Today’s Wisdom:
The first few months of the Biden administration brought a lot of new legislation but many of our clients are paying close attention to the tax proposals that are on the table. Let’s take a look at the places where increased taxes could be coming and what it means for planning.
Want to save time? Click the timestamps below to jump ahead to specific spots in the episode.
What You’ll Learn:
It shouldn’t come as a surprise to anyone that new tax proposals were among the first things on the list for the new Biden administration. This was highly discussed during the 2020 election and now we’re starting to see what the new tax code could potentially look like.
On this episode of the Money Wisdom podcast, Joel will take us through four different increases and explain what it could mean to individuals and their financial planning. Remember that these are only proposals at this point but we have to begin planning for them just in case.
The first is the top individual tax rate increasing about three percent from 37% to just under 40%. That won’t affect a large swath of people in the country, but it would be close to a 10% increase for top taxpayers. The question needs to be where we want to be as a country and what is appropriate? There’s an argument on both sides but should anyone ever be required to pay close to 50% of their income back to the government? That’s what needs to be determined.
The next proposal hits corporations pretty hard by increasing their tax rate from 21% to 28%, which is a 33% increase from where it currently stands. We don’t work directly with corporations, but this does impact individuals because it gets passed on in different ways. Think about this, when the companies have extra dollars, they can do a few things. The first is to keep it, which increases the value of the company and investors’ benefit. The second is to pay it out in a shareholder dividend, which benefits people that have invested in the company. And the third is hiring new people. These are things to keep in mind with this proposal.
The next proposal is one that has been discussed quite a bit since it was laid out, and that’s raising the capital gains to bring in more money from Wall Street. This one could be significant because the amount that’s being discussed is nearly double where it currently stands. The market reacted to the news immediately and we’ve heard from a number of people about how this impacts investing.
The final proposal is to eliminate the stepped-up basis at death, which is one Joel hopes doesn’t get enacted. This isn’t a rich person’s tax. It impacts everyone that receives assets from a loved one because now they’d be left with a significant tax burden immediately upon inheritance. We’ll get into it in detail on the show and explain exactly what this means.
All of these are just proposals but the tax code changes could come later on in 2021 and have an impact in 2022 and beyond. That’s why there’s a focus on taxes for the rest of this year for our clients. By making changes now, you can reduce the amount of taxes you’re going to have to pay over your lifetime.
Let’s get started with the show. You can listen to it by using the audio player above and click on the timestamps to skip to a specific topic of conversation.
[1:02] – Quote of the week
[1:53] – Biden tax proposals
[3:19] – Top individual tax rate increase
[6:02] – Corporate tax rate increase
[10:24] – Top capital gains rate nearly doubling
[12:17] – Elimination of stepped-up basis at death
[14:17] – Proper planning
[17:17] – Moving to different states for tax reasons
[20:39] – Mailbag question on pension funds
Thanks for listening to this episode. We’ll be back again next week for another show.
Final Thoughts:
“Some of these proposals are so drastic, I’ve got to believe this is sort of a shot that’s being fired across the bow to bring some kind of compromise into the system.”
– Joel Johnson
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• Answering Questions on Renting, Health Insurance, and Dividends
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