Pay attention to taxes. They are your largest annual expense. You need not do it yourself, but you must do it.
Einstein reputedly said that the most difficult thing to understand in the universe was the Income Tax. I have checked to see if that might be true and came on this story.
In 1963 a letter written by Leo Mattersdorf appeared in Time magazine with the following assertion: “From the time Professor Einstein came to this country until his death, I prepared his income tax returns and advised him on his tax problems.” Mattersdorf told the following anecdote about Einstein [TLM]:
One year while I was at his Princeton home preparing his return, Mrs. Einstein, who was then still living, asked me to stay for lunch. During the course of the meal, the professor turned to me and with his inimitable chuckle said: “The hardest thing in the world to understand is income taxes.” I replied: “There is one thing more difficult, and that is your theory of relativity.” “Oh, no,” he replied, ”that is easy.” To which Mrs. Einstein commented, “Yes, for you.”
LEO MATTERSDORF New York City
There are several takeaways here:
- Income taxes are difficult, possibly inscrutable.
- Being bright won’t let you solve the problem, by yourself.
- Some people can help you.
- Anything you know how to do is easy, FOR YOU.
Hire someone to help with what you do not know. Taxes for example. It is not enough to do your annual tax return. That is organizing the past. The wise advisor can help you understand what it could look like. That is organizing the future.
Since you will live the rest of your life in what is now the future, it makes some sense to discover your options.
Taxes matter. If you pay an average rate of tax of 40% on investment income for 50 years. (Life expectancy for at least one of a couple aged 40) You will get a much different answer than if you pay 30%. Never mind zero as with a Tax Free Savings Account. A single investment of $100,000 earning 8% with taxes at 40% of income will become. a little more than $1,000,000. At an effective tax rate of 30%, a little over $1,500,000. Worth some thought.
“Effective tax rate” is important.
When you pay taxes is important. A dollar deferred earns income too. Some investment structures created deductions that others do not. Income splitting matters. Each improves your effective rate.
Learn the fundamentals and keep in touch with an advisor who keeps current with the changes both to the tax regime and with your specific resources and requirements. Their advice is cheap at many times the price.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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