If you listened to episode 24 you already understand the basics of income tax planning. Today we’re going to kick it up a notch by discussing additional income tax information that will help you increase your tax efficiency.
You will want to hear this episode if you are interested in…
- Changing tax laws [1:42]
- The differences between traditional and Roth retirement accounts [5:38]
- State income taxes [7:55]
- Your homework [9:53]
Tax laws change
Some say the tax laws are written in pencil. Congress keeps us on our toes by changing things around just when we start to get comfortable with the previous laws. An example of this is the Secure Act 2.0 which created more than 90 provisions enacted over three years.
It is a fruitless endeavor to try and predict the way Congress will behave in the future but what I can predict is that we will continue to be taxed in a progressive tax structure. The best thing you can do is to minimize the amount you pay in taxes over your lifetime.
It is important to understand that we are enjoying the Trump-era tax cuts–probably the lowest tax structure that we may see in our lifetime. These tax cuts are set to expire in 2025.
Knowing that, if you feel that your income is lower now than it will be in the future you should adjust your tax strategy appropriately, if your income is higher now than it will be in the future you also need to adjust accordingly. If you need help with this tax planning send me an email at Info@WallerFC.com.
Flexibility is the best strategy
If you know that the federal income tax infrastructure will change then you can understand that there is no guaranteed way to pay less in taxes. Your goal then should be to work to have optionality over time. This will give you flexibility and more control over your tax situation regardless of what Congress decides to do.
You can prepare to be more flexible with your tax standing in the future by utilizing both traditional and Roth retirement accounts. Traditional retirement accounts defer taxes until retirement whereas Roth accounts have you pay the taxes now and allow you to withdraw them tax-free in retirement. Listen in to hear a racing analogy to better understand tax flexibility.
There is no one perfect state
Every citizen of the United States is required to pay federal income taxes. In addition to this, many states also have their own income taxes which are all handled differently. There are eight states that have no income taxes. However, this does not mean that residents of these states are not taxed at all.
For states to provide infrastructure and services to their citizens they must generate revenue somehow. The states that don’t collect income taxes find other ways to fund their coffers. If you are looking to relocate, the cost of living is an important factor, but your decision shouldn’t necessarily be dictated by that state’s income tax structure.
Consider your current income tax plan. Are you planning to pay more of your taxes in the accumulation phase of your life or the enjoyment phase? Is that the right approach for you?
Don’t worry if you don’t have your tax strategy perfect right now. Having a tax strategy is better than having none at all. You can always work to improve in the future. Regardless of where you are in your financial race, you can always make things better for the future you. Think about what you can do to level up the income tax planning component of your Financial Training Plan and do it.
Resources & People Mentioned
- Episode 24 – Your Efficiency with Income Tax Planning
Connect With Justin Waller
Subscribe to MONEY MILE
Audio Production and Show Notes by – PODCAST FAST TRACK