tax planning

As of October 2020, the U.S. debt is an astronomical $27 trillion. Increased government spending during the pandemic to help struggling businesses and individuals, added trillions more to the debt. The national debt is expected to exceed the size of the entire U.S. economy in 2021 – this hasn’t happened since World War II. Could this mean tax increases might be in your future?

Much like a credit card, U.S. taxpayers will have to pay back this accumulated debt. Increased government spending now and the expiration of the Tax Cuts and Jobs Act at the end of 2025 could be contributing factors to potential tax increases. More than likely taxes will increase in the future, but there are some tax minimization strategies you may be able to use now to lessen your share of the burden.

The 2017 Tax Cuts and Jobs Act provided taxpayers historically low tax brackets. How can you take advantage of today’s low tax rates?

Roth IRAs:

  • You may consider a Roth IRA, where you pay tax on contributions and not on distributions.
  • A Roth conversion may make sense in a year in which your income is lower than usual, or if you think your tax burden will increase in the future.
  • Roth IRAs are not subject to Required Minimum Distributions (RMDs). RMDs may increase your tax burden after age 72.
  • Roth IRAs may also help reduce your beneficiary’s tax burden.

Taxes on investments:

  • Investments held for one year or less before being sold are considered short-term capital gains and are taxed at ordinary income tax rates.
  • Investments owned for longer than a year and sold result in long-term gains or losses, and are taxed at preferential rates of either 0%, 15%, 18.8%, or 23.8% depending on your income.
  • Up to $3,000 in net losses can be deducted per year.
  • Losses over $3,000 can be carried over to subsequent years.

Strategies for those who own property:

  • Mortgage Interest: If your mortgage is from December 15th, 2017 or earlier, you can deduct the interest on the first $1 million of your mortgage if you itemize your taxes.
  • Delaware Statutory Trusts (DSTs) can allow you to continue investing in real estate while avoiding the “Terrible T’s” of being a landlord, AND the potential tax trap.
  • Opportunity Zone Fund investments may allow taxpayers to defer capital gains tax through 2026, avoid paying tax on 10 -15% of the gain, or even pay no tax on the appreciation.

Taxes can often be our single largest expense – between taxes on your retirement account withdrawals, real estate holdings, Social Security benefits, and investments, you may be leaving a substantial amount of money on the table without a comprehensive tax minimization strategy in place. Do you have a long-term tax minimization strategy, or are you only focused on minimizing your tax burden on a year-to-year basis? Finding the right strategy to minimize taxes really depends on your goals and unique financial situation. You’ve had a successful career and accumulated a substantial amount of wealth, and now deserve to have someone help you keep more of what you’ve saved. Let us know if you would like a complimentary retirement tax analysis.