Taxation of Dividend Income VS Wages 💰|Dividend Income Taxes

Taxation of Dividend Income VS Wages 💰|Dividend Income Taxes


you’re about to learn the massive tax
savings between make your living through wages versus make your living through
dividends or investments good morning Internet! how’s it going welcome back to
money in live TV I have a very very special video for you guys today a
really fun one at that I’ve been thinking about doing a video around this
topic for such a long time and I’m just finally getting to it now now most of us
has probably we’ve probably heard the amazing story about compounding interest
and how investing and dividend growth and all that can eventually make you
wealthy slowly over time but I bet you’ve never heard about the story of
the incredible tax savings you can obtain by investing and making your
living through dividends we’re gonna look at that in this video real briefly
and show you guys why I think dividend investing is so powerful and this is a
part of the reason I like to structure my investments this way because not only
will it provide me a residual income that has a very low risk of ever running
out but it can allow me to collect that income at virtually zero tax or a very
very low tax rate compared to making that your livings we’re wages let’s dive
right into it guys remember if you liked the video make sure to drop a like it
really helps the channel out and it gets this information out to more and more
people the numbers and the calculations we’re looking at on screen have been
verified using tax software so I know the numbers are solid we’ve got solid
numbers here the examples I’ll be showing you on-screen I’ve put it on tax
forms so that you can see it’s more transparent and it’s gonna make more
sense of how this all plays out so you can see with a full clear picture of the
tax differences between wages dividends and things like that so starting off on
the second page of the 1040 that’s where the numbers start to show up we see that
in this example chipper has whoops sorry let me scroll down here in this example
on page 2 of the 2018 1040 chippers showing 100,000 in wages not about
income right now let’s see how that plays out
axe wise and let’s just for simplicity let’s just stick with that income let’s
pretend there’s no other income sources at all and how that plays out on for
chippers taxes okay so first of all in the in this example tripper is single so
that means he gets a standard deduction automatically of 12,000 bucks so that
standard deduction is going to reduce his overall taxable income so his
hundred thousand in wages is reduced by twelve thousand gives him a total of
eighty eight thousand dollars in taxable income on line ten now the tax that
calculates on that on line eleven is fifteen thousand four hundred and
sixteen dollars that is the tax chipper that’s the income tax chipper pays on
his wages what’s all but what’s not included here
is a Social Security and Medicare taxes because the 1040 primarily just deals
with income taxes which is why you don’t see that here so from an income tax
perspective with if chipper made one hundred thousand in wages he had a
filing status a single and no other credits or deductions he would pay
fifteen thousand four hundred and sixteen dollars in federal income taxes
none of the examples just real quick none of the examples have I’m not going
to be showing state income taxes because each state has very unique in different
tax laws and it would be impossible for me to cover that so I’m just focusing on
federal income taxes but if there would be state potentially be state income
taxes on this income as well now we’ve seen the amount on the taxes on wages
now let’s move on over to dividends and see what the differences are let’s start
off with ordinary dividends okay so this is example two ordinary dividends let me
scroll down to where the tax form starts okay so as you can see here chipper has
no wages now chipper is making all of his living through dividends important
distinction here is on line three a you’re seeing that there’s qualified
dividends and right now we’re saying chipper it doesn’t have any qualified
dividends but chipper has ordinary dividends on line three B of one hundred
thousand so one hundred thousand wages now
mm dividends now these are ordinary dividends and that’s really important
because the reason these are ordinary dividends is it could be a couple things
one either chipper has it held onto those investments long enough for them
to become qualified dividends to maybe this is his income that’s coming through
through real estate investment trusts which cannot get qualified dividend
treatment or maybe it’s coming through MLPs
or something else where qualified dividend treatment may or may not be
allowed so that maybe that’s why so those are some reasons why he would have
a hundred thousand and ordinary dividends versus qualified dividends and
we’re gonna cover qualified dividends here a little bit more in just a moment
okay how does this play out so once again chipper is finally in status is
single heat so he gets that automatically he gets a $12,000 standard
deduction his income is reduced to 88,000 and he once again on line 11 his
total tax is 15,000 for 16 now you’re saying now I know what you’re thinking I
know what you’re thinking you’re like Mike why do I show me this it’s this is
exactly the same well I’m gonna show you that it’s actually not in just a moment
okay so there’s an important thing to remember here so your wages I’ve
mentioned in previous videos on some of my tax videos your wages are taxed at
ordinary income rates all ordinary income rates the same is true for
ordinary dividends if the dividends you’re receiving are ordinary
they’re tax at the same rate for income taxes as your wages so there’s no tax
advantages there not yet but now watch what happens when we shift over from
having ordinary dividends to having qualified dividends something magical
happens okay now we’re looking at example 3 chipper now has $100,000 in
order and dividends but but right here notice there’s $100,000 now on line 3a
which means it means of those $100,000 in dividends
