Taxes and Golf ⛳

This week has quickly become one of my favorite weeks of the year. The Masters tournament kicks off for those of us that are golf fans and I start to turn my focus to our strategies for the coming year.

It’s been an unusual last few years in our business. So much so, that I’ve begun to wonder if we will ever see “normal” again. I’ve taken great pride in our advisory services over the course of my tenure as the Managing Partner here at HD.  We’ve worked closely with our clients to not only minimize taxes in the short term but to build broader, long term strategies that help our clients not only build wealth but help them achieve their ideal state of success and financial freedom.

Many of you have heard me talk about my position on our current tax environment in a way that is more unique than most.  Our current tax rates are likely the cheapest tax rates that we will see for many, many years.  See chart below illustrating that most of the last 100 years we’ve seen top tax rates at effectively double where we are today.

Here is a great illustration of those rates as we attempt to predict what is to come.  

Tax rates staying low seems like a difficult argument. In 1960 our GDP (Gross Domestic Product) was about $560B vs a national debt of about $290B.  Quite simply,  our revenue was almost 2x our debt.  Fast forward to today when our National Debt is hovering around $34 Trillion compared against our GDP of about $26T.  

Our Debt to GDP ratio today is about 130% today compared to about 50% in 1960.

What does all of this mean to you?  

You should at a minimum know that this exists and that there is a high degree of likelihood that taxes are going to continue to rise for many years to come.  There is a chance that our national economy is able to raise GDP via other sources such as investments in AI, Chip Manufacturing and Energy Independence but all of those things take time. But, there have been many studies that show that maintaining such a high Debt to GDP ratios is unhealthy long term for any national economy.  

A Unique Perspective on Tax Planning

Many of my clients have grown accustomed to hearing me talk about this over the last two years and it’s an uncomfortable shift in the mentality surrounding tax planning.  Many people are hyper focused on paying the least amount of taxes THIS YEAR that they lose focus on what that mentality will cost them over a longer period of time.  

Our focus over 2024 and 2025 will continue to work with clients to minimize the tax deferral mechanisms that they have had in place for many years.  Debt to GDP is most certainly a factor that I’ve monitored but the other “wild card’ continues to be ongoing tax legislation. The 2018 Tax Cuts and Jobs Act (TCJA), known to many as the “Trump Tax Cuts” are set to expire after the 2025 tax year.  This has a relatively broad impact to many taxpayers but could be just the beginning of increases coming our way.  This by itself translates to about a 3% increase across the board to income tax rates. See chart below.

Individual Income Tax Rates

*Indexed for inflation based on 26 U.S. Code § 1(f)(3)**Estimated, indexed for inflation
Most importantly for many business owners,  the 199A Deduction, the 20% qualified business income deduction (QBI) for pass-through entities will be eliminated as well when these tax provisions expire.  Many of our clients have pass through entities and are currently getting 20% of their income from their business tax free.  Be careful in counting on this tax provision sticking around long term,  it makes sense to continue to consider minimizing deferrals and paying taxes while this deduction is still available.  

Estate Taxes – Death and Taxes are certainties.

The current estate tax exemption is a little over $13M but is projected to sunset back to $7M per person in 2026.

There is certainly a possibility that tax legislation can be passed that prevents all of these things from happening but it’s important to consider all factors when assessing the likelihood of tax rates staying this low for much longer.

We’ve built our system around some very simple concepts.  

1.) Make sure your accounting is clean and transparent.  Our clients stay in touch with us all year long about their expected income and we work with many of them throughout the year to ensure that their books and records are always accurate so that we can plan throughout the year.

2.) Don’t spend money just to save taxes.  It sounds like a simple concept but lost on many.  The goal is to accumulate the maximum amount of wealth net of taxes over your earning career.  I’ll say that again, for those that did not “hear me”.  The goal is not to pay the least amount of tax today.  The goal is to accumulate the maximum amount of wealth net of taxes over your earning career.

3.) Deploy your capital the best way possible.

4.) Stay attentive to your pricing and margins.  

5.) Keep the big picture in mind.  Whether that is growing your business or retiring from your job, our focus is keeping you dialed in to what helps you achieve your goals and blocking out any other distractions that don’t contribute to the plan.

We’re looking forward to another year of growth along side our clients.  We take great pride in being a partner in your growth not only today but for many years to come! Our business continues to evolve and grow alongside yours and we’re grateful that you continue to allow us to be a part of your journey.

Happy Masters Week!