As stated by Albert Einstein, “The hardest thing to understand in the world is the income tax.” Congratulations to you for surviving another taxing time, filing your income taxes. While we all share the misery of complaining about taxes, allow me to put things in perspective for you. Together we will look at the time it takes to file, compare tax rates over the years, identify which tax rate matters, and help you discern what is your highest priority. “ It takes the average American taxpayer 13 hours to comply with the tax code, gathering receipts, reading the rules and filing out the forms the IRS requires. The tax code forces Americans to spend over $168 billion to comply and 6 billion hours,” according to Representative Dave Camp, hearing of the House Ways & Means Committee, April 11, 2013. The Washington Post confirms that Camp’s statements are in order as this estimate comes from none other than the Internal Revenue Service. Here’s my YouTube version:
The IRS goes on to say that 69% of all taxpayers devote 16 hours to the task. The 1040EZ form, by comparison, takes just four hours out of the year. Businesses, however, spend an average of 23 hours filing taxes. The average consumer refund for 2014 is expected to be $3,034, according to Yahoo Finance on April 15, 2014. What is even more interesting is what over 5,000 people who responded to the Yahoo Finance poll said what they would do with the money. In past polls, people said they would spend their refund. In the current poll:
- 46% said they plan to save it,
- 34% plan to pay down debt,
- and 20% plan to spend it.
$3,034/13 = $233.00 per hour
When we do the math, that $3,034 refund divided by 13 hours of time equals $233/hr. If we work for ourselves we don’t think of that work as costing us anything. We work for free. When we pay someone to do this kind of work for us the cost may turn out to be much more expensive than we thought. According to the US Census Bureau, the average household income in the USA is about $50,000. Those who earn $233 per hour for 40 hours a week command $9,320. Over a month that adds up to $37,280, which becomes $477,360 in a year. A household income of about $113,000 lands you at the top 10 th, while $394,000 makes you a bona fide member of the top 1 percent, according to the World Top Database on August 29, 2014.
When we talk about taxes, we often complain about the tax brackets. We always remember the last tax bracket that we might be in, but it is the effective tax that matters. In 2013, married filing jointly with $50,000 annual income the top marginal tax rate is 15%, but the effective tax is 13.2%, according to taxfoundation.org. For a single person making the same money the effective tax rate is 16.86%. To put things in perspective, if you or your parents were making the same money in 1950, the highest marginal tax rate was 90%. That’s not a typo. Your effective tax bracket was 53.64%, but your effective tax rate was 20.75%. These are tax rates we can all live with. And we all know, tax rates will eventually go up. In 1950 the average annual income was $3,210, and it took $8,450 to buy a new house, gas was $.18 a gallon, and the average new car cost $1,510, according to thepeoplehistory.com.
What do you require?
Let’s get to the bottom line here. We can all find lots of things to complain about. But at the end of the day, there is only one reason we all file our taxes. It is because filing income taxes is required by the US Government. Notice that there is a deadline. Otherwise, even with the best of intentions, most of us would be too busy to file our income taxes. On top of that there can be penalties, and we all know of people who have lost property and assets due to tax evasion. There is difference between tax avoidance and tax evasion. That difference is, of course, time in jail. So let me suggest that you take a page out of the IRS playbook. Now that we know how much time it takes to file income taxes, we can also see that you have the time to determine how much money you require for your future. Add a date to that goal. In the words of Diana Scharf, “Goals are dreams with deadlines.”
John L. Grace>Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The opinions voiced in this article are for generational information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Past performance does not guarantee future results. Neither diversification nor active management strategies can guarantee a profit or protect against a loss.