15 Jan How can I protect my money from upcoming tax changes?

Q. Now that Democrats have control of Congress, I’m afraid they will take away the Trump tax breaks. What can I do to make sure I’m not paying a ton? Are there shelters I can use in some way?
— Concerned

A. There are many ways to protect your income and assets from taxes, but the best strategies for you will depend on the specifics of your situation.

First, though, people are assuming taxes will rise under President-elect Joe Biden and a Democratic Congress, but that’s not a sure thing.

“Biden has said that taxes would not be increased for people with incomes below $400,000,” said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton. “So if you are below $400,ooo, I would not worry or do anything.”

If you have income above $400,000, planning strategies can be more complicated, so you should speak to a professional who can examine your entire financial situation, he said.

“I would wait until the rules come out and I do feel it is reasonable that nothing will happen until at least the end of 2021 due to COVID-19,” Lynch said.

But no matter what happens, don’t forget the big picture.

Taxes will continue to change and that is why you need to have tax planning built into your financial plan, Lynch said. If you don’t, you are destined for problems, he said.

“For example, if all your money is in a tax-deferred retirement account, then you retire and they raise taxes. What do you do? Either you take out more money and run the risk of running out of money or you spend less, and both options stink,” he said.

The ideal way to deal with tax unknowns is to retire with three tax buckets of money, all having different tax characteristics, he said.

The first is a tax-free bucket, which can include funds from the sale of a primary home, which is tax-free up to $500,000 for married people who file taxes jointly or $250,000 for singles, he said. It can also include income from muni bonds, Roth IRAs and taking cash from your bank or your principal from an investment.

Then you have a capital gains bucket.

“This is money in an investment for one year or more, and the tax rates can be 0%, 15% or 20%,” he said.

The final bucket is ordinary income.

“This is the worst bucket to use. Rates go up to 37% and possibly higher in future,” Lynch said.

He said if you have all three buckets, you can control your taxable income by drawing from the various buckets as needed and based on the tax climate of the time.

”If you only have a pre-tax IRA, you have no options,” he said.

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This story was originally published on Jan. 15, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.