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Income tax rates will never go up for that huge proportion of the citizenry that doesn’t pay taxes now – I expect they will get even more money back from the government. But I expect income tax rates to increase for higher-income taxpayers in future years, and that presents a tricky problem for people looking at seriously high IRA and SEP withdrawals and conversions. I also expect the estate tax exemption to revert to a lower amount when its current term expires. No one can predict the future, but I think the most likely case is that the political parties will engage in their typical brinksmanship and somehow come up with an alternative for higher-income tax rates that will lift them a bit, but not as high as some activists want it to be, and an estate tax exemption that is higher than those activists want, perhaps a lot higher, but not as high as it is now. (Of course, we will all pay all sorts of higher fees and one-time charges, and also higher taxes indirectly as corporate taxes flow through.) Wage and other inflation, along with higher interest rates, is bumping more and more taxpayers into higher brackets, so the perception that we have only “haves” and “have nots” is getting murkier and less and less true. It is those people in the middle who will provide the leverage one way or another.
In Fidelity’s financial planning tool, I add a 10% local tax that doesn’t actually exist. I use this to account for future federal and state tax increases.
No, tax rates will not inevitably increase if fiscally responsible governments are elected, and available resources are spent on public goods. A tall order.
It seems like rates change these days every time a new president takes office. So I try to take a long-term view. Sure, rates might go up in the next few years, but they could also come down again in five or ten years. Investors’ only and best protection, I think, is to have assets in each of the three major tax categories — taxable, tax-deferred and Roth. That at least provides flexibility down the road to make withdrawals that are beneficial under the tax regime prevailing at the time.
The highest marginal personal income tax rates declined steeply from about 1960 to about 1990. Since then they have been relatively flat. People have been saying higher rates are inevitable for a decade or more, but for 60 years the effective tax rate has declined – any increases were marginal and impermanent. Seems to me that it’s difficult to conclude that a rate increase is “inevitable”. “Possible” is the word I would use.
I think preparation depends hugely on your personal situation. For most people, there’s little to be concerned about, income will never be high enough for the marginal rates to exceed 12% or thereabouts, and the acceleration of income (i.e. by moving from Traditional to Roth) is most likely harmful to future wealth. For folks with $2-5M, some actions like back-door IRAs or Roth contributions may be helpful.
How will the latest multi-Trillion dollar expenditures by Uncle Sugar be financed – by taxing all the illegals happily working in our service industries? I want whatever you are smoking, John!
Socking as much away as in the company Roth 401 (k) as possible. Or Roth IRA if that is what is available. Buying dividend-paying stocks of companies that can raise prices with inflation – consumer staples, utilities, pharma, etc.
Buying stocks of global companies with a wide moat. Owning real estate and Real Estate Investment Trust stocks.
Nothing in finance is inevitable, but if I had to bet, I would say tax rates will rise from here. How to prepare? By practicing tax diversification, that is, holding tax-deferred, tax-free, and taxable accounts.