By Roy Ice
Politicians have been wooing reluctant audiences by crooning about how they will fix the tax system for as long as anyone can remember.
Understandably, individuals have some reservations about the intentions of their political suitors when they are presented with a new tax proposal.
If tax policy gets your heart aflutter, then the U.S. Department of the Treasury has put out a detailed publication about the Biden administration’s tax proposals, also known as the “Green Book.” Before getting into its contents, you should understand that tax proposals are a long way from law. The proposal and the legislation that would possibly make it to the Congressional floor are about as different as meeting someone in person vs. their dating app profile. It is nicely packaged when you read about it online — but when you finally get to interact with the real thing, it rambles on, omits details, comes with a lot of baggage and is likely a little more bloated than what you were led to believe.
Tax proposals are only skin deep. However, there are some clues behind glossy publications that can be used to make informed choices. For example, we do not know what final legislation will look like, but we can consider the areas that consistently pop up in conversations about tax reform. Hot topics right now are related corporate tax reform, higher tax rates on earned income and capital gains for high-income individuals, and expanded credits for families related to earned income, children, expenses related to childcare and health insurance.
The proposed changes seem to be courting those in the middle class and below since they target many aspects of taxation that most people do not regularly encounter, like foreign income. Based on the proposed income thresholds, many tax increases would be based on income out of the average person’s league. However, the proposed tax changes provide lucrative credits for working families, such as the Child Tax Credit expansion.
Corporations and high-wealth individuals seem to get a bit more of the cold shoulder with the tax overhaul. Right now, we are told that tax hikes would affect wages over $400K, capital gains over $1M, and raise the corporate tax rate to 28%. However, it is difficult to put a tax plan in place when we do not have a thorough understanding of where we need to hedge against tax effectively. As it stands, the vague language of the proposal would tax a farmer who had a one-time $1M gain from the sale of family land at the same ordinary tax rate as a stock sale by a corporate CEO making $10M per year. That does not seem to be in line with the spirit of the proposal, but we would need to wait for more guidance.
In the meantime, we can, and should, consider the likelihood and magnitude of proposed changes on your tax bill. If the impact could be significant, we can steer away from tax risk areas without needing to know what the exact outcome will be. We can recognize gains over time to smooth out spikes in income. We may want to consider gifting instead of letting assets pass to your heirs at death to lock in the current, generous gift and estate tax exemptions. The key is to look for big areas of risk and do so in a comprehensive and calculated manner consistent with your overall plan and avoid emotional decisions.
You should always discuss any big changes with your advisor. They can save you some heartache and help you avoid a bad date with the IRS.