The end of the year brings with it a number of feelings. The most common is joy for having celebrated this special time with family and friends. That other feeling is angst, caused by the need to make potentially last-minute tax moves. With the exception of contributions to an Individual Retirement Account, your options to make any last minute tax moves expired when the clock struck midnight on Friday morning.
Between you and me, I'm not familiar with anyone who actually enjoys doing their taxes. In fact, I often hear from friends and family that they feel they're being overtaxed by the federal government.
In the United States, we have seven individual income tax brackets, ranging from a low of 10% to a peak marginal rate of 39.6%. What consumers often fail to account for are the standard deductions of $6,300 per individual, or $12,600 for married filing jointly. There are other deductions and credits as well that American taxpayers may be able to take advantage of, including possible mortgage interest deductions, tax-loss selling, and certain contributions to retirement plans, which in the case of a 401(k) simply reduce your taxable income since the money heading into those plans is pre-tax dollars. By the time taxpayers have factored in their deductions and credits, they've often paid a far lower effective tax rate than expected.
11 countries where individual tax rates can hit 50% (or higher)
Another thing that'll likely make the American taxpayer feel better about their current tax situation is knowing that there are plenty of other countries out there with higher peak marginal individual income tax rates than the United States'. In fact, based on the latest tax aggregation by KPMG, there are 11 countries where an individual's peak marginal income tax rate could hit 50%, or higher. Here's a rundown of those 11 countries:
- Aruba 58.95%
- Sweden 57%
- Denmark 55.41%
- Finland 52.35%
- Netherlands 52%
- Zimbabwe 51.5%
- Japan 50.84%
- Slovenia 50%
- Israel 50%
- Austria 50%
- Belgium 50%
Makes you feel a little better knowing that your peak marginal tax rate is "just" 39.6% in the U.S., doesn't it?
Why individual tax rates are so high in these 11 countries
You might be wondering why tax rates for these countries, many of which are European, are so high. It boils down to three key factors.
First, many European countries have different social values than we have in the United States. For example, the United States is the only developed country in the world without a universal healthcare plan. Universal health plans aren't cheap, and many of the aforementioned European countries provide financial support for national health coverage via taxation. Additionally, countries like Sweden, Finland, Norway, Slovenia, Germany, and France offer college educations for free, or for a negligible cost, depending on conditions which can vary by country. Tax revenue helps pay this cost.
Secondly, taxes are a critical component to the success of the Eurozone. Many Eurozone countries find themselves heavily indebted, and high tax levels are a way to ensure they don't become the next Greece. Belgium, for instance, had a debt-to-GDP percentage of 111% as of the first quarter of 2015, and the Eurozone as a whole was sporting a debt-to-GDP of 92.9% based on data from Eurostat, which was provided during the summer.
Finally, with few exceptions, higher tax rates also tend to correlate with high standards of living. Aruba, the country with the highest individual income tax rate of nearly 59%, has a generally low unemployment rate, and residents of Aruba enjoy a comfortable standard of living, thus supporting the world's highest peak marginal tax rate. But it's important to note that these aforementioned countries typically have progressive tax brackets like the U.S., where marginal tax rates increase along with income. In Aruba, the 58.95% peak marginal bracket doesn't kick in until nearly $166,000 in income is earned in a given year. There are actually 14 separate tax brackets in Aruba, ranging from a starting point of 7.4% to the high of 58.95%. Therefore, it's important that you understand not all dollars earned are being taxed at 58.95% -- most residents are likely being taxed at a considerably lower effective tax rate.
There's still time for you to make this one smart tax move
Now that you feel a little better about your own tax situation, how about making it even brighter?
As mentioned above, one tax move that can be beneficial in multiple ways that you do still have time to make, and which can be retroactively applied to your 2015 tax return, is opening and/or adding to an IRA.
The two most common IRA choices are the Traditional IRA and Roth IRA, with each offering its own perks. In the case of a Traditional IRA, money contributed may be deducted on your 2015 tax return, but the amount of the deduction will depend on your income level. Your investment in a Traditional IRA also grows tax-deferred until you begin making withdrawals sometime between age 59-1/2 and 70-1/2. There are also no income limitations when it comes to contributing to a Traditional IRA.
For a Roth IRA, account holders don't have the ability to take current year tax deductions on the amount they contribute, and there are income limitations that could prevent an individual or couple from opening or contributing to a Roth IRA. However, investments can grow completely free of taxation within a Roth IRA, as long as no unqualified withdrawals are made. Over time this can prove considerably more valuable than taking current-year tax deductions for some individuals. Additionally, Roth account holders can continue to contribute past their 70th birthday, and aren't required to take minimum distributions as with a Traditional IRA once they turn 70-1/2.
It's time to turn that tax frown upside down America!