Taxes are probably the biggest expense anyone has to pay on a monthly or annual basis. However, we hear all the time how some of the richest people in our countries or in foreign countries don’t pay any taxes. Since the law is pretty strict we all wonder how it is possible that those individuals are not punished. Here we will go over how taxes typically work and explain how it is possible to pay 0 taxes in some cases.
Not all Income is Taxed Equally
Given the different employment and compensation structures, it’s only natural that there are different laws for taxing those types of income. Basically, there are four categories for this and they are:
The first two almost always pay taxes and do have some means of reducing those expenses, but for the other two categories, it’s possible to pay 0 tax in some countries, like in the US.
If someone is employed they have little control over how their income is taxed. There are usually tax brackets for different ranges of income, and those seem to scale upwards as the income increases. This doesn’t mean that if you go into the next bracket that your entire income is taxed under the same rate. It just means that the amount that goes into that range gets taxed under that rate.
It’s also possible to use the portion of the pre-taxed earnings for investing in a retirement fund. In that case, the amount you invested is subtracted from your income before taxes are applied. Meaning you can pay less, and once you retire the retirement income will be taxed separately.
Those who are self-employed also need to pay state tax in addition to income tax, which means their expenses are higher. However, before their earnings are taxed they can write off a lot of things as a business expense. So if you have to use a car, buy a new computer, or pay for electricity and other utilities, all of that can be written off as a business expense.
Those who run businesses or corporations get to enjoy lots of tax benefits. For example, you can get a tax break if you are using the money for funding research or if you create housing for the low-income portion of the society.
Another way to get a break is through debt. If you take a loan to pay bills, pay for business assets or invest in construction, that debt won’t be taxable. You can then use your profits for paying off that debt and thereby offset the amount of money that is taxable. Using debt to turn profit into asset equity which is basically tax-free.
Anyone can benefit from these tax benefits. For example, all you need to do is invest your income into housing and then sell that house after holding it for one year. You can get a tax break on the profit you make, or if you invest that profit again into housing you won’t pay any taxes.