What Expiring Bush-Era Federal Tax Cuts Mean to Your Wallet

While flipping between college football games, Chicago Bears updates and the Manny Pacquiao fight, nothing was more prevailing on the news this weekend than the discussion of the expiring Bush-Era tax cuts at the end of 2010.  What we are facing within the next 6 weeks is the beginning of one of the largest tax hikes in history…obviously with the greatest impact on the middle-class and small businesses.

Here is what is at stake:

Filing Status       Household Income        Tax Hike if Cuts Expire

Single, no kids            $50,000                               $1,100

Single, no kids            $100,000                             $2,100

Married, two kids        $100,000                             $4,500

Married, two kids        $325,000                             $7,400

Source: Deloitte Tax, LLP

As if we didn’t have to dig deeper into our pockets to regain the losses in our IRA/401(k) plans, send our kids to college because state funding for college assistance has either been suspended or cut and pay more for gas to get to work each day…standby to pay Uncle Sam’s ready hand another $90-600/mth (depending on your tax filing status) if Bush-Era tax cuts do not get extended or compromise is met.

Sure, Obama has his plan to address this issue.  In the above video, Mike Huckabee, former Governor of Arkansas and Republican Presidential candidate, shares some positive viewpoints.  Part of this is continuing to redirect $70B to enable small businesses to hire, buy inventory and expand their companies.  Since this tax increase is around the corner, they hesitate, hold onto their cash and wait.

Bottom line, taxes are eventually going up.  Smart businesses have advisers or board of directors guiding them through these uncertain waters.  How about individuals?  Taking personal responsibility for your own financial future is more apparent now today, than ever before.

Here are just a few financial strategies that can help put you in a better position to withstand the taxman:

  1. Home Ownership – current tax code incentivizes this through deductible mortgage interest  and business expenses to invest in real estate.  Combine this with lower values of real estate and high inventory of foreclosure property available you can stand to not only financially profit but lower your personal income tax.  In Chicago, paying $1000/mth in non-tax deductible rent puts you within reaching distance of buying a home for that same amount in many decent locations.  Plus, the same $1000 you were used to paying in rent, is now a $1000 mortgage payment, if you own a home, which allows you to take advantage of tax-deductible provisions. This means LESS TAX to you.
  2. Fund or Convert to a Roth IRA – In the words of America’s IRA Expert, Ed Slott, “Taxes are on sale!” A Roth IRA is funded with your take-home pay and once it is held for 5 years and you reach the age of 59 1/2, ZERO INCOME TAXES are paid on withdrawals.  Taking an existing IRA and converting it to a ROTH IRA triggers a tax consequence this tax year but, allows you to parlay what federal income tax you owe over a two-year period.  Once this conversion is done, it can mean ZERO TAXES for the life of your retirement savings.  And, if you can save more than $5-6k/yr and contributing to your 401(k) plan to the percentage they match your contributions…
  3. Maximum Fund a Permanent Life Insurance Policy – take advantage of TAMRA 7-pay guidelines creates another bucket of tax-advantaged cash, free of any government involvement.  This is different from the traditional way of buying a $20/mth for $250k of life insurance death benefit, called term insurance.  Structuring a permanent life insurance policy (not term insurance) oriented towards the build-up of tax-deferred cash can further supplement Social Security income, pensions and depleting IRA and 401(k) plans over time, to name just several of the many benefits of this. Did I mention that the life insurance industry is one of the LARGEST purchasers of America’s corporate bonds of which their policyholders indirectly benefit? Haven’t heard a life insurance company go out of business during this recession, eh? (And AIG was the parent company, where it’s subsidiary life insurance companies held capital independently in a highly regulated environment) This strategy comes along with what most American households lack, a tax-free death benefit that their heirs can inherit with ZERO income tax.

Bottom line, we all know that the government has a plan, which will not please everyone. Your choices are simple.  You can either take the government plan or you can get your ducks in a row and take your own personal plan customized to your individual situation.  No one cares more about you, than you!

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