Investment Basics

I recently taught a basic investing class for an audience of older adults. Below are some of the key take-aways related to investment principles, investment characteristics, and later life investing:

Common Investment Concerns- In later life, investment concerns include income generation from investments, decumulation (spending down assets), sequence of return risk (negative returns early in retirement), inheriting unfamiliar investments from others, market volatility, tax implications such as required minimum distributions, possible cognitive decline, and passing securities on to heirs.

 

Saving and Investing- Savings is money held in cash assets such as online bank accounts, money market funds, and CDs. It is generally used for short-term goals and emergencies and also useful for older adults as a “buffer account” for older adults to hedge sequence of returns risk. Investments are used to increase net worth over time and achieve long-term financial goals (generally 5+ years away).

 

Investment Risk- Risk in investing is uncertainty about future investment returns and whether you will lose investment principal or see it grow over time. There are many sources of investment risk including business failure, inflation rates, jobs reports, politics, interest rate changes, currency value changes (international investments), and a “herd mentality” in response to market trends.

 

Risk Reduction Strategies- Investment risk cannot be eliminated but it can be reduced. Three common strategies are diversification (holding a mix of different types of investments), buy and hold (not panicking and selling investments during market downturns), and dollar-cost averaging (investing regular amounts of money or making withdrawals at regular time intervals (e.g., $500 monthly).

 

Asset Allocation- This is the ratio of stocks, bonds, cash, and other asset types in your portfolio and is a primary determinant of investment success according to numerous research studies. Factors that affect asset allocation include investment goals, time horizon, investment risk tolerance, time and skill to manage investments, taxes, and, for older adults, availability of guaranteed income sources.

 

Investment Categories- There are two types of investments: ownership (where you own a piece of something) and loanership (where you lend money to a government entity or corporation). Ownership assets include stock, stock mutual funds and exchange-traded funds (ETFs), real estate, and collectibles. Loanership assets include bonds and bond mutual funds and ETFs.

 

Hybrid Investment- ETFs are a cross between stock (where you are part owner of a company through your shares that trade on a stock exchange) and index mutual funds (mutual funds that track a market index like the S&P 500). ETFs are similar in composition to index-tracking mutual funds but trade like stock on a stock exchange.

 

Older Investors’ Mutual Fund Dilemma- Mutual funds are required by law to pass their earnings on to investors. This can cause a big tax problem for older adults with accounts that have grown for decades. If they sell shares, they face capital gains tax and if they stand pat, they face increasingly larger taxable distributions. There is one escape hatch: donate appreciated securities to charity.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

America 250- Income Taxes Future

 As I noted in my two previous posts, I taught a new class called Income Taxes: Past, Present, and Future on April 15 as a small part of the nationwide America 250 effort. Previously, I described the past history of income taxes in America and current tax regulations in effect.

 

This post discusses future plans and predictions for income taxes in the future:

 

What We Know for Sure

 

2028- Temporary tax deductions put into effect under the 2025 OBBBA law are scheduled to expire at the end of 2028. This includes the “no tax ons” (for tips and overtime pay), the auto loan interest deduction, the $1,000 government “seed money” for newborn (in 2025-2028) children, and the bonus senior deduction for income-qualified older adults.

 

2029- The $40,000 state and local tax (SALT) deduction cap, enacted under OBBBA, applies to the 2025 through 2029 tax years. It will expire at the end of 2029 with the cap reverting to $10,000 for the 2030 tax year.

 

Big Concern

 

Wars have impacted income taxes throughout U.S. history. The first income tax (later repealed) began in 1862 as the Civil War was underway. Income taxes rose significantly in 1918 to pay for expenses incurred during World War I (top tax rate of 73%) and in 1944 to fund World War II (top rate of 94%). 

Since the U.S. is now involved in heavy warfare in the Middle East, many are wondering if a tax increase to pay for it will soon be implemented as was done previously. Mounting national debt and income inequality are other key factors that could impact future income taxes.

 

Future Predictions

 

What could happen in the future? Nobody knows for sure but the following ideas have been floated:

 

§  New tax laws (almost a given)

§  Higher taxes on wealthy taxpayers

§  Higher taxes on capital gains which were once taxed at ordinary income tax rates

§  Changes to the “stepped up basis” for inherited securities upon an account owners death

§  Tax on unrealized capital gains

§  Increased IRS reporting and enforcement

§  Closing tax loopholes (e.g., backdoor Roth IRAs)

§  Expanded retirement savings incentives

 

Only time will tell how income taxes will evolve. Stay up to date with blogs, podcasts, and other reputable information sources to learn about future tax law changes and how they will affect you.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

America 250- Income Taxes Present

 

As I noted in last week’s post, we are in the final stretch of 2025 income tax season and I am teaching a new class called Income Taxes: Past, Present, and Future on April 15 as a small part of the nationwide America 250 effort. Previously, I described past history of income taxes in America.

