In this world nothing can be said to be certain, except death and taxes.
Benjamin Franklin, Letter to Jean-Baptiste Leroy (13 November 1789)
Whether or not you do your own taxes, here are some things you’ll have to consider when managing your investment portfolio or your personal finances. The list has been boiled down to 9 points, so its easy to remember:
1) Each state has its own tax system. Historically high tax states have been New York, California and Hawaii. Southern states like Florida and Texas have typically lower rates.
2) State and local taxes range from one to nine percent. Use 5% for your back of the envelope planning.
3) Watch out for wealth taxes. Some states have used wealth taxes in the past. These levy an overall percentage on a majority of your assets. Florida currently has one. Other states have used them in the past.
4) Owning any sort of real estate brings a property tax bite. Sometimes property tax is expressed as a dollar amount per hundred dollars of real estate you own. Otherwise, if you own any sort of real estate, expect to make payments to local government.
5) State taxes can be deducted from federal tax. This is a commonly overlooked by do it yourself tax filers.
6) Dividend and interest income are taxed as ordinary income. Make sure you to do the added math to claim your gains properly. For a conservative estimate, assume state and federal taxes will eat up 1/3rd of your dividends and interest payments.
7) Capital gains are taxed as ordinary income. You’re looking at a tax rate of 15% for long term gains and 25 to 30% for short term gains.
8) Pay attention to capital gains exclusions on a primary residence. A couple can exclude up to $500,000 in capital gains for the sale of a home as long as it has been the primary residence of one of the couple. A single person can exclude up to $250,000 in capital gains.
9) Unless you are from Mars – or someplace fortunate enough not to have taxes – levies on your income will likely be your biggest overall expense. Reduce your taxable income by maximizing your 401k and IRA contributions. ROTH contributions also help to spread out your taxation.
Main takeaway here: taxes have a huge impact on financial plannings. It pays to take some time to learn the basics.
Best wishes,
James
Mojtaba – A ROTH is basically a mechanism to put away money for retirement. The difference is that ROTHs are contributed to after tax. This means that you pay the taxes now, but you will never pay taxes on any gains that you have in that account. This means that while you are paying for the taxes now instead of later, you also know where you stand in terms of gains. Another thing is that you distribute your taxes between now and later, when your tax bracket may be different.
Some people have mixed opinions, but the majority see ROTHs having a pretty big advantage.
Hope this helps.
Cheers,
Miel