A boy getting a cavity filled asks his dentist, “Mr. Dentist, do I need to floss my teeth?” The dentist stops what he’s doing and replies, “No, definitely not. You only need to floss the teeth you want to keep.” And so it goes.
Do you need to know about or care about taxes?
Nope. But if you kind of have an affinity for money and somewhat of a desire not to be broke, then sure, I guess it makes sense to know a little about taxes.
But there are so many! Which ones should you know about? We can slash two buckets off our list because there’s really not a lot you can do about them. Those two are:
- the “spend it” taxes, like sales tax
- the “own it” taxes, like property tax.
Again, not a lot to know or plan for with these taxes.
The bigger fish, the much bigger fish, are “earn it” taxes.
Primarily, income taxes and investment taxes. For my clients, these taxes are their biggest expense, so it makes sense to know a thing or two about them and how to minimize them.
The other big fish for some people are the “give it” types of taxes, mainly estate taxes and gift taxes.
I’ll talk about these in a future lesson, but for now, let’s focus on income taxes.
Income taxes are based on the income you make from your job or your business.
There are two groups who tax your income:
1) Federal Government
2) State Government
Let’s talk for just a second about state taxes and then move on to the big guy. Depending on the state you live and work in, the state may tax you on your income. So, if you live in California, you will have to pay the state of California tax on the money you make. Not that you asked, but guess how many states have no income tax? Just eight (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming).
Having to pay state income tax is no good, and the amounts they want can really add up, but the bigger fish to fry (or for you vegetarians out there, the bigger tofu to toast) is the tax you pay the federal government.
Have you heard of the IRS?
This is the federal government organization that is in charge of calculating and collecting the income tax you owe. What does IRS stand for? Income Reduction System? Nope, just kidding – a little tax humor there. IRS stands for Internal Revenue Service.
The federal government, through the IRS, makes you pay them some of the money you make. Oh, and if you don’t pay them? You go to jail. You go directly to jail. You do not pass go. Just ask Wesley Snipes, who owed $17 million in back taxes and was sentenced to three years in prison.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.