CommentaryApril 2020 Commentary

The Tax Man Cometh

Did you know that in 1952 the top marginal tax bracket in the United States was 92%  Do you know the only time since 1913 when the US Income Tax Code was put in place only the following years had a LOWER highest marginal tax bracket than we have now (27 out of 107 years):

1913 to 1915 7%
1916 15%
1925 to 1931 24% to 25%
1987 38.5%
1988 to 1990 28%
1991 to 1992 31%
2003 to 2012 35%

Source: Tax Policy Center at Urban Institute and Brookings Institute

Here’s one more fact- between 1936 and 1980 (44 out of 107 years)- the prime working years of the generation we refer to as “The Greatest Generation”, the highest marginal tax rate was NEVER lower than 70%.  This generation paid for World War II for the United States and rebuilding the world, added Social Security and Medicare as benefits to all Americans, and build both the National Highway System and a National Defense Program, including space travel, like no population on the planet had ever seen.

Now we’ve got Netflix and iPhones, low taxes and a $24 Trillion Dollar Credit Card Bill.  We think times may have to change, and it could be a reality shock for all top earners out there.

Currently, our top marginal bracket is 37%, capital gains are taxed at 20% maximum, and a person can die with less than $11,000,000 before they owe estate tax.  All of this could change rapidly or slowly over the next decade as we decide as a society how we are going to pay our bills and our credit card down.  Assuming the brackets are going up, what can someone who is forward thinking do to help themselves keep their nest egg from shrinking?  We have a few thoughts:

  1. Change your paradigm: it’s hard to have a tax bill- ever. But if we think that taxes will go up substantially in the future, does it make sense to pay taxes now at current rates, if we could lower them in the future?  If so, change your mind set to look for opportunities to pay taxes now if it may reduce them later in higher brackets.  Taking actions like contributing to Roth 401ks instead of traditional ones, converting IRAs to Roth IRAs, taking tax sensitivity into choosing investments, and gifting to kids in lower tax brackets may make sense as strategies to review.
  2. Look at your long-term cash flow strategies and consider using tax advantaged assets for later. As an example, if you are in distribution mode, should you be tempted to tap into that Roth IRA? Or should you save that tax-free income source for much later years, if the rates are higher or you need a large lump sum?  If you have an HSA account in your accumulation years, should you use it now for medical expenses, or let it grow and put it aside for later?
  3. Build flexibility into your future income planning. If the bulk of your assets are all in one type of savings- say a pre-tax 401k account and IRAs, then you only have one tax law to work with.  If instead you have some assets subject to capital gains, some Roth, and some tax-exempt assets, you have an arsenal of tools that can be used to keep your income stable but control the taxable portion.
  4. Pay attention to the long-term effects of your decisions today. Not building margin of error that could cover increased taxes in the future into your current planning can change a wealthy person into a poor person before they know what is happening.  If you are in accumulation mode, live below your means and “over save”.  If you are in distribution mode, don’t pull the maximum income you can, especially early in retirement.  If you are buying your happiness in either stage of life, you probably aren’t really all that happy in the first place.  Our “richest” clients are the ones who don’t need to spend to be happy.
  5. Look at YOUR picture, and don’t blindly follow guidelines. If conventional wisdom says to defer taxes as long as you can- question that recommendation, don’t blindly accept it.  Conventional wisdom is for everyone.  It may very well not apply to you, as your situation may be different.  We have found a common thread with many people we work with is they focus on the opportunities and challenges of their personal situation continuously and modify as they need to.  They are unlikely to blame external factors like market swings and tax rates for their successes or failures, because they build flexible plans and adapt as necessary.

We pride ourselves on attempting to use historical data to look down the road for our clients to see what may be coming and make suggestions accordingly.  Of course, we don’t know what will happen- no one does.  But we believe that thinking out possible obstacles and how we can adapt is a value.  This is especially true when it comes to planning for how taxes may impact our clients and their future lifestyle.  Working with them, their tax and legal advisors can be a game changer when it comes to the process of planning.
The Planned Approach, Inc.

420 W. 98th Street
Kansas City, MO 64114
(816) 941-0098

Our Disclosures/CRS FORM
The Planned Approach, Inc.

420 W. 98th Street
Kansas City, MO 64114
(816) 941-0098

Our Important Disclosures

Insights for Your Life Stage

The Planned Approach, Inc. is an Investment Advisor registered with the Securities and Exchange Commission. No client or prospective client should assume that any information presented or made available on or through this website, is a receipt of, or a substitute for personalized financial planning consulting advice. Financial planning consulting advice can only be rendered after the following conditions are met: 1. Delivery of our Form CRS, Form ADV Part 2A and 2B to you; 2. Execution of an Investment Advisory and/or Financial Planning Engagement Letter between us. You may obtain a copy of our ADV Part 2A Disclosure Brochure containing similar information by sending a written request to The Planned Approach, Inc., 420 W. 98th Street, Kansas City, MO 64114. Additionally, please note that hyperlinks included throughout this site are provided as a matter of convenience and we disclaim any and all responsibility for information, services or products found on websites linked hereto. Please contact the firm for further information. The Planned Approach, Inc. is not engaged in the practice of law and does not provide legal advice. Always consult with an attorney regarding your specific legal situation. The Planned Approach, Inc. is not engaged in the practice of tax consulting. Always consult with your tax advisor regarding your specific tax situation.