- Proposed legislation to expand benefits for lower- and middle-income Americans will likely have a significant impact on investors.
- Astute investors tend to adapt to changes in the economy and use the occasion to identify opportunities.
- Market volatility and political transition demonstrate the value of a flexible long-term investment plan.
- Start building your tax and wealth planning team now to help prevent tax losses from eroding investment gains.
Give Your Financial Future Its Moment
2020 was the year of COVID. 2021 is likely the year of taxes. President Biden’s administration has passed or proposed three different spending programs approaching $2 trillion each, and on May 28 was set to propose a $6 trillion budget. The means of funding these programs is likely to impact all of us, and good financial counsel will be invaluable.
What’s on the docket
Arguably, the various tax proposals are the widest ranging in history. There are proposals from, but not limited to: President Biden, Sen. Bernie Sanders, Sen. Chris Van Hollen, and likely from Sen. Ron Wyden. The list below highlights the all-encompassing nature of the potential changes:
- Income — Raising the top federal income rates on individual income to 39.6% and capital gains and dividends to 43.4% (American Families Plan).
- Real estate — Limit the like-kind exchange deferral to $500,000 (American Families Plan).
- Stepped-up basis at death — After a $1 million individual exclusion, gains at death would be subject to income tax — effectively eliminating the “step-up” in basis (American Families Plan).
- Gifting — Decrease of lifetime gift exclusion from $11.7 million to $1 million, a 91% decrease. (For the 99.5% Act)
- Mark-to-market (antideferral) — Sen. Ron Wyden released a report (in a previous session of Congress) that would adopt antideferral rules, making many investment securities subject to annual taxation on appreciation, instead of being triggered upon sale.
Impacts on the economy
A 2015 Congressional Budget Office study by Whalen and Reichling shows that final impact depends on a myriad of variables, including how the money is spent and how much slack is in the economy. Possibly the clearest message from the pandemic is that Americans adjust when circumstances change. Investors, in particular, adjust financial plans and business models to accommodate new rules — seeking to minimize impact and identify opportunities.
How to react
- Have an integrated team of professionals and start now — It’s now more important than ever to build a team of tax, financial, investment, insurance, and legal advisors. Some of the tax proposals disseminated thus far could begin impacting investors in 2021, allowing limited time (if any) to react. Don’t procrastinate! Particularly if you are going to need an estate planning attorney’s help, look to have your plans formulated as soon as possible.
- Tweak, while being very cautious about wholesale changes, your portfolio — Increased government and consumer spending and continued monetary stimulus from the Federal Reserve somewhat offsets tax hikes, and the International Monetary Fund forecasts the United States will exhibit strong economic growth in 2021 and 2022. In the context of a long-term financial plan, what happens in the next couple of years has limited impact. Investors may find it beneficial to remain in the market long term — and be wary of big changes to that portion of your investment capital in equities. Work with your team of tax and financial planners to build a customized and flexible plan.
How we can help
When approached holistically and flexibly, your overall financial plan can help you navigate volatile markets and create confidence, whatever the current climate. Our seamless, comprehensive approach to wealth management is designed to integrate tax planning, estate planning, and investment advisory offerings tailored to your personal needs.