Is it Time to Revisit Your Tax Strategy? –


In recent months, there’s been a lot of talk about taxes. More specifically, there has been much discussion of the potential for tax increases as well as the reality of an expansion of the child tax credit. More than a century before income taxes were a part of the fabric of American life, Benjamin Franklin wrote that “nothing is certain but death and taxes.” While I agree that taxes are a certainty, the how, when, who and how much of them is ever-changing. Does your current approach to taxes match today’s new normal?

Here are six questions to ask as you do your own self-assessment.

  1. Where do I stand with investment income? An increase in capital gains taxes and or the hit on other investment income, like dividends, could have you looking for more tax-efficient investment options. Exchange-traded funds or tax-exempt municipal bonds come immediately to mind. The timing of sales (or sales themselves) may be more crucial in your planning to accommodate an increase in capital gains taxes. Business as usual may leave you with less. Examine your portfolio for opportunities, with an eye on what you keep, not just what you make.
  2. Am I making the most of today’s tax brackets? Regardless of changes, it pays (literally) to understand the setup of our progressive tax system. Using the tax brackets to guide your plans for retirement plan or IRA conversions, voluntary withdrawals or if you still are saving, choosing the appropriate type of retirement plan can save you money.
  3. Am I leveraging “tax windfalls”? In July 2021, the expanded child tax credit checks started arriving in bank accounts across the country and will provide yet another opportunity for financial good. Don’t squander this opportunity. Be purposeful with any additional income that comes your way by paying down debt, building savings or investing for other goals.
  4. Is my account selection still on point? If you’re trying to select the “right” tax-advantaged account or type of bond for your non-retirement account, what works best today may not make as much sense in the future. Changes to your income, which could put you in a higher tax bracket, or modifications in the tax laws can work to generate a different answer to what makes the most sense. That’s the bottom line of this article; now is a great time to assess your financial situation. And if nothing looks definitive, play it safe and ask.
  5. Should I look to hedge my bets? When it comes to saving for retirement, using a combination of tax-free (Roth), pre-tax (traditional) and currently taxable (non-retirement) accounts could provide you tax advantages today and in the future.
  6. How much will I appreciate tax free? I’m often asked whether a traditional or Roth account makes more sense. Like so many financially related questions, the answer is, “it depends.” However, to a degree, it’s a bit similar to the question, “Should I pay off my home or invest with extra income?” “It depends” works for both. However, in both situations — getting to retirement without a mortgage or with a source of tax-free income — you eventually will be very happy with the answer and actions that got you there.

Good, bad, angry or mad, no matter how you react emotionally to the changing tax landscape, it’s still important to have a well thought-out plan. In parting, keep in mind some wise words from the late Ann Landers — “A person doesn’t know how much they have to be thankful for until they must pay taxes on it.”

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