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History of Taxes
353 Plays3 years ago
The old joke goes that nothing is certain except for death and taxes. But in reality, the United States didn’t even have a permanent federal income tax until Christmas Day, 1913, which means we have spent more years as a country without a federal income tax than with one. Over the years, taxation became more and more complicated as the government sought more ways to raise revenue while citizens looked for ways to pay less in taxes. This led to what we have today which is an often difficult to follow maze of tax codes representing a desire for more revenue pitted against tax-reducing incentives to encourage people to behave financially in ways that put less burden on the government overall (such as retirement savings and health care savings).
In this episode, we’re talking about taxes. We’ll discuss how the progressive tax system works, key moments in US tax history that drove some of the tax code provisions that are key to modern tax planning, and considerations around Roth investments, your off-desk Robinhood account, and how the current tax landscape compares to the past.
Of course, we can’t predict the future and this discussion isn’t tax advice. We definitely recommend you connect with a tax advisor for help with your tax questions and financial situation.
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Transcript
Introduction to Uncommon Wealth Podcast
00:00:00
Speaker
Everyone dreams of living an uncommon life and the best asset you have to achieve your dreams is you. Welcome to the Uncommon Wealth Podcast. We're going to introduce you to people who are living uncommonly. We're also going to give you some tools and strategies for building wealth and for pursuing an uncommon path that is uniquely right for you.
00:00:25
Speaker
Hello and welcome everybody to on Commonwealth Podcast. I love that intro music. You know what we have today? We have a three person podcast. We have myself, Brian Dewhurst. Hello. Hola, como estas? This is Brian Dewhurst. And the one and only Aaron Kramer. We have three of us. Hello, Aaron. Hello. My name is Aaron.
Historical Context of Taxes
00:00:45
Speaker
yep and you know what we're gonna do today we're gonna talk a little bit about taxes what have they done historically what are they gonna do in the future and why should we care where do we start out we have a document an attachment for this that we're gonna kinda be going over but all we're trying to say in this whole podcast is it matters and where have we been historically where we at now where we where do we think obviously we're kinda projecting a little bit nothing that we should say right now caveat caveat
00:01:14
Speaker
risk compliance, compliance, you know what I'm saying. So, yeah, we are not tax advisors and we are not giving tax advice. That's, that's, Brian keeps me out of jail. I appreciate that. So where do you guys want to start? And then I think I'll be kind of litmus test. If I start falling asleep, I'll be like, pull off, pull off. We're going too deep. Okay. That's my job. I can start like,
00:01:36
Speaker
This is a fascinating thing to me. When I was reading Ed Slott's book, this is where we got this from. I'm a visual learner and seeing what we're going to put there in the notes here, if you do go out and look at it, it really opened my eyes to where the top federal income tax brackets were and where we're at now and how long we've been there.
00:02:02
Speaker
It's kind of scary. So what this document looks like when you look at it is just a year, it goes 1913, and then what the top federal income tax bracket is, and then it just goes year by year until today. So that's what we're looking at. And so I'd love to quickly, just for those who don't understand how the tax code works, it's tiered. Brian, tell us how it is and why we're talking about the top tier.
00:02:27
Speaker
Yeah, it's progressive is kind of the word I think most associated with the tax code, very similar to tiered.
00:02:34
Speaker
but you're probably either tiered or progressive. So, you know, zero to whatever the first tranche is is like no taxes and then the next tranche is like 10 to 15% taxes. I'm not going to go through the actual code because it changes all the time, but basically the marginal rate with which you pay taxes as your income goes up, it goes up.
00:02:57
Speaker
So if you make only $6,000 a year, you're probably not going to get taxed on that. But then if you get paid more, you're going to get taxed. Yeah, if you make in $600,000 a year, then that income that's coming in, that last dollar is coming in at the highest bracket. And that $600 one is getting taxed different than the $25,000 mark. So that's why
Impact of High Tax Brackets
00:03:19
Speaker
it's progressive is the real world. Thanks for correcting me.
00:03:24
Speaker
So I think the important thing to note, or I guess that I want to get out there since I identify as a libertarian, but
00:03:32
Speaker
is the fact that our country was founded in 1776 and there was no taxes until 1913. That to me is also an interesting part of the story and the tax code was put into place on Christmas Eve in 1913 with the Income Tax Act along with co-legislation for the Federal Reserve Act. So our country
00:03:58
Speaker
materially changed in 1913, and it's never gone back for the Fed controlling the money supply or for us paying federal income taxes on our labor and wages. Got to love it. Okay, Aaron, where do we start, buddy? Kick us off. Yeah. I mean, my thing is when we're looking at this,
00:04:19
Speaker
It's seriously, when we look at this graph starting in 1944, all the way to 1963, we were our top federal income bracket was in the 90 percentile. So I know if you're a listener here and like even myself, I'm like, well, I'm not in the top brackets. I don't really care. But remember a Phil and Brian just said it's progressive. So that means I probably would have been in like 30 or
00:04:48
Speaker
50 or I don't know how they would have done that. But like, we're gonna have a much higher tax bracket because it goes up so you don't just jump from being what you're in now to like 90. So that means, man, when we're looking at it. And I know a lot like so I know I talked to some people about this. And they're saying like, well, a lot of this followed like World War Two or the wars and stuff that we had to pay for. Which is true.
