Tax reform important, including to those who don’t think they have much to tax

By BOB CUNNINGHAM

Frequently, when the subject of taxes comes up I hear people refer to their own lack of income and assets, and indicate that “any changes won’t affect me much..”

Even if the statement were true, which it almost always isn’t, that represents the wrong attitude when considering your personal finance.

Sure, many people – primarily younger adults still trying to get themselves established – lack the income and/or asset accumulation to be significantly affected by marginal tax rates and such.  But it’s still a good idea to understand how the system works, and how new changes in the law compare, because eventually, such things will directly impact your bottom line.

I’m not going to attempt to go into any sort of detail in this space on the proposals recently offered by President Trump.  It would take a great deal more space than is practical to dedicate here in order to do it justice.

Nor do I intend to go all political on you.  Again, that’s not what this blog is for.

But I will comment on some specifics, and suggest you pay attention to them regardless of your current economic standing.  NOTE:  Nothing from this post, or anything else found on this website, should be interpreted as professional advice.  For all things tax-related, seek the advice of a certified tax professional.

The major tone to the president’s changes elicits simplicity – purportedly, 80 percent of Americans will be able to file their taxes annually on one sheet of paper.  Wow… I presume we will need both sides of the page?

The simplification in terms of tax rates is two-fold.  First, the proposal suggests a low-end tax rate of 12 percent, up 2 percent, among only three levels.  What… he’s raising taxes on the lowest income Americans?

Hardly.  Instead, as I understand it, those who don’t make enough currently to be required to pay federal tax will still be under that line.  And the aforementioned 2 percent difference will more than be made up for by a doubling of the standard deductions, for both individuals and married couples.

And some long-held itemized deductions, like for mortgage interest and charitable contributions, will remain intact.  Other deductions, however, such as home office write-offs and gambling losses (currently, the law allows you to claim losses up to a maximum equal to any claimed winnings) would go by the wayside.

After the 12 percent, the other two rates are 25 percent and 35 percent, plus possibly an additional upper bracket still to be determined.  Currently, the top bracket is about 39%.

Also unclear is the treatment of capital gains.  Under current law, they are taxed at a cap of 15 percent – this affects you and me if you understand that, in order to get the capital gains rate on the growth of your investments, you are required to have held these investments at least for one year.  If you sell stock less than 12 months after you bought it, folks, any gains are taxed as regular income. That can make a substantial difference.

It’s also important to understand that the 12%, 25%, 35% and whatever other rates are included in the new proposal are, like the current system, tiered.  In other words, if your adjusted gross income is $100,000 per year, you would fall under the 25% rate.  But that doesn’t mean all $100K is taxed at 25%.  Instead only, the portion that falls within the 25% rate range is taxed at that rate.

So in a fictional example, you may get taxed nothing on the first $25,000, 12% for dollars $25,001 through $74,999, and 25% for dollars $75,000 through $100,000. Again, these numbers are fictional for ease of explanation, but if the above were true, your effective tax rate on $100,000 would be $5,999.88 (12% of 74,999 – $25,000) + $6,250 (25% of $100,000 – $75,000) = $12,249.88, or about 12.25%.

In the meantime, as Washington D.C. labors over tax reform and other issues, your job as an individual (or couple, if you’re married), is to pay as little in taxes as you can legally avoid.

Doing so starts with understanding the basics of how your taxes are determined… and may be perpetuated by utilizing tax-friendly strategies including (but not limited to), Roth Individual Retirement Accounts, maximum leverage on personal as well as investment real estate, and owning dividend-paying whole life insurance policies as a central part of your financial plan.

We’ve discussed the life insurance aspect in previous posts, and we will continue to explore these types of strategies in the future.  So stay with me, and as always…

Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.