What Is On An Income Statement And A Step By Step Process Of How To Make An Income Statement

Many of you may think that writing a financial statement is very hard and needs professional skills. Well! I highly recommend to visit a financial planner and let him/her to write a financial statement and financial plan for you. There are four good things in visiting a financial planner:

1. They know lots of things that you may have not thought or heard about they have experience in financial Items and terms.

2. They have no emotional feelings attached to your financial situation, so they can devise a plan just for you without any emotional problem involved.

3. They solve the problem of learning, knowing and lots of financial and accounting terms and lingo that you might rarely use. So you can focus on other issues like making more money.

4. Having a financial planner and accountant is a crucial part of being rich. Rich always have expert and knowledgeable accountants and financial advisors helping them. So, if you want to get rich and stay rich, you shall have a good team and financial planner is an important part of the team.

But do not get frustrated or scared! If you don’t have any assets or any income from your assets and still have a 9-5 job, having a financial planner may only cost you about $100-200. But if you think you don’t need a financial planner or you think you can write one for yourself, that’s OK. I want to help you here starting to write a financial statement.

Which Type Of Income Do You Like To Have?

One of the most important parts of any financial statement is Income Statement. This is the earning part of the statement and shows you how much you exactly earn over a certain period of time. It contains three parts and each part might have some more sections.

There are different types of income available in the financial world. I list them here and explain each a little so you get an idea of what an income can be.

Earned Income: This is the most known type of income. It’s the income you get from a 9-5 job. At the end of each month ( or week or fortnight, depending on how you receive your income) you get a check for a month of work you have done.

Portfolio Income: This is the income you get from investments in stocks, bonds or mutual funds. It is also called dividend.

Passive Income: This is the income you receive from a real estate investment or a business that doesn’t need your presence to generate money.

These incomes are totally different and can be discussed in detail, but let me tell you a little about the differences between these types and which one is mostly used by rich people and why they prefer it over the other types.

If your only source of income is your earned income, you pay the highest rate of tax possible. People who only have earned income pay about 40-50% tax though they think they pay only 20%. That’s why sometimes it’s called 50-50 income because for any dollar you earn, government receives 50 cents.

Note: any type of bonus or extra money you receive must be considered and treated as an income. If you make a profit in a deal or sell your car, that money should be listed in the earned income column.

If you have investments in stocks, bonds or mutual funds, you get your income as portfolio income. This is called 20-80% income because you pay about 20% tax for it. This type of income is very fluctuate depending on the conditions of the market.

If you buy some properties and earn your income from the rent you receive or you have a business that is run by somebody else, you get passive income. This is the income that rich people earn most of their income from because of the tax advantages it has and it doesn’t need them to be there. It is called Passive Cashflow and it’s the type of income that I talk about in PassiveCashflowAcademy.com.

Now you know why rich prefer passive income over the other two types. They can earn huge amount of money without physically working paying tax.

Which one of these is your current income type and which one do you want to earn more in the future? This is an important part of the financial plan that you must decide on before starting your journey to become rich. If you know the exit, you can look back and build a strategy that gets you there faster and easier. So take some time and think about the type of the income you like to have in next 5 or 10 or 15 years from now and then plan for it.

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How Much Income Tax Are the Feds Really Taking From You?

If you’re trying to save money, you ought to know how much the federal government is taking from what you earn. Most people just don’t know. Finding out will show you why it’s hard to get ahead. This article shows how the fed gets 35.4% of an $80,000 working income.

We hear a lot about income taxes, but most people don’t know just how much income-related taxes they’re paying. We’re taxed by both our federal government and our state. Since the federal government takes the lion’s share, I’ll concentrate on its taxation.

Two simultaneous taxes on your income:

The federal government imposes two different taxes on what you earn by working. They are the:

* income tax, and
* payroll tax.

What everyone knows as your ‘income’ tax has a set of tax brackets each with its own tax rate from 10% to 35% (2009). These rates are applied to your taxable income which is income in excess of your ‘tax free’ income.

Your tax free income is any income you earn that’s below the ‘tax-threshold’ for your filing status – single, married, and head of household. This tax threshold is the sum of your personal exemption and the standard deduction. For a single person the tax threshold is $9,350 ($10,750 if age 65 and over); for married it’s about twice this.

The more taxable income you have the more it moves into higher tax rate brackets – increasing the average overall tax you pay for ‘income’ tax.

The ‘payroll’ tax is a second tax system simultaneously applied to your working income. This tax pays your Social Security benefits (income) at retirement age and most of your Medicare benefits when you reach 65 – presumably.

The ‘payroll’ tax applies at a fixed percentage of your working income – no brackets. As an employee, you pay 6.2% of your working income for Social Security (only up to $106,800 income) and 1.45% of it for Medicare (no limit). Together they take an additional 7.65% of your income. There’s no tax threshold (or tax free) level of income for this system.

But your employer also has to pay 7.65% of what income he pays you for your Social Security and Medicare. Most employees are unaware of this extra tax money your employer is paying for you. So, between you and your employer, the federal government takes 15.3% (= 2 times 7.65%) of your income. If you’re self-employed you pay the whole 15.3%.

So from your working income, the federal government taxes takes your ‘income tax’ you pay according to your taxable income applied to the tax brackets and also gets 15.3% of your working income too.

How much does the fed get from a single person making $80,000?

Let’s take a person under age 65 who makes $80,000 for a salary and apply the two federal income tax systems on his salary to see how much tax he generates for the fed.

For the ‘income’ tax system, we subtract off his tax free income – i.e. the tax threshold of $9,350 from his $80,000 – to get his ‘taxable income’ of $79,650 (= $80,000 less $9,350). This is applied against the tax brackets as:

The first $8,350 is taxed at 10% tax rate to give $835
The next $25,600 is taxed at the 15% tax rate to give $3,840, and
The next $48,300 (but he has only $45,700 left) is taxed at the 25% tax rate to give $11,425
That results in a total ‘income’ tax of $16,100 which is 20.1% of his $80,000 salary.

For his ‘payroll’ tax as an employee he pays 7.65% of his $80,000 which is $6,120. His employer, though, must pay the same 7.65% – another $6,120. So between the employee and his employer, the fed gets 15.3% of his $80,000 which comes to $12,240. Note that an employee costs an employer his income plus 7.65% more.

If the employee was self-employed with $80,000 of net income, he’d have to pay the full 15.3% for ‘payroll’ tax.

So the total tax paid to the federal government based on his working income comes to $28,340 made up of:

* ‘income’ tax of $16,100
* ‘payroll’ tax of $12,240 ($6,120 from employee and $6,120 from employer)

The employee pays $22,220 of this which is 27.8% of his salary. His employer pays the rest.
If he were self-employed with an $80,000 net business income, he’d pay all $28,340 taxes
Yes, $28,340 is 35.4% of an $80,000 working income. That’s what the fed gets.