By Brandon Miller, CFP–
If you’ve ever played chess—or watched The Queen’s Gambit—you know that the game is all about forethought and reaction. You strategize what you want to do and try to execute your plan, while at the same time countering any moves your opponent makes. What takes place on the board makes you constantly revise your thinking.
Financial planning requires a similar flexibility. Tax laws and financial regulations are always changing. The best “players” pay attention to what new legislation does and make their moves based on their own goals and the changed landscape.
Right now, the Biden administration is considering four significant tax changes that may alter how you manage your money. Here are the proposed changes, and my suggested strategies for not sacrificing too many of your pawns.
Government Move: Raising the Highest Tax Bracket
The Tax Cuts and Jobs Act of 2017 reduced the top marginal tax rate to 37%. Most workers got a tax cut, but the wealthiest got a greater share. In our marginal tax rate system, the first dollars you earn are taxed at lower rates that get progressively higher the more you earn (i.e., the first roughly $1k of earnings gets taxed at 10%, the next $3.7k at 12%, the next $10k at 22%, and so on). So, the uber rich reaped the benefit of all the lower-bracket rate reductions, as well as getting a 2.6% cut on any earnings above the highest threshold.
The Biden tax plan is looking to return the top tax bracket to the pre-TCJA rate of 39.6%.
Suggested Countermove: Shift Income
If you are in that top-tier tax bracket and have the ability to control when you receive salary or bonuses, see if you can shift more of your earnings to 2021 when you know your tax rate will be 37% max.
Government Move: Capital Gains Tax Increase
The Biden tax plan also proposes taxing capital gains—the profit you make from selling property or other investments—as ordinary income for people who make a million or more a year. Currently, capital gains are taxed at rates of 0, 15, and 20%.
Suggested Countermove: Sell Now
Knowing that your tax hit might be about to get worse, this could be the year to sell, sell, sell. Especially if you have a whole lot of one stock that has appreciated greatly.
Government Move: Estate Tax Threshold Reduction
Quick sidebar here: Estates, not heirs, pay estate tax, but only on the portion of the 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 married at the time of death. That’s a pretty big estate to shelter from taxes, which may be why the Biden tax plan is looking at possibly decreasing the threshold in coming years.
Suggested Countermove: Play Santa
You can easily reduce the size of your estate by giving portions of it away while you’re still alive. How fun is that?
Government Move: Elimination of Step-Up Basis
This one impacts all heirs, regardless of the value of the estate. Cost basis refers to the amount paid for an investment when it was originally purchased. Inherit someone else’s property and you get a step-up in basis, making your new basis the fair market value of the property when you inherit it. Sell it immediately and you won’t owe any capital gains. Or keep it until you die and your heirs get a new step-up basis.
This rule obviously allows families to shield lots of wealth by holding onto property generation after generation. But eliminating the step-up basis, as the Biden tax plan suggests, could increase the tax burden on investments, making this a more controversial proposal.
Suggested Countermove: Life Insurance
A policy worth the estimated tax bill on your estate may allow your heirs to pay off the debt without dipping into the fortune you want to leave to them.
Building and protecting your wealth can be easier when you know what the government has in store, and can make moves to counteract the impact of legislation. Now that’s a game worthy of your time.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such.
Brio Financial Group is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Brio Financial Group unless a client service agreement is in place.
Brandon Miller, CFP®, is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
Published on April 8, 2021
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