00:05:14
Speaker
But also we just have gone through some funky times these past couple of years. We've printed more money than we've ever printed in history in these past two years. So the potential for taxes to go up.
00:05:28
Speaker
I mean, it's the, I don't think it's a matter of if it's a matter of when. Right. Right. But let's just quickly just understand this. Like the highest it goes up to is 94%. Could you imagine what your mind would be thinking if I make over this 94% of it is gone. I mean, think about what that does mentally to you. Like what's the point? Like, yeah.
00:05:53
Speaker
Right, it just kind of like totally like demoralizes you from even trying to be creative or trying to push the envelope. Not saying that money is the incentive for everything, but if you're getting 94% taken away, that changes your mindset a little bit, right? Yeah. Sure. I think our current, don't hold me to this, I don't have it looking at, I think what you're making like 350,000 or something like that, you're in the top tax bracket right now.
00:06:24
Speaker
Yeah, 350 to 440, I believe, if you're married, filing joint. Right. Depending. Yeah. That's not like you're just like, you're not even in the 1%. Right.
Ed Slott on Tax Efficiency
00:06:35
Speaker
So for listeners out there to think like,
00:06:38
Speaker
I mean, we're not saying like, yeah, if you're making billions of dollars and you're going to get taken, you know, 94% of it, like, I mean, whatever. But like, you're only making, I say it only, but like, you're not some big mil, making millions a year, 300 and something thousand dollars a year, and they're going to take 94% of it.
00:07:00
Speaker
Right. And then you could just see, cause I can almost hear myself thinking like, okay, what can I do to avoid that? Right? Yeah. Like how many things are, or how many people do I have to surround myself with to help me avoid paying 90% in taxes? It's interesting. Yeah. And I think, I don't think this chart has the federal Medicare surcharge tax added in cause I think it's actually higher than 37%.
00:07:26
Speaker
So, let's just say it's 40 as of today if you count the Medicare surcharge tax. What is that for our listeners, Brian? It's the tax that was basically added through Obamacare to further offset the cost of the legislation to be passed. So, it's just another tax to help pay for Obamacare.
00:07:50
Speaker
Medicare benefits and stuff like that. So, I mean, that's my understanding of it. But I think the important thing that we're trying to get at is your labor and your wages are taxed at a healthy rate, whether you think that's high or low. Historically, it seems low, but I think now more than ever, like what you're saying, Aaron, more people are in these higher brackets than there were 50, 60, 70 years ago, for sure.
00:08:19
Speaker
And when you look at potentially making gains on your assets, like real estate, stocks, bonds, whatever, you have to do that or you should be thinking about how to do that in a tax deferred way or tax sheltered way. And so that you're not adding to your tax liability with your investment strategy. Yeah. And the other thing to start thinking about though, you know, work with your financial advisor,
00:08:45
Speaker
or somebody is that, you know, it's like we use ourselves, for example, we're all fairly young. We get to like retirement age that we put all this money into an IRA, it's tax shelter, that's great. But it was tax shelter from our lower taxes today. And then you get to retirement and then now taxes have gone up since then. That's a good point. That's a great point. Now we go to pull it out and let's say we're at 50% tax bracket. And now that has now been hit by,
00:09:15
Speaker
It's only worth half because you're going to give half of it to the government. So there are strategies to do to help like convert that or not convert that. That's a bad word. Medicate that risk. Yeah, yeah. Medicate that risk for sure.
00:09:31
Speaker
All right, let's talk about this for a second, because you mentioned old Ed Slott at first. And both Brian and you, Aaron, have studied and read books. We all get, if you've heard this show before, probably not me, but I'm grateful I have smart people around me.
00:09:46
Speaker
Tell the listeners what, I mean, he's kind of, he's done a lot of research, I'll just say that. And we pull a lot of information from him. So let's talk about quick ed slot. What is different about him? What is he trying to prove or trying to help people with? Let's talk about that quick. And then also know that both Brian and Aaron have studied some of his stuff. Brian, you've gone in depth just recently with the class and I know that you were like, it was like drinking from a fire hose. So,
00:10:15
Speaker
Yeah, I can go tip it off since he went to the class so he knows more than I do, but I've just read his books. He is the leading CPA on IRAs. So he kind of just really helps financial advisors, tax experts, and estate attorneys understand the ins and outs of taxes when we're looking at like some of our biggest wealth vehicles, which tends to be our IRAs.
