Income taxes, while not popular, are an important part of everyone's financial life. They are a complicated issue that many just accept as part of the cost of living in America. While the top marginal federal income tax rate dropped from 70% in the early 1980s to 35% in 2004, almost everyone feels they pay more in tax than they would like.
And, it is not just federal income taxes. Your income ends up being subject to state, Social Security, Medicare, and, in some cases, local or city tax taxation. All in all, most Americans end up paying from one-fifth to one-half of their income to some governmental body.
Be Tax Wise, Not Tax Driven
Making financial decisions based only on the income tax implications is almost always a bad idea. The key is to have an understanding of the tax implications and factor them into your decision-making process.
The most common form of tax advantaged investing is using the beneficial income tax rates applied to long-term capital gain. If you have owned stock for more than one year and sell the shares for a gain, the maximum income tax rate on that gain is 15%. This compares with the top rate of 35% (for 2008) on other types of regular income and on gains on investments held for less than one year. Be sure to remember this if you are considering selling shares close to that one-year anniversary of your purchase.