Taxes are due today, so it only makes sense I write about taxes. Specifically, I am going to focus on the upcoming changes to the current tax brackets and rates. Grab some caffeine for this 2-minute article.
- We are still in the TCJA world of taxes. This stands for Tax Cuts and Jobs Act of 2017.
- With this massive change to the tax structure back in 17 we saw tax cuts for both individuals and corporations.
- Brackets were reduced as well as the actual tax rates.
- However, there is one key point. The tax cuts for corporations were permanent and those for individuals were temporary.
- This temporary tax structure ends in less than 3 years. That means higher taxes coming your way!
What Does This Mean:
- At this point we can only operate under the tax structure as we know it.
- I know lots of “experts” like to give their opinions on what will happen with taxes for individuals regarding this upcoming change, but they are nothing more than guesses now.
- Ultimately, we are in a lower tax environment now than we will be in three years. Assuming nothing changes.
Let’s Talk Specifics:
- How about we start with tax rates. Right now, we have rates along the lines of 10%, 12%, 22%, 24%, 32%, 35% and 37%.
- We will be reverting back to rates like 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
- You probably noticed most rates increase.
- Also, the actual income tax brackets will be changing. They will be adjusted for inflation, but the threshold to get into higher brackets is lower.
- Simply, you get into higher tax brackets faster!
- There are other changes to things like Marriage Penalty (returns) and Standard Deductions.
What Should You Be Doing:
- Unless you are cool with paying more taxes, start thinking about ways to take advantage of the currently lower tax environment.
- Things like Roth conversions, accelerating income, doing Roth 401ks now vs shifting to traditional 401ks later, and more.
- Don’t fall for what I am sure will be coming marketing campaigns to do all kinds of questionable things to try and hide income and reduce your taxes. I predict lots of free dinners and TV programs on the horizon!
- Ultimately, have more conversations with your CFP and CPA about ways to do effective tax planning.
- You have heard me use the expressions of Not Tipping Uncle Sam and even It’s Not What You Make; It’s What You Keep.
- Ultimately, the goal is to pay the lowest overall lifetime tax bill.
- With that, keep in the back of your head things like “Low-income years are terrible things to waste” and “Your goal is to pay taxes when your rates are the lowest.”
- Following the above themes will help you achieve the lowest lifetime tax bill.