00:10:43
Speaker
So he helps us how to learn or teach us how we can like make those as tax proficient as possible. Yeah. And I think the, you know, I go back to legislation, you know, the IRA and all of that was created in the seventies after wall street rated corporate pensions and
00:11:08
Speaker
In the 70s and 80s, they'd go in and buy out all these companies and then ransack the pension because it made the company instantly more profitable than they'd sell it. They needed a vehicle to pass the liability of retirement on because they were essentially eliminating it. That's really where the 401k, the IRA, and the ERISA legislation started was the need to replace the company pension.
00:11:33
Speaker
All of this, you know, the unintended consequences of all of these rules. And there's been a
Strategies for Tax Mitigation
00:11:39
Speaker
lot of rule changes in the last two years with COVID, with the CARES Act. And so a lot of the class was on all these, I would say maybe a little bit more edge cases of
00:11:51
Speaker
situations that happen in life, and because of all these nuances of this legislation that's been passed, what you thought was going to happen is not what's happening now.
00:12:03
Speaker
And so Ed also provides a community to stay on top of all this stuff, because it changes actually quite a bit. For example, they've just made a massive change to beneficiary IRAs and withdrawal, like the order in which you have to take your money out and how quickly you have to take it out. They've changed the requirement of distribution age from 7.5 to 72. They're talking about moving to 75 or eliminating it.
00:12:31
Speaker
which is interesting. And so, there's just all these things that are very challenging to stay on top of, you know, if you're just a retired person trying to manage this stuff yourself and you have, you know, some of these kind of edge cases or nuances that, you know, you may break a rule or fall into a better strategy unknowingly, you know, just because of life.
00:12:55
Speaker
So that's a big part of what Ed Slott's community is too, is just the constant continuing education around all this stuff and the way it changes. That's good. So from a tax perspective, what you guys are saying is historically we're fairly at a lower rate than normal. Is that what I'm hearing? Did I hear that correct? And you both are saying like, all signs are pointing that these things are probably going to go up.
00:13:22
Speaker
So if you are putting your money into an account that's going to get taxed in the future, it might be something you want to think about today. So what is one action item that people can do if they have found themselves in this exact situation? So I know like the one thing for younger clients, if you're, you know, 10 years out from retirement, five years out from retirement is start doing Roth conversions. If it works out for you.
00:13:52
Speaker
Uh, again, you gotta make sure you talk to a financial professional. I'm not saying it works for everybody, but, uh,
00:14:00
Speaker
That's one way to do it so you can ensure that you're not going to pay taxes on that in retirement. You're going to pay taxes on upfront for whatever you convert, but you're paying on the taxes of the tax rate you're in right now prior to them possibly raising those rates, which then decreases the value of that IRA.
00:14:22
Speaker
Yeah. And we've seen that Roth conversion work the best when you are actually getting a tax return at the end of the year and you use that tax return to then pay taxes on the conversion. That's where we've seen that work really powerfully. So that's just another thing you can talk to your professional and say, hey, would this work in my situation? Right. Yeah. And to do that most effectively, you know, I think Aaron's done a great job of this is you really got to dial in your tax liability
00:14:52
Speaker
in the current year early. Yeah. Yeah. Like October through December and really baking that in of what you're going to owe. And, um, yeah, like if you have a $4,000 refund coming in April, you can do a Roth conversion in November, December against that. Cause a Roth conversion triggers tax.
00:15:11
Speaker
and the tax can't come from the IRA. It has to come from your out-of-pocket money, cash, bank money. So if you're gonna get four or five grand back from the government, we can essentially Roth convert against that and bring your refund to zero, but then shift those IRA dollars into Roth dollars. But to really get good at that, you have to have your taxes ready to go in November, December. So we can estimate that with your accountant.
00:15:40
Speaker
Yeah. Another reason why- I would say the other strategy is just on the non-qualified is, you know, I think a lot of people are maxing out their IRA, 401k, Roth capabilities, and they're saying, hey, I still have, you know, whatever, one to 5,000 a month I could be saving between, you know, my spouse and I, where and how do we put that? And so that's really where we're focusing on
00:16:05
Speaker
either tax-managed strategies, like if you're in a brokerage account, trying to grow that money without triggering capital gains tax, or municipal bonds, now that interest rates are higher, are looking more attractive. That interest is federally tax-free and probably partially state tax-free. It's hard to buy all of municipal in just one state, but largely federally tax-free, mostly state tax-free. Obviously, the life
Strategic Investing for Wealth
00:16:30
Speaker
insurance is a tax-sheltered asset class.
