What will you do if your taxes go up? Almost every client conversation I’m having these days contains questions about tax law changes. Many are speculating that tax hikes will be significant, no matter your level of income. I just don’t see significant tax increases for most Americans based on, what I think is, my informed opinion. Those earning significant compensation will likely pay more, but the vast majority of Americans will likely see little to no income tax changes. The truth is, until a bill is passed into law, none of us know for certain what the changes will bring. Once passed, we, like everyone else, will be carefully studying the changes and making recommendations for clients to compensate for the changes.
If your taxes do go up, you will likely be in search of tax deduction strategies. Much of the work we do for clients is done in tax preference accounts or using tax favored investments and these will become even more popular with increased income taxes.
Did you know that:
- Roth IRA gives you unlimited tax free growth
- Traditional IRA gives you a tax deduction when you make a contribution? (up to $6,000 per year per person) ($7,000 if you are age 50 or older)
- 401(k)s allow you to contribute $19,500 of your compensation as a tax deductible contribution or Roth (tax free growth) and you get to choose which. ($26,000 if you are age 50 or older)
- Health Savings Accounts (HSA) can offer both a tax deduction for your contribution and tax free growth (The 2021 limits are $3,600 for an individual and $7,200 for a family)
- Annuities provide for unlimited tax deferral
- Municipal bonds provide federally tax free interest (sometimes state tax free too)
- Life Insurance cash values can accumulate tax free
There are more niche tax strategies or investments that can provide tax benefits, but the above list is widely used to gain tax benefits. As with everything, you must understand the details of a tax benefit or tax preference and how it fits within your personal financial situation, but taking the time to understand the options available is critical. If major tax law changes are made, helping people minimize the impact of the changes will become a bigger part of the work we do.
Speaking of IRA and Roth IRA contributions. The 2020 tax filing deadline was recently extended until May 17th, 2021 and with it the deadline to make your 2020 IRA or Roth IRA contribution. Hopefully this allows some people a little extra time to make good on that IRA contribution goal for the tax year of 2020.
As always, we hope you find the Weekly Market Review both informative and interesting.
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Trevor N. Coe, CFP®