Avoiding Future Tax Increases

Most taxpayers have an instinct to delay paying taxes to the last possible minute. We want to hold on to our money and let it “work” for us. However, there is one exception to that notion. Most of us pay our property taxes as early as possible. Why? Because there is a discount for paying those taxes early. Well, the same may now be true for income taxes.

With the recent tax law changes, taxes are now historically low. However, they are scheduled to go up when the current tax law sunsets in 2025. Moreover, there is always uncertainty about what changes Congress will make to tax rates in the future. Given the country’s enormous debt and the current demographics of the baby boomers reaching retirement who are now becoming eligible for Social Security and Medicare, the government will likely need to either increase revenue or cut spending. Voting to slash benefits is typically hazardous to a Congress.

Therefore, we are recommending to our clients, they attempt to position significant assets into strategies that produce tax-free income such as Roth IRAs and overfunded cash value life insurance. As far as Roth conversions, we are typically recommending gradual partial conversions while attempting to keep clients out of the top tax bracket. For couples filing jointly the tax bracket is only 24 percent for income up to $168,400 and 32 percent up to $321,450. When tax rates go up in the future or when your kids — who may be subject to additional state income taxes — inherit your IRA, these rates will seem like a bargain.

For non-qualified assets, according to Bloomberg, several prominent wealth management firms have been repositioning billions of dollars into specially designed life insurance contracts for their high net worth families to allow for tax-free growth and future tax-free income. There are many factors to consider when doing long-term tax planning, so it’s prudent to consult with your adviser before implementing any long-term tax reduction strategies.

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Keith Singer

Keith Singer, a well-known financial advisor in Florida, is both a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a licensed Florida attorney.

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