00:16:34
Speaker
And so, you know, trying to build wealth in those ways and then obviously if you're incorporating real estate that has its own potential tax advantages, deductions and that type of thing that can carry forward to your return as well.
00:16:46
Speaker
Right. And I think that's why like our philosophy is always really powerful because it's interesting to me kind of like, you know, we run into just a lot of people and it's just amazing to me how many people are like trying to trade, like, you know, got a Robinhood account, E-Trade account. And I'm not,
00:17:05
Speaker
you know, saying not to do that. It's just amazing to me how many people are doing it. And it's just like, if you actually make money at that, like you're going to pay tax immediately at the, you know, I think the short term bracket now in cap gains is like 28%. That's also stacking onto your personal return. So, you know, based on that progressive tax bracket thing, you know, we kind of talked about at the beginning, it can really impact your tax liability, especially if you're making over, you know, six figures for you and your spouse. So
00:17:35
Speaker
You know that's the kind of money that if you don't have a legitimate trading system and you're just kind of like following message boards and doing random things like that's not a system to build wealth over time you could certainly get lucky and a lot of people had.
00:17:50
Speaker
But in terms of building a wealth-generating system of dollar cost averaging into strategic asset classes to mitigate tax, build wealth, and maintain your liquidity, liquidity just means access to your money. That's where I think a lot more people could be very strategic with those dollars and grow wealth much faster if they had a concrete strategy with those funds as opposed to just like, oh, I followed Wall Street bets or somebody, I made a trade, or I'm trading this.
00:18:20
Speaker
The problem with trading is you have to continue to be right. And that's a daunting task when you and your spouse have full-time jobs, kids, you know, all that type of stuff. So the people, I feel like, are successful with trading. It's their full-time job. Like, they've quit their job. They're trading their own money. They're managing their taxes. And that is their long-term strategy. And that's a very select few of people that are doing that successfully.
00:18:47
Speaker
It takes a lot to like be that person. Like you have to emotionally be able to handle.
00:18:52
Speaker
your money generating money from, you know, because a whole different ballgame backwards on a stock chart. It's like, Oh, I should have done this. Should have done that. When you look forwards, it's blank. It's a blank page. And, uh, you know, to cross that chasm is a whole different thing. And so I do think there's a very big benefit to building wealth by owning stocks, uh, and investing in stocks in the longterm. Obviously we have, you know, stalwarts like Warren buffet to look at for that. But, um,
00:19:21
Speaker
To do that from a tax perspective now, it used to be easy to do that in an after-tax brokerage account. Now, if you're a high-income earner and you're triggering capital gains often, it can be very detrimental. Shifting the individual stock portfolio to a Roth is the more strategic play I think some should look at, depending on where their income levels are at.
00:19:44
Speaker
Um,
Personalized Financial Advice
00:19:45
Speaker
so anyways, I think that's a lot we've covered. Yeah, it's a lot. And, uh, that's why I think our philosophy is just the other thing I'd say is every person's situation is different. Like where their income's coming from, where their brackets at, like where their money's at. Like it's, it's interesting to me, uh, how different a lot of people's situations are. What's happening? There really isn't one cookie cutter system for one person. So, uh, like that's,
00:20:11
Speaker
where my biggest thing comes in where you know you hear a lot of people out there on the internet tell me what to do. I want to make it very clear that that's not us when I tell you what to do. It's just there's it's ideas of what to think about because everyone you know your neighbor in the same neighborhood could have similar same job as you and your spouse and when you sit down they have a completely different goals situation background.
00:20:37
Speaker
which could totally change what they need for retirement than what you need for retirement or just in general. Yeah, definitely.
00:20:45
Speaker
So I think we hit that well. I think we've lost Philip's microphone. We sure have. If you have questions or want to go over your individual plan, obviously you can reach out to us at www.uncommonwealth.com. Also, if you're making any type of serious money, please start working with an accountant or a CPA.
00:21:08
Speaker
It's just critical. And especially if you own a business or an entrepreneur, there's just a lot of nuance to the tax code now. And if that's not your full time job, don't try to make it your full time job. So surrounding yourself with a team like a wealth protection team or a wealth freedom team.
00:21:26
Speaker
financial freedom team, we'd love to be a part of that. So yeah, this has been Brian Dewhurst on the Uncommon Wealth Podcast. And Aaron Craylon. And Philip Ramsey. And we sign off for Philip. So thanks for listening and everybody go be uncommon.
00:21:43
Speaker
That's all for this episode, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.