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The bucket approach: Both the federal and local government take their own slice from your savings, so educating yourself on where exactly the majority of those “slices” come from is the first step to keeping more hard-earned dollars in your pocket. Here, the author divides your potential income sources into three buckets: “the bad bucket, the better bucket and the infinity bucket.” The income included in each bucket is as follows:
📌Bad bucket – Most often, this contains the majority, if not all, of your income, making it the most susceptible to taxes. It begins with your wages, which see many different tax deductions before ending up in your account.
📌Better bucket – This income includes rents, royalties, interest and short-term capital gains; all of which fare better than wages when it comes to taxes, but do still face an ordinary income tax based on your tax bracket.
📌Infinity bucket – Here is where you put the government at the greatest distance away from your income. One main source includes real estate, closely followed by stock dividends, simply because they are taxed at the same rate as long-term capital gains, versus the ordinary income rate.
Not all income sources are created equal: When it comes to your investments, considering the after-tax return is critical in pinpointing potential value. One of the best parts about retirement is the ability to transition your income into a more efficient tax bucket; and with some advanced planning, you can certainly help maximize those returns.