There’s a lot of potential “good” stuff in the Inflation Reduction Act, but to put it simply, if you make less than $200,000 annually, Congress has raised your taxes.
The estimated $16.7 billion in the United States’ new law is coming out of the middle and lower classes’ pockets, and an estimated $14 billion will be coming out of the pockets of those making between $200,000 and half a million dollars annually.
I’m not getting “political” here, just stating the facts as I’ve read them.
On the other hand, there are some perks in there if you qualify… especially when it comes to improving the energy efficiency of your home.
So, what can you do right now to begin to mitigate this tax increase?
First things first, you need to prepare for the new law by becoming smarter with where your money is going. That’s easy to do at a certain point financially, but it can be hard if you or your kids are just starting out. My advice is to begin with the end in mind – your retirement.
To lower your taxes in the new tax law, you need to look at maximizing your retirement contributions, but NOT in a company-funded 401(k). Yes, take the “free” money your company will give you, but start planning on how you can fund alternate accounts…
A Coverdell. A self-directed 401(k). A Roth IRA. Even overfunding a Whole or Universal Life Insurance policy.
…And take the slowdown in the housing market to really push towards finding and purchasing a home. Yes, interest rates are going up, and might even be bumped up again before year’s end, but over the life of the loan – 15 or 30 years – the money you can save even at 5.5% interest is far and away lower than renting for the next decade.
The point is: This has to be a wake up call for anyone making less than $200,000 a year. You’re going to have to begin a journey to learn how to mitigate and/or invest your post-tax income in new ways, or Uncle Sam is going to take it.
The good news?
Simple – there are a LOT of ways to legally mitigate your tax bill AND ensure your overall quality of life doesn’t suffer … but you have to be ready now – not later. Unfortunately, there are going to be a lot of surprises in the months ahead, as the IRA comes online. Some quick hints right now?
Position you, your investments, and your income for continued inflation, additional rate hikes and more volatility in the market. If you’re looking to invest now, smart places are dividend stocks as well as with companies with pricing power – and healthcare stocks seem to always be a good hedge against inflation.
…And even more importantly, now that we’re into the last quarter of the year, we really should schedule time to sit down and really game plan for 2023, before it gets here.