Today we’re talking about three ways you can pay more in taxes.
That doesn't sound very encouraging, but it's part of our current series: The Coming Tax Storm. Since last year, we've been sounding the alarm over the potential for most Americans to be under a new, more rigorous tax regime. Congress is pretty well-poised to change the tax laws for the worse anytime they choose. We've been living under a nice environment with historically low brackets for the past several years since the passing of the Tax Cuts and Jobs Act. But this won’t last forever. And if Congress gets its way, it’ll end sooner than later.
In prior segments on the tax storm, we talked about your silent partner: the IRS. If you have a tax-deferred account (an IRA, 401K, 403B, or 457 plan), you defer taxes until later and hope you won’t pay high taxes in retirement. That's a myth. You will likely be in similar or even greater brackets down the road than you are today. With the government spending money at an unimaginable pace, it's only a matter of time before the budget is going to have to be more balanced. They have to increase revenue for the whole system to keep working.
The US debt has now topped over $30 trillion. It's unbelievable what we're facing today and it's showing no signs of slowing down. As we discuss taxes from the standpoint of planning, we'll talk about three ways to pay more taxes; a tongue-in-cheek delivery to give you an outline of what to avoid, unless you're just feeling especially generous towards the government.
Do not develop a tax plan and let tax brackets change against you. As part of your Financial Independence Review™ at Lord and Richards, we study where you fall in the tax brackets and determine the changes that will help you avoid overpaying taxes. This is critical, and the vast majority of people have never had this completed on their behalf.
The Tax Cuts and Jobs Act was passed in 2017 and will extend through the upcoming tax year in 2025. We know that brackets are going to revert back naturally in 2026 if we don't do anything about it. Won’t Congress just extend the new-and-improved tax brackets that we're experiencing? Historically, Congress has let them expire because they're no longer usefu
\\"With the government spending money at an unimaginable pace, it's only a matter of time before the budget is going to have to be more balanced."
Those brackets helped a previous political generation but will not help the new generation. New laws have to be passed so that new political credit can be taken. If you look at the deficit, entitlement spending, and the trillions in new debt through stimulus packages, higher tax brackets are almost guaranteed.
Consider the changes that were made. For a married couple filing jointly, if you made $75-76,000 in the past, everything you earned over $75,000 was in the 25% bracket. Currently, it is a 12-22% bracket. That is a remarkable difference. And those who make $150,000 or more will see even greater savings. As a taxpayer, you may see numbers like that filing jointly or alone. Sitting by and doing nothing while the tax bracket changes is the number one way to pay more in taxes.
Do nothing while the deductions that have been increased in your favor go away as they expire. We received a lot of nice deductions in the last tax law; the “Trump Tax Law”. The standard deduction went up so high, charities worried that people would stop giving because they wouldn’t receive as much of a deduction anymore since it’s already built in to their taxes. Well, Congress doesn't want to vote on tax increases for constituents. What's one of the easiest ways to make sure more money flows into the government's pocket? Let the deductions expire on their own, just like the tax brackets in the Tax Cuts and Jobs Act. And that's exactly what's going to happen.
Be oblivious to stealth taxes. The appellate court judge, Learned Hand, made this powerful statement:
“In America, there are two tax systems: one for the informed
and one for the uninformed. Both are legal.”
Stealth taxes are on the rise and being oblivious to what's coming is not a good strategy. You may believe you’re aware of all the taxes you’re paying, but consider this: currently, if you take Social Security, up to 85% of that check from the government can be taxed, even though you already paid taxes to receive it. It's more of a program, you see. The government doesn't mind taxing you on your Social Security check if you make over a certain threshold. Knowing that limit and working with it is an important strategy to reduce taxes on your social security. This can also trickle down to Medicare Part B and make an impact.
Our retirement tax code is written in pencil. It’s absurd to think that it will remain the same for the next 30 years. We have to keep an eye on both stealth and more obvious taxes and develop a written plan that addresses these kinds of items in advance.
Awareness and Preparation
As we discussed, the repeal of the Tax Cuts and Jobs Act may happen prior to the 2025 sunset date, if Congress votes to do so. Other credits, like the step-up in basis, could also be eliminated. A step-up in basis is having appreciated assets that your family can inherit. The government did this so that farms and other important assets aren't broken up in order to pay taxes. The growth and value of that asset over your lifetime is not included in calculating tax when it passes to your heirs. And the government wants to get rid of it.
Raising the corporate tax rate has been in the crosshairs for some time. You may think it will only affect corporate America, but it will filter down into the cost of goods and services. We're trying to fight inflation right now. Raising taxes on corporations that set prices of the goods you purchase is one of the worst reactions to inflation and will likely increase it.
Our government is spending millions on auditing and enforcement by hiring more IRS workers. But don’t be discouraged. You don't have to be caught flat-footed. You can prepare in advance and be better off during times of crisis when those laws change, and tax brackets go up. Lord and Richards can help you develop a plan to become financially independent.