With April 15th right around the corner, well its Tax Day. Time to settle with Uncle Sam. If you have state income taxes, you will also have to settle with Cousin Sam.
A Brief History of Income Taxes
The first modern day income tax in the United States was in 1913 with the passage of the Sixteenth Amendment. The tax rates started at 1% and went up to 7%.
In 1982, after he became President Ronald Reagan, he mentioned that when he was an actor, he would only make one movie per year as income tax rates were over 90% in the 1940’s.
That is not a typo, income tax rates were over 90%.
In 1988, President George H. Bush said, “Read my lips: no new taxes.” We know what happened after that…
In a 1934 Supreme Court Case, Judge Learned Hand said regarding income taxes:
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Listen to the Judge, he knows what he is talking about.
Income tax rates are like interest rates in one respect. They can go down, stay the same, or go up.
The most common measurement of interest rates is the Federal Funds Rate. This rate topped 19% in 1981. 1) When economic times were tough during both The Great Recession of 2007-2009 and the 2020 COVID-19 pandemic the Federal Funds Rate was cut to near 0%.
We see the highest income tax rate was 7% back in the day. They rose to over 90% in the 1940’s. For 2025, the top rate is 37%. The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025. If it does expire, the highest rate will revert to 37.9%.
The National Debt is about $36 trillion (yes, that is with a ‘t’), and, surprise, surprise, growing. The budget deficit for 2025 is estimated to be another $1.9 trillion.
As mentioned above, one of the responses to the COVID-19 pandemic was to cut interest rates to near 0%. This was one of the tools the government used to simulate the economy. However, it also allowed the government to issue debt at extremely low interest rates.
In 2025, $9 trillion of low-interest rate debt will mature. This is about 25% of the country’s total debt. 2) Which can only mean one thing:
Houston, we have a problem.
These debts will need to be rolled over. This will be at higher interest rates.
Despite what Elon Musk and DOGE are doing, well, there are challenges. Start with the National Debt. Then look at budget deficits for as far as the eye can see. Finally, the rising interest rates that will be paid on this debt. Then ask yourself a simple question:
Will income tax rates decline, stay the same, or increase?
If you want to make it a little less painful next year, follow these five steps to, hopefully, less taxes.
Fund Your 401(k) plan
This is where all employees should start. Day one on the job. Sign up for the 401(k) plan at work.
A quick primer here. In 2025, employees can contribute up to $23,500 into their 401(k). Employees aged 50 and older, can make a ‘catch-up contribution’ of $7,500 for a total of $31,000. Finally, employees aged 60-63, the ‘catch-up contribution’ is $11,250, for a total of $34, 750.
Maximize a Traditional IRA or Roth IRA
If you have earned income, you can fund a Traditional IRA (IRA) or Roth IRA. Earned income is from your wages as an employee. It could also be your net income from any self-employment earnings.
For both 2024 and 2025, the maximum contribution to an IRA is $7,000. If you are aged 50 or older, you can make an additional ‘catch-up contribution’ of $1,000, bringing the total to $8,000.
An IRA can be income tax-deductible. Higher income earners that participate in a qualified retirement plan through their employer, are not eligible for a tax-deductible IRA. The most common qualified retirement plan at work is the 401(k) plan mentioned above.
Like an IRA, to fund a Roth IRA there is an earned income requirement. Additionally, the maximum contribution for 2024 and 2025 is $7,000. If you are aged 50 or older, the additional ‘catch-up contribution’ is also $1,000.
Unlike an IRA, there is no income tax deduction for a contribution to a Roth IRA. However, the benefit to the Roth IRA is that if the account has been open for at least five years and you are over aged 59 ½, then all the distributions are income tax-free.
Another benefit to the Roth IRA is that they are not subject to the Required Minimum Distribution Rules (RMD). These rules require taxpayers with 401(k) plans and IRAs to begin withdrawing from these accounts at age 73. These distributions start at about 4% of the value of the fair market value of the account from the prior December 31st. This percentage goes up annually as it is based on a life expectancy table.
Whether you fund an IRA or Roth IRA, it’s important to understand The Difference Between Tax-Deferred and Tax-Free.
Contribute to a Health Savings Account
Health Savings Accounts (HSA) are an effective way to pay for health care expenses. To be eligible to contribute to an HSA you need to have a high deductible plan. This means having a minimum deductible and maximum out of pocket expenses.
In 2025, families need a minimum deductible of $3,300 and maximum out of pocket expenses of $16,600. Individuals are one-half of these amounts, $1,650 and $8,300, respectively.
Finally, in 2025, eligible families can contribute up to $8,550, singles up to $4,300. Additionally, taxpayers aged 55 and older can make a $1,000 “catch up contribution.” The IRS annually indexes the deductible, maximum out of pocket expenses and maximum annual contribution to inflation.
Here are 3 Great Reasons to Fund a Health Savings Account.
Use a Cafeteria Plan to Pretax Health Care Premiums
Many employees will have to pay a portion of their Health Care Premiums. The good news is approximately 70% of employers offer cafeteria plans.3)
The formal name of a cafeteria plan is a so-called Section 125 Plan, which is the IRS Code section after which it is named. Check with your employer to see that a Premium Only Plan (POP) is one of the options within the plan. This allows employees to make their contributions for their portion of any health care premiums pretax.
Additionally, if your employer plan allows it, the Section 125 Plan can also be used to pretax childcare expenses. Up to $5,000 per year can be contributed to this account.
Consider Your Options with 529 College Savings Plans
While there are no Federal Income Tax benefits with contributing to a 529 College Savings Plan, there can be tax benefits on qualified distributions from these plans. Here are 5 Reasons to Fund a 529 College Savings Plan.
Additionally, if you are a Connecticut Resident and contribute to the Connecticut 529 College Savings Plan, there are tax benefits for contributing. The Connecticut Plan is called Connecticut Higher Education Trust (CHET).
Connecticut Residents can get a deduction on their Connecticut Income Tax Return for contributions to the CHET program. Married couples filing a joint income tax return can deduct up to $10,000 a year. Single filers can deduct up to $5,000 a year.
Action Item
If you need help with “I Love Paying Taxes.” Said No One, Ever! Give us a call at (860) 645-1515 or E-Mail Thomas.scanlon@raymondjames.com.
This is original content written by Manchester, CT Financial Advisor Thomas F. Scanlon, CFP®, CPA.
1) Sofi.com – January 13, 2025
2) Finbold.com – February 4, 2025
3) Journalofaccoutantcy.com – March 1, 2020
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that is accurate or complete, it is not a statement of all available data necessary for making an investment decision, it does not constitute a recommendation. Any opinions are those of Thomas F. Scanlon and not necessarily Raymond James.
Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Change in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.