Believe It or Not, the Tax Code is Your Friend

You may have received your W2 and other tax forms by now and are getting ready to prepare and file your 2024 tax return. This might be a good time to discuss our approach to tax planning at Retire SMART.

Those who listen to me on the radio or watch me on television know that I am no fan of taxes and government bureaucracy. However, I am a fan of the tax code in this regard: it is written to help you pay lower taxes. That’s why at Retire SMART, we read and continually study the tax code. Between the federal and state tax codes, there are more than 1,700 incentives to help you reduce your tax liability.

The problem, of course, is that one must read all that mind-numbing bureaucratic language to figure out what the incentives are and how to apply them. As I often say, you don’t know what you don’t know. Never is that more true than in the field of tax policy. There’s no shortcut. You must dig in and gain command of all the details in the tax code.

We have served numerous clients who would have left tens of thousands of dollars in taxes on the table for Uncle Sam to claim in a given year if not for the strategies we implemented to keep that money in the clients’ hands. We were able to do it because we knew the tax code, and which incentives would work for each client.

We focus on about 120 strategies. It’s common to use several strategies in combination to serve a single client. By utilizing every arrow in our strategic quiver, we routinely save clients more than a hundred thousand dollars in taxes over the course of their retirement.

We love it as much as our clients do, but it takes a lot of hard work.

We do tax planning for businesses as well as individuals. Proper tax planning for business owners requires a much higher level of research and strategy.

For instance, has your advisor prepared you for the possible change regarding qualified business income? It’s a tax deduction that generally allows small business owners to deduct up to 20% of their pass-through income from their taxes. Do you know all the rules and qualifications? Are you taking full advantage of this deduction?

If you are, great, but have you planned for what will happen if the 20% discount you have enjoyed goes away? That could generate a devasting increase in your tax liability. As it stands, the law says the qualified business income provision will sunset Dec. 31, 2025. You cannot afford to be caught flat-footed if and when this deduction sunsets.

As a small business owner myself, I know you went into business because you have a dream and a passion. You want to provide a good or service at the best price for the most people. You did not go into business to wrestle with tax codes and ever-changing tax policies. That’s where we can help. We wrestle with tax codes and ever-changing tax policies so you don’t have to.

The good news: federal tax rates are at a historically low point. If you look across the history of the federal tax code since it came into being in 1917, the average top marginal rate has been 63.8%. Today it’s 37%, and has remained below 40% since the Reagan presidency in the 1980s.

The bad news: federal tax rates are not likely to remain there much longer. Since 2001, federal spending has produced annual deficits and run the national debt up to $34 trillion. Gross Domestic Product in 2023 was roughly $27 trillion. As a nation, we owe 26% more than we make. That’s not a healthy financial condition.

There is buzz about the new Department of Government Efficiency and its mandate to reduce the size of the federal government and cut spending. It remains to be seen whether it will happen. DOGE would not be an actual department of government. It would be a volunteer committee making recommendations.

Even if there is some streamlining of government, it likely will not be enough to forestall future tax increases. Any rational analysis of the current political and economic situation leads to the conclusion that taxes will be higher in the future. You need to account for this in your retirement plan. You can’t afford to cruise along on automatic pilot, hoping for the best. Your advisor must monitor the tax code and expected changes in tax policy so your tax burden is minimized when tax increases become reality.

You must look beyond the next year and ask yourself where you believe tax rates will be 5, 10, or 15 years from now. When we do tax planning, it isn’t just for the next year; we are looking down the road so are you positioned to maximum advantage for decades to come. That way you can relax and enjoy your retirement.