Although taxes are a four-letter-word in virtually everyone’s vocabulary, we’ve been living during a period of historically low tax rates – attributed to the Reagan era and also the Bush-era tax cuts. The how, when and how much taxes will continue to increase is an unknown factor, but common sense tells us that continued increases are likely.
Many changes are in effect each year such as contribution and exemption limits. As you plan, it’s important to stay on top of these changes.
Last year’s tax increases mainly affect the top tax bracket, so over 95% of taxpaying Americans are not directly affected by this increase. Individuals filing single in 2014 and earning over $406,750 annually or married couples filing jointly earning over $457,600 annually now pay a 39.6% income tax rate. Capital gains rates remain the same EXCEPT for those who fall in this higher income tax bracket, who will pay a 20% rate.
Those affected by the Alternative Minimum Tax (AMT) were also provided an index for inflation that has no expiration. The 2014 exemption is $82,100 (married filing jointly) and $52,800 (single).
Some good changes for everyone is that most employer plans now offer an in-plan Roth conversion option. This allows you to convert all or a portion of your tax-deferred balance into a Roth. You will pay income taxes now on the amount converted, but any growth in the account is distributed tax-free.
The annual gift exclusion limit remains steady at $14,000 for 2014.
The gist of all of this information is to begin planning for higher taxation.
Consult with both a financial professional and tax advisor to take advantage of the still low tax rates now to provide for likely higher rates in the future and any temporary provisions that will probably not be around long. With prudent planning, your overall financial portfolio can be set up to prepare you for wherever taxes may land in the future.