Elections and Taxes

Get ready for changes!

It has been accurately said that every time Congress meets, your tax dollar is at risk.

This has a deep ring of truth now with many of the proposed changes to the tax code now being discussed.

What is on the menu?  A sample of the proposals being discussed include:

1) an increase in the corporate income tax rate from 21% to 28%

2) an increase in the federal income tax rate from 36% to 39.6%.

3) A reduction in the estate tax exemption being lowered from $11.6 million down to perhaps $6-$7, million -per individual.

4) for those earning over $1 million, the capital gains rate would go to 39.6% from the current federal rate of 20%.

5) applying the Social Security tax to earned income above $400,000.  Social security tax is now capped at a lower income level.

6) some good news?  The limit on state and local tax deductions could potentially double from its current $10,000 to at least $20,000 -this will make New York, Connecticut, and California folks very happy.

7) The elimination of the current benefit of step-up in basis for inherited assets has been discussed. Should this get passed, those who inherit assets would be required to use their parent’s cost basis in determining the gain -this would be a nightmare to enforce and send CPAs into the nuthouse.  It is also essentially a double taxation on inherited assets given estate taxes may also have to be paid.

While it is uncertain which of these proposals will actually get passed (and when), these changes in the tax code will be an important issue for investors to address in their financial planning. Once these resolutions go into law, it will be important to review strategies to minimize the tax bite.

We would be surprised to see any of these changes effective in 2021 given the weakened state of the economy-certainly these tax proposals will not increase economic activity and the government does not want to hinder the fragile recovery we are in as a result of the Covid virus.  We would love to see spending caps put in place to address the budget issues, but apparently, that is something only ordinary folks do.