Personal Finance Learning Guide
<aside> 🗒️ In this section: We learn what taxes are, how they work, and hacks to pay less taxes.
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Taxes are money the government charges its citizens for public services, including national defense (military), education and social programs. While taxes are often complained about, countries cannot run without them.
To understand more about what exactly taxes pay for, check this out.
Income Tax
This is the tax the government charges you on income you make from your job. Tax rates are progressive, which means they change based on how much you earn. For example in the US, the federal tax rate can range anywhere from 12% to 38%.
To learn more about how progressive tax rates work, check out this video.
Sales Tax
In the US, this is the tax your state government charges when you buy something. This varies from state to state but often ranges from ~5% to 10%.
Investment (Capital Gains) Tax
This is the tax the government charges you on any investment gains you have. For example, if you sold a house or stocks for more money than you bought it for, you pay taxes on the profit. In the US, there are two types: short-term (when you've sold something in <1 year since you bought it) or long-term (when you've sold something in >1 year since you bought it). Short-term capital gains taxes often match the income tax rate, whereas long-term capital gains are a flat 20%.
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/81b53e8f-baf7-44d9-a7a4-b48b236f2d27/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/81b53e8f-baf7-44d9-a7a4-b48b236f2d27/Favicon-simplify.png" width="40px" /> One reason rich people stay rich is much of their income comes from investments, which if held for longer than a year, are often taxed at a lower rate than income.
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Check out the difference in tax rate between Warren Buffet (famed investor) and his secretary in this video.
Property Tax
Property tax is money the government charges you for owning property. This typically is charged by local (city/state) governments to help pay for schools, roads, and other services.
Paying taxes is a duty you have as a citizen and go to important things, including helping people that are less fortunate than you - it is important that you pay them. That being said, there are ways you can be smart to lower your tax bill:
<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/81b53e8f-baf7-44d9-a7a4-b48b236f2d27/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/81b53e8f-baf7-44d9-a7a4-b48b236f2d27/Favicon-simplify.png" width="40px" /> Invest in a 401K (retirement account). 401Ks allow you to invest pre-tax money for retirement, which also lessens the amount of income you pay taxes on today.
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