With summer and 99% humidity fully upon us, one of the questions we’ve been getting from clients is, “How high are taxes going to go and when will they take effect?”. It’s a fair question; taxes were one of the top agenda items that Biden campaigned on last fall. There has also been $5 trillion in stimulus paid out in just 18 months, not to mention an infrastructure bill that is currently making its way through congress, that will initially be for no less than $1 trillion we believe. Somewhere along the line, this needs to be paid for and it will be done so with an increase in taxes. But how high these taxes will go are still to be determined. Biden has said that tax increases will only be on the highest wage earners, those making over $400k jointly or $200k individually. What we want to do is relay over what we are hearing from our Washington insiders when it comes to the tax conversation. Both, where we see taxes going and what we are proactively doing as we continue to learn more.

When it comes to income tax, it is our belief that the highest rate makes its way from 37% to 39.6%. This is the same level it was prior to Trump lowering the rate when he was elected to office. This isn’t a huge shift and is far below the 50% levels that Biden was calling for on the campaign trail.

When it comes to capital gains, this is where we are likely going to see the most change. Right now, Biden is calling for capital gains to go all the way up to 40%, doubling the rates from the 20% they are at now for the highest wage earners. This would obviously affect consistently high earners, but it would also affect the mom-and-pop businesses who are not high-income earners except for the one time in their lives when they sell the business and realize a large gain. It would also affect real estate investments.

However, what we are hearing out of Washington is that these rates will settle at a much lower rate – probably in the 25%-28% range. A big increase, but not enough to deter real estate investors or other investments that could result in capital gains.

The last area of taxes that Biden had originally discussed was the estate and gift tax. Currently the exemption on this is at $11.7 million. His campaign proposal wanted to lower this down to $3.5 million. However, his latest proposal made no mention of this tax. One reason for this is that the tax is already set to “sunset” and will go back down to $5.6 million in 2025. Planning around the estate rules is something that is tough to do. For example, from 1997 up to current laws there have been five meaningful changes to the law. Only in certain specific situations does it make sense to make a drastic change to the plan and it is always important to pull your tax accountant or CPA in for a big decision like this.

It is our belief that any potential tax changes will not be retroactive and will not go into effect until 2022. Right now, there is still a lot left to be learned as any proposal must make its way through the halls of congress and pass a Senate that is divided 50/50. We are keeping a close watch on any potential changes. We also feel it is important to not react and make changes to plans when it comes to taxes until we know exactly what rules we are playing by. For clients that will be affected by any changes we will certainly be reaching out to strategize where we can and come up with a plan to better help their overall financial picture.

As always, if you have questions around this, or anything else, do not hesitate to reach out to us!

Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Any opinions are those of Myles Zueger and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.

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