This post discusses class highlights relating to current income tax laws and policies.

 

Gross and Adjusted Gross Income (AGI)- Under current law, taxpayers start out with their gross (total) income from sources such as wages, dividends, taxable interest, business income, alimony received, and required minimum distributions from retirement plans. Adjustments to income, often referred to as “above the line deductions,” include educator expenses, student loan interest, 50% of self-employment tax, health insurance for self-employed workers, and retirement plan contributions.

 

Individual Income Tax Rates- The U.S. federal income tax system uses progressive tax rates, meaning higher levels of income are taxed at higher percentages. As of 2026, the tax brackets range from 10% to 37%. Each rate applies only to income within its bracket, so taxpayers pay gradually higher rates as their taxable income increases.

 

Long-Term Capital Gains- Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on taxable income and tax filing status. Long-term capital gains are calculated by subtracting the cost basis (usually the initial purchase price plus additional deposits such as reinvested dividends) from the selling price of an asset held longer than one year.

 

Standard Deduction- The standard deduction is a fixed amount that taxpayers can subtract from their AGI before calculating federal income tax. It reduces taxable income without requiring taxpayers to itemize individual deductions. For 2025 returns filed in 2026, the standard deduction is $15,750 for single filers, $31,500 for married couples filing jointly, and $23,625 for heads of household. Taxpayers age 65 or older or blind may claim an additional standard deduction amount.

 

Senior Tax Deductions- There is an additional standard deduction available to taxpayers age 65 or older that reduces taxable income beyond the regular standard deduction. For 2025 tax returns, the extra deduction is $2,000 for single filers and $1,600 per eligible spouse in married couples filing jointly. The bonus senior deduction under the OBBBA tax bill is an additional temporary increase to the standard deduction designed to reduce taxable income for income-eligible older adults.

 

Required Minimum Distributions (RMDs)- RMDs originated with the creation of individual retirement accounts in 1974. They are the minimum amounts that retirees must withdraw each year from most tax-deferred retirement accounts, such as traditional IRAs and employer savings plans. Under the SECURE 2.0 Act, RMDs generally begin at age 73. The required withdrawal is calculated using IRS life-expectancy tables based on age and account balance at the end of the previous year.

America 250- Income Taxes Past

It’s the final stretch of tax season! On April 15 (when else?), I am teaching a new class called Income Taxes: Past, Present, and Future. As a small part of the nationwide America 250 effort, the class describes taxes in America since its founding in 1776. 

For almost 100 years, there was no income tax at all (until a short-lived tax that began in 1862 to help fund the Civil War) and the country earned revenue from customs duties, tariffs, and excise taxes on alcohol, tobacco, and, yes, even slaves.

In this post and the next two, I will present class highlights starting with past tax history. Below is a chronology of some key historical tax-related legislation, events, and trends:

 

1776-1861- No federal income tax existed

1862- First federal income tax to fund the Civil War and Office of Internal Revenue established

1872- Income tax repealed

1894- A 2% peacetime tax was passed by Congress and the Bureau of Internal Revenue was created

1895- The Supreme court ruled that the new tax was unconstitutional and the tax bureau disbanded

1909- President Taft recommended a constitutional amendment for government taxing authority

1913- 16^th amendment to establish an income tax was ratified and first 1040 form introduced

1918- The Revenue Act of 1918 significantly increased taxes to fund World War I (73% top tax rate)

1931- Al Capone was convicted of tax evasion and sentenced to 11 years in prison

1943- Income tax withholding was introduced

1944- Standard deductions were created and top tax rate of 94% for income over $200,000

1945-1963- Top tax rate of 91% for nineteen tax years!

1954- The tax filing deadline changed from March 15 to April 15

1969- Alternative minimum tax (AMT) created after wealthy people boasted that they paid no tax

1981- The Economic Recovery Act of 1981 lowered marginal tax rates and expanded IRA access

1986- The Tax Reform Act of 1986 simplified the tax code and lowered top tax rate from 50% to 28%

1986- Limited electronic income tax filing began

1992- Taxpayers who owed money were allowed to file tax returns electronically

2001 and 2003- Bush tax cuts reduced income tax rates and capital gains taxes

2010- The Affordable Care Act introduced the Net Investment Income Tax (NIIT) to help fund Medicare

2017- The Tax Cuts and Jobs Act (TCJA) greatly overhauled the tax code and nearly doubled standard deduction

2024- About 93% of individual taxpayers filed their income tax returns electronically

2025- The spending and tax bill known as OBBBA passed and made the 2017 TCJA tax cuts permanent 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.