Last week we looked at how businesses could potentially save more by tax planning changes than what they would get from the 20% QBI (qualified business Income) deduction next year. The week before that we talked about mortgage deductions and planning tips.
This week we are getting down to the “core” of the changes (cute right?) and what the taxpaying public really needs to get their arms around. The talking heads on CNBC and some of the other more neutral media outlets are talking about the signs we are already seeing of confidence in the economy. People are starting to see a little more in their paychecks this week, which brings a nice warm feeling this time of year. Even 30 dollars more per paycheck for many working Americans can be the difference between eating out or buying a new shirt…or NOT! We seem to be fighting off a stock market correction according to many analysts, as the country’s businesses now have money to spend on expansion and to pay workers more….right?
The reason that we taxpayers need to do a self-check on the happiness scale is that the bad news has been so bad for so long that it doesn’t seem to get the attention it deserves these days. Things are getting better in the tax code, great, but if this “Hail Mary football pass” doesn’t work then we are simply adding another 37 pounds to the fat man who already weighs 345 pounds and has had 6 heart attacks, is diabetic and can’t feel his fingers or toes.
What do we mean?
These tax cuts are a “bet” that we as a country are making. The “bet” is that since we can’t seem to curb our spending at the federal level, that we will be able to grow our way our of all of our government obligations through a larger tax base. However, we have 20+ trillion dollars out on “credit cards” (the federal debt), plus we have promised another 13 trillion dollars (some say more some say less) out in future Social Security obligations that by projection we will not be able to pay out to recipients, and another 25-40 trillion (again some say more some say less) in unfunded expected heath care obligations through Medicare and Medicaid. Baby boomers, all of whom will get old and sick at the same time, that we aren’t projecting we can pay, that we will grow our income to cover it all. Does anyone see a problem here? If you and your spouse maxed out all of your credit cards, applied for more credit cards and maxed those out as well, then borrowed money on your house with a balloon mortgage note, then borrowed money from your parents, how would you feel about the plan for paying it all back being “Well, we’ll keep spending the same amount, but we`ll just earn more because we want and need to”?
Don’t misunderstand, we needed to do something to stimulate the economy, and putting more spendable dollars in the hands of Americans will do that. The best solution would be to spend less at the same time we are achieving more growth, but that’s not looking possible with today’s political process. No Tea Party talk here, and no finger pointing. Most of us have and spend more than we need.
So, should we all just toss in the towel and give up? No, not at all. Just look down the road to the finish line in 2025, when the tax cuts are expected to expire. If we have paid down enough debt to solve these problems, or at least make them more manageable, we will all be happy! However, if instead we are still in the same spot or worse, it will be time to cut the leg off the patient to save his life. What will that look like? Drastically reducing all welfare programs, increase the Social Security retirement age to 70, 75, 80? End Medicare as we know it, or make premiums 40% of income for everyone over 65? No one believes these things would be allowed to happen. It will likely be more likely this.
All 401K, IRA, 403B…any retirement plan or retirement savings, will need to be taxed at 35, 40 or even 45 percent. No zero rate. No 10% rate. No 12% rate. Those are all set to expire at finish line 2025.
So, what should YOU do? There’s a movement in this country called the Power of Zero. They are having seminars and workshops all over the country. Look for one near you and attend it! The ultimate goal will be developing a plan to expose all of your pretax accounts to taxation in a strategic manner over the next several years, before the finish line is reached in 2025. Then, when the next sweeping tax changes happen, you would have no pretax dollars left, only “tax free” dollars that have already been taxed by the government, and cannot be taxed again! If you don’t get yourself to “no pretax money” before 2025, our guess is that the US government will do it for you.
Go see a tax planner, today!