For many of us, income taxes are the number one expense we will have over our lifetimes. Many of us pay more in income taxes over our lives than we do even for our housing. Over the next few years, we may see some real opportunities to take advantage of reducing our income taxes both now and/or in the future. 

Income Tax History

The financial requirements of the Civil War prompted the first American income tax in 1861, at 3%. It was later repealed in 1872, but the idea never really went away. The federal income tax as we now know it was introduced in 1913, partly to make up for lost revenue, and partly to shift the burden of funding the government towards the high earners who would be subject to the income tax.

Income Tax Now

If you look at where we are right now as a country in terms of our income tax brackets, we are sitting at a relatively low marginal income tax rate with the highest bracket being 37%. Our highest income tax bracket was 94%, and it was 91-92% from 1951 to 1963.

As you approach age 73 or 75, depending on your birth year, you will need to be thinking about how Required Minimum Distributions (RMDs) may affect your taxable income.  RMDs are taxable distributions from our IRAs, 401Ks and other retirement accounts. Consequently, I speak often about the “sweet spot” between retirement and the age when the RMDs kick in. These years are the perfect opportunity to do some effective tax planning, as you can often be very intentional about the taxes you pay or don’t pay.

Income Tax in the Future

As the Tax Cuts and Jobs Act expires at the end of 2025, we can expect an automatic increase in income taxes as income tax brackets sunset back to 2017 rates. We’ll also see a pretty big reduction in the standard deduction.  In addition, the U.S. National Debt has grown to over $34 trillion and counting. Before the end of 2025, lawmakers will need to address the pending tax increases and wrestle with their budgetary impact. So, if you are able, now might be the right time to take advantage of the lower tax rate environment.

Here at Brogan Financial, we can help you plan for the long term by assessing your current situation and potential future tax burden in retirement. Taxes don’t disappear in retirement, so plan for your future self. We offer complimentary financial reviews so that you can get your questions answered, and we can help you take the first step towards creating a comprehensive retirement plan built to last for the long road ahead. Schedule your complimentary review today.