Is it your mortgage? Car payment? Food and groceries?
While driving the other day, we had a very interesting conversation. He heard on the news that the sales tax in MA was going up by 25%. He thought that it was climbing from 5% to 30%.
After explaining to him what it really meant, and having a general discussion about taxes, it occurred to me that very few people realize that their biggest expense is actually taxes.
Think about it – there’s income tax, sales tax, property taxes, gas taxes, meals tax, hotel and travel related taxes, taxes on your cell phone bill, etc. Just about everywhere we ‘buy’ something, we pay some sort of tax.
This is not a blog post on the merits of various taxes and political views. Frankly, I personally expect taxes of all sorts to increase.
Taxes are in a category considered “transferred money” – money that people pay, knowingly or unknowingly, and not part of your lifestyle expenses that reduces your wealth.
Now you just can’t (legally) avoid taxes. However, you can have some control your taxes. For example, you can choose where to buy things to save sales taxes. And save income taxes by contributing to a flexible spending account.
When it comes to your financial wealth, many of the ‘rules of thumb’ can actually cost you in the long run. Many individuals – and financial professionals – focus on investment returns. But without considering the tax aspect, a ‘great’ investment may not be that great after taxes. Even contributing to a 401(k) – a common rule of thumb – can cost you in the long run (that will be the topic of another post).
There are many areas where people can legally manage their taxes and even use an understanding of the tax code to benefit you. For example, you might qualify for a ‘scholarship’ from the IRS to help pay for college. No essay needed!
So what are you doing to reduce taxes and transferred money?
Trivia question – when did our current system of taxation (paying taxes on income) start?
Answer will be posted next week.
