Independence, Freedom, and Taxing Obligations

July 4, 1776, the day 245 years ago when in signing the Declaration of Independence, the fledgling Continental Congress declared that our thirteen colonies no longer were vassals of King George III of England. We were, and are today, united, free, and independent states. Georgia was one of said colonies.

As we celebrate Independence Day, 2021, we know that the battle to define and maintain the meaning of freedom is an ongoing work in progress. We fought a revolutionary war against England, then the most powerful military nation on earth, to secure our freedom. Over the years since we’ve struggled as a society and a country to define and expand freedom for all. We endured a tragic Civil War fought at the core over civil rights and human dignity, engendering movements that continue to this day.

As individuals we struggle at times to assert our rights to life, liberty, and the pursuit of happiness. But along with freedom come obligations, including the responsibility to pay taxes to support community, state, and federal operations. That obligation gave rise in the 1940s to Tax Freedom Day, a day that represents how long Americans as a whole work to pay the nation’s tax burden. If you paid your taxes up front every year, how many days into the new year would elapse before you get to keep all you earn? Calculated annually by the Tax Foundation, a Washington, DC-based think tank, the date varies by state due to state and local taxes, but it generally occurs in early to mid-April. On average many folks work solely for the Tax Man for three months and a few weeks every year!

Radio and TV entertainer, Arthur Godfrey (1905-1983), declared, “I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.” President Biden outlined the American Families Plan, encompassing spending and tax breaks for expanded nutrition, childcare, education and healthcare programs, nationally paid family and medical leave, and other programs. Biden’s spending agenda includes a plethora of infrastructure and transportation investments, climate change initiatives, eldercare support, and other items. How to pay for it? Substantially higher taxes aimed at high earners, wealthy investors, and larger estates.

Targeted is annual income above $400,000 for a family. How that applies to individuals vis-à-vis a family is unclear. But for higher earners, assume tax burdens will rise! Higher marginal tax rates on ordinary income, increased long-term capital gains rates, and loss of a number of tax breaks are contemplated. Tax planning is a hot topic for those potentially impacted. You have an obligation to comply with tax laws. You also have the right to take advantage of tax laws to legitimately reduce your tax burden. Even those with income below Joe Biden’s targeted threshold (whatever that term means after Congressional battles and partisan maneuvers) may take advantage of prudent tax-minimization strategies.

Business owners, farmers, ranchers, real estate investors, those with substantial holdings of highly appreciated stocks or other low tax basis assets, etc., in any one year could experience an explosion in taxable wealth when value is monetized and liquidated. Succession planning for closely-held business owners has assumed new urgency. Revised estate tax laws have been proposed with narrowed exemptions, which, in turn, spurs estate planning and gifting strategy conversations with financial advisors, attorneys, and CPAs. All of this is about more than taxes, however.

You don’t know if or when you’ll be disabled in some form. In the event of incapacity, who will step in to manage your affairs? What legal authority do you wish to grant? What should that family member or other person know about your affairs and wealth now? We all die. Everything you own or control will pass to someone, somehow, someday. Wills, trusts, gifting, and philanthropy play a role in purposeful and tax-wise transfers. Providing for minors, special needs children or adults, requires thoughtful planning.

Unless tax laws change, certain types of life insurance can be an effective way to build an asset that may facilitate tax-free cash flow in retirement, and/or fund estate planning or charitable giving goals. Traditional long-term care (LTC) policies are increasingly expensive but certain types of hybrid life insurance policies can serve both LTC and other retirement and estate planning interests.

As you ponder post-pandemic challenges, you may be more sensitive to the realities of life posed by the certainties of death and taxes, as one of the signers of the Declaration of Independence, Ben Franklin, noted. Add the uncertainties of life, the likelihood of forced major life transitions, anxieties involving potentially high valuations on stocks and other assets, the specter of accelerating inflation and increased punitive taxation, and there’s much to consider.

Complexity and uncertainty are unsettling and taxing (pun intended). But procrastination also can be very expensive. Just sayin’.....