Regardless of whether you want to or not, it's time to start thinking about preparing your taxes.
Most people aren't thrilled about doing their taxes because it can involve hours, or even days, of receipt hunting and number crunching that gets into the most intimate details of your finances from the previous year. Yet, with more than 80% of tax filers netting a year-end refund, it's a critical time of year for consumers and retailers.
Another reason we tend to not like doing our taxes is it's a reminder of the perceived high tax rate we pay as individuals in the United States. Based on corporate tax rates, only businesses in the United Arab Emirates pay a higher rate than in the U.S., so many Americans simply assume we're overburdened by Uncle Sam. Yet, the truth is actually far from it.
11 countries with the highest individual income tax rates
Even though single individuals making more than $406,750 in 2014 will be exposed to a peak marginal tax rate of 39.6% on each dollar over that amount, this is nowhere near the peak tax rates in other countries around the globe. In actuality, there are 11 countries (data courtesy of KPMG) that have an individual tax rate of 50% or higher on their upper-income earners in 2014.
These countries are:
- Aruba (58.95% peak individual marginal tax rate)
- Sweden (57%)
- Denmark (55.56%)
- Netherlands (52%)
- Spain (52%)
- Finland (51.25%)
- Japan (50.84%)
- Belgium (50%)
- Austria (50%)
- Israel (50%)
- Slovenia (50%)
Whereas the average global peak marginal tax rate is 31.12%, the OECD average peak income tax rate -- the OECD is an organization of 34 developed countries that comprise more than 60% of the world's GDP -- is a whopping 41.58%.
One clear standout is that most developed European countries have a considerably higher peak marginal tax rate. The reason is simple: the European Union is heavily indebted. Greece, Spain, Portugal and Ireland are all debt drags on the EU, and it's imperative that European countries like Sweden, Netherlands, Finland and Belgium bring in enough in tax revenue to counter growing national debt levels so they don't succumb to the same growth and debt concerns as these aforementioned countries.
Another point to consider is that social programs are far different in select European countries than they are in the U.S. For example, Finland charges no tuition fees for its universities, and even offers many of its programs in English. The only thing it doesn't cover are your day-to-day living expenses. Similarly, Sweden offers tuition-free Ph.D. programs for college students. Considering that U.S. college costs have sextupled since 1985, the prospect of a nearly free college education probably sounds pretty good. However, the ability to offer free tuition doesn't grow on trees for these countries. Instead, it's derived from the funds collected from comparably high income tax rates.
Comparably, we have it made
Relative to these 11 high income tax countries, we've got it made in the United States. Best of all, we have a number of ways as individuals that we can offset our income and lower our effective tax rate well below our peak marginal income tax rate. Let's take a quick look at a few simple ways you, too, can lower your tax liability in the upcoming year.
One unique way to reduce your tax liability is to do absolutely nothing with your investments! As long as your investing thesis remains the same for your investments, you'll see your capital gains tax rate drop from what could be as high as 39.6% for a short-term gain to nothing higher than 20% once you've held your investments for at least one year. For upper income individuals that's almost 50% more that they'll keep in their wallet by not selling their investments before a year is up.
Tax-advantaged retirement accounts are another smart way to lower your taxable income, either immediately or many years down the road. For instance, a 401(k) through your employer or a Traditional IRA allows you to deduct your contributions in the current year on your taxes, although you'll be responsible for the capital gains once you begin taking eligible withdrawals. On the other hand, a Roth IRA offers no upfront tax deductions, but it'll allow your money to grow completely tax-free during the life of the account.
As you sit down to tackle your taxes this year, if you find yourself annoyed by your high income tax rate, be thankful you don't live in a country like Sweden or Denmark where you could be paying out well over half of your taxable income to the government. You may not like the complexity of the U.S. tax code or your individual income tax rate, but it could be much, much worse.