Most of us have heard the saying regarding death and taxes, neither of these are avoidable in life. This is for the most part correct, there is only a very small fraction of people on this planet who never pay any taxes during their lives. For most of us the reality is taxes are part of our financial lives, do we want it or not. Why do we dislike taxes so much? Well when we look at our payslip and the chunk that disappears from under the line due to taxes.. It hurts. So we can't really avoid them and we do not like paying for them. What should we do then to feel like we also get something out of this big amount we pay? Best way is to start understanding the taxes we pay better and figure out the possible deductions and benefits we are applicable for. Lets deep dive into this with 3 different angles, individuals, companies and ones who apparently don't pay any taxes, the rich and wealth

Individuals

With individuals I mean the people who earn their income mainly from salary or wages. As far as I am aware, taxation on salary or wage income is the main source of income for most governments. Reason being this is the easiest transaction of money that can be taxed due to its predictability. Most people need money and people need to work to get it, put a tax inbetween the transactions and the government gets a nice steady income.

Let's make a list of the most common taxes an individual pays:

• Income tax

• Capital gain tax

• VAT (Value added tax) Works a bit differently around the world but the idea is the same

Simply put, taxes can be categorized into 3 categories, what you earn, what you buy and what you own.

Income tax can go up to 60% of what you earn in some countries.. That is an insane amount of money you need to pay from your hard earned money. In most countries the story is exactly this, individual income tax is the highest hitting category. You pay by far the highest amount of tax on your income as an individual if it is in the form of salary. On the flip side, you pay less taxes on things that you own as asset owners tend to get a lot of better tax deals in form of deductions and benefits.

Companies

This is where taxing becomes much more volatile and depending on the country you are based on. Companies and legal entities have things for the most part much better when it comes to taxes. The main difference usually comes with taxing on dividends and other forms of income distribution instead of salary income. The taxing tends to be much more in favor towards dividends and gives a large benefit to company owners. I won't spend too much time explaining all the possible scenarios in this but ill quickly give an example of how I can for example play with taxes where I live by using a company:

Lets say my company generates revenue 100 000$. First of all I do not need to pay any taxes on the gain if I re-invest this whole amount, which is a huge benefit. So the amount I make as profit, I do not pay any taxes on it if I reinvest this into the company. The only time I need to pay taxes is when the company distributes the profit to owners or employees. Either have to pay taxes on the salary/wages or on the distributed dividends. The company pays 20% of profit tax on dividends, so let's say that if they want to distribute the 100 000$, the shareholders get 80 000$. After this the shareholders/individuals do not need to pay anymore taxes. If they pay the same amount as salary/wages, the tax would be closer to 42% in total as the company has to pay social taxes etc on top of the salary cost and the employee pays income tax on the amount also.

All of this works a bit differently depending on where you live, but companies and the owners tend to have much better tax benefits than individuals that work for the company. So if you are investing on a bit larger scale I would recommend how you might benefit from using some form of company/legal entity to your advantage. There are many other ways to benefit by using a company.

The rich and wealthy

The discussion regarding tax evading rich folk is something that is constantly ongoing. Question is, is this actually true or is there more to the topic than the headlines. Let's think about this from the point of view of what we read earlier, salary taxes are high, companies and owners have less.. Simply put, the rich and wealthy do not have salary incomes as a main source of income in general. They own assets and get cash flow in form of e.g. rent and dividends that have lower taxes regardless of the amounts they are. Some of this cash flow might even be tax deductible creating even larger differences to the income levels.

Small example:

CEO of a large company makes 10 million $ annually as salary. The taxes are most likely around 45-60% on this amount. Investors who get 10 million $ annually as dividends from the same company pay 20-30% taxes on the income. The difference in income level annually is multiple millions as the cash flow type is different.

The rich also pay taxes, but due to the type of income they have, the taxes are much less. There is of course some truth to this, the rich and wealthy also have access to services from people who are able to structure their finances so that the taxes can be quite minimal in the end compared to an average person getting salary income.

Make taxes your business

I know, taxes are overly complicated and so boring that they work as a sleeping medicine. Issue is, if you do not make an effort to understand taxes that involve you and your finances, you might be losing a lot of money in the long-run by neglecting this topic. If you want to seriously create wealth then this topic is something you cannot ignore and on the flipside, if having financial struggles getting some tax breaks might help you out of the hole.

Few examples of areas to look into:

• Make sure you are applying all tax deductions you are eligible for to decrease taxes you pay off your salary. This might be related to interest on mortgage, renovation help, commute expenses.. They come in various forms depending on where you live.

• There are various tax relief and deductions on pension investing. Many countries that I'm aware of, have some type of a system for this that you should look into. This might be a large win in the long-run. Example where I live, I get tax returns for 20% of the amount that I have invested in this fund, up to a certain amount. So I get a guaranteed 20% return on my investment next year, it's quite a nice deal.

• If you are already making investments in a steady way, look into the fact if you could get some tax ease by doing this through a company or form of legal entity. There might be huge differences if doing investments outside your pension funds by using this to your advantage.

So sexy or not, taxes are something you need to start understanding. This of course does not mean that you have to start learning the tax code by heart. Mainly the point is that make sure you are utilizing all the possibilities you have, seek help from tax professionals also, read online various examples that are posted, contact your tax office and ask questions, that's what they are for. Take the time to figure taxes and your finances will look so much better in the long-run.