It's important for any comprehensive financial plan to offer strategies that seek to reduce the impact 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 take you through some of the tax-related challenges you're likely to face — and to provide some potential solutions.
The federal budget deficit is higher than ever
Annual federal budget deficits have existed since the first part of the century, but have risen dramatically in the past couple of years. 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 2013.
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 will face an additional 3.8% tax on dividends and capital gains beginning this year.
U.S. federal Income tax rates, 1960-2012
This chart reflects the maximum federal income tax rate at each year-end.
Source: Internal Revenue Service, 2013.