Passive Income to Offset Increasing Taxes (USA 2013)

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i want you - Uncle Sam
Image from Flickr by tinou bao

I just received a troubling e-mail from a friend. The e-mail is a forwarded e-mail from his accountant that explains in detail some of the upcoming tax changes that will affect more than 90% of Americans starting in 2013. It makes me wonder why I strive to create riches through passive income at all!

“Raise taxes on the rich.” – “The rich need to pay their fair share.” These are just a few of the democratic/liberal talking points being used during the 2012 presidential campaign to try to appease to middle and lower class voters. Unfortunately, many of these less informed voters probably don’t realize that former tax cuts are about to expire, effectively raising taxes on them. This is happening despite the campaign rhetoric that is telling them otherwise.

Republicans/conservatives will often argue that higher taxes kill business and hurt the economy. Their simple logic explains that a higher tax on achievers actually takes away the incentive to achieve. You’ve heard the saying, “The more we make, the more they take.” Yeah, that is exactly how the United States progressive tax system works.

Why should entrepreneurs and business owners work hard to grow their businesses only to be punished with higher taxes? <— Click to Tweet

The following section is a portion of the e-mail that was forwarded to me.

Taxes Increasing for Nearly 90% of Americans

If you are watching financial headlines, you have probably seen reference to the “fiscal cliff”.  You also probably are aware that Congress’ tax changes (usually tax cuts) in the last 20 years have been increasing in number, but most have a short lifespan.  Somehow, it seems as if all the tax cuts now expire either at the beginning or at the end of 2012.

In addition to the expiring tax cuts, we have some new taxes on the books.  This means almost all of us will see taxes increase in 2013, unless Congress makes a lot of changes very soon.

Examples of changes on the books:

  • 2% rate increase on Wages and Self-Employment income.  (This is a Social Security Tax rate change for employees which was lowered from 6.2% to 4.2% for 2011 and 2012, and is going back to 6.2% in 2013.)
  • An additional  tax of 0.9% on wages and self-employment income over $200,000 (single) or $250,000 (joint).
  • A new 3.8% tax on investment income – Part of the health care reform act was to tax investment income when your total income is over $200,000 (single) or $250,000 (joint).
  • 10% tax bracket eliminated – income that falls in this bracket will be taxed at 15%.  This affectseverybody who pays federal income tax, as the first portion of their taxable income is calculated using the lowest tax rate.
  • 25% and higher tax brackets all bumped 3% to 28% and higher rates.  The exception to this is the top rate of 35%, which  is being bumped to 39.6%.
  • For married filing joint – The point where you jump from the 15% tax rate to the 28% tax rate will drop – effectively increasing the rate from 15% to 28% for families that reach this bracket.
  • Dividends – Qualified Dividends which have been taxed at lower capital gain rates will be treated as ordinary income in 2013.
  • Long Term Capital Gains rates increase in 2013 – although they are still lower than regular income tax rates, they are increasing from 0% and 15% to 10% and 20% (8% and 18% for assets held more than 5 years).
  • Child Tax Credit drops from $1,000 to $500 for each qualifying child.
  • Estate & Gift Tax will jump to 55% and only provide exemption equivalence for the first $1 million instead of the current $5 million.

Continuing to Strive for Passive Income

Many might look at the numbers stated above and opt to throw in the towel. Why should I continue to try to create value for others which in turn will create profit for me when I know I am just going to be taxed more. This may hold true for active income, such as income produced from a day job. Typically, at a day job, you are trading your time for a paycheck. You are creating some sort of value for others, but are paid a set and predetermined amount. With higher taxes on the horizon for higher achievers, there is absolutely no incentive to work hard to get ahead and earn more.

This is the beauty of passive income though. I like Pat Flynn’s tag line for his Smart Passive Income blog –  put in the hard work now so you can reap the benefits later. This is what I am doing with this blog and with my other ventures that I am documenting and planning to document within this blog. Despite higher taxes and anything else that goes on with the governmet, I am going to continue to work hard to try to create a good steady stream of passive income. When I get to the point that I am later reaping the benefits, I won’t care as much about taxes because I won’t be actively working for that income. Sure, I will have already put in the work, and I will likely still be working to create more future passive income. The point is – I will be working to create something that is mine and something I can be proud of. Government may be able to take a portion of it in taxes – but they won’t be able to take away whatever it is I have created. (Like this blog).

Readers: Which of the upcoming tax changes will have an affect on you? Do any of them change the way you will go about your business in the near future?