$100,000 of that is qualified and the reason s import
is once you start to receive qualified dividends you no longer pay taxes at
ordinary income rates that’s a big thing that’s a big deal when it comes to taxes
once you’re receiving qualified dividends you now get to pay taxes at
capital gain rates which is significantly less than ordinary rates
that you would pay on ordinary dividends other income or like income on your
wages so let’s watch how this plays out and by the way if you’re not used to
seeing tax forms this is not saying that chipper has 200,000 in dividend income
no no no no this is saying that of the 100 thousand dollars of dividends
chipper received one hundred thousand dollars of that amount is qualified
that’s what that means just to clarify if there’s any confusion okay let’s move
on down the tax form once again chipper gets his standard deduction of twelve
thousand because he’s filing single total taxable income of eighty eight
thousand but look at that tax difference his tax difference because now he’s
getting to pay taxes at capital gain rates he only pays seven thousand four
hundred and ten dollars in federal income taxes on that dividend income
he’s killing it tax wise now it’s a huge tax savings so when he was making wages
chipper was paying fifteen thousand four hundred sixteen dollars right but now
that he’s receiving qualified dividends he’s only paying seven thousand four
hundred ten dollars in taxed which is an eight thousand dollar tax savings which
on that amount it’s huge it’s like he virtually cut his taxes in half is
essentially what just happened there so let’s look at the summary page so you
guys can see the real power of dividend investing so I created this summary page
that summarizes the three examples that we just looked at we just looked at an
example with wages and that plays out where you you have a hundred hour
fifteen thousand four hundred and sixteen dollars in income tax we looked
at ordinary dividends and we looked at qualified dividends the thing that’s not
mentioned here on wages which is why it’s from a tax standpoint it’s the
worst way you can make your living unfortunately it’s through wages
I know I know you’ve been told your whole life it would be the job and work
hard for money well from a tax standpoint that is the worst thing you
can do Robert Kiyosaki if you’ve read any of his books author of Rich Dad Poor
Dad the cash flow quadrant he says that if you want to be wealthy or if you want
to have a better chance of becoming wealthy you want to either own your own
business make make a living that way and make your living through investments and
this is what he’s actually talking about meant in his book he doesn’t list out
examples like this but this is from a real stack tax standpoint by looking at
real numbers real examples this is how that plays out so not only do you pay
less tax down here on the qualified dividend line of seven thousand four
hundred ten dollars if you take into account that your wages not not only are
they subject to income taxes but they’re also subject to Social Security taxes
and Medicare taxes just from these three things if you were making your living
through wages you would pay twenty three thousand dollars roughly in taxes okay
now it but if you look down here qualified dividends if you would pay
remember dividends are not subject to Social Security Medicare so you
completely avoid those taxes and I call them taxes because who the hell knows if
we’re ever gonna receive that money if you know I’m 34 years old and there’s
I’ve already been told that I’m only gonna receive 75% of what I was promised
not a hundred percent seventy five percent which means the generations who
are younger than me are going to receive even less which to me actually says that
that Social Security Medicare is actually you’re actually paying more tax
than you think you are because the likelihood have you ever seen that money
is has been reduced or we don’t know it’s uncertain so that’s why in reality
we’re all paying higher taxes on our income especially if you’re younger the
baby boomers in the generation before them they’re they enter to the golden
age of Social Security but for us younger folks who are in our 30s who are
now you younger and just starting off who knows if we’ll ever see that money
so that’s I just want to point out these distinctions
here guys of how big of a tax savings it really is if you can make your living
through investments so if you if you run the math the total taxes from qualified
dividend income due to capital gain tax rate treatment and by avoiding Social
Security income taxes our Social Security taxes and Medicare taxes you
would have a 68% less tax bill your tax bill is reduced by 68% holy crap that is
a huge savings so not only can you tell you realistically you could actually
make less money through dividend income and still come out ahead because you’re
not paying as much tax as you you used to under under this example I wanted to
show you guys this because this is a huge reason why I invest for dividends
because I know as a CPA and I’ve seen this on a couple people’s tax returns
where they’re making buku bucks like over a hundred thousand a year or near a
hundred thousand year in dividends and they’re hardly paying any tax at all
because they because the majority of their dividends their qualified
dividends and it’s a fantastic way to make a living a living where you don’t
have to worry so much about the ups and downs of the market timing the mark and
all that but it’s like a residual income it’s like it’s a pension replacement in
a sense that mixed with some other investments can be very powerful for you
for your retirement and from a tax standpoint
alright internet I really hope you found this information helpful if you did do
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great week everybody I’ll see you down in the comment section below leave your
thoughts your comments your questions whatever it may be down below and I’ll
look forward to reading what you all have to say see you next week’s video
guys live life on caged peace

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