Not Rich Yet | Managing higher incomes

TAG | Death and taxes

Personal income tax rates in the US are at relative lows.

Over the past 50 years, income tax rates have been much higher. See the following chart from Wikipedia:

Based on recent government spending as part of the bailout and other programs to stimulate the economy – regardless of your political opinion on whether this was right or wrong – taxes have nowhere to go but up. The government needs income to balance the budget, and like it or not, higher taxes are will come.  And guess who they will hit? Not the poor, not the “middle class”, not the ultra-rich, but the folks with higher incomes (doctors, lawyers, professionals, etc.) that earn enough to labeled rich by politicians, but not rich enough to really defend themselves.

So let’s just assume for a second that my assertion above is correct. What should you do differently if you anticipate (much) higher tax rates within the next few years?

Here are my ideas:

  • Accelerate taxable events
    • If you own a house or some other asset with a lot of appreciation, you may want to sell earlier rather than later to avoid a higher capital gains tax
    • If you want to pass on your wealth to the next generation, you may want to give extra thought to estate planning and vehicles that allow you to maximize the impact of your inheritance for your heirs
  • Reduce your reliance on tax breaks
    • One popular way for the government to increase taxes is by doing away with tax breaks or lowering the bar at which the tax breaks phase out. If you heavily use tax breaks, you should think of ways to reduce your reliance on them
    • This includes relying on tax-deferred accounts such as 401ks and IRAs.  Just because those are tax protected now, doesn’t mean they will be in the future. One day all of us who invested diligently in 401ks will be the new bad rich people that politicians will strive to tax.  So don’t put all your chickens in one basket and diversify amongst different tax-deferment strategies and keep a healthy chunk in good old-fashioned taxable accounts.

What would you do? What would recommend?

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