This start of this year has already shown us how much change is on the horizon in Washington DC. One of these changes is in the arena of tax reform. While the winning Republicans often favor tax cuts over increases, even President-elect Donald Trump’s proposals would signify tax increases for some people of every income range. (1) And what if things don’t work out for the new ruling party? Four years from now the pendulum could swing the other way. No matter which political party is in control, you should always maintain a tax-diversified financial strategy.
Tax Rates Then and Now
It seems like people are always complaining about taxes, but did you know that they are historically low right now? Take a look at the graph below. It shows the tax rates paid by the highest income-tax bracket.There have only been a few short periods since the inception of the federal income tax when rates have been lower than they are now.
Higher tax rates were common in the 20th century. As World War II came to an end in 1945, the highest tax bracket was 94%. Even after the war, tax rates stayed high, with a top rate of 70% commonplace well into the 1980s. Our current 39.6% is incredibly low compared to that.
Tax Rates In The Future
Though no one has a crystal ball to see exactly what the future holds, a solid understanding of economics and government can give us some clues, which all point towards tax increases.
Simply put, taxes fund government spending, and the more the government spends, the more taxes are needed. With our aging population accessing Social Security and Medicare, government programs like the Affordable Care Act and federally subsidized student loans, and interest on our ever-growing national debt, our government is going to need more money in the future. The Heritage Foundation predicts that at current tax rates and expenditure levels, tax revenues will be completely consumed by 2030. (2) This means we can expect tax rate hikes to pay for the continuation of these programs.
How Can You Prepare Your Portfolio For A Tax Increase?
It’s challenging to plan for an unknown future, but your best bet is to be proactive. One way to do this is to use tax-free investments, like municipal bonds. That way, if marginal tax rates increase, that income will not be affected.
You can also prepay taxes and lock in current rates by utilizing Roth IRAs and Roth Accounts. A shrewd move, this will shield you from future tax rate increases and all growth is tax-free. One caveat: the Roth tax vehicle does not protect against new taxes that could be added, such as a consumption tax.
How I Can Help
In light of historic tax rates and future projections, you should review your portfolio to see if it is properly prepared to weather a tax increase. An experienced financial professional can easily identify any weaknesses in your portfolio and recommend any improvements that should be made. If you want the opinion of a seasoned professional, call me today at 770.249.7424 or email me at firstname.lastname@example.org. Together we can come up with a strategy to protect your portfolio no matter what Washington throws your way.