By Brandon Miller, CFP–
If you’ve ever played chess or watched The Queen’s Gambit, you know that the game is all about foresight and reaction. You strategize what you want to do and try to carry out your plan while at the same time counteracting all of your opponent’s movements. What is happening on the blackboard keeps you reworking your thinking.
Financial planning requires similar flexibility. Tax laws and financial regulations are constantly changing. The best “players” pay attention to what new laws are doing and move around based on their own goals and the changed landscape.
The Biden administration is currently considering four major tax changes that could affect the way you manage your money. Here are the suggested changes and my suggested strategies so as not to sacrifice too many of your farmers.
Government move: increase in the highest tax bracket
The 2017 Tax Reduction and Employment Act lowered the highest marginal tax rate to 37%. Most workers received a tax cut, but the richest got a larger share. In our marginal tax rate system, the first dollars you earn are taxed at lower rates that keep getting higher the more you earn (i.e. the first roughly $ 1,000 income is taxed at 10% and the next $ 3.7,000 12% next $ 10k at 22% and so on). The affluent rich benefited from all interest rate cuts in the lower price range and were able to reduce their income above the highest threshold by 2.6%.
The Biden tax plan provides for the top tax bracket to be traced back to the pre-TCJA rate of 39.6%.
Proposed countermovement: shifting income
If you are in this top of the range tax bracket and have control over when you get a salary or bonus, see if you can defer more of your income to 2021 knowing your tax rate is 37% or less.
Government move: Capital gains tax increase
The Biden tax plan also calls for capital gains – the profit you make from selling real estate or other investments – to be taxed as normal income for people who earn a million or more per year. Currently, capital gains are taxed at rates of 0, 15 and 20%.
Proposed countermovement: sell now
Knowing that your tax rate may get worse, this could be the year you sell, sell, sell. Especially when you have a whole lot of stocks that are very valued.
Government move: lowering the estate tax threshold
Quick sidebar here: Estates, not inheritors, pay estate tax, just that portion of cash, real estate, retirement accounts, and other assets that exceed the exemption level. The TCJA doubled the exemption level and indexed it for inflation. The threshold for 2021 is $ 11.7 million for individuals and $ 23.4 million if they are married at the time of death. That’s a pretty big property to protect yourself from taxes, which is why the Biden tax plan may include lowering the threshold in the years to come.
Suggested countermovement: Play Santa Claus
You can easily reduce the size of your property by giving away parts of it while you are still alive. How much fun is it?
Change of government: elimination of the step-up basis
This affects all heirs, regardless of the value of the estate. The cost base refers to the amount paid for an investment when it was originally purchased. When you inherit someone else’s property, you receive an increase in base, making your new base the fair market value of the property when you inherit it. Sell it right now and you will not owe any capital gains. Or keep it until you die and your heirs get a new base.
This rule obviously allows families to protect much wealth by holding onto property generation after generation. However, as the Biden Tax Plan suggests, removing the top-up base could increase the tax burden on investments, making this proposal more controversial.
Suggested counterattack: life insurance
A policy that is worth the estimated tax burden on your estate can allow your heirs to pay off the debts without delving into the assets you want to leave them with.
Building and protecting your wealth can be easier when you know what the government has in store and take steps to counter the effects of the legislation. This is a game worthy of your time.
The opinions expressed in this article are for general informational purposes only and are not intended to provide advice or recommendations specific to any person or regarding any particular safety. It is only intended to convey information about the financial industry. To determine which investments might be right for you, consult your financial advisor before investing. Past performance discussed during this program is not a guarantee of future results. All indexes referenced for comparison are not managed and cannot be created directly. As always, please remember that investing involves risk and potential loss of capital. Please seek advice from a licensed professional. Brio does not provide tax or legal advice, and nothing contained in these materials should be construed as such.
Brio Financial Group is a registered investment advisor. Advisory services are only offered to clients or prospective clients for whom Brio Financial Group and its agents are properly licensed or exempt. Brio Financial Group cannot provide advice unless there is a customer service agreement.
Brandon Miller, CFP®, is a financial advisor with Brio Financial Group in San Francisco specializing in helping LGBT people and families plan and achieve their financial goals.
Published on April 8, 2021