Americans en mass are just this week finishing up their tax paperwork or picking up their returns from their accountants and tax preparers. Many are happily waiting for their refund, while others are cutting the dreaded check and mailing it off to the IRS. It’s a yearly ritual we all know well.
We should know it better. Taxes to me are like healthcare. We go to the hospital or visit our doctors commonly without having any idea what the actual cost is. Why bother? The insurance company pays the bill, so we never even look. For our taxes, why bother? We’ve been paying in increments through the year, so when we pick up the returns and send them off, it’s not as impactful as it would be if we had to cut that one big check to send off. Some people don’t even believe they pay taxes because they get a refund every year.
Huge mistake. Huge. If there is one place and time for an American citizen to sit down, learn something well and do it right, it’s all about the taxes. Most people won’t even believe what I’m about to write in this next paragraph.
Simple question. Take a guess. What percentage of all the money you make during the course of your entire lifetime will you pay in taxes and fees to the government? I’ve read many studies. The numbers are all over the place, but if you include all taxes and fees, I’ve read as high as 54%. More than half of all the money you make in your life is paid out in taxes and fees to the government. Wow.
Fact is, when it comes to financial security and your future retirement, it’s not how much money you make – It’s how much you keep.
Don’t think that’s a real number? Think it through.
Income taxes of course are on everyone’s mind right now, given the time of year. But that’s not all. In addition to the federal income taxes, which for most people are in the 28% bracket, you have state taxes (Colorado is one of the lowest taxing states in the country at around 6%.). While you’re at it, pay the FICA taxes for your future Social Security checks and Medicare benefits. If you own a company or are an independent contractor, (real estate brokers, accountants, attorneys, babysitters and daycare workers, Uber and Lyft drivers, landscapers or anyone who makes money without being an employee of a company or person), you pay self-employment taxes.
If you own a home, you’re part of the population that pays for our police and fire departments, schools, street maintenance, parks and pools and the mayor’s salary – anything that you vote on during election years to pass a new or extended mil levy. You pay those with your property taxes. It might be hidden in your monthly mortgage payments, but it goes to the local government.
People who invest their money wisely (stocks, bonds, mutual funds, real estate, puts and calls, options, hedge funds, derivatives, etc.) knows that you want to buy at a low price and sell when the price is higher. When you do, you pay capital gains taxes.
I sold my home in Washington state when I moved to Colorado many years ago. In that sale was a state excise tax of 3.2% of the selling price of the home. Thousands of dollars in a tax simply for the right to sell my property. Washington isn’t the only state that does it.
Those who don’t invest and live simply, just living from paycheck to paycheck without the hassle of investments, investment advisors and attorneys, keeping their emergency funds in a safe on the floor of the closet – end up paying a higher percentage than the more affluent. Sales taxes on just about everything take up a real chunk of your income. Wealthier people spend a lower percentage of their incomes on things they buy in stores. Sales taxes are close to 10% in some communities. When you buy a car, look at the contract calculations in the contract you sign. The sales taxes on that car would have paid for a lot of gas, but off it goes to your government.
Let’s not forget estate taxes. There are cases in the courts where people worth millions of dollars die, and their estates end up owing the government more than the total value of the asset base. The highest tax bracket for estate taxes hovers around 55%. If you try to leave your estates to your grandchildren, thinking to avoid paying taxes for at least this one transfer, the estate may end up paying an additional 55% in generation skipping taxes. Last I read, 55% plus 55% is more than the whole bucket.
We won’t even mention the little things that add up, like driver’s licenses, hunting and fishing tags, fees for driving into a park or using the local swimming pool. If you own a car, you buy the license tabs every year. It all adds up.
So pause as your money moves out of your wallet and into the marketplace. Listen carefully for that quiet sucking sound. A lot of that is taxes and fees that go to your government. Learning to structure your money and assets, along with your ability to keep accurate records for your accountant or tax preparer, could make a significant difference in your retirement plans.
I’ll be sure to include some of those strategies and structures in future communications. Meanwhile, if you’re looking to move soon, or thinking about real estate as an investment, call me. We should talk.
Enjoy the day,