As the first 100 days of Biden’s administration come to a close, I am reminded of the song by
80s hair band Whitesnake, “Here I go Again.”
I don't know where I'm goin'
But I sure know where I've been
Hanging on the promises in songs of yesterday
An' I've made up my mind, I ain't wasting no more time
Here I go again, here I go again on my own
After passing the most recent COVID stimulus bill via budget reconciliation on a purely partisan basis, here we go again with promises of bipartisan support and potential tax increases. While the benefits of these plans will help millions of Americans, people are asking, “Will my taxes go up?”
The Basics: The Biden administration is proposing two infrastructure plans and associated tax increases:
1. The first plan is a $2 trillion package to revitalize our crumbling transportation
infrastructure, water systems, broadband, and manufacturing. This plan would be paid
for by increasing the corporate tax rate.
2. The second plan, dubbed “The American Families Plan,” is a $1.8 trillion “human
infrastructure” package designed to provide free community college, universal pre-
school, and comprehensive paid family leave, amongst other priorities. This plan would
be paid for by increasing ordinary income and capital gains taxes on the wealthiest
Americans, which begs the question, “Who is considered wealthy in America?”
As we begin to digest the dizzying array of physical and human infrastructure plans and their
associated pay fors, we are starting to see who may be impacted. Th article aims to help you
understand the direction these potential tax increases may be headed and if you may be
affected.
Here are 4 thoughts about the pending tax changes:
POTENTIAL FOR BIPARTISAN SUPPORT?
Biden ran on the promise of unifying the nation. After years of worsening partisanship, it will be interesting to see if he can genuinely find compromise in the halls of Congress. Because of the Democrats slim margin in the senate, with Kamala Harris acting as the tiebreaker, the
Democrats will need all of their Senators and 10 Republicans to pass legislation in a bipartisan manner. Otherwise, here we go again.
Moderate senators, led by Joe Manchin, are demanding that Congress shows that our
government and democracy are functional and can pass bipartisan legislation. In addition, New York representatives are demanding the SALT cap of $10,000 be removed, complicating
manners further. To get something done it will be interested to see how these plans change as The Dems try to pull together the liberal and moderate elements of their caucus to agree on a package to pass via budget reconciliation.
What does this mean? Expect this to get messy. Watching the sausage get made isn’t pretty,
and there will be a lot of plans proposed. The devil will be in the details and watch for the
moderate voices in the Democratic party to minimize the impact of tax increases.
IMPACT ON REGULAR INCOME TAXES
During his campaign, Biden promised that any tax increase would not affect people earning less than $400,000. The question was, is this for single filers or married couples? More clarity will be expected over the coming months, with details starting to trickle out. So far, we are beginning to see some clarity as negotiations progress:
The top regular income tax rate may increase from 37% back to 39.6%.
This might impact single filers with income over $453,000 and married couples with income above $509,000 adjusted for inflation. Also remember, that since we have a progressive tax system, only income above these thresholds is taxed at the highest rates.
What does this mean? Unless you are in the highest tax bracket and the top 1.8% of all
households in America, you most likely will not face any ordinary income tax increases.
However, if you are close to these thresholds, we can help you with tax planning to avoid the
highest tax brackets. These will be moving targets and worth monitoring throughout the year.
IMPACT ON CAPITAL GAINS TAXES
The American Families plan would potentially double capital gains taxes to the top income tax rate, 39.6%, plus 3.8% surtax on investment income for a top federal rate of 43.4%. Currently the top capital gains rate is 23.8%.
Fear not, the good news is that it is looking like increased capital gains taxes will only impact the 0.3% of Americans who earn more than $1 million per year of income and also sell appreciated investments in taxable investment accounts.
What does this mean? Unless you earn more than $1 million of income and have assets
invested in taxable accounts (not IRA’s, 401k’s, or Roth IRA’s) that you plan on selling, you will
not be impacted by the increased taxes.
However, buyer beware; it is possible that if you inherit significant assets, one proposal
would remove the “step-up” in basis and cause you to be taxed on gains on inherited
assets. This is something we are monitoring very closely.
HOW DOES THE STOCK MARKET REACT TO INCREASED TAXES?
It is inevitable, with the talk of increased corporate and personal taxes, the media and
conservatives are sounding the alarm about stock prices declining. However, the last tax
increase was in 2013, and the stock market increased 30% that year!
What does history teach us about stock prices when taxes increase?
The charts below show periods back to the 1950s where corporate, personal, and capital gains taxes have increased, and the average return was positive for the next 3, 6, and 12 months.
Due to bipartisan compromise and appeasing moderate- and high-income state
Democrats, expect a watered-down version of tax increases affecting the highest-earning
Americans. But we like to say, “don’t let the tax tail wag the dog,” and in this case, don’t
let the fear of increased taxes derail your financial plan.
THE VALUE OF WORKING WITH A FINANCIAL PLANNER
Financial Planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on. At Abel Financial Management, we are local, family- oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.