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Proactive Income Tax Planning

Proactive Income Tax Planning

Like most election cycles, there has been a lot of talk about the direction of income taxes.  While the results of the Senate race will not be known until January, we know that neither party will have a majority in both the Senate and the House.  This means that getting any large-scale tax changes passed may be difficult, and that the current tax environment is likely to remain in place for at least the immediate future.

While the election cycle is important, when planning for retirement we are generally planning for 25 years, not just the next four.  As a result, it’s important for us to take a look at where tax rates have been historically.  The chart below plots the top marginal tax rate in the United States dating back to the early 1900’s – and as we can see, today’s tax rates are on the lower end of the range.  While it might be hard to envision us ever seeing top tax rates north of 70%, it’s also hard to believe that we may see taxes decrease from today’s levels. 

So What Will Change?

There are a few potential items in the next few years that could result in major changes to our tax structure. 

  • 2022 Mid-Term Elections – The next election cycle could produce a change of power in Congress which might lead to changes.
  • Growing Federal Deficit – The CARES Act passed in 2020 added to the growing deficit here in the United States – tax revenue is one of the primary levers that we can utilize to bring the deficit down from current levels.
  • 2026 Tax Law Sunset – This tax law is scheduled to change tax rates back to the higher levels that they were before the Tax Cuts and Job Act.  Below is a sample of different income levels and the projected change in tax rate.

Tax Planning Tools

With a variety of factors potentially pointing us towards higher tax rates in the future, the natural question is so, what can we do about it now?  There are a few tax planning tools that we can utilize today to provide a smoother tax experience for investors in retirement.

  • Question Tax Deferral – In our peak earning years, it is almost second nature to consistently defer taxes by contributing funds into Traditional retirement plans.  If you find yourself with a portfolio concentrated in tax-deferred assets, focusing on Roth 401(k) contributions may make more sense to provide some tax diversification of assets.
  • Take Advantage of Low-Income Years – In retirement, but before required minimum distribution (RMD) age, considered the gap years, individuals often find themselves in favorable tax situations.  It is counter intuitive but accelerating income in these years can provide tax savings over the long term.  This can be accomplished through Roth Conversions, IRA Withdrawals, and taking capital gains.  Read more about the gap years in retirement here.
  • Maximize and Bunch Deductions – With a high standard deduction and few opportunities to itemize deductions today, bunching together deductions (such as charitable donations) into one year and then taking the standard deduction in off years can provide more tax savings then repeating the same deductions every year. Read more about bunching deductions here.
  • Manage Portfolio Tax Efficiently – The final piece of being proactive in tax planning is to make sure you are constructing the portfolio in a manner that results in the highest after-tax return possible.  This is done by taking advantage of the different characteristics of your accounts.  For instance, placing ordinary income producing investments in tax-deferred accounts to shelter income and placing more favorable qualified dividends and capital gain asset producers in taxable accounts can boost your after-tax return versus repeating the same allocation strategy in every account.

Taxes are always a challenge for investors whether you are still working or in retirement.  Be sure to talk to your RegentAtlantic Advisor today to determine how best you can plan your future.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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