Enemy to Wealth #2 – Taxes
April 15th…what comes to your mind? Taxes! Taxes are painful. No one escapes them. They are essentially the rent we pay to be citizens of one of the greatest nations on earth. Every time you hear a siren, enjoy passage on a newly plowed road on a snowy day or turn on the tap for a tall glass of water, these are all by-products of paying taxes. Nevertheless, the tax system creates an obstacle to personal wealth. Let’s take a look at its impact on you in terms of personal tax, which for most people is a familiar occurrence twice a month.
Through your employer, the government takes first dibs on each and every paycheck you receive. You essentially receive the money left over after federal, state and local taxes, and then Social Security and Medicare grab their share. Note that these do not include sales tax, gas tax, property tax, and the long list of additional taxes we pay every year. Taking home anything less than 100% of what you earned must be considered a barrier, even if it is the law.
For law-abiding citizens, taxes are an unavoidable barrier, all the more reason to seek after efficiencies when accumulating wealth. For the business owner, the process differs a bit. To illustrate, business owners earn their income, deduct the expenses incurred from conducting the business, and pay taxes on the remaining income. That’s a simplistic definition—the IRS tax code certainly takes more care in spelling out each individual rule to ensure that business owners pay their share of taxes. This brings us to an important principle called the WYHTE principle.
“The real price of everything,” writes Adam Smith in Wealth of Nations, “is the toil and trouble of acquiring it.” Tax Freedom Day is “celebrated” as the day Americans stop working for the taxman and start working for themselves. First recognized in the early 1900s by the Tax Foundation on January 22, the tax barrier has gradually grown to its current estimate of April 30. Breaking down this
120-day period, the Tax Foundation estimates it will take:
- 43 days of work to pay off federal, state, and local income taxes.
- 30 days to pay off payroll taxes (for Social Security and Medicare).
- 16 days to pay off sales and excise taxes.
- 14 days to pay off corporate income taxes (assuming that a tax on a business is passed on to its customers, employees, and shareholders in terms of higher prices, lower paychecks, and less shareholder value).
- 12 days to pay off property taxes.
- 4 days to pay off other taxes (e.g., customs duties).
- 1 day to pay off estate and gift taxes.
Typically, before we can spend anything, Uncle Sam needs payment first. At the upper end of the tax brackets “you have to earn” $2 before you can net just over $1 after all of your taxes. The $35,000 new car requires roughly $70,000 in gross income. Fortunately, if you are in the 33% tax bracket for both federal and state, that $35,000 car will only require you to earn $52,200.
As you can see, taxes are typically the 2nd largest barrier to wealth behind debt payments. If you want to enjoy the future when your money works for you rather than you working for money, you had better figure a way to minimize the effect taxes have on the money that will flow through your life. Give us a call at 801-990-5055 if you are interested in discussing tax minimization strategies with us.
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This content is provided for informational purposes only. It is provided by third parties and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
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