« Buying Insurance | Main | Health Insurance »
State Taxes
Once upon a time, some 50 to 100 years ago, you’d mention the word “taxes” and most people would immediately think of federal income taxes. After the 16th Amendment formed the Internal Revenue Service (IRS) in 1913, that was the definition that Americans understood. There were few if any state taxes, or even state sales taxes.
Oh, how times have changed.
Today we live with a confusing array of taxes on everything from gasoline to car tires, collected by counties, states and, as ever, the federal government. For tax planning purposes, of course, the most important additional ones to consider are state taxes, as these take the biggest bite from most Americans’ paychecks. Thus they require more planning to minimize, or avoid entirely, whenever it is possible (and legal) to do so.
Past not perfect
The “once upon a time” stories always seem to speak of the past as a simpler time, but when you talk to people who lived through it you find that there have always been challenges in life. Having your financial life buffeted to and fro by the changing face of politics and the expansion of taxation has never been fun, regardless of the publicly expressed reasons.
The fact is, today’s total tax burden, including state taxes, is lower than at many times in the last century. Politicians finally began to learn that high marginal tax rates suffocated innovation and entrepreneurialism, and that a lower rate on greater cumulative earnings resulted in increased government revenue. This model has affected the last 20+ years of tax policy. With a stable tax system, of course, it is much easier for individuals and businesses to minimize the bite of both federal and state taxes through various strategies.
The era of tax planning
Since the 1970s and the passage of various tax amendments – creating Individual Retirement Accounts and Roth IRAs, for examples – American taxpayers have been provided a number of ways to save money advantageously. With employer contributions and tax deferrals, these new investment and retirement plans have encouraged more and more people to take an active role in their retirement planning, and look at everything from stocks to annuities as ways of minimizing federal and state taxes.
Financial planning is not just about retirement, of course. Particularly if you are a business owner or have a substantial net worth, your financial plan also has to include strategies and contingency plans for insurance, disability income, current taxes, future living arrangements and possible long-term care. Tax planning is a specialty area that not every financial planner is good at, so make sure to choose your advisors carefully.
Bottom lines
Depending on your particular situation, you may take a variety of approaches to minimizing, eliminating or even recovering a portion of the state and federal taxes that you pay. The people who do good financial planning early in their careers will accrue more wealth, have more options and retire earlier than those who wait. If you are a young, ambitious professional, starting (and maintaining) a solid, sensible financial plan today is the single wisest financial move you can make.
As your situation changes – in any area, from income and expenses to state and federal taxes – you need to adjust your plan and its particular procedures. This is something that you should do on a regular annual basis, at any rate, since constant fine-tuning is needed to stay on track in changing conditions. Study up, get good advice and stay focused on the results you are trying to achieve, and do not fall for any get-rich-quick sales pitches.
You are not in a race, but if you were, slow and steady wins it, just as in the rabbit and tortoise story. Be creative and flexible, certainly, but never be rash. It’s your future, after all, and you only have one!
Topics: Taxes |
