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The Coming Tax Increases...
Old 10-27-2007, 08:32 AM   #1
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The Coming Tax Increases...

It seems likely to me that tax rates and burdens will take a significant step up in the 2009-2010 period. Capital gains and dividends may well be taxed at normal income rates. The Feds may even look at an Assets Surcharge Tax (levied in some countries now). Universal health care, in some form, will mean higher taxes.

This all said, how does a FIRE'd couple prepare for this situation. MY DW asks if moving out of the USA is an option, should taxes REALLY shoot up. Any thoughts out there?
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Old 10-27-2007, 08:47 AM   #2
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One can set it up so that you have no income in the 2009-2010 time period. If you are living off a safe-withdrawal rate of 4% of your assets, you can simply have 12% of your assets in cash or stocks with no gains in those years. You can spend the cash to cover expenses and sell stocks with no gains (return of capital is tax-free).

We reduce our taxes by having no fixed income in taxable accounts, so all the bond dividends are tax-deferred or tax-free in our IRAs and 401ks. In our taxable accounts we do tax-loss harvesting (sell losers) and do not book capital gains, so with no realized cap gains, we have no cap gains taxes.

We read on these forums of several folks with 6-figure incomes who pay about 5% of their income in taxes. That doesn't seem like a burden to me.
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Old 10-27-2007, 09:10 AM   #3
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From what I understand, moving away isn't an option, unless you're also willing to renounce your citizenship with all that implies. US citizens are liable for income taxes regardless of where they live. Of course there are credits for some foreign taxes, but that won't offer much if any net savings.

I agree that chances are we'll see an increased tax burden in 2009 or 2010, in income tax at the high end and potentially dividends and capital gains as well (although I view that as less likely).

However, I think the chances of an asset surcharge tax in the short or intermediate term are very close to zero. It would take a much larger resurgence of economic populism in this country for that to happen. It could certainly happen at some point in the future, but I can't see it happening before the next presidential election.


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Old 10-27-2007, 09:13 AM   #4
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Well, when we retired taxes were higher. Cap gain taxes have kept coming down which has really helped us over the years because we have been divesting from a single company stock over the time period.

I plan to mostly be done with the stock selling by the end of 2008 in anticipation that cap gains tax rates might increase even though they aren't due to expire until 2010. So yes, I'm expecting cap gains taxes to increase and the dividend tax rate to revert back to standard income tax rate.

All I can do is to try to keep my mostly taxable investment portfolio as efficient as possible given the constraints of my allocation.

So far, we pay the AMT rate on non-cap gains income, and of course 15% on the cap gains/dividends realized any given year. If we could get past AMT, our tax burden would be lower, but I guess overall it's not so onerous especially as 2/3 to 3/4 of our income is taxed at the cap gains rate.

I would never consider moving out of the US for lower taxes.

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Old 10-27-2007, 11:20 AM   #5
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You never know, Ron Paul might actually win and eliminate income taxes.
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Old 10-28-2007, 01:00 AM   #6
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You never know, Ron Paul might actually win and eliminate income taxes.
Or Hillary
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Old 10-28-2007, 11:39 AM   #7
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Or Hillary
You mean Hillary might eliminate income taxes, too?

Or that Ron Paul might eliminate Hillary?
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Old 10-28-2007, 04:59 PM   #8
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I agree that taxes have nowhere to go but up.

For someone who is already FIRE'd about all you can do is be vigilant in your investing strategy to avoid taxable events (e.g. allocate taxable funds to ETFs or individual stocks like BRK which avoids dividends and capital gain distributions). Then, you sell your highest basis (if taxable account) to fund living expenses. Unless you're subject to RMDs, you should be able to keep your taxes pretty low.

I agree that a wealth tax is hard to fathom at present. There are too many variables with illiquid investments in privately held firms for it to be workable. In countries that do have such a system (India is one I'm familiar with), asset hiding and underreporting are endemic to the point where such a tax collects very little at the end of the day.

My prediction is that the labor force participation rate (currently around 67%) will drop way down in the next 5 to 10 years, perhaps to 50%. I think there are an awful lot of people who can make it just fine if health care were available outside of a work relationship, especially if it becomes "free" to those who no longer work. My prediction is that a great many will decide that continued work just isn't worth it given the new taxation levels and - if health care is no longer tied to working - will stop working.

Look on the bright side, membership on this board has nowhere to go but up!
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Old 10-28-2007, 05:11 PM   #9
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I agree that taxes have nowhere to go but up.

For someone who is already FIRE'd about all you can do is be vigilant in your investing strategy to avoid taxable events (e.g. allocate taxable funds to ETFs or individual stocks like BRK which avoids dividends and capital gain distributions). Then, you sell your highest basis (if taxable account) to fund living expenses.
If we think taxes are going up in the future - why would we want a fund that avoids cap gains distributions and dividends?

If the cap gains are not paid out now, they will be included in the NAV when we sell later (all else being equal). If tax rates are higher at that time, we will get a bigger tax bite (though it will be deferred).

I know this is contrary to the usual advice to defer taxes, but does that still make sense in a (likely) rising tax environment?

-ERD50
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Old 10-28-2007, 05:18 PM   #10
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If we think taxes are going up in the future - why would we want a fund that avoids cap gains distributions and dividends?

