Monday, July 26, 2010

Ready for YOUR New Tax Rate, Come January 1, 2011?...

Ready for YOUR New Tax Rate, Come January 1, 2011?
I am sure you are aware that your current income-tax rate is much lower than what you were paying prior to the passage of what many call the “Bush tax cuts,” which went into effect on June 7, 2001. Among other things, that law created a new 10 percent rate, indexed the then lowest rate on the table of 15 percent, and lowered the 28 percent, 31 percent, 36 percent and 39.6 percent rates to 25 percent, 28 percent, 33 percent and 35 percent, respectively. So, if you were, say, in the 28 percent bracket, the law lowered your rate to 25 percent, and so on.

This law is schedule to end December 31 of this year. So in approximately four months and a few days – unless Congress passes new legislation – tax rates, including yours, are scheduled to revert to the higher rates of before the “Bush tax cuts.” For instance, if you are a single filer with a taxable income of $35,000, today’s rate of 25 percent will go up to 28 percent. Those at 28 percent will move up to 31 percent, those at 33 percent now will become 36 percent, and so on. Here’s my question for you – and though the answer is obvious, I’ll ask you anyway:

Where Do You Believe YOUR Future Tax Rate Is Headed – Beginning January 1, 2011?

If you believe your taxes are going anywhere other than up, I’m afraid you may be living in complete denial. If you believe rates are headed up, why do you – or anyone else – see an advantage in postponing your tax obligations into the future? Next question:

Isn’t It Time YOU Seriously Revamped Your Retirement Strategy?

Recently, a young lady who had just received $70,000 of qualified money from her late father’s estate consulted me about her desire to make the best move with that money – which she intended to save toward her retirement, which is still some years ahead (aka, the future). Prior to our meeting, every other advisor she had consulted recommended that she allow those funds to sit in a tax-deferred status until her retirement, because doing anything else will amount to her paying “too much” in taxes today. That sounds like a good idea, doesn’t it? But does it really hold water? Let’s analyze this together.

This young lady is a head of household, with a steady annual taxable income of approximately $46,000, putting her in a 25 percent bracket based on today’s rate. You see, according to the IRS tax tables for 2010, a head of household with taxable income between $45,550 and $117,650 will pay a 25 percent marginal rate. So if you do the simple math, this gal could claim the entire $70,000 this year and bump up her taxable income from $46,000 to $116,000 and her tax rate will STILL be 25 percent! So how’s she worse off, as all those advisors claim? If things stay as is, come January 2011 – which is just four months away – this same young lady’s rate will increase from 25 to 28 percent! Yet for some strange reason, other financial advisors believe that she’ll be better off waiting?

After looking at the facts of her case with me and getting a better understanding of the situation, she decided that it would be extremely savvy to pay her taxes at today’s rate – of which she is sure – rather than gambling that her future rates might be lower. She can then save her after-tax $52,500 money ($70,000, less 25% tax) in a nonqualified alternative, that under IRS rules allows her access those funds anytime (even before age 59 ½), tax-free. Yes – completely tax-free! In addition, she won’t have to meet any “required minimum distribution” rules once she hits age 70½. And the income she pulls out of this account will not affect the taxation of her Social Security benefits one bit. When she dies, any remainder will go to her heirs, completely income-tax free!

I don’t know about your situation, but this young lady believes she’ll be better off with tax-free income in the future than betting on tax rates coming down any time soon. A word of caution: please don’t just run out there and try to mimic this lady’s solution, because that could be extremely dangerous. You need a qualified professional with a ton of common sense to guide you through your specific situation.

We’d be glad to talk with you. Please call us at (301) 949-4449 or visit us on the web to schedule your complimentary consultation to see if there is anything you can do today to keep more of your hard-earned dollars tomorrow.


  1. SAMUEL, This is an excellent piece! I especially like how you came up with the situation that your client would not be saving any money today by not paying those taxes. Most of us are programmed to think that any increase in income will cost us more taxes but that is why we all need thoughtful planners like yourself.


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