Benjamin Franklin once said that there are 2 certain things in life: death and taxes. We all know we have to pay tax when we are doing our business or working at our job. Income taxes are an integral part of our life and we have to pay them whether we like it or not. Depending of where you live, the income tax rate is different, and if you live in a tax haven, good for you. Most people however have to deal with tax rates that are in the range of 20-50%, and some places even more.
These are not negligible percentages. If you make 20,000 and you are in the 25% tax bracket, your income is now 15,000. And if you make 100,000 and you are in the 45% tax bracket, your income after tax is now 55,000. Most people know what tax percentage they have to pay, but they don’t really know how this affects them, especially the ones with the lower tax brackets. They think since they aren’t making much, they won’t pay that much.
The real problem arises when people do not consider their real income after tax when they make purchases. Many people have their gross income on their mind all the time, whether they invest or spend, and at the end of the year, they are always surprised where the money really goes.
An individual making $30,000 as gross income per year may want to invest 20% of its yearly income before expenses to a project he just started. This translates to $6,000. After his regular expenses (rent, food, cloth, car, etc…) and the $6,000 for the project, he is left $12,000, which he thinks is not so bad. He would be right, except that then you start accounting income tax of 30%, what he is left with suddenly drops down to $3,000. At the end of the year, he wonders how he made this foolish mistake.
There is yet another group of people who totally forget about any type of expense and tax. You know, the kind of people who say, “I’m making $40,000 a year and in 5 years, I’ll be having $200,000 and will invest in this great sure fire business”. I heard this one from the friend of my cousin when we all went out dining once. I didn’t make any comment.
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May 4th, 2007 at 1:54 pm
[…] your time now, and calculate all your expenses that is needed and the money you are going to make, don’t forget tax, you should be in a good position to see your future and how everything will turn […]