We’ve all heard that one of life’s certainties is taxes, but have you ever stopped to consider the real impact of taxes on your everyday finances? Some taxes are more straightforward and obvious — we can look at the bottom of any sales receipt, for example, and see the amount of sales tax added. While state and local sales taxes vary, they often add up to only a few dollars on typical purchases: The average sales tax in the U.S. is 5.75%, or $5.75 on a $100 purchase. That may be relatively small potatoes in terms of your bottom-line budgeting, but taxes can be a hidden expense if you’re not aware of them and can have a much bigger impact than you anticipated. Keep a watchful eye on these tax-related budget-busters.
Buying a new car. This might be your first experience with a big tax bill on a major purchase — and it could run into the thousands. The sales tax on new cars varies by state, ranging from under 3% to more than 8%. This means that for a $30,000 car, you could pay up to around $2,000 in taxes. And the extra burden doesn’t just apply to a new car purchase — a used ride would be subject to the same tax rate. Even if someone gifts you a car, you may still need to pay taxes on the value of the vehicle.
Purchasing a home. Property taxes are an ongoing expense, assessed annually and paid above and beyond your mortgage. They continue even when a home is owned outright. Property taxes are usually assessed by the county you reside in, and the rates may vary if you move. They will also be reevaluated by the county tax assessor regularly, and your tax bill may get bigger if your property value goes up — especially as you make renovations or improvements.
Traveling. Both airlines and hotels charge taxes and — depending on your destination — they can really add up. If you fly domestically, the U.S. government imposes a 7.5% tax on all airfare. Internationally, it’s usually more expensive, and taxes imposed by other countries vary widely. In some locales you’ll need to pay occupancy tax on your hotel room, and international destinations can even impose nonresident tourist fees on top of that.
Income Taxes. Filing your income taxes can be complex and somewhat difficult to navigate on your own. You can owe taxes if you didn’t withhold enough or had earnings from a second job. These tax obligations continue as long as you receive income — even from Social Security! Income taxes can cost you a lot of money over time. This is why it can be so advantageous to get professional support in tax planning, income tax preparation and investment decision-making that impacts your taxes, and there’s another strategy that can help you outsmart the taxman …
A 401(k) retirement account is a powerful tool to help minimize taxes throughout your working years. With a 401(k), you lower your tax liability by contributing pretax dollars. Those dollars then grow tax-deferred until, eventually, you must take required minimum distributions from your account — hopefully, at a time when you’re in a lower tax bracket. Consult with your financial professional to learn how you can benefit from 401(k) participation in your tax planning.