The Value of a Dollar After Much Taxation

Investment Gains Needed to Break Even After Being Taxed Three Times

Aug 17, 2009 Christopher Pascale

Dollars taxed on earning, capital gains, and consumption have to work extra hard just to get back to even. Surprisingly, it can be done with even modest gains.

No one likes to pay taxes. Since taxation will not become a thing of the past, regardless of the various reform bills in place, investors should know exactly how much it takes to bring one's money up to the level they are being said to earn through their labor.

This explanation will be simple in that the only forms of taxation that will be covered will be income, capital gains, and sales taxes. Property, health care, and other taxes will not be accounted for. However, tax write offs, such as medical bills, daycare, and business expenses are not being noted either.

Therefore, the actual gains needed to bring a dollar up to its original level after being taxed will vary depending on the taxpayer.

For Every Dollar Earned, the Government Makes Change

Prior to the average person working in the United States receiving money he or she has worked for, the federal government withholds the portion for some of its own overhead. Currently, a person earning between $30k and $60k will only be entitled to receive 75% of his pay as a quarter of every dollar is taken by way of income taxes.

After Income Taxes, People Should Invest What They Can

Many middle income families do not have much to invest after paying for the rent or mortgage, groceries, and, for those in college, school expenses such as tuition and text books. For this reason, it is important to understand just how much a person will need to gain on his investments in order to bring what's left of an earned dollar up to one dollar.

A person being taxed at the 25% rate will essentially be investing with $.75 of every dollar earned. In order to bring $750 to $1,000, investment gains of over 33% must be made plus the amount to cover capital gains rates and sales tax.

Capital Gains Rates Are 15% and 20%

Short term capital gains are taxed at 20%. Those who earn their gains over longer periods of time will pay 15%. Taxes on income are performed inclusively, meaning that if an investor gained $1,000, he would owe $150 in taxes, netting him a gain of $850.

In this case, $750 has been invested. If this investor has a gain of 50%, he will cash out his investment with $1,125. If the gain of $375 is taxed at 15%, then $56.25 will be deducted, leaving the final outcome of the investment to be $1,068.75. This, however, may not account for an equal amount in spending power.

American Consumers are Taxed for Consuming

45 of the 50 US states charge sales tax. Many do not add it for food, non-prescription drugs, or prescription drugs. The exception is for those in the military, who pay a 7% surcharge on all items bought at commissaries (base grocery stores) regardless of whether the item is a gallon of milk, Children's Tylenol, or a cork screw.

Most consumers would be able to pay for $1,000 worth of goods after investing $750 at a 50% gain, even with sales tax. The exceptions include those living in California, Mississippi, New Jersey, Rhode Island, and Tennessee, and every military member or dependent who shops primarily at the commissary. After additional sales taxes are added from the county or town, it becomes clear that 50% gains on investments are going to leave most middle income earners a bit short when it comes to spending power on investment income.

Long Term Investments Will Overcome Lost Value From Taxes

The silver lining in all of this is found through long term investing. Modest gains with mutual funds of 6% would lead to an investment doubling in value every 12 years. Over 24 years, $1,000 would become $4,000. After 36 years, it will be $8,000. Imagine $1,000 added every year to gain interest!

The best means of combat is to invest early, regularly, and significantly relative to income. 50% annual gains are hard to come by, but 50% lifetime gains are not. In fact, if an investor gained 6% per year over 25 years while losing 4% to inflation, the gain would be 50% in simple interest alone. It can be done.

While taxes will eat up a substantial part of a person's hard earned money, investing over 25 years or more can strike a balance to keep one's nest egg competitive, allowing an investor to retire with dignity.

The copyright of the article The Value of a Dollar After Much Taxation in Investment is owned by Christopher Pascale. Permission to republish The Value of a Dollar After Much Taxation in print or online must be granted by the author in writing.

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