Monday evening was one of the most pleasant Wisconsin summer evenings in a long time. Tolerable temperatures, minimal humidity, and no bugs. A great night for a hike with my wife.
To be completely and thoroughly honest, you may actually consider our activity to be a walk since we stuck to the roads by our house. However, walk does not fit my theme for today – which is hiking.
Congress has two hikes on the docket that could impact your financial lives. One is a short hike and the other is a longer hike.
In the short-term, Congress is about to take a hike out of Washington, D.C., for their traditional August recess. When they come back from recess after Labor Day, they will have about 25 days before the end of the government’s fiscal year. And, as usual, Congress is a little behind in its homework.
The House of Representatives’ Appropriations Committee has approved eight of the 12 bills that constitute the federal budget for fiscal year 2024 starting on October 1. Zero have passed the full House of Representatives. The Senate Appropriations Committee has approved five of its 12 bills, but zero have passed the full Senate.
Keep in mind all of these bills must pass both chambers once, go through a conference committee which reconciles the differences between the two bills, pass both chambers again, and then be signed by the President to become law.
Once again Congress is setting itself up to use temporary stop-gap measures to keep the government operating starting on October 1. This could lead to political theatrics, gamesmanship, and market volatility starting in a month or so. The most likely outcome is another giant spending bill around Christmas (which is becoming something of an unsightly gifting tradition).
Congress has another hike scheduled to start on January 1, 2026,
The current federal personal income tax rates expire on December 31, 2025. That means 2023, 2024, and 2025 could possibly be the lowest income tax rates you will see for the rest of your life.
It is difficult to envision federal tax rates declining as long as Congress chooses to spend over $1,000,000,000,000 more per year than they collect in taxes. Throw in a structural Medicare shortfall around 2031, a structural Social Security shortfall around 2033, and ballooning interest payments on an ever-rising national debt and it is not that hard to envision the government will need significantly more revenue to simply maintain current programs. If they choose to create new programs or expand existing programs the need will be even greater.
Over the next three years, you may have opportunities to minimize your future tax liabilities. We strongly encourage you to work with your tax professional to take advantage of this year’s low(er) income tax rates. You only have five months left in 2023.
Starting in 2026 the 12% federal tax bracket is currently scheduled to bump to 15% — a 25% tax hike in one year. Upper federal tax brackets will also be hiked by 2-9% when tax rates and adjusted brackets are taken into consideration.
Of course, Congress could cancel their scheduled tax hike at the last minute and extend the current income tax rates into the future. However, it is highly unlikely that they will reduce income tax rates further given their need for revenue.
Whether you like it or not, you will be participating in these upcoming hikes. Be prepared by steeling yourself for contentious headlines, practicing ignoring market volatility, and thoughtfully planning to minimize your future taxes.
Quote of the week: John Adams: “No man’s life, liberty, or property is safe while the legislature is in session.”