The US tax code gives a massive advantage to one group of people: long-term investors. This is how people like Warren Buffet keep their taxes low. I am here to tell you that you can take advantage of that as well.
You would be surprised to know that if your AGI (Adjusted Gross Income) is less than $77,200 and if you are married and filing taxes jointly, you don’t pay any federal taxes on your long-term capital gains. Surprising, isn’t it?
And let’s say your AGI is $600,000 and let’s say all of that income is from long-term capital gains, then you pay only $84,470 in federal taxes. To simplify, I have ignored standard/itemized deductions.
However, if $600,000 of AGI came from a W2 job, can you guess what your federal tax bill will be? It will be a whopping ($1905+$7002 + $19,272 + $36,000 + $29,350 + $70,000) = $163,529, yes roughly $80,000 more. You need to also remember that to make AGI of $600,000 via your job, your real gross income has to be probably closer to $700,000, to fund social security, Medicare and Disability Insurance.
If we were to compare the overall tax rate with the $600,000 example above, the investor pays 14% while the wage earner pays 27.25% (roughly double tax rate). And that’s how Buffet’s secretary pays a higher tax rate than Buffet himself.
You can devise your life around long-term capital gains. Invest as much as you can in long-term investments. Then reap the rewards later by dropping off the job bandwagon early and live off your investments, paying very little taxes on your way.
If you find saving taxes like this morally discomforting, then ask your lawmakers to change the tax code. Well, most of them won’t listen to you but you can try nonetheless!