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Paying High Taxes

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What is your marginal tax rate? Basically, the marginal tax rate is the percentage of tax you pay on the next $1 you earn. The US has a progressive tax rate system – progressive meaning that as you make more income your taxes progress upward. Your income is taxed by the Federal Government (the Internal Revenue Service) and the state where you earn your income. The IRS maximum tax rate is 37% which starts if you earn $539,900 income or more in the current tax year (2023). In California the maximum tax rate is 13.3% which starts if you earn $2,156,696 income or more in the current tax year. These percentages are added together to total 50.3%. If one has an event like the sale of their business, or a bunch of stock options vested, or a large bonus, the tax on $2,200,000 in income would be over $1,100,000 paid to the IRS and the State of California. There are a variety of ways to counter act this. One way is for example the California insured triple tax free municipal bonds. The rates on these bonds which can be quite competitive, if your tax rate is going higher and higher, these tax-free bonds have a couple of different advantages.

First, what you see is what you get. The income that comes off of the bond is tax free and the money that goes into your account is yours and is not taxed. There are cases where the bond itself makes a profit. For example, if interest rates go down the resale value of the bond goes up. If interest rates go up, the resale value of the bond goes down. If you hold the bond, you get the face value and as you hold it you can receive a cash interest payment that is fixed and will not change. This helps one plan for an expense like property taxes or some other expense.

Secondly the bond is insured which is a comforting feeling when the investment is decreasing in resale value. Or if the stock market is going down, the buyer of the insured bond knows that the face value of the bond and the uninterrupted interest payments of the bond are insured by an outside insurance company.

To be fair the resale value is / could be changing and it is important not to put too much money into the bond or better said it is important to leave enough cash or liquidity that would cover any unexpected emergency.

If you would like to get more information on how to avoid paying high taxes, please click below and add your name, and/or schedule an appointment with me via email, phone or meet me at my Palo Alto office.

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