Paying our taxes is something that every American must come to grips with, but how we prepare and react to that tax bill makes all the difference, according to our Money Coach Bill Stanley.
“Nobody likes to pay taxes!” he said. “Unfortunately, the mention of taxes goes to the wrong part of our brain and results in bad thoughts and bad actions.”
Stanley said his clients often complain that they will pay more taxes this year than last year. That's not necessarily a bad thing.
“I try to point out that this is because they made more money this year -- and making more money is a good thing,” he said. “The more you make, the more you keep. People don't hear me when I say this; they just continue complaining about paying more taxes.”
Taxes are as low now as they have been in generations, Stanley said. We are in the midst of two wars which have to be paid for. We also cannot continue to run up budget deficits forever. So, at some point in the future, Stanley said taxes will go up.
Logic would suggest, he said, that it's better to pay taxes now (at a lower rate) than deferring taxes to the future (when they will be higher).
What should the average taxpayer do? Stanley offered up some suggestions – including going against conventional investing advice.
“First, we must realize that 'tax deferral' is not necessarily a good thing,” he said. “When we have money deducted from our salary and put in an IRA or 401(k), we skip paying taxes on the retirement contribution now so we can pay taxes at some date in the distant future.”
But if those tax rates go up, we won't be withdrawing as much money as we originally thought we would.
Stanley said that IRAs and 401(k)s are still good vehicles for investing – especially if your employer offers a matching contribution (because it's free money), and it especially helps those who have a hard time saving to automatically put money aside.
However, he offered up another investment option that he said is a wiser way to play the tax game.
“One tax smart move is to put some of your salary in a Roth IRA,” he said. “At the end of the year. you pay income tax on most of your salary (including the Roth contribution) but the Roth money is never taxed again – it grows tax free until you take it out and spend it,” he said.
Another thing to look out for, he said, is any financial person offering to sell you a product that is “tax deferred.”
“I've said many times: Never buy a financial product from someone who recommends it,” he said. “Why? Because they'll probably recommend whatever gives them the biggest commission.”
Annuities, for example, have high commissions, he said. Annuities are not only tax deferred, but the earnings over all those years is taxed as "income" when it is taken out – not as "capital gains” or “dividends" which are taxed at a lower rate.
Bottom line is this: When it comes to your taxes, Stanley said we need to think "I want to pay my fair share of taxes now" and "I want to invest so I pay the lower capital gains tax."
Bill Stanley and Money Matters airs every Tuesday on FOX21 Morning News.
If you have a question for Bill, contact him directly: moneycoachbill@aol.com
TV Station Profiles & Public Inspection Files forKXRM