Taxes should be part of your financial plan; they are a fact of life. You pay taxes on each paycheck and when you purchase an item at a store. It is not a healthy plan to only figure taxes immediately before April 15. Still, many people do just that. Your tax planning should be considered throughout the year. Someone once told me that a good tax plan tells me how to save on my taxes today, but a great one shows me how to save on my taxes tomorrow as it guides me. Taxes are inevitable. It is wise to develop a strategy.
Photo by Nataliya Vaitkevich: https://www.pexels.com/photo/tax-documents-on-the-table-6863245/
The Tax Foundation, year after year, calculates how long until the average person works to pay off their taxes. That day is called the Tax Freedom, and it came in the middle of April. Approximately the time when the average person files their taxes, they have worked to pay taxes to the government. It is essential to know the tax laws to plan for your taxes. You can make purchases and investment decisions that will reduce your tax burden. We all need to shoulder the load of taxes and pay our fair share. We all benefit from the services our government supplies. We all use the roads and the infrastructure, and everyone using them should pay a reasonable price for these services. It is unfair that those who abuse this system get away with demanding more and more and spending less. However, just because others use the system, this abuse by our fellow taxpayers does not justify our abuse of the system. We, as Americans, need to stand up and demand to be counted and tell our government there are no people who are too big to fail.
The average person pays four different types of taxes:
- Taxes on purchases
- Taxes on property
- Taxes on wealth
- Taxes on earnings
We’ll take a moment to discuss each of these categories.
Taxes on Purchases
Most people pay a sales tax on most items they purchase. Food is exempt from tax in many states unless it is restaurant-prepared food. Service people are exempt from taxes on things they buy from military installations. Our federal and state governments impose excise tax on specific items or services. These include cigarettes, gas, alcohol, tires, air travel, hotel, and phone service.
Property Taxes
Real Estate property taxes are a significant source of revenue for local governments. These taxes are to be based on the value of the land and the building on the land. These property taxes for many have seen a steep rise in the past few decades. Some states impose a personal property tax on the value of autos, boats, furniture, and farm equipment; sometimes, they include livestock. These are not new taxes. They are old ones being revisited. In old farmhouses, many times, the bedrooms did not have closets. That was caused by a closet being taxed as an additional room. People removed their closets and made furniture to take their place.
Taxes on Wealth
At the time of a person’s death, an estate death is imposed on the value of a person’s property. It is supposed to be based on the fair market value of the deceased person’s investments, property, and bank account, less allowable deductions and other taxes. The money and properties passed onto heirs may be subject to state taxes. An inheritance tax is applied to the value of property bequeathed by a deceased person. This tax is paid for the right to acquire the inherited property.
However, as of 2020, an individual can give cash items up to 15,000 dollar value once a year to another without paying taxes on the gift. Also, the amounts spent on tuition or medical expenses are exempt from taxes when paid directly to the institutions.
Taxes on Earnings
The two central taxes on our earnings are Social Security and income taxes. The Federal Insurance Contribution Act, AKA (FICA) Social Security, was created to fund the old-age, survivors, and disability insurance portion of the Social Security System. The hospital portion was to be covered through Medicare.
These two taxes are usually 7.65%. Medicare receives 1.45%, and Social Security getting 6.2%. When employed, your employer must also pay this amount also. If you are self-employed, then you pay for both parts. There is a wage cap on Social Security each year. In 2022, this cap was $147,000. However, there is no cape on Medicare. If your wages are more than $200,000 when single or $250,000 filing married, then there is an additional tax of .9%.
Thus, it is easy to understand why income taxes are a big part of financial planning for most people.
Seven states today do not charge state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax the dividend and interest incomes.
There are two strategies that people use with their withholding from their paychecks. One of these is paying as little as possible with each check and possibly having to cover the difference at tax time. The other strategy is allowing your employer to deduct the maximum permitted amount and then get a refund. The average taxpayer invests their money better than trusting Uncle Sam to handle it properly. Most of us don’t purchase $14,000tolet seats, but the Defense Department reportedly did https://www.nytimes.com/2018/12/19/opinion/pentagon-budget-military-spending-waste.html. This decision is yet another time when the Time Value of Money should be considered along with opportunity cost. For years, I have been a general contractor. Years ago, I purchased a gun nailer. I could have held on to the 169,00 dollars, but I chose to buy the nailer. It increased my production output, and by doing so, it increased my wages. It allowed me to accomplish this without increasing the demand on my body. This increase in production output allotted me more free time to relax or pursue another avenue. I chose to further my education. Doing so, I now demand an even higher wage and am in a position where I oversee others doing the tasks that I didn’t appreciate having to do. Thus, today, I am an old man who still loves what he does for a living. I could have kept the money, blown out my shoulder from overhead nail driving, had reconstructive surgery, been forced into retirement, and been frustrated living hand to mouth on SSI.
I hope you understand the opportunity cost for purchasing that 1st gun nailer was more than $169.00.
All this should point you in the direction of a great tax person. A person who will listen to you and your dreams of tomorrow and help develop a tax strategy that allows you to achieve them.
Note: Images on this blog site are from accessible sources. No image or group of photos are intended to represent the people I serve. I don’t care about race (that is a politically correct term that I do not like because we are all of the same race, the human race. I prefer the term ethnicity), color, religion, sex, gender, marital status, disability, genetic information, national origin, source of income, Veteran or military status, ancestry, citizenship, primary language or immigration status. I am a service provider for all people. We will all rise together when we band together and help one another. Joseph Erwin is a Real Estate Broker, DRE # O2131799, and a CA general contractor # B 696662. He’s a member of the CRMLS and The East Valley Association of Realtors located in the Inland Empire region of Southern California.
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