If the cap gains are not paid out now, they will be included in the NAV when we sell later (all else being equal). If tax rates are higher at that time, we will get a bigger tax bite (though it will be deferred).

I know this is contrary to the usual advice to defer taxes, but does that still make sense in a (likely) rising tax environment?

-ERD50
Agree, my comments spoke more to "how to invest once taxes are already higher". In that scenario, avoiding taxation on anything except what you need to sell to pay for your living expenses is preferred.

For now, with relatively low tax rates, it may make every bit of sense to cash in long term capital gains to enjoy the lower rate now. In fact I kinda suspect that any discussion of higher capital gains tax rates, or elimination of preferential treatment for capital gains, might tank the market.
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Old 10-28-2007, 05:20 PM   #11
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Agree, my comments spoke more to "how to invest once taxes are already higher". In that scenario, avoiding taxation on anything except what you need to sell to pay for your living expenses is preferred.

For now, with relatively low tax rates, it may make every bit of sense to cash in long term capital gains to enjoy the lower rate now. In fact I kinda suspect that any discussion of higher capital gains tax rates, or elimination of preferential treatment for capital gains, might tank the market.
OK, that makes sense to me. Thanks.

-ERD50
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Old 10-28-2007, 06:13 PM   #12
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If you think tax rates will be worse in the future, one thing you can do is convert more money from regular to Roth IRAs now.
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Old 10-28-2007, 06:22 PM   #13
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If you think tax rates will be worse in the future, one thing you can do is convert more money from regular to Roth IRAs now.
I intend to do that in 2010, when the income limit disappears and we have 2 years to pay the tax on the conversion.
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Old 10-28-2007, 10:43 PM   #14
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I went one better (in early 2004) ... I cashed out a Traditional IRA, the penalties be damned. My logic is that taxes might well be higher in decades ahead (I was just in my early 40s) ... even that presently exempt assets (IRAs) might be taxed some day. Did I mention that most of the money was in gold shares, and went into gold coins instead. I've done well in gold over the past ten years ... wish I could say that for the ten years before then
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Old 10-29-2007, 12:27 AM   #15
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If you think tax rates will be worse in the future, one thing you can do is convert more money from regular to Roth IRAs now.

I am suspicious of the long-term non taxable status of Roths. I think Uncle Sam has probably gone overboard in pushing ROTH, and in the not too distant future will be desperate for revenue sources.

Here is a prediction within the next 15 years, ROTH IRA earning and/or withdrawal will be treated like Tax Exempt Bond Interest for Social Security purposes.

Currently the interest earned from Tax Exempt bonds is treated as income, in order to determine how much of your social security benefits are subject to taxation. If Congress can make that change no reason that can't treat Roth withdrawals the same way.
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Old 10-29-2007, 08:00 AM   #16
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Serious tax question without meaning to cast aspersions on anyone:

I'll admit I'm young, so I don't have any first hand experience on the following question.

For folks suggesting that Roths, for example, might lose some of their tax exempt status in the coming years or decades, are there examples from recent U.S. tax law history that suggest the government might take away favorable tax treatment of these type accounts. In other words, if one were to act in reliance on the promise from the government that a certain account type (or other long-term, non-revocable money decision) would be tax exempt/tax favored going forward, has one been disappointed by the government changing their position after the fact? Have promises been broken?

I'm drawing blanks right now.
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Old 10-29-2007, 08:05 AM   #17
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For folks suggesting that Roths, for example, might lose some of their tax exempt status in the coming years or decades, are there examples from recent U.S. tax law history that suggest the government might take away favorable tax treatment of these type accounts. In other words, if one were to act in reliance on the promise from the government that a certain account type (or other long-term, non-revocable money decision) would be tax exempt/tax favored going forward, has one been disappointed by the government changing their position after the fact? Have promises been broken?
Well, the assumption for decades was always that Social Security income would not be taxable. And these days, many recipients pay income tax on 50% to 85% of what they receive.

Personally I believe that if Congress decides that Roths are too good a deal for taxpayers, they'll simply abolish them and repeal the enabling legislation. Anything already in Roth IRAs and 401Ks would likely be grandfathered but no additional money could be added.
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Old 10-29-2007, 08:57 AM   #18
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Well, the assumption for decades was always that Social Security income would not be taxable. And these days, many recipients pay income tax on 50% to 85% of what they receive.
Yup, and SS taxes were paid with after-tax dollars (just like Roth's). Also Medicare taxes (unlike SS) are on one's entire income (no cap), and the part B premiums are now being means-tested.
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Old 10-29-2007, 01:40 PM   #19
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I'm drawing blanks right now.
They won't change the rules..directly. My guess, is they'll add
roths to AMT calculation or do it like SS they tax the amount
over some limit. Understand if we ever were to go to a national
sales tax, your Roth's tax free status is null & void.
I would recommend have some in Roths, some in regular IRAs,
some in taxable accounts, so you are tax diversified.
TJ
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Old 10-29-2007, 01:45 PM   #20
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I would recommend have some in Roths, some in regular IRAs, some in taxable accounts, so you are tax diversified.
TJ
I can't make up my mind either......
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