Benjamin Franklin said, "'In this world nothing can be said to be certain, except death and taxes." It was Will Rogers who added, “death doesn't get worse every time Congress meets."
With a tax deal in our rear window and a new Congressional semester about to take place in January, news of tax changes will soon fill the air again, like locusts on warm Kansas evening. Here are some points to keep in mind as you follow the noise out of Washington.
Average versus Marginal Tax -- With a flat income tax, the more money you make, the more you pay in taxes, but your average tax rate and your marginal tax rate will be the same. A progressive tax means you will pay an increasingly larger amount of your income as your income increases. Your tax divided by all your earnings is used to compute your average tax. The tax on your last dollar of earnings is used to determine your marginal tax.
When making investment decisions, it is the tax on your last dollar, your marginal tax, that is most important. If your marginal rate is high, you may want to shield your investments from further taxes, even if the relative return is lower than other more-taxed choices. Remember, it is not how much money you make that matters; it is how much you get to keep.
At KeyAMS, we help frustrated, overwhelmed -- and frankly scared -- business owners and professionals Master their Financial Universe. What we do best is help you construct a sound financial plan, which serves as your basis for comparing every financial decision: one investment versus another, one goal versus another. What actions you take today that will affect your taxes later, play a big role in how securely you will live in retirement. That's what we are here to help.