O.K., this Simple tax return isn't one that will ever become law. But read the scenarios that may now affect you or your heirs.

Scenarios To Make You Think Twice

The five scenarios discussed here are: 

I.  Current IRA, 401-(k), or other "Qualified" type accounts for Current Workers

II.  Current IRA, 401-(k), or other "Qualified" type accounts for Retired Workers

III.  Current IRA, 401-(k) or other "Qualified" type accounts inherited by a spouse or other heirs of the estate.

IV.  The Trouble with a Flat Tax

V.  What happens to Charitable Giving?

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Scenario For Current Workers

First, lets discuss the traditional IRA's and 401-(k) plans and how a flat tax would affect them while you are still alive and still in the "contribution" stage. Though some proposals also include a "consumption" tax which is a hidden form of  a sales tax, we will examine the benefits and disadvantages of a flat tax (generically of course a this point) mostly.

It is obvious that a flat tax is levied on your income earned, but all the current proposals differ. Some would not allow many, if any deductions. Others would allow common deductions we are used to subject to limits of income. (Those with high income will stand to loose some or all of any previous deductions they are used to, just like our current tax law)

An advantage would exist if 401-(k) contributions and/or Traditional IRA contributions continues to lower your W-2 reportable net taxable income. But, at the rates being proposed and promoted, the removal of the "marginal" rate means your savings will most likely be less for higher income individuals.

And lower income individuals will not benefit very much, just like now, in making any kind of tax favored retirement contributions. What I am saying is that the higher the marginal rate, the more money you save on current plans. The flat tax flattens that special benefit and advantage. A tax savings exists, but it won't be as good as before.

Of course, low income workers stand to pay more in a flat tax rate environment, or at least pay "some" versus currently not having any taxable income after all deductions are applied.

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Scenario For Retirees

Being retired, maintenance of current traditional plans under a potential flat tax law scenario would encourage conversion to Roth IRAs, if still allowed under such a new flat tax proposal if it ever became law. The reason is that though the taxable bite to just cash in after age 59 1/2 (assuming that penalty trigger prior to this age continues as now) would be less than now for those in a higher marginal tax rate, money KEPT FROM ANY TAX for as long as possible makes a lot of long term sense no matter what!

Also, if you feel the scenario below exists (Nothing to Stop a Flat Tax from Growing Bigger and Bigger), then getting "taxable" money from one side of the ledger over to "tax free" side while the rates are low doesn't need a rocket scientist to figure that one out. Sure, cashing in also makes sense if penalty free and a rate as low as 9% federal tax was to apply (but don't forget your state tax - they may go "flat", but not down by any means since most are struggling greatly)

So, money washed clean of taxation by taking a lump sum at retirement sounds really nice. But, you can be assured there will be "hooks" and "conditions" in any final proposed law that most likely will not allow any cheaper way to cash in the day you retire without similar costs and taxes or fees as we have now.

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Scenario For Heirs After Retiree's Death

Since our firm is an Inherited IRA expert consulting company helping clients all over the country each week when loved ones die and leave large or relatively large IRA type accounts to the, we openly say we are concerned how a flat tax proposal becoming law could put us out of business. So far, we aren't holding our breath!

You see, this "tune' has been played before. We have all heard it. And, most times, no one remembers the lyrics after the election. But, just by chance, something actually develops this time, (the environment is better for a change) we still don't think anything will ever become simple. And, unless it does, clients will still need our IRA consulting services.

If a flat tax is put into law a year or two from now, the scenario for heirs receiving IRA funds will definitely change. The proposals talk a lot about individual tax rates and corporate rates. But, a third rate, the fiduciary rate must also change. Since it is currently similar to the corporate rate structure, we assume it too would come under a flat tax rate scenario as well. And, since it is the highest rate in the current tax code, heirs would have an advantage to just pay the taxes on Qualified plan IRA accounts they inherit in the future.

But, we also feel this advantage would be short lived as the scenario presented just below is almost un-avoidable. That is, the flat tax rate will start low and keep going up. Also, for very large estates that we work on from time to time, their very well could be an "estate" tax that survives any new proposals becoming law and the combination of income and estate tax, and state taxes, gives a lot of credibility in still seeking out competent professional inherited IRA talent right now to plan for known and unknown situations that could come up, after you are gone. We are available to do just that. We also associate with numerous law firms for any legal questions that may come.

A free call will give you more details:

1-800-782-2806

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The Trouble With A Flat Tax

Obviously, the trouble with a flat tax is that it will become law at a relatively low rate that seems palatable. But, based on past performance, our government can not make a budget and hold to it. Therefore, what starts out low has only one direction to go.

UP!!!

So what is going to stop the government from raising the flat tax whenever they need more money?

Yet, another situation exists. Let's call it the "pile one".  Just like a tackle in a football game, you can pretty well bet that legislators will initially look at a much smaller average federal tax rate (a new flat tax) at say 9% or 15% or even 20% and then say, "It's low, let's put 1% surcharge on all bank deposits and withdrawals" or "let's tax turkey farmers 3% as no one will stop eating turkey for thanksgiving" or some other stupid tax or levy. They won't stop. One tax after another will pile up after a flat tax until we have a pile.  And, do you know what we call that in my home state - Iowa farm community?

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What Happens To Charitable Giving?

The key factor motivating rich people to give to charities may very well be their sincere desire to give back something in thankfulness for what has been bestowed upon them. That may apply to a few folks with millions and billions. But, for the most part, giving to charity tickles the "marginal" tax rate bone of most donors and the day those marginal rates are cut in half, (or more), you are going to see a huge drop in charitable giving in this country.

Any flat tax proposal of any kind from any party or politician must factor this FACT into the projections. Failing to do could bring this country into a depression faster than a whole city of greedy Wall Street investment bankers!

Think twice about the Flat Tax. It could force another great depression!