Why Future Tax Rates Will Go Up

Why tax rates are going up!

Near Term Forces:

Politics:
It appears obvious to me that this country is ready to try a different course of action in 2008. The Democrats are focused on reversing the tax cuts that the Bush administration helped put into place.

Alternative Minimum Tax (AMT):
The AMT is basically a flat tax that is imbedded inside the regular tax rules. The rate is 26% after receiving a $60,000 deduction (with lots of adjustments and gyrations). You pay the higher of the two systems. Unfortunately the AMT is very complex and is beginning to hit more and more taxpayers. The AMT will impact 23 million taxpayers in 2007 and more than 40 million taxpayers by 2010 if it is not fixed.

Most everyone would like to see these complex calculations go away. The problem is that the AMT raises a trillion dollars of revenue and the government is addicted to the money.

Longer Term Forces:

Healthcare:
We have the best healthcare in the world, but the costs are outrunning our ability to pay.
Individuals not covered by company plans or not already on Medicare realize the cost of health insurance and deductibles can easily cost $1,000 a month. Many middle and lower income families are having to make tough choices and may consider going without insurance. Sooner or later the Government is going to offer a national healthcare plan and pay for it with taxes.

Social Security:
The Social Security system is virtually bankrupt for your children. Every year the annual statement you receive from the Social Security Administration (SSA) discloses that they only have enough money to pay 75 cents of every dollar they promised in the year 2041. There is also a brochure called “Future of Social Security” which discusses this information available at the Social Security Administration office.

There are only so many ways to fix this issue and none of them are particularly pleasant.
1. Raise taxes – both income taxes and the amount of Social Security taxes workers pay. This hurts consumers and the economy.
2. Deny benefits to certain classes of individuals. This always seems fair as long as it is someone richer than you taking the cut.
3. Allow a more liberal immigration policy and sign the new workers up to pay for these benefits.
4. Allow private investments of Social Security taxes. This is a good long-term solution in my opinion but it won’t solve our immediate crisis.

Medicare/Medicaid:
The first baby boomer turns 62 in January of 2008. This same person turns 65 in just three more years and is eligible for Medicare. Most people understand that Social Security is in trouble; however, Medicare and Medicaid are in worse shape. Numbers seem to fly everywhere but some are predicting that Medicare is facing insolvency by 2020.

I have heard that 70% of a person’s lifetime medical costs come in the last two years of their life. I believe this to be a reasonable conclusion after watching my mother rack up $100,000 to $150,000 of medical costs per month during the last year of her life. When baby boomers need the assistance of Medicaid to pay for nursing home and medical costs, the drain on the system will be enormous.

Conclusion:
Thirty years ago the top tax rates went clear up to 70%. Today the top rates stop at 35%. It is at least conceivable that rates can be raised again to try and pay for these upcoming costs. But it’s not as easy as changing the rates and assuming the money will start rolling in. If the next dollar I earned was being taxed at 70% I wouldn’t be too excited about making that dollar. Once rates become confiscatory, the whole economy begins to constrict and the actual dollars collected may in fact go down.

What does this mean for your retirement?

Here is my plan to deal with the rising costs of taxes and healthcare during retirement.

1. Save diligently to grow a reasonable nest egg.
2. Invest to stay ahead of inflation in a diversified portfolio of top quality investments.
3. Eliminate as much debt as possible prior to retirement.
4. Protect my family from large costs that are out of my control by using life, disability, long-term care, property and umbrella insurance products. You can’t preserve wealth by taking unnecessary risk.
5. Review my tax plan often to pay as little as legally possible.
6. Learn to be content to live within the resources I have available.
7. Take time to plan my retirement and estate annually.

It’s great if you can do all this yourself, but most people need the help from a retirement coach--a person that you can trust and who has experience. As both a CPA and CERTIFIED FINANCIAL PLANNER®, I am well positioned as a retirement coach.

Obtain a copy of my book 18 Common Sense Rules for Enjoying a Successful Retirement, available only by attending one of my seminars or by personal request.