Honestly, sometimes the jokes just write themselves.
Odds are good that if you hear the words “Mike Tyson” and “money,” you think of the huge purses ($685 million!) that Iron Mike won, then squandered, in his colorful career. Tyson, who surely could have benefited from reading a Dave Ramsey book, was legendary for his excess. Who else would drop $1.5 million on five Bentley Azures in a single day, or $180,000 on three Bengal tigers, or $2 million for a gold bathtub? Boxing fans can debate where Tyson ranks at throwing punches — but pound-for-pound, he was the heavyweight champion of the world at throwing away his money.
It turns out, though, that on his journey from the mean streets of Brooklyn to the glittering Las Vegas strip, Tyson learned something profoundly important about our own favorite topic: tax planning. Back in 1996, as he was preparing to earn $30 million for 30 minutes’ work fighting Evander Holyfield for the WBA Heavyweight Championship, a reporter asked him if he had a “plan” for the fight. Tyson, who turns out to be a lot smarter than some people might have expected, famously quipped that “Everyone has a plan until they get punched in the mouth.”
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Tax planners like us don’t headline on pay-per-view TV. We don’t take down multimillion-dollar purses in Vegas casinos. But we still get punched in the mouth, even if we rarely lose a tooth. And the way we bob and weave when we’re in the ring for you can make the difference between showing off your new bling, or paying your rent with Wendy’s coupons.
We’ve just taken one unexpected punch in the form of Covid-19. Much of the planning we do involves estimating when and how best to recognize taxable income. For example: should you contribute to a “traditional” retirement plan, defer the tax, and pay when you take it out? Or should you choose a Roth option and take the tax hit now in exchange for tax-free income down the road? Events like the Covid recession wreak havoc for some clients, and create surprising opportunities (like Roth IRA conversions) for others. This chaos makes careful planning and projection crucial.
Now it looks like we’re about to take some more jabs in the form of higher taxes. Candidate Joe Biden proposed rolling back most of the Tax Cuts and Jobs Act of 2017, and his razor-thin majorities in the House and Senate should make those changes possible. These would include raising corporate taxes from 21% to 28%, raising the top rate on individuals back to 39.6%, and capping the value of itemized deductions at 28% for filers earning over $400,000. He would also reduce the estate tax threshold from $11.7 million to $3.5 million and raise the rate from 40% to 45%.
Biden has also proposed hikes that would go well beyond undoing the 2017 cuts. For starters, he would double the rate on capital gains for taxpayers earning over $1 million. That probably wouldn’t have cost Tyson anything: as good as he was at buying, there’s no known record he ever sold anything at a profit.
And Biden would also impose the full 12.4% social security tax on wages over $400,000. That sort of haymaker would have cost Tyson an extra $85 million over his career. Just imagine how many tigers or cars the extra tax would have knocked out!
2021 is going to be a “Main Event” year for tax planning. There won’t be room to hide in the ring. Good thing you’ve got us in your corner! We’ll help you go the distance against whatever punches Washington throws.
Tax Beat is a weekly column with a unique angle: making taxes entertaining. Every week Ed explores the humorous aspects of taxes and current events.
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