It's important for any comprehensive financial plan to offer strategies for mitigating the erosive effect of taxes on a portfolio. And with the federal deficit higher than ever and taxes today still relatively low by historical standards, the potential for higher future tax rates is significant. This page is designed to help you walk your clients through some of the tax-related challenges they're likely to face — and to provide some potential solutions.
The federal government continues to have large deficits
Annual federal budget deficits have existed since the first part of the century, but have risen dramatically since 2008. In fact, the annual deficit more than tripled from 2008 to 2009, according to the Congressional Budget Office, while government debt is at a post-WWII high.
Annual U.S. federal budget deficits, 2000-2012 ($B)
Source: Congressional Budget Office, Budget and Economic Outlook, January 2014.
In which direction do you believe tax rates are headed?
Since the 1960s, tax rates have been trending lower. Today, the top marginal federal tax rate stands at 39.6% as a result of recent legislation. At the same time, the highest income earners face an additional 3.8% tax on dividends and capital gains.
U.S. federal Income tax rates, 1960-2013
This chart reflects the maximum federal income tax rate at each year-end.
Source: Internal Revenue Service, 2013.