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A Lifetime View of Taxes

From Josh Manifold | Advisor | Principal

Tax planning is one of the most important conversations we can have as we approach the end of the calendar year. However, many families have the wrong goal: the lowest tax bracket and bill possible.

In most cases, getting the lowest bracket possible in one year is only made possible by deferring the liability to later years. It’s a game of “Win now, pay later.” Given enough time, that liability catches up and erases whatever gains we made on the front end.

This is why your approach to tax planning needs to focus more on lowering your highest tax years rather than bottoming out the current year. We do better when we focus on reducing our 20-year tax bill, not primarily the current year.

One of the best examples of this is Roth conversions, which you can read more about here. (The visualization is a great explanation.) It’s a classic example of when we choose to incur more taxes during years when our taxable income is abnormally low to protect assets when our tax bracket is highest.

Don’t get tunnel vision on the game of beating the IRS this year. Play the long game. Lean on guidance that helps you grasp the causes and effects in play.

Solid Job Growth: Unemployment rates have indeed increased from a low of 3.4% in April 2023 to 4.3% in July of this year. Hiring has pulled back, with the Job Openings and Labor Turnover Survey telling us that the hiring rate (hires as a percent of the labor force) has pulled back to 3.3%—a rate we last saw in 2013. In September, unemployment dropped to 4.1% and payrolls grew by 254,000, doubling expectations for a 125,000 increase. The good news is that July and August payrolls were revised higher, taking the 3-month average to a solid 186,000. The report is outsized because Hurricane Helene will likely impact the next two payroll reports. It will be January before we get another “clean” report.

Over the last three months, wage growth has run at an annualized pace of 4.3%, which is solid but shouldn’t raise anyone’s inflation hackles. If you combine wage growth with employment growth and hours worked, we get a sense of aggregate income growth across all workers in the economy. Right now, that’s running at a 3-month annualized pace of 4.4%. If you’re wondering why economic growth keeps exceeding a lot of people’s expectations, especially after recent upward revisions, here’s why: Income growth is powering the economy, as opposed to credit. That is perhaps why this cycle has confounded many people since we haven’t seen something like this in decades.

Stock Market Astonishing Returns: A year ago, the 30-year return for the S&P 500 was 834%, which is to say it rose just over ninefold between the end of Q3 1993 and the end of Q3 2023. Today, the index’s 30-year return is 1,135% — it’s risen more than twelvefold in the past 30 years and currently stands at an all-time high (Axios.com).

On an annualized basis, the S&P 500 is up 8.8% per year over 30 years, 11.3% over 10 years, and 20% over the past three quarters. No matter your holding period on positions in the market, investors should be happy with performance.

 

 

 

*The views expressed are those of the author as of the date noted, are subject to change based on market and other various conditions. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results.