Taxes have an immense effect on our finances and can have a major bearing on whether we reach our financial goals. They affect your income, investments and property holdings – as well as how much is saved or spent for retirement.
Your tax burden depends on which country and state you call home. Some taxes are collected per transaction (like sales taxes or tariffs), while others ( like property taxes) need to be paid regularly.
Taxes on income
Taxes have an enormously complex impact on our finances. Income taxes are levied on personal and business income by both the federal government and many states, often at different rates.
Taxes are an integral source of revenue for governments. They finance public services and pay debts. Furthermore, taxes provide goods and services directly to citizens such as education systems, pensions for elderly citizens, unemployment benefits, transfer payments subsidies or public transport subsidies.
Progressive personal income taxes can help reduce economic inequality by encouraging lower and middle-income earners to work more and increase savings, while steeply regressive personal income tax systems like those found in the “Terrible 10” states (Washington, Texas, Florida, South Dakota, Nevada, Tennessee Pennsylvania Illinois Oklahoma and Wyoming) only exacerbate it further.
State excise taxes are the most regressive component of many state and local tax systems, taking an outsized share from lower-income families as opposed to richer ones and being eight times harder on middle class households than on rich ones. They have an effect 17 times greater on poor households versus rich compared to middle-class households and eight times worse for the poor than on rich ones.
Taxes on investments
As is often the case, taxes on investments can have a dramatic impact on your finances. Thankfully, however, you can take steps to minimize or even avoid taxes on income generated through stocks and other investment vehicles.
Stocks have long been an attractive investment option for individuals and families alike. Stocks may provide higher returns than alternative investments such as bank CDs or government bonds.
But capital gains taxes on investments can be an aggravating source of frustration for investors. When selling stocks at a profit, for instance, you must report any gains (the difference between your cost basis and selling price) as taxable income on your federal tax return.
Long-term capital gains are taxed at lower rates than short-term gains, offering buy-and-hold investors who hold securities longer than one year an advantage in terms of tax.
Taxes on property
Your property taxes can have a major effect on your finances if you own a home. Property taxes help pay for local government services like schools, police and fire departments, which impact our society as a whole.
Tax rates also play a part in how much you owe on your mortgage loan; typically lenders will place part of each monthly mortgage payment into an escrow account to cover property tax payments when due.
Your property tax bill depends on many variables, including the county budget and how your home is valued. Furthermore, changes to your neighborhood – such as new development which brings additional revenue for local government – also impact this amount.
Your property tax liability varies based on jurisdiction and type of property; however, property taxes remain one of the primary funding streams for most cities and towns across America. Paying your due share can ensure your community provides public services you require.
Taxes on retirement
Maintaining an effective tax strategy is vital to managing the impact of taxes on your finances. In general, the more income you can reduce before retirement, the less in taxes will need to be paid afterward.
Keep in mind that Social Security benefits and savings may not be subject to taxes when initially taken out; however, surcharges or Medicare costs could potentially add several thousand dollars of additional income over time even if no actual payments owe tax.
As part of a retirement move, selling your primary residence may allow you to exclude up to $250,000 of gains from your income (or up to $500,000 if married filing jointly) which could help lower future tax obligations.