Looking for a Haven from Tax Day? Then Consider THIS Investment
April 15, aka “Tax Day”, is behind us, but I pay a lot of attention to a different tax day: Tax Freedom Day.
Tax Freedom Day? That’s the mythical day when we as a nation have earned enough money to pay for all federal, state and local taxes for the entire year. In 2018, Americans will pay $3.4 trillion in federal taxes and $1.8 trillion in state and local taxes. This adds up to a total tax bill of $5.2 trillion, or 30% of our incomes. Yesterday (April 19) was Tax Freedom Day.
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Each year the IRS releases data that spells out the collective details about how much in taxes Americans have paid. The results are always interesting and often surprising.
Despite what the mainstream media wants you to believe, one of the most important truths the IRS numbers prove is that our tax system is indeed quite progressive. The vast majority of the income taxes are paid by the highest income earners in America:
141 Million Taxpayers: The most recent numbers show that 141.2 million American taxpayers reported $10.14 trillion in adjusted gross income (AGI) — and paid $1.45 trillion in individual income taxes.
The Bottom 50%: It may be hard to fathom, but 50% of those 141 million taxpayers only pulled in 11.3% of that $10.14 trillion and had an AGI of less than $39,275. They paid only 2.8% of the total income taxes.
Keep in mind that 141 million Americans filed a tax return, but a large group of Americans didn’t because they had no taxable income. So, the bottom 50% is actually a larger number if you include those non-filers.
The Top 50%: The upper 50% of all taxpayers paid 97.2% of all individual income taxes
The Top 1%. Those often-maligned Top 1% of taxpayers had an AGI of $480,930 or higher, and paid 39% of all federal income taxes at an average rate of 27.1%. Moreover, the Top 1% received 20.6% of the income, but paid almost 40% of the taxes.
Indeed, the top 1% of taxpayers paid $568 billion, or 39% of all income taxes. Meanwhile the bottom 90% paid $428 billion, or 29.4% of all income taxes. In fact, the Top 1% of taxpayers paid more income taxes than the bottom 90% combined!
These numbers shouldn’t surprise you because our tax system is designed to collect more taxes from the affluent.
And it does.
However, the recent Trump tax cuts will make our tax system even more progressive — which you’d never know if you listened to the mainstream media. High-income earners in high-tax states are going to get hit hard because of limitations on mortgage interest deductions and state income taxes.
In fact, a recent Wall Street Journal analysis shows that the very top earners will now pay an even higher percentage of overall taxes. The top 1% go from paying 38% of total income taxes to a little over 43%.
Does all this make you want load up on tax-free municipal bonds? For most wealthy, income-focused investors, muni bonds make more sense than ever.
There are thousands of tax-free bond funds. See our chart (above) of the top Weiss-rated municipal bond funds to help you get started.
That doesn’t mean that you should buy any of these funds tomorrow morning. Our Weiss Ratings are an excellent screening tool, but the timing — when to buy — is a completely different consideration.