Tax Freedom Day Has Arrived!

Tax Freedom Day® fell on April 23 in 2008, according to the Tax Foundation's annual calculation using the latest government data on income and taxes.

While this day doesn't involve trees, eggs, or fireworks, you should be just as concerned about it. In 2008, almost one-third of our time (30%) will be spent working for the government.

According to an annual report issued by the Tax Foundation, a nonprofit, nonpartisan research organization, in 2008, Americans will work 74 days to afford their federal taxes and 39 more days to pay state and local taxes. Meanwhile, buying food requires 35 days of work, clothing 13 days, and housing 60 days. Other major categories are health and medical care (50 days), transportation (29 days), and recreation (21 days).

The Tax Foundation took its analysis one step further and broke down the tax implications for each state (and the District of Columbia). This year, Connecticut is the unlucky winner, bearing the nation's largest tax burden with a Tax Freedom Day of May 12. On the opposite end of this spectrum is Alabama's , which celebrated the earliest Tax Freedom Day on April 11.

How can you reduce the time it takes to reach Tax Freedom Day next year? Ask yourself three simple questions related to your financial situation in 2008:

• Did I receive 1099s from my bank accounts?
• Did I receive 1099 from other investments?
• Did I spend or reinvest the interest?

If you earned taxable interest on investments that you expect to hold for the long term, it's too bad you had to pay current taxes on it. With taxable investments, the reality is that you don't always liquidate your holdings to pay taxes. In all likelihood, you pay the tax out of current income or out of withholding from other income sources. This technique reduces your spendable income today, and may reduce it in the future. Fortunately, there are sensible strategies that will help you maximize long-term returns while potentially reducing your tax bill.

With investments like annuities, your earnings have the ability to accumulate on a tax–deferred basis. Simply put, you don't have to pay current taxes on money that is ear–marked for the long term. Instead, all earnings are reinvested and continue to accumulate on a tax–deferred basis until withdrawn. Of course, withdrawals of earnings from annuities are taxable and, if you are under age 59½, may be subject to a 10% tax penalty.

*Excerpted from the Tax Foundation Special Report No. 134, "America Celebrates Tax Freedom Day."

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