A true marker of a wealthy mindset is the passion for reducing taxes. Often rich people receive grief because they want to lower or eliminate their tax bills.
They usually receive this hate from the lower or middle class, who pay a large percentage of their income to the government. However, rich people pay the majority of the total tax revenue the government receives.
Changing your mindset. It’s our duty as Americans to reduce or eliminate our tax bills. Why? Because the government is pushing us to stimulate the economy through the tax system.
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Why does the government favor real estate investing and small businesses? Because it wants to incentivize individuals to build homes and employ others.
Why does the government exempt treasury bonds from state taxes? Because it wants to give investors (who have multiple options) the incentive to invest with the US Government.
Why are most municipal bonds exempt from federal taxes? Because it gives investors a reason to invest in state projects and infrastructure.
To become an elite passive income hero, you will need to change your mindset toward taxes. Your income should increase annually—meaning you’ll keep pushing into higher tax brackets.
If you don’t take measures today to reduce your tax bill, you’ll be giving dollars away to the government. By focusing some time on reducing taxes, you can control your tax expenditures and your income levels.
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Federal vs. State tax exemptions. All this brings us to the main event—treasury bonds versus municipal bonds.
Treasuries, which include bills, notes, and bonds, are tax-exempt from state taxes. Most municipal bonds are exempt from federal taxes.
The best way to ensure your tax exemptions for treasury bonds is to buy directly from the US Government via the TreasuryDirect website.
You’ll probably pay state taxes if you buy bond funds, such as Vanguard Long Term Bond Fund (BLV) or iShares 20+ Year Bond Fund (TLT). This is because these funds are a business, and the Treasuries funnel through the system and come out as dividends (not interest).
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I live in Florida, so I don’t pay state taxes. You’ll want to conduct deep research on your bond funds to ensure you receive the desired tax advantages.
Munis to the rescue. Municipal bonds are tax-exempt at the federal level, generally. There are thousands upon thousands of municipal bonds, so you need to perform your due diligence.
In this case, municipal bond funds are the best way for the average investor to participate in these investments.
Some municipal bonds are actually tax-exempt from state and local taxes if you are a resident of the state that originated the bonds. For example, municipal bond funds can focus specifically on munis from California or New York.
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Read the prospectus on each fund to ensure it meets your requirements. I would also invest a small sum, say $1,000, and let it sit for a year.
Once I receive my 1099-DIV (or 1099-INT) for the year, I will ensure it meets what I need from the bond fund. Then I can go and purchase more of the funds.
This is what I did with Nuveen AMT-Free Municipal Fund (NVG). Once I completed my taxes for a year and NVG was tax-free, I bought more of the fund.
Totally tax-free living. As you focus on income investing and passive income, you’ll want to develop tax-free strategies.
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It is difficult to generate tax-free income under the watch of the US Government. However, if you can make it work, you should keep those earnings tax-free.
Your current and future living conditions will determine the right fit for your investment needs. Let’s look at a few examples.
As I move into retirement, I know that my VA disability is a tax-free entitlement. Say I receive $1,000/month in VA disability tax-free.
I want to invest that income into NVG because it is federal tax-free, and I have no state tax (Florida). The dividends NVG creates for me will be tax-free from a tax-free source—again, very rare.
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If you live in California, you will need to conduct similar research. Can you lower the income on your business or real estate ventures, making them tax-free or greatly tax-reduced?
Lots of research goes into tax planning. Don’t get angry when you see headlines that business people, politicians, and entrepreneurs are not paying taxes.
They give back to society by hiring professionals, building houses, and starting businesses. They are taking enormous risks, and the government rewards and incentivizes them to conduct these businesses.
You should ask how these individuals are lowering their tax bills. As you shift your mindset toward becoming wealthy, creating generational wealth, and growing your net worth, you must start tax planning.
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Treasuries are a great introduction to tax planning. If you live in California, it may be better to buy Treasuries than certificates of deposit. Why? Because California may tax the interest on your CDs—along with the federal government.
Municipal bonds are outstanding in states without a state income tax, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Conclusion. If you are building your fortune in a high-income city, like San Diego or Los Angeles, and plan to relocate, you may want to invest in Municipal bonds funds.
If you plan to retire to a no-income-tax state, your municipal bonds may be completely tax-free. These seemingly small choices can lead to massive gains over 30 years.
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Although I have Treasury Bonds funds like TLT and BLV, I prefer to buy my Treasuries directly from the source. That guarantees I get the exemptions I desire.
I read the prospectus and conducted my due diligence for municipal bond funds; I then started a small position. I then waited for the 1099-DIV to arrive and did my taxes the following year.
If everything passes the test, I can build a more significant position on my municipal bond funds. These ideas compound when you take income from Roth IRA capital gains and dividends.
If you pass away, your kids have ten years to liquidate your Roth IRA. If they have the knowledge, they can roll this tax-free windfall into tax-free income for life. That’s the power of having “the information.” Good Luck!
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