes. That was 40% of all income taxes. But they only earned 22% of all wages. In short, the marginal tax rates on America’s top earners were almost 100% more than average. OBAMA! will increase the top rate these people pay – because paying 100% more than average just isn’t quite “fair” enough.

We might argue about whether or not we ought to charge some citizens different rates of income tax. But if you’ll take the time to read the U.S. Constitution, it’s clear that progressive taxation is unconstitutional. Just read the 14th Amendment. It says the government “may not deny to any person within its jurisdiction the equal protection of the laws.” That means the law can’t treat one citizen differently from another – white or black, rich or poor.  Read more... (525 words, 8 images, estimated 2:06 mins reading time)

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In case you haven’t heard, Congress will soon implement a “Cash For Clunkers” program. If you trade in your old car, you’ll get $3,500 towards the lease or purchase of a new one. If you have an old SUV you’ll get $4,500. Seems like a good plan doesn’t it?

Yesterday I had a short phone call with Bob Meigan, VP of TurboTax and we discussed the short-comings of this program. First of all, your car has to be a clunker. That is it shouldn’t be worth more than $3,500 since you won’t get anything extra if it is worth more.  By law, the dealer will have to scrap the car so even if its worth $5,000 he’s not going to give you a dime more than the $3,500 he’s getting from the goverment.

image source  Read more... (397 words, 10 images, estimated 1:35 mins reading time)

According to The American Housing Rescue and Foreclosure Prevention Act of 2008, passed by Congress in July, first time home buyers who purchase homes between April 8th 2008 and July 1st 2009 are eligible for a first time home buyer tax credit. They can get $7,500 tax credit or up to 10% of the value of the home for home purchases under $75,000.

There are certain conditions though. The credit has to be repaid over 15 years, so effectively it’s an interest-free loan from the government. So if you buy a home this year and claim the credit next year, you start paying $500 back in your 2010 taxes which you would file in 2011. So at least you get a few years grace period before you have to start paying it back. Not sure what happens if you sell the home in 2010, though. Maybe you might have to pay back the entire amount in a lump sum.  Read more... (481 words, 8 images, estimated 1:55 mins reading time)

Since this is tax season and this site is dedicated to earning passive income, I thought I should post something about the taxation of passive income. From the IRS’s point of view passive income is any income that you get without having to to materially participate in. Examples of passive income include rental properties and partnership returns.

Unlike earned income, passive income has great tax benefits. Earned income is subject to self-employment tax which is just over 15.5% (if you’re W2 employee, your employer pays half of this). Your passive income isn’t subject to this tax. If you own rental property, you also claim depreciation. Depreciation is the replacement cost of equipment used in a business and is spread out over its useful life. For residential real estate, the IRS deems the useful life to be 27.5 years. However, the useful life of a house could well exceed 60 years. This results in you being able to claim a tax loss which doesn’t really result in any loss to you. Because of this, depreciation losses are sometimes termed as phantom losses.  Read more... (924 words, 8 images, estimated 3:42 mins reading time)

I know for a fact that I’m not going to get my share of Social Security and I don’t even have a choice whether I want to contribute or not.  But how much will my share be?

Lets assuming the average person makes $50,000 a year for 35 years. Even though most people start working with they’re 16 and keep working until they’re 65, we’ll exclude the first 14 years when they may not be making a lot. We’ll also ignore the effects of inflation and salary increases to keep the math simple.

Considering that Social Security taxes (FICA and Medicaid) are ~15%, (even if you’re an employee andd only pay half of that, its a cost to your company that results in a lower salary to you) that comes out to $7,500 per year.  Considering the savings could have been invested in the stock market at 8%, the total comes to a whopping $1,395,766.11.  Read more... (272 words, 8 images, estimated 1:05 mins reading time)