Uncommon Cents

A tax is a fee imposed by the government on products, forms of income, or activities. In the United States we are very familiar with various taxes on products (such as a gasoline tax or tobacco tax), income (such as the federal income tax or state income tax–which is not in all states, Medicare tax, and Social Security tax), or activities (such as retail sales tax). Taxes fund public goods and services (think sewer services, trash pickup, and street lighting). In some cases taxes may also be used to try to discourage certain types of activity (such as cigarette smoking) and/or attempt to recoup public dollars spent dealing with that activity (such as Medicaid funds spent to deal with lung cancer).

One of the best ways to help your investments is to take advantage of tax advantages. IRAs and 401(k)s offer ways to build your portfolio tax free and/or reduce or eliminate taxes in the end. There are certain government bonds and money market accounts that are tax free as well. Taxes are also one of the reasons why passively managed portfolios and mutual funds tend to outperform actively managed ones–when stocks or bonds within the portfolio or fund are sold, they typically trigger a capital gain, which is subject to tax. I suspect we will see some of this when I assist my friend with her portfolio makeover in coming posts!

I am personally not opposed to the idea of paying taxes because I like having paved roads and trash pickup; I do, however, want my tax dollars to be used wisely–which is an entirely different issue that we won’t get into on this blog. What do you think about your taxes?

Tags: 401(k)s and equivalents, Bonds, Investing, IRAs, Mutual funds, Stocks, Taxes, Waste

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