Tax rates are at historical lows with capital gains rates at 15% and ordinary income tax rates at 10-35%. What a lot of people don’t realize is that in times past, capital gains rates have been as high as 77% with the top ordinary income tax rate as high as 94%. Add to this estate taxes which are currently at 35% with the ability to shelter $10,000,000 of assets from taxes and one can see we are in a fairly low tax environment. It is our opinion this is about to change and ordinary income tax, capital gains and potentially estate taxes will be heading higher. This is not only based upon the fact that things typically average out over time, it is also based upon the fact that the government is projecting a $1.2 trillion deficit for this year and the current deficit stands at $15.2 trillion. The government needs money and we feel some of that will come in the form of tax increases.
Given the belief that taxes will increase, we spend a lot of time with our clients doing proactive tax planning. This is one area where we can create significant value without taking on additional risk. We do this in many ways, but one is in reducing taxes during retirement through the use of tax favored vehicles. Our goal is to generate significant tax free income. Some of the investment vehicles we use are well known such as municipal bonds. We also like real estate investment trusts which generate a nice income stream with a good percentage tax free due to depreciation of interest write offs. We also use lesser known vehicles such as oil and gas investments and life insurance. Oil and gas generates significant up front tax deductions that can be used to shelter retirement income from taxes. Life insurance can be structured to generate a significant tax free income during retirement as well as at death. Lastly, we look at other strategies to reduce taxes. Some of these allow clients to sell assets and avoid capital gains taxes. Others involve sheltering individuals from future tax hikes such as roth conversions. If you would like to discuss how a more proactive approach to tax planning can benefit you and your family, do not hesitate to call us.
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