If you drive a car, I’ll tax the street,
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat,
If you take a walk, I’ll tax your feet.
—–TAXMAN – The Beatles – 1966
This is an apolitical statement: at Proficio Capital we believe with a high degree of probability taxes are going up in our lifetime. You have heard the story before, massive fiscal deficits, trillions of unfunded liabilities, crumbling infrastructure, cries of income inequality, and an expiring Trump tax cut. In our view, it is safe to assume that the direction of taxation is higher, potentially much higher if we had to wager.
Taxes are a hot topic in the news but some investors don’t think about taxes and the impact on their investments. Some may think it’s a problem for higher net worth people. I’m here to tell you that if you have ANY investments, you should be thinking about how much tax is eating away at your total returns.
Let’s just set the stage. The Federal Debt to GDP stood at 105% at the end of 2018 (near an all-time high) and the Budget deficit, per the CBO, is projected to be at a record high of $1.4 Trillion in 2028. None of these numbers include a potential recession, which by 2028 would make 20 years of uninterrupted growth. That is an unlikely scenario. We are also starting to see/hear about higher layers of state and local taxes, especially in the Northeast and California. Finally, many candidates for President are calling for much higher estate taxes.
With all that as a backdrop, what is an investor to do now? There is no one solution, but rather a conscious focus on taking tax considerations into one’s investing mandate and to think about post-tax investment returns. Too many investors spend all their hours considering the purchase/sale of Stock A vs. Stock B, rather than focusing on what type of structure should hold the investment. In an era where many active managers are consistently underperforming indices, the structure and tax considerations should take center stage when deciding upon asset allocation.
There are a few basic tools/products that investors should consider. This is by no means an exhaustive list, but rather a starting point for investors to consider.
• Effective Tax Harvesting – This should be a year-round exercise and not the typical “sell your losers” in December. There are many tax-smart funds to help with this. Just make sure these funds sit outside tax-efficient (IRA, 401k) structures.
• Tax Advantaged Municipal Bonds.
• Charitable giving using appreciated securities.
• Investments thru Life Insurance – A more tax efficient way to own tax- inefficient assets such as income funds.
• Opportunity Zone Deals – The ability to defer and reduce existing taxes and eliminate future capital gains.
• Qualified Dividend Income Bonds – These are interest payments taxed as dividends vs. ordinary income (a substantial uptick in post-tax returns).
• Estate Planning & Trusts – There is too much to go through here, but proper estate planning can save families a significant amount over a lifetime.
• IRAs, 401Ks, 529s and Other Govt Programs – This is a great way to either eliminate or defer taxable income. Just about every family should be considering these.
If none of the above are right for you, one can always consider moving. There are many places in the US with no state and city taxes as well as no state estate/death taxes. The trends are powerful, just look at Illinois, Connecticut, and New York (outflows of millionaires) vs. Florida and Texas (inflows).