Regardless of their net worth, our clients will turn to us for guidance on any changes in tax policy under Biden‘s management. While there may be a tax impact only for clients with higher income levels, all clients will want to know “What does this mean to me?” First, put the proposed tax increases in perspective. The top marginal income tax rates would rise from 37% to 39.6%, which was the top rate before the 2017 tax cuts. The rate was already scheduled to return to 39.6% in 2025. Nobody likes to pay higher taxes, and the Biden administration is focusing on raising taxes for high-income individuals and families and corporations. Under the plan, households making less than $ 400,000 a year are unlikely to be significantly affected.
Financial advisers whose clients have more than $ 400,000 in annual household income should start thinking about a tax plan in relation to their goals. If clients make more than $ 1 million in annual revenue, the tax plan under consideration will definitely have an impact, including a near doubling of the capital gains tax rate to 43.4% from 23.8%. Combine this with reducing the estate tax exemption to $ 5.49 million from $ 11.7 million and many more customers may be affected by these changes. Read: Biden’s plan to raise taxes on the capital gains of the rich is good policy but bad economics. If these tax rates increase, there will be a greater focus on creating greater tax efficiency in client portfolios. Some investors may consider long-term gains before capital gains tax rates increase. The “asset location” will be more valuable; This is where client portfolios should have those assets with the greatest tax consequences, such as high turnover, located in tax-deferred retirement accounts. Estate Planning Considerations For estate planning, some people may want to set lower rates of capital gains for estate purposes. If the “increase” basis is removed, capital gains realization can now become another option for estate planning. However, for business owners whose most important asset will often be business value, this may not be a viable option. Expect to see an increase in the use of insurance to help business owners finance estate taxes, especially if the exemption drops to $ 5.49 million per person. To keep this in perspective, keep in mind that estate taxes were already scheduled to return to this level after 2025 and were at the same level in 2017. Annuities in the spotlight Insurance will become a more interesting option not only for wealth benefits, but also for favorable tax growth. The cash value of the insurance increases tax-deferred, much like a traditional IRA or 401 (k) retirement account. As the cash value of a policy increases, the policyholder does not pay income tax, unless it is withdrawn. Tax deferral can have a significant impact as value grows over time. The same concept can be applied to annuities. One of the most common drawbacks of annuities is the expenses associated with the contract. However, annuities have become much more competitive for pure tax deferral. They have also significantly increased the number of investment options offered. Another commonly cited disadvantage of annuities is the sacrifice of future growth from unqualified annuities that are treated as ordinary income versus long-term capital gains. This negative may need to be reassessed if capital gains rates are raised based on the customer’s annual income and the ordinary tax rate. Tax Efficiency and ETFs Other areas where we will see increased use are tax efficient investment management strategies. These investments seek to provide clients with higher after-tax rates of return, and if tax rates rise, these products will be more valuable to high-income individuals. We have already experienced a significant increase in the use of exchange-traded funds in client portfolios and this may continue in popularity with the proposed change to tax policy. Compared to mutual funds, ETFs can be more tax efficient, often resulting in lower tax liability than if you had a similarly structured mutual fund. Proper planning will help the advisor and client decide whether a single strategy to minimize taxes, a combination of strategies, or no changes will be optimal. Clients have many resources and centers of influence to seek guidance, including tax advisers, investment and insurance specialists, attorneys, and even trusted family and friends. Coordinating a plan among all financial professionals helps relieve the client of the pressures of sifting through different channels of information. You don’t want a customer to feel like they are “stuck in the middle” of all the different experience doors available to them. Potential tax law changes noted by Biden’s management can significantly affect a client’s current tax strategies and will undoubtedly be a priority for our clients. This presents a timely opportunity for financial planning specialists to continue to work closely with tax professionals to reinforce with clients that we are here for them. A financial advisor must be able to correct course when appropriate and create new opportunities in planning to minimize taxes and enhance the client’s ability to achieve their best financial life. Marc Scudillo is the CEO of EisnerAmper Wealth Management and Corporate Benefits LLC (www.eisneramperwmcb.com). He is a Certified Public Accountant and Certified Financial Planner ™ and Certified Business Exit Consultant®. Plus: Increasing the capital gains tax rate won’t sink the stock market, and here’s the reason Plus: Some new investors see a ‘buying opportunity’ if Biden raises capital gains taxes on millionaires from United States