The signing of the American Rescue Plan Act of 2021 promises to extend the 20-year trend in our country’s deficit spending, and potentially set a new annual deficit record.
Bill Clinton’s four-year balanced budget was aided by two seldom discussed factors that no longer exist. Republican-controlled Congress cooperated in raising taxes and reducing the military budget. He was also helped by amateur investor day trading in stocks. During the tech stock bubble, almost anyone could pick winners to buy in the morning and sell at a profit that evening. Their “short-term” gains were taxed at normal income rates that were up to 50 percent higher than long-term capital gains rates. Perhaps our current administration should find a way to glorify day trading in order to reduce the current annual deficit.
Significant funds from the ARPA will certainly pour back into the economy and, along with organic GDP growth, generate tax revenue that partially offsets the book cost of our newest debt. What is missing is the significantly higher income that higher tax rates would bring. Our politicians understand this and are clearly weighing when our COVID-weary citizens will accept with minimal hiss when a large number of feathers are plucked. To ensure that the hiss is minimal, the published original target for such increases will be the relatively small percentage of the wealthy.
Even if we don’t see a tax hike in the next few years, the automatic hike will come at the end of 2025 when the current tax rates that came into play in 2018 hit their sunset. Virtually all tax advisors have accepted the inevitability of a tax hike. The only open questions seem to be when and how high.
Those advising on tax issues should familiarize themselves with techniques that can preventively minimize the effects of tax increases. You can foresee the tax storm ahead and should help clients make tough decisions today that should pay off tomorrow. This may require different consideration of the tools and techniques of planning.
Reduce your pension contributions
Does it make sense to defer income in a low tax bracket when it is likely to be taxed at a high rate later? Perhaps some of our customers should get off the hamster wheel with tax deferral or just contribute enough to get the “free” money from their company game.
Variable annuities for guaranteed income, not for growth
Should pensions be avoided if the tax deferral needs to be reconsidered? Perhaps the tax deferral should take a backseat in favor of the most valuable option of retirement: guaranteed income. Many annuities sold today have drivers that guarantee retirement income forever. A retirement income calculator using Monte Carlo simulations can measure the benefit of the income guarantee against other income opportunities.
Shelter benefits from business sales
Nationwide, a handful of attorneys and accountants have helped clients minimize capital gains tax recognition when selling their businesses. Since 2010, a little-known international tax treaty with the country of Malta provided for a Supercharged Cross-Border Roth IRA-like plan. If properly set up and managed, this can generate an unlimited amount of unrecognized profits from the sale of certain assets, such as: B. related companies. In search of more tax revenue, Congress could attempt to renegotiate this treaty and make it less favorable. Right now, this can protect profit from corporate sales from taxes, regardless of whether the tax rate is high or low.
Estate planning concepts
Income Modeling Before Gifting: Much has been written about family gifting to reduce potential estate taxes. In Fall 2019, the IRS announced that under the current gift (and estate) tax exclusion of US $ 11.7 million per person, gifts will not be “reclaimed” if the exclusion is lowered. Therefore, a large gift receives a much greater benefit today than if the gift is given after the exclusion amount has been reduced. Before entertaining big gifts, it is a good idea to use the aforementioned income modeling with Monte Carlo simulations. Factors such as longer life expectancy, uncertain investment returns, inflation concerns, and care needs require assessment of the adequacy and long-term security of donor income before irrevocably giving away property that may later provide greater security for the donor.
Insured Tax Protection: Life insurance is often portrayed as the cheapest method of paying estate taxes, largely because the premiums and death benefit can be protected from tax.
For married couples, the primary form of insurance used for this purpose is survival (also known as second-to-die life). This is a joint life insurance policy with benefits paid after the death of both insured spouses. This is usually when inheritance tax is due. The protection strategy is to pay just enough premium (in the first year) to maintain coverage for a few years until greater certainty can be gained about the increase in inheritance tax costs.
Winning Harvest: The stock market has been very good for those who invest. So good, in fact, that it is gains rather than losses that should be the goal of many people’s harvest. Some stocks have seen gains of more than 100 percent since hitting lows in March 2020. Over the past 12 years, the S&P 500 has grown at an average annual rate of 14.6 percent.
In many cases, people have held onto stocks and strategies for far too long not to pay taxes on their profits. Perhaps now, while the long-term capital gain rate is only 15 percent for most people, the time has come to reap profits, rebalance portfolios, and perhaps rethink overall investment strategies.
The preventive opportunity
Washington is just telling us that the rich will see higher tax rates. Maybe that’s true during our COVID recovery. Perhaps it is also inevitable that we all have to share the burden of bridging the gap created by out of control deficit spending. Regardless of how chicken soup is, it can’t hurt to take advantage of the almost historically low tax rates we are currently enjoying before they’re gone.
How often do tax laws change and we try to advise our clients? For once we know what’s coming. The only way to win is to get our customers to consider their options sooner rather than later.