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Have you ever witnessed toddlers fighting—whining, screaming and stubbornly holding their ground? At some point either everyone gets a time out, or frustration overflows and it gets physical. They are just not equipped to handle their emotions like—ahem—adults.
Change the scene: Capital Hill. The acrimony between opposing parties has been raised to new levels. The result is a gridlock that is in the best interest of no one. Each party’s agenda seemingly leaves no room for discussion, negotiation or anything that helps our government function. Unfortunately, there’s no “time out” space in Washington DC.
Leaving the rest of us to, if you’ll excuse the expression, suck wind.
But that doesn’t mean we have to like it or that we have to sit on our hands and do nothing.
Tax changes WILL happen, in one form or another, but they won’t be the sweeping reform necessary to fix a broken system that’s been patched by the ill-equipped, uninformed and unrepentant actors on the Hill.
So what to do?
Tread lightly. There seems to be a clear urgency on the part of some “experts” to get in under the wire, to create a significant tax strategy or make drastic changes based on the speculation of changes to come. Just remember, it’s you (or your heirs) who will have to live with the consequences of those actions
We saw this very clearly when everyone expected Congress to lower the Estate Tax limit threshold from $5 million back to $1 million. This belief led attorneys to devote countless hours trying to pump out documents, creating significant costs to clients that all became meaningless when Congress did nothing.
Planning isn’t bad—on the contrary, planning is important when there is enough real information to make appropriate moves. Over planning and speculative planning typically have a whipsaw effect that hurts far more than it helps. Remember the tax shelter days of huge write offs that became even bigger tax bills and phantom income? What about tax strategies based on Private Letter Rulings that are later disallowed?
Unlike three-year olds (or legislators), we need to use a “reasonable” test when making financial decisions, most especially where taxes are involved.
Ask questions. Don’t rely on anyone’s opinion or speculation and that includes your professional advisors. Make them put their recommendation in writing and provide a reasonable level of expectation.
Make sure you fully understand what’s being recommended. Whether we’re talking tax strategies, insurance policies or investments, any true expert should be able to walk you through technical issues in plain language.
Adopt a “what’s the worst case scenario” thinking. Once you understand the worst case, you can make a better decision on what’s a reasonable risk to you.
Vote with your feet. If your advisor isn’t making the information useable based on your level of knowledge, it’s time to find a new advisor.
Engage in discussion. Our strategies and financial decisions should be aligned with your values and what is most important in your life. Make sure your financial team understands what you care most about.
Don’t let the tax tail wag the dog. No one likes paying taxes and it’s our right to pay the least the law allows. Just know that when you make decisions motivated by tax savings, the consequences might be too costly. For example, tax loss harvesting—where you sell assets to offset gains—is a common strategy for investors. But it also means you cannot re-buy those securities for 31 days. Sometimes, the risk associated with selling (trade costs and the risk of being out of the market) is greater than saving a few dollars, especially when you’re in a lower tax bracket.
Yes, it is guess work because you cannot know what you don’t know. Adding to the degree of confusion is the speculation, analysis and “punditization” that drive newsletter sales and endless debate, normally amounting to nothing.
When it comes to prudent tax planning, the farther out the ramification of your decision goes, the more likely an unanticipated outcome will occur. Tread lightly. The club wielding pols will slug this out to a conclusion as yet unknown.