Tax law and policy have taken many different shapes and forms over the years. Their primary purpose is the generation of revenue, with individual income taxes contributing approximately 50% to the annual US federal budget.
Another purpose of tax laws and policies is to affect economic and social behavior. Investing in stocks comes with the risk that you could lose some or all of your investment. Taxing your long-term stock gains at lower rates than those applied to less risky interest income may provide the encouragement for you to take that additional risk, invest in stocks, and help keep our capital markets functioning. Similarly, income tax rebates for investments in alternative energy like solar help make it more affordable, encouraging more people to implement this technology than might otherwise be the case without the tax rebates.
The income and estate tax consequences of your financial decisions should always be considered when creating and implementing your WealthPlan. However, your financial decisions should not rely too heavily on the existing tax laws for their future success as tax laws can change quickly when federal administrations change. Your ability to reduce your taxes through deductions or credits generated by a particular wealth management strategy could be eliminated by the future stroke of a pen. If the success of your investment is dependent on those eliminated tax savings, your investment could be worth a lot less than you paid for it, become very illiquid, or both.
The tax advantages of a particular wealth management strategy should come on top of the already strong economic foundation of that strategy. A good question to ask is, Does the strategy you are considering provide a reasonable return for the risk you are taking without the tax advantage as part of the equation? If the answer is yes, then you can rely on that strong economic foundation to grow and protect your wealth even when tax laws change in the future, which they always do.
To find out how we can help you transform the complexity and confusion surrounding this important topic into your improved WealthConfidence, call us today (321)773-7773 to schedule your free initial consultation with one of our WealthCoaches™. For more information about FirstWave Financial check out our website at www.firstwavefinancial.com.