Doctor, it hurts when I do this. Do what? Pay Taxes!
There is lots of talk today about the government’s new tax plan proposal. Current speculation ranges from tax breaks across the board to taxes that hurt the middle class to tax breaks just for the rich.
I am here to tell you that whatever tax plan is voted upon doesn’t really matter. The reason it doesn’t matter is that in either 3 or 7 years there will be a new president voted in. And then that president is going to implement their tax plan. To help support my point, historically the long-term capital gains rates have been – 0%, 5%, 8%, 10%, 15%, 18%, 20%, 21%, 25%, 28%, 31%, 35% and 38%. The highest marginal income taxes have historically been – 0%, 7%, 15%, 24%, 25%, 28%, 31%, 35%, 38.5%, 39.6%, 43.5%, 46%, 50%, 58%, 63%, 67%, 69.13%, 70%, 73%, 75.25%, 77%, 79%, 81%, 82%, 84.36%, 88%, 86%, 91%, 92%, and 94%.
If you are 55 years old you will probably live another 30 to 35 years. You could have anywhere from 4 to 8 new presidents depending on the length of their presidential terms. That means anywhere from 4 to 8 presidents and their new tax plans. In the last election, one of the candidates wanted to raise the highest marginal rate to 50%, another wanted to raise it to 90%.
Unless you are actively planning how to structure your financial life, you will be subject to a roller coaster ride with new presidents and their tax plans. If structured correctly you can legally be completely exempt from whatever tax plan is implemented in the future. This means not paying taxes on your IRA’s, your non-qualified accounts, your annuities, your pensions. And ultimately means that you would eliminate the taxation of your Social Security benefit (in case you don’t know, if you make more than $44,000 during retirement, 85% of your Social Security will be taxed at your highest marginal rate).
Your doctor isn’t going to be able to fix this, and a band-aid isn’t going to help.