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Higher Income Taxes Are Coming! Higher Income Taxes Are Coming!

Those of you who have received my newsletters over the years know that I am a big movie fan. From viewing (and re-viewing) the many classics, sometimes my life begins to feel like an endless stream of screenplay quotes; far too many of these old movie lines leap to mind than I care to admit.

This month’s title comes from the 1966 classic “The Russians Are Coming, The Russians Are Coming”, a movie made when the Cold War was still in full swing and the possibility of open warfare with the former Soviet Union weighed heavily on our minds. It’s a relief now to look back on those anxious times through the lens of an old comedy and just enjoy the laugh. However, as I read through the news today, it’s hard to ignore another looming threat that may not equal open warfare but is also no walk in the park.

After staggering through a deep recession and enduring the damage it has done to our savings and retirement plans, we now almost certainly face the specter of higher income taxes. In the last few hours I have read through the following articles; Higher Taxes Are Coming, but it’s not the end of the world, Dan Gross Says - March 23, 2010 - Aaron Task, Newsweek; Taxes; What’s New for 2010? – January 20, 2010 - Randle Spiegelman, Schwab Center for Financial Research; Higher Tax Rates Are going To Cost You – December 15, 2009 – Andrea Coombes, Marketwatch; Three Ways You Can Beat Higher Taxes – September 14, 2009 – The Motley Fool. The authors of these articles believe there is little doubt that income taxes are going up. Conversely, Googling “will income taxes go down” gets you a few links to a Canadian article and outdated rhetoric from the most recent Presidential Campaign.

Actually, income taxes rising is a certainty, as under current law federal income tax rates on ordinary income, capital gains and qualified dividends are set to go up to the pre-2001 tax cut levels on January 1, 2011. Congress may decide to keep some lower tax rates in place while allowing the upper brackets to revert to the old higher levels but this remains to be seen. According to the Congressional Budget Office, the combination of federal stimulus spending and declining tax revenues over the past couple of years will serve to drive the federal budget deficit to more than $ 1.5 Trillion this year. The federal budget deficit for 2009 was $ 482 billion, approximately one third of this year’s projection.

Many states and counties around the country are facing similar budgetary shortfalls, yet what other choices do governments have? Local, State and the Federal Government are all under a severe pressure to find more money to cover their ever-increasing expenses, their only recourse is to increase taxes. (Imagine a bad Russian accent and insert another quote from my old movie: “Emergency! Everyone to get from street!”)

Other than queuing up old movies to get your mind off these troubles, what is a taxpayer to do? The articles I mentioned earlier do provide some recommendations for dealing with the tax increases we all face.

First, maximize your 401k contributions. Any matching benefits from your employer are free money and your contributions go in pre-tax which reduces your taxable income. If you have already maximized this contribution, consider also a traditional or Roth IRA.

Incredible as it sounds, one financial move they recommend is to sell off investments that will generate capital gains taxation this year. Today’s 15% maximum capital gains rate is in danger of rising to 20% or more, so it might be better to sell now and pay taxes at the lower rate than to hold onto them and potentially pay higher taxes later.

You may be able to add value to your investment portfolio by positioning your investments between account types. Broadly speaking, investments that tend to lose less of their return to income taxes are good candidates for taxable accounts and investments that lose more of their return to taxes should go into tax-deferred accounts. If investing in municipal bonds (even with all their limitations) made sense for you before, they would likely become more attractive in a higher tax environment.

Given all the attention that is currently being paid to tax avoidance strategies and the amount of time and energy that will surely go into this topic in the not-too-distant future, you would think someone would be able to come up with a financial product that provides benefits completely free from State, Local and Federal income taxation.

Wait a minute! We all know one and you guessed it: a classic structured settlement provides guaranteed benefits to the recipient completely free from state, local and federal income taxation. Tax-Free income is an essential value of a structured settlement and you should make sure you use this fact to your greatest advantage. Remember to inform qualifying claimants and their attorneys (or investment expert Uncle Bob) that one extremely valuable element of this form of settlement is that they will never pay a dime of income taxes on any of the projected future payments. The ability to establish a non-taxable stream of income is a rare and wonderful thing, especially these days, with concerns about tax increases looming.

My old movie ended with the residents of the island of Gloucester and the Captain and crew of a Russian Submarine literally staring through gunsights at each other in the Town Harbor. Disaster seemed unavoidable when an accident provides a surprising resolution (I don’t like spoiling good endings. Rent the movie!).

Want to help someone avoid a financial disaster? Can the added value of no income taxes add enough value to help settle your case? Let’s find out. Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.