No one can be sure where income tax rates will be in the future. Will we be paying more in taxes in the near future? How will the federal government combat the rising cost of healthcare and the depletion of the Social Security coffers? Will Federal budget deficits impact your retirement?
No one really knows for sure, and anyone who says they know where taxes will be in the short or long-term is only guessing. Are they possibly making educated guesses though? Maybe they are. Are there things that happen in the economy that can sway the amount of taxes that we pay? Absolutely! Knowing those key market characteristics and how those changes affect you can help you minimize the amount of taxes that you pay.
The Impact of Taxes on Everyday Life
Taxes affect every single one of our money transactions whether we want to believe it or not. Taxes can help push you over the edge when trying to decide whether or not to buy or rent a home. How many of us take the home interest tax deduction into account when we finally decide to purchase a home? Most people do. You’re not alone.
Taxes also play a big role in helping us decide when to sell our investments. Since you can carry losses forward or have losses offset capital gains, many investors time their investing strategies to help them minimize their tax burden. Another important tax consideration we all tend to make is with estate planning — when to give assets to heirs, and how to minimize the “death tax”.
Economic And Political Trends That Raise Taxes
There are a few historic trends that you see either in the economy or in the political arena that can often spell higher income tax rates. Currently, the national debt sits at about $14 trillion. This year the United States will collect about $2.2 trillion in tax revenue but spend over $3.8 trillion. It would take drastic cuts in spending to close that gap. Spending cuts alone cannot do it.
Rick Newman recently brought up a great point in an article for US News where he pointed out that in the past tax revenue accounted for 20% of the United States’ Gross Domestic Product (GDP) when President Clinton was in office. Now, taxes only account for 14%.
Tax Impact on Your Retirement
There is a constant discussion in personal finance circles on which is better: taking a tax break now and investing in 401k or Traditional IRA, or paying taxes now but never paying taxes again on your nest egg. If personal income taxes skyrocket in the future just in time for your retirement, then a Roth IRA is by far the best choice.
On the other hand, the government may come up with alternative means to increase taxes while leaving the personal income tax the same or lower. With all the uncertainty ahead, it makes sense to balance your tax mix with both tax-deferred and post-tax investment accounts.
Final Thoughts – No One Knows For Sure
I hope that many of you have seen the trend throughout this article where I say that these trends may result in high income tax either over the short-term or the long-term. There is no certainty. We may look back in a few years and find that eight or more years of a Democrat president actually lowered taxes instead of raising them.
The truth of the matter is that no one can be certain where income tax rates will be in the future. They may be higher, but then again taxes could actually be lower in the future. The best course of action is to continue investing and following the financial plan that you and experts have laid out for you regardless of where taxes are or will be in the future. There are so many things that we have control over, and unfortunately, taxes are not one of them.
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