Taxes Are Going Higher for Everyone - Ep #60

WARNING - Why Taxes Are Going Higher for Everyone

This episode is airing on April 15th, our tax filing deadline and a key aspect of my financial planning practice is to identify and implement tax-saving strategies for my clients. In this episode, I’ll share why it’s almost certain that everyone’s taxes will be going higher in the future because of our annual federal deficit and our cumulative national debt.

In this episode...

The Government Spends Worse than a Drunken Sailor [3:10]
Tax Burdens by Income Level [07:12]
Possible revenue streams for the US Government [11:02]
Tax Saving Strategies [15:24]

The National Debt

The federal government of the United States has an annual budget. It’s the set amount that the Federal government spends throughout the year. The amount they are currently spending is much more than the “income” they receive from individual and corporate taxes. In the Calendar Year of 2023, the federal government spent $6.3 trillion but only collected $4.5 trillion in taxes. Just what happens when you add up all of this overspending year after year? That’s called our national debt. Right now that total is over $34Trillion dollars. I shared more in episode 33 of this podcast entitled Time to Pay the Piper. Our debt is steadily climbing at over $34T as of this recording and is expected to be over $5oT by 2032. you can see more at the website usdebtclock.org.

We must get our deficits lowered because the interest costs are set to become enormous. In 2028, Federal tax revenue is expected to be $6.1T, actual spending is expected to be $11.7T and just the interest payments on the debt will be nearly $2.7T a year. In order to reduce our debt and the interest we pay on it, we will need to stop adding to it each and every year with the government's extra spending. As John Mauldin says: “Yet people continue to say we could balance the budget and pay down the debt by“making the rich pay their fair share.” I wish it were that easy. I really do. But sadly, as I’ll show you, it’s not.”

Tax Load

Here’s how it looked in 2020 (the latest available data from the IRS courtesy of the Heritage Foundation).

The top 1% earners in America, those that earn over $548k/year earn 22% of the income and pay 42% of the income taxes received by the Federal government.

The top 5% earn more than $220K 38% and pay 62% of the taxes paid to the government. The top 10% earn more than $152K earn 49% of the income and pay 73% of the taxes paid to the government.

The bottom 90% (those that make less than $152K) earned 50% of the income and paid 26% of the taxes.

The US deficit will rise by an average of about $2 trillion/ year for the next decade.

As John points out, to account for the extra $2 trillion of spending we will need $2T more of tax revenue. If we raised taxes by about 50% on everybody, from the bottom 1% to the top 1%, it would only get us $850 billion which is a little less than half the way there. Clearly, we don’t have enough money just to match the current projected spending of the government. Instead, they have to reduce spending and raise taxes on individuals and corporations and likely also look for additional sources of tax revenue because income tax by itself won’t cut it. The most likely option in my opinion is a national sales tax or value-added tax.

Suffice it to say, we and really our children are in a heap of trouble given our debt obligations. We’ll eventually have to pay the piper for our overspending. What exactly happens is uncertain but I believe what is almost certain, is that our taxes will be going higher to pay for it in the future.

Tips Tricks and Strategies

In past episodes, I’ve outlined numerous ways to save money on taxes. The Augusta rule, where you can rent your primary residence for 14 or fewer days each year and all of the money earned is tax-free. For business owners, it’s even better as they can rent their house to their business and get a deduction on the expense from their business and transfer-tax-free income to themselves. See episodes 8 and 9 for the details. I’ve also discussed Roth contributions and when they make the most sense (see episodes 1 ), Roth conversions (see episodes 12, 26, 49), and Roth IRAs for your kids (episode 6). I also discussed Traditional and 401k contributions (Ep 1). Defined benefit plans where I’ve helped several clients reduce over $250k in a single year from the highest tax rates (were highlighted in episode 7) and Health Savings Accounts have figured prominently as well (see episodes 2, 8, 9, 26, 29, and 59). I also discussed tax loss harvesting and its incredibly powerful and less well-known sibling, tax gain harvesting (see ep 26). In episode 34 I shared about Net Unrealized Appreciations or NUAs which is a significant tax savings that could be hiding in your 401k if you own company stock. In episode 51 I shared tax-advantaged ways to give to charity through Donor-advised funds, Qualified Charitable distributions as well as donating appreciated stock and a tax saving strategy to stack contributions.

References

US Budget Gap widened During Year on Rate Rise, Revenue drop

Responding To Critics of Rolling Back the Retirement Tax Break

Do the Rich Pay Their Fair Share