The pandemic has caused our national deficit to explode. No matter which political party will be elected this fall, there will be an outcry to bring down our Godzilla sized national debt. The current projections from the White House report $3.7 trillion in new debt. In addition, several respected economists project that the 2020 increase in the national debt will be closer to $4 trillion.
What will Congress do?
The following is pieced together from presidential candidate comments in addition to rumors from Congress.
- Congress will not raise taxes on households with incomes earning less than $50,000.
- Expect only small tax increases on households in the middle. Those between $50,000-$500,000.
- Expect selected tax increases on the “successful” group. For example, households earning over $500,000.
But wait! Using the above incremental increases, how will Congress make a dent in the over $25 trillion national debt? With sleight-of-hand, or more like, their hand in your pocket. Instead of providing clear income tax increases, watch for Congress to drastically reduce many common tax benefits that all of us, especially investors. Look out for:
- Capital gains tax breaks to be reduced or eliminated. In the future, long term capital gains could be taxed the same rate as ordinary income.
- 1031 exchanges to be reduced or eliminated. This will bring tax receipts forward, causing investors to have less available cash to make the next investment.
- Medical and dental deductions to be even more restricted.
- Home mortgage deductions to be even more restricted.
- Forget business at home deductions.
- Student loan interest deductions may be restricted.
Who will these new costs hit the hardest? Almost every household earning $50,000 or more with special emphasis on those who are building wealth by investing.
However, the above tax burdens caused by changes in the federal tax code may pale compared to what will happen at the state level. The state treasuries are being drained at every turn. Unfortunately, unlike the federal government, states cannot just print more money.
State revenues are plummeting in 2020
- State income tax revenue will be down.
- Income for state and local sales will be down.
- Gasoline tax income will be just a shadow of previous years.
- Even income from the sale of lottery tickets has dropped.
At the same time, the costs of running the sates remained unchanged or are higher
- Unemployment benefit costs have increased.
- Aid to dependent children has increased.
- Public safety costs have remained unchanged or have increased.
- Even with schools closing early, education costs remain high.
- State employees remain on the payroll at 100%.
How will states fill their budget deficit?
Many states have already used up backdoor ways to raise money by using sin taxes. Likewise, many states have already:
- Legalized casino gambling to fill budget gaps.
- Expanded alcohol sales to fill budget gaps.
- Squeezed everything they could out of gasoline taxes.
- Offered state lottery ticket sales.
- Legalized marijuana sale.
- Some states have legalized online gambling.
With all the sin tax used up, how will the states close their deficit gap? Simply, increase state and local income taxes. The reason, that is all that is left.
In conclusion, how can you protect yourself?
There is a giant tax haven that no one has, or likely will, mention as a target. It is the IRA. IRAs have become a “third rail” for politicians. Similarly, like Social Security, no politician wants his or her name on a bill that would take away the ability to save for your family’s future. Therefore, IRAs and their benefits appear safe from government tampering.
If your household earns $50,000 or more what should you do to protect yourself and your family from the tax onslaught?
- Start an IRA.
- Make an IRA contribution. Remember, you have until July 15, 2020, to make your 2019 contribution.
- If you have a Traditional IRA and have not already done so, CONVERT TO ROTH. Converting to a Roth IRA has never been more important. Let’s look forward just five years to 2025.
Those who convert to a Roth IRA now and take the tax hit based on 2020 tax rates will be glad they did when they look back in 2025.
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