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Financially Sophisticated

10792766_sWe have all heard the phrase, “You don’t know what you’ve got till it’s gone,” and we have all likely found it to be true on more than a few occasions. What’s worse than simply not knowing what you have is not even being aware that you are at risk of losing it.
 
This sentiment certainly rings true in the financial world. Most people don’t realize they have opportunities to improve their financial situation, and they are not aware of the financial and legislative flux that puts those opportunities at risk. As the end of 2014 approaches, a familiar conversation keeps popping up in Congress involving the popular tax breaks that millions of Americans enjoy and the possibility that they could disappear. These tax breaks are a perfect example of not knowing what you’ve got until it’s gone.
 
It is not often that the tax code works to our advantage, but when it does, we must all take advantage of those opportunities. Let me give you some examples. Currently, we can take a deduction for any contributions to charitable organizations made directly from an Individual Retirement Account (IRA). This allows for a tax-free required minimum distribution. Another example are above-the-line deductions that are available for educators’ out-of-pocket expenses. The same is true for college tuition and related fees (giving us a needed break on college costs). We are also given an energy-efficient home improvement tax credit, as well as about 55 other ones.
 
Here’s where the “until they are gone” part of the scenario hits. Each of these business and individual tax breaks expired at the end of 2013, and their future is still somewhat up in the air. We don’t know which, if any, tax breaks will be extended, or for how many years moving forward, but many lawmakers are proposing and backing the permanent reinstatement of a few of the major ones. Back in April, the House passed several bills to do just that, but the White House took out the proverbial red pen and put a halt on those permanent extensions. You see, President Obama believes that the tax revenue is needed in Washington.
 
Hmm. Disagreement between different branches of our government stalling progress for the betterment of the people? What a surprise!
 
With the November elections behind us, many are expecting legislators to snap into gear and extend these tax breaks through 2014 and beyond. In my opinion, that remains to be seen. I do believe we will see an extension soon.
 
But will it be soon enough?
 
The problem with not knowing the future of these tax breaks until the 11th hour is that many of them cannot be taken advantage of with such short notice. They involve strategies we need to work into our investment and tax planning ahead of time, and often cannot be accomplished overnight.
 
Yes, we understand that Congress likes to procrastinate and delay their decisions as long as possible (usually after several vacations), but that is forcing people to do the same with their tax planning decisions. Take the deduction opportunity for “IRA direct rollovers to charities” for example. The clock is ticking to take any 2014 required minimum distributions, but with the extension of that deduction in limbo, no one can be sure what decisions are most tax advantageous.
 
Nevertheless, tax planning is becoming a more and more critical step in your retirement planning future. Retirees today must be more financially sophisticated than in any previous generation. We are encountering something of a perfect storm (or, more accurately, a tragic storm) with our country’s wealth landscape. As the World War II generation passes away and baby boomers retire, we are seeing the greatest transfer of wealth in our nation’s history. This is happening while our economy continues to struggle and our government is grasping at straws to pull themselves from a staggering national debt and unfunded liabilities like Social Security, Medicare, and the Affordable Care Act. This transfer of wealth, those savings that we have spent so much time building, look like pretty attractive straws, and future tax ramifications will likely grasp at them.
 
Tax planning gives us the chance to pass our wealth on to our loved ones, in the face of a dismal financial future for our nation, rather than to lose half of it because we don’t take advantage of available tax-saving opportunities. If these tax breaks are extended, for one year, for a few years, or indefinitely, make sure you have them built into your retirement plan. Taxes may be one of the few guarantees in life, but we can affect the impact they have on our finances. And remember, it is not what you make, but what you keep.
 
Be vigilant and stay alert, because you deserve more.