Taxes, much like death, are inevitable in today’s world. However, income taxes were not established at the founding of the country. An income tax was first proposed in 1814 to fund the war of 1812. However, the Treaty of Ghent ended the war, and ultimately the need for the extra income, in 1815. It wasn’t until the Tax Act of 1862 that the first income tax went into effect; the Civil War brought on desperation and President Lincoln had few other choices. However, this was brief, and was repealed in 1872, with few ever actually paying or filing income taxes. It wasn’t until 1913, and the 16th amendment, that gave Congress the power to tax citizens’ incomes.

Although politicians and political theories come and go, it is likely foolish to believe the income tax will ever be abolished. In fact, income tax, as a portion of the GDP, has remained steady over the past few decades.

Fundamentally, the US tax system is progressive, meaning tax rates increase as taxable income increases. For instance, the lowest tax rate in the US is 10%, for the first $9,875 earned, and the highest bracket being 37%, on each dollar made beyond $518,401 within a taxable year. Although income taxes are progressive, they are based on income, not wealth. For instance, an individual in retirement, regardless of their savings/nest egg, is taxed on their income (dividends, Social Security, pensions, etc.) not on their entire savings. This makes strategizing and managing your assets essential to ensuring you minimize tax impacts on your savings. This can make your retirement savings last well longer ensuring a healthy and prosperous retirement.

Because of the complicated nature of taxation in America, KCA Wealth continues to hold educational webinars to assist retirees, their families and their communities. You can find an abundance of educational webinars, including those specifically on taxation, on KCA Wealth’s website. Don’t forget to register here well in advance to save your spot!

KCA’s educational webinars on taxes include topics such as Tax rules from the 2017 Tax and Jobs Act, Roth Conversions, Health Care Laws and Your Taxes, Distribution Actions, “Tax Smart” Assets, Gift Tax Exclusions, Treasury Securities and Tax-Exempt Municipals, and Giving Appreciated Assets to Charity.

2017 Tax and Jobs Act

In 2021, the bill included well defined rules, including:

• 2021 standard deduction is $25,100 for joint filers, $18,800 for heads of household, and $12,550 for single filers
• State and Local Tax (SALT) deduction has a $10,000 cap
• Child Tax Credit remains at $2,000, phased out at $400,000 for married filers.
• Mortgage interest deduction caps at $750,000 in principal value.
• 529 Plans are eligible to fund elementary and secondary education
• Reversing a Roth IRA conversion is no longer allowed
• Alternative Minimum Tax exemption increased to $114,600, with the phase-out beginning at $1,047,200
• Estate tax exemption increased to $11.7 million. 

All of these rules have unique impacts and implications for a variety of individuals. It is essential your finances are reviewed with both a tax and financial professional to ensure you are maximizing your savings, investments and capital. It is important for individuals to also acknowledge that even though this is the current law in force, a new administration is bound to change laws, and the 2017 Tax Act is set to expire at the end of 2025. Because of this fact, many changes are bound to happen in the next five years, regardless of action in Washington DC.

Roth Conversions

Conversions are full of advantages for some investors, but not all, so it is essential that a qualified financial advising professional, such as those at KCA Wealth Management, are there to help you elect these large decisions. A conversion provides investors the ability to withdraw from a traditional IRA, to pay the federal and state taxes due, and roll them into a Roth IRA. Thereafter, future growth and withdrawals are tax free. However, this could significantly increase your current tax burden and/or reduce benefits if the IRA funds are used to pay the conversion tax, and Roth IRA distributions must meet a five-year holding requirement and occur after age 59½.

Health Care Laws and Your Taxes

The Additional Medicare Tax and The Net Investment Income Tax were introduced in 2013, which both affect high-income taxpayers, specifically. Thresholds have changed and, overall, a 0.9% tax on wages have been levied above the specific threshold. However, a second tax, which affects investment income was newly minted in 2013. Some investors now are levied an additional 3.8% tax on income from investments, which can put a damper on certain individuals reliant on their investment income, especially in retirement. However, there are strategies to minimize healthcare costs overall and adequately plan for healthcare costs in retirement.

Distribution Actions

Retirement Distributions can make or break a retirement, and there are plenty of strategies in distributions in regards to tax and retirement fund management. KCA has extensively discussed the sequence of return risks in it’s blog section, however, taxes also play a large part. It is essential to organize all sources of retirement income and review the tax treatment of each, preferably with a financial expert. Strategies, such as transferring capital from a taxable to tax-deferred account can help stretch your retirement.

“Tax Smart” Assets

Many assets, such as cars, homes or bonds are basic commodities we nearly all own, however, some assets can be considered “Tax Smart” assets. These assets help in managing tax liabilities by using advantageous taxation strategies that some investments and accounts offer. For instance, tax-deferred accounts and municipal bonds offer tax savings many general investments do not. However, Tax Smart assets vary based on a multitude of factors, such as risk tolerance, age, and goals. These assets and strategies are often only able to be created alongside a financial professional that fully understands your strategy, but can stretch your retirement savings far further than perhaps previously thought.

Gift Tax Exclusions

Another often overlooked, but great strategy is maximizing your dollars through gift tax exclusions. These exclusions allow any individual to gift $15,000 in 2021, without using a lifetime gift exemption amount. In regards to married couples, this can be as much as $30,000 per recipient! Further, money can be given to individuals by making direct payments for certain “qualified” expenses, such as medical, tuition and dental expenses, which never count against annual, or lifetime, gift exclusions. These exclusions can protect your assets for your heirs, and your personal accounts in case of emergency expenses

Treasury Securities and Tax-Exempt Municipals

Treasuries often offer lower rates of return than taxable fixed-income investments, however, they are backed by the full faith and credit of the US Government, and also boast tax benefits.

All interest may be exempt from both state and local taxes, so investors from states with an income tax, such as Pennsylvania, can benefit. However, the interest as income is considered tax deductible, any capital gains from the sale of the treasuries themselves are not tax exempt in most cases.

The same applies to Municipal bonds, in-fact, some are even excluded from federal income tax as well. They also boast safety, with just 113 of over 50,000 issuers of Moody’s rated municipal bonds defaulting in the past nearly 50 years.

Giving Appreciated Assets to Charity

Lastly, charitable contributions are important to many. Often we build both our personal and financial lives around the values we care about most. However, when making contributions to the non-profits and charities that matter most to us, we must also evaluate the tax implications. Frankly, if we do not optimize and maximize these contributions it leaves a negative impact on the charitable causes themselves through a decreased value of contributions. Setting up proper trusts and managing annualized contributions, along with properly allocating funds, is just the beginning of maximizing charitable contributions.

At KCA Wealth Management our mission is to provide our clients with the highest level of service while helping them reach their financial destination. We will help you develop, implement, and monitor a strategy that’s designed to address your individual situation.