• WisBusiness

Tuesday, June 30, 2009

Uncle Sam -- our silent partner

By Kevin Reardon
Recently one of my kids asked one of the all-time great questions: "Dad, how much money do we have?" Reflecting back to a similar conversation I had with my father, I recall clearly his response. He said, "I would have lots more if Uncle Sam didn't keep taking what we earn".

My dad's take on the question was clear and very thought-provoking. During my career as a financial advisor, the concept of keeping what you earn has always been one of our primary objectives when counseling clients, and it comes in several forms.

With every dollar earned in the form of wages, we owe Uncle Sam, i.e. the Federal Government, a piece of our earnings. In addition, many of us pay state income taxes, unless you live in a state that doesn't impose such tax. Our tax code is considered 'Progressive,' which doesn't mean it has anything to do with progress or advancement. Rather, a progressive tax code means higher income earners pay a higher tax rate. In addition to these income taxes, don't forget that every employee pays a 6.2 percent tax for Social Security (up to $106,800 in 2009) and 1.45 percent tax to Medicare (unlimited). In the event you are a business owner or are self-employed, you also pay the matching employer contribution, which brings your total tax to 15.3 percent. Taxes are considered 'Silent' because most taxes come out automatically and without (real) discussion. I mention that government is our 'Partner' out of pure sarcasm.

Of course, there are a few ways to lower your income taxes. First, contributing to an employer sponsored retirement plan, such as a 401k or 403b, will lower your taxable income. This money comes out before taxes, allowing 100 percent of your contribution to flow into retirement accounts. In addition, the government doesn't tax the growth on your investments while it is in a 401k or IRA. Keep in mind that the government will be back to tax you when withdrawals occur, and if you tap into these funds before a designed retirement date, they will tack a penalty on top of the income tax.

Another common way to reduce your taxes is through various deductions allowed on your tax return, including charitable contributions, mortgage interest deductions, business expenses, etc. Remember that none of these deductions are free. You still need to give money to charity to receive the charitable deduction, carry a mortgage in order to deduct the interest, and be incurring and paying for business expenses in order to deduct them.

Once you have paid your income taxes, the money left over is yours to keep, right? With some of your hard-earned 'fortune,' you might consider buying things, like groceries, clothing, personal sundry items, or even shoes. Don't forget that you will pay sales tax every time you make a purchase. Again, the 'Silent' tax returns. This tax is collected automatically every time you make a purchase without negotiation or discussion. Not surprisingly, the onerous task of collecting this tax is placed on businesses ... further 'taxing' their operation.

Now that you have paid your income taxes and purchased essential items for survival, the remaining fortune is yours to keep, right? If you purchase a home, don't forget to budget for property taxes. Few first home buyers look at the total cost of maintaining a property before purchasing it and property taxes are usually a leading expense. Property taxes vary from state to state and from one municipality to another. All things being equal, smaller homes will be assessed less property tax than large ones. In addition, it is usually less expensive to maintain a smaller home than a larger home, leaving more money in your pocket.

Now that you have purchased essential items for survival and own a home, many people invest those proceeds hoping to grow their fortune. This is a wise move, but not without risk and cost. If you invest wisely and grow your assets, your 'Silent Partner' returns to claim a percentage of your growth in the form of a capital gains tax, without having taken risk or exerting effort.

In addition, countless taxes and user fees are assessed on us each and every day. Some of my favorites include: hotel taxes (also known as a pillow tax), rental car taxes, tax on your phone lines and utility bills, drivers license and fishing license fees, personal property taxes for business, stadium taxes, etc. (See the list below for additional items on which you're taxed.)

For the family who worked hard, saved money, invested wisely and accumulated wealth, the government created the ultimate tax - the inheritance tax, better named the Death Tax. For people who have accumulated a certain threshold of assets, this is a tax on the assets of those who have died. It is the ultimate tax because it is difficult for those paying the tax to object to the collection of the tax.

As you consider all of this, let me ask two rhetorical questions: First, how much money does government need to operate? Of course, we could be talking about the Federal Government, State Government, County Government, City Government, etc... The answer for all types of government is ironically, and unfortunately, the same: they need More, More, More!

Our second question is to ask, What is it that government does incredibly well, better than any individual or private enterprise could do? Please ponder this question and provide us with the long laundry list of items you come up with - our list is rather short.

Now that you're smiling, here's a little poem for your further amusement:

The Tax Poem

Tax his land, tax his wage,
Tax his bed in which he lays.

Tax his tractor, tax his mule,
Teach him taxes is the rule.

Tax his cow, tax his goat,
Tax his pants, tax his coat.

Tax his ties, tax his shirts,
Tax his work, tax his dirt.

Tax his tobacco, tax his drink,
Tax him if he tries to think.

Tax his booze, tax his beers,
If he cries, tax his tears.

Tax his bills, tax his gas,
Tax his notes, tax his cash

Tax him good and let him know
That after taxes, he has no dough

If he hollers, tax him more,
Tax him until he's good and sore.

Tax his coffin, tax his grave,
Tax the sod in which he lays.

Put these words upon his tomb,
"Taxes drove me to my doom!"

And when he's gone, we won't relax,
We'll still be after the inheritance TAX

- Author Unknown

-- Reardon is owner & president of Brookfield-based Shakespeare Wealth Management Inc.


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