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  • Jason Flurry, CFP

Investors Beware: Uncle Joe could be coming for you soon


I’ve heard it said that people who complain about taxes can be divided into two classes: men and women. And it seems that almost everyone I know seems to think that taxes will be higher in the future, not lower. You probably feel the same way too!


So, if we can agree that taxes will likely be higher in the future, we need to factor that into the mix when doing your planning – especially if you meet one of these criteria:


1. You’re in a high income tax bracket now.

2. You have most of your nest egg savings in your retirement accounts

3. You have large gains in your investments

4. You are self employed

The Proposed New Plan

The White House has advanced an ambitious agenda of income tax changes targeted at U.S. corporations and individuals making more than $400,000 a year.


Several administration proposals were published in the U.S. Treasury’s “Green Book” on May 27 of this year. One was that the U.S. corporate income tax rate would increase from the current 21% to 28%. With an average state corporate income tax in the 7% to 9% range, the combined corporate tax rate would rise to 35% or higher, placing the U.S. near the top when it’s compared with other countries.


The individual income tax rate would increase under the proposals from a maximum of 37% to 39.6% for those making $400,000.


The Old-Age, Survivors and Disability Insurance (OASD) component of Social Security taxes, which currently phases out at $142,800 of wage income in 2021, would resume at $400,000 of wages (and also count pass-through income). The hospital insurance component of 2.9% would rise to 3.8% for incomes above $250,000). This makes the effective marginal federal tax rate on income 39.6% + 12.4% + 3.8% = 55.8% for income above $400,000. Add a state income tax (say the one in Georgia, which is 6%) and the total tax would be 61%.


For those with a larger investment portfolio, the capital gains rates could be changing too. Normally, capital gains tax rates are lower than income tax, but Biden’s administration wants to tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% for people earning income above $1 million. When you apply the net investment income tax (3.8%) and state capital gains tax rates, which are 13.3% in states like California, the effective rate could be over 50%.


Additionally, the Biden administration also proposes turning death into a taxable event—meaning that the estates of taxpayers would recognize a deemed sale of all assets they hold when they die. That means that you would no longer be able to pass on highly appreciated assets to your heirs and avoid paying taxes on the gains due to a step up in your cost basis, like we can do now.


Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” Will Rogers retorted that even if that were true, at least death doesn’t get worse every time Congress reconvenes. By advocating to make death a taxable event that triggers recognition of all appreciation in taxpayers’ assets during their lifetimes, Will Rogers may be proved wrong: Death may actually get worse the next time Congress meets.


The time is now (if not sooner) The immediate question based on these proposals is, “When will this legislation, if enacted, become effective?”


Well, the Wall Street Journal published an article on May 27, 2021, revealing that the Biden administration intends to increase the federal capital gains tax to 43.4% … and that this would be retroactive to April 28, 2021.


Can they do that?! The short answer is, yes they can. In 1993, the Clinton administration signed a dramatic increase on income taxes, from 31% to 39.6% for individual taxpayers, on August 3, 1993, that was also retroactive for the entire calendar year. The U.S. Supreme Court later upheld the idea and the tax meter started running from January 1, 1993.


Many proposed tax changes are effective on the date the proposal is reported out of the tax committee—meaning that by the time you hear about the change, it is too late to plan for it.


But if taxes are retroactive, you may not even have until the end of 2021 to get your estate and wealth plans in order.


We need to look at creative strategies to preserve your wealth long-term and create tax free sources of growth and income for the future. Today is the first day of the rest of our fiscal lives, and it might make sense to act on things now that may not be permitted later.


If you’d like to discuss some of your options, please call me at 678 388-2233 to let me know. Even if Congress doesn’t pass all the Biden tax agenda into law now, the strategies we can use to help ensure more financial independence for you in the future are still practical and prudent considerations.


It's not Uncle Sam’s responsibility to look out for you. He’s more likely to just be looking for you. That means it’s up to us to make wise decisions and use tax avoidance strategies whenever possible to preserve the money you’ve worked so hard to earn and save. After all, like Arthur Godfrey said, “I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.”