Before we get into the details, here is the tl;dr version of today’s topic:
1. For 2024, everyone is entitled to a 0% tax rate on the first $14,600 of their income. This is called the standard deduction.
2. There are two completely different tax rates in The United States. And this is one BIG reason the super wealthy don’t pay taxes like the rest of us. I really want you to understand this because when you get it, it's so enlightening.
3. It’s because of the long term Capital Gains Tax Rate. This tax rate only applies for investments that have been held for longer than a year in a brokerage account. Any investments in a regular taxable brokerage account that is sold in less than a year WILL be taxed using the more unfavorable ordinary income tax rate.
4. If you want to learn how to invest so that your investment gains can pay for your lifestyle, come to our next FREE Investing Class!
So now is a good time to introduce that there are two very different tax rates that the government uses to tax us: the Ordinary Tax Rate and the Capital Gains Tax Rate.
But before either of these tax rates apply, I want you to know that there is a 0% tax deduction that we are ALL entitled to getting on our income. This is knows as the standard deduction.
If you are a single filer or married filing separately, the first $14,600 you make in 2024 is taxed at a 0%. If you are married filing jointly, it’s actually the first $29,200 made between the two of you that is taxed at 0%.
Now that we understand the standard deduction, let’s talk tax rates.
The first rate (Ordinary Income Tax Rate) is for money that we make through active work (through our blood, sweat and tears 😭). It doesn’t matter if it’s through a business or through a W2 job, this rate applies to all active work.
Basically our income is taxed like a staircase. The first money you make is taxed at a lower rate but the more you make, the more each dollar is taxed. This is also what’s known as the marginal tax rate. But looking at the picture you can see that the rate goes from 10% to 37%. And this is just federal taxes! We aren’t even talking state, medicare and social security taxes. And this is the same tax rate that our 401k and IRAs are taxed at too.
But you know what? The government decided to have a completely different tax rate for investments held in a brokerage account (or real estate). And this tax rate is called Capital Gains tax rate.
Capital Gains is the money that our money makes (aka NOT through our blood, sweat and tears). This is passive investment income. And it’s taxed at an extremely favorable rate. (0%, 15%, and 20%) as long as the investments are held (not sold) for longer than a year. If the investments are sold in under a year, they are taxed using the ordinary income tax rate.
So now let’s compare these two tax rates. Same amount of money is taxed completely differently. Say you were Married Filing jointly ...
...you can see up to $94,050 of capital gains for married filing jointly is taxed at 0%. And when you add in the standard deduction (remember that 0% tax everyone is entitled to?), this means over six figures of investment gains can be sold in one year at a 0% tax rate! Wild isn't it?!
This is one of the reasons why the wealthy don’t pay the same rate of taxes as the rest of us.
Most wealthy people are not getting their income from active work. They are living off of their investments. And if you play the game right by learning how to strategically invest and holding them for the long term, that can be you too.
Want to learn step-by-step on how to invest so your 0% taxed gains fund your lifestyle? START HERE.
You deserve this.
Mahi Amaha, founder of Black Womxn Are Wealthy
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