Don’t Fear the Tax Man
In the 850 financial coaching meetings I've hosted in the last five years, plus the hundreds of other meetings I've attended, there are a few themes that repeat over and over and over. Today, I want to discuss one such topic.
People are terrified of taxes. Not boogeyman-type scared, but sabotage their own wellbeing if it means they can avoid paying one more penny of taxes scared. Seriously, though, we Americans hate taxes so much that we'll literally prevent ourselves from making more money if it means we don't have to pay more to the government.
Here's a common example: taxable investing. I'm a huge fan of people investing in the stock market in such a way that the money is readily available for whatever purposes necessary (weddings, college, cars, trips, houses, insert your dream here). Let's say you invest $10,000 into a taxable account. Let's also pretend you'll have this money invested for 15 years and average a long-term 9% rate of return. In that scenario, your $10,000 contribution will be approximately $36,400 by the time you need it.
Since this is a taxable account, you can take the money whenever you want, with one catch: you must pay taxes when you sell and withdraw it. People are fully onboard with the idea of turning $10,000 into $36,400, but the moment they "have to pay taxes on it," they are out.
This is where I jump up to the whiteboard. Turning $10,000 into $36,400 means you made $26,400 of profit.....that's a win! Most Americans will owe a 15% tax on this profit, or $3,960. Again, this royally irks people. But let's look at the big picture. After paying roughly $4,000 in taxes, you still turned your $10,000 investment into $32,400 of cash that you can do anything you want! You more than tripled your money!
But the taxes! Even after walking through the math, many people get stuck on the idea that we had to pay the government $4,000. Therefore, we'll willingly give up the $22,400 profit we made just so we don't have to pay the government the $4,000 they are owed.
While I'm no fan of taxes, I'd like to encourage you to think about taxes through a different lens. Taxes are the consequence of financially winning. Sure, I'd like the consequences to be less than they are, but it still means you're winning. Please don't be afraid of that.
One last related thought for the day. There is no scenario where you make more money, causing you to jump into the next tax bracket, and you take home less money. That's a myth perpetuated by social media and politicians. Going up a tax bracket doesn't mean all your income is taxed higher......just the income that's in the new bracket. I regularly talk to people who turn down promotions, bonuses, and second jobs out of fear their move to the next tax bracket will actually lose them money.
Don't fear taxes. Pay whatever you owe, not a penny more, and be grateful for your financial blessings.
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