Taxes are the biggest line item in our personal budgets. It makes some sense to learn how to address them.
From the government’s point of view there are three general rules of the game:
If you play the game without thinking, these rules are absolute. Most tax practitioners will tell you that there is some flexibility in rule 3)
Governments try to accomplish two things with tax laws. Raise the cash they need to carry out their perceived mandate and minimize the push-back from the people. Income tax is the easiest to work with. Other taxes like commodity taxes, duties, service charges and such have their own rules.
There are cheap and easy ways to raise the money, but you manage push-back with favors, punishment of high income earners, and preferences. Minimizing push-back creates complexity and for tax managers, complexity is good.
Divide, deduct, defer are the headlines for your tax plan. Extinguishment is nice, but limited or without a death not always possible. Most people will not die to suit their tax plan.
There are limits to how much any person can do, but every little bit helps.
Learn a little about the process. Know that marginal tax rate is the rate you pay on the next dollar of income. Know that average rate is nearly useless for planning purposes. Know that effective rate is the time adjusted marginal rate.
Effective rate matters because taxes compound. If I pay 50% tax on a 6% income stream for 40 years, a $1,000 investment will grow to be $3,262. If I paid the tax at the end, $5,643 for me. If I paid no tax $10,286. By paying annually my effective rate of loss is 75.6% of the potential income.
No one should accumulate money without understanding a little about taxation. Seek help. The rules are dense and not easy to find.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772