A Tip for Understanding Your Taxes

As we approach tax time, I wanted to share one tip I do with all my clients. It is a simple exercise to help comprehend how much you are paying to Uncle Sam annually. 

 Are you ready? 

 Here it is: Take the Total Tax number from your Federal Tax Return and divide it by twelve (12). 

 That is it!

 Oh, this number can be found on Line 24 on your 1040.  

For simplicity purposes, let’s say Line 24 shows your number at $120,000. Dividing this by 12 gets you to $10,000.  

You pay Uncle Sam $10,000 a month. 

 I share this tip simply because over the years this is the most effective way I have found to help clients get their arms around how much goes out to Uncle Sam.  

Breaking it down to a monthly cost resonates more like a mortgage, car, credit card, or whatever other kind of regular monthly payment.  

For some reason, seeing the $120,000 number doesn’t hit home like $10,000 a month. I guess we can chalk that up to Behavioral Finance.  

Feel free to try this simple tip on your own. For my clients, it is right there on their One-Page Financial Plan.  

One final thought. Even though this is super simple, I have only heard of literally two other advisors who break out their clients’ tax numbers this way. You can see it is not difficult. However, most advisors avoid anything to do with taxes so odds are they don’t know your number because you don’t spend any time doing tax planning with them. Remember – Lowest Lifetime Tax Bill wins!