For the past few weeks, there has been a flurry of news regarding the Biden administration’s proposed tax changes to fund the $3.5 trillion infrastructure bill. But, According to Accounting Today, not all House Democrats are on board with the package and may want to pare it down.
The proposed tax changes are exactly that: a proposal. Nothing is set in stone. And with the additional dissent from the Democrats, there is now uncertainty about the many tax increases and credits included in the proposal.
The key to succeeding under the new tax provisions – once they are determined and enacted – is an understanding of the provisions of the tax proposal as well as developing and acting on a financial plan to safeguard your finances against increased taxes and continue to grow your financial legacy.
During this live discussion led by John Scott, Tom Gibson, CPA, and Brian Shey, a member of your Family Office team, will discuss:
Transcript (edited for clarity)
John Scott: Good afternoon, and thank you for joining today’s webinar, Proposed Tax Changes: A Time to Plan, Not Panic. My name is John Scott, Director of Business Development at TSP Family Office. I’m joined today by Senior Tax Strategist, Tom Gibson. Welcome, Tom.
Tom Gibson: Good afternoon, John.
Scott: We also have Brian Shey, a member of your Family Office Team, with us. Welcome, Brian.
Brian Shey: Thanks, John. Hi, Tom. Good to see you guys and welcome everyone.
Scott: Let’s go ahead and get started. Tom, as the title of our webinar describes, these are proposed tax law changes and it’s time for us to plan and not panic. I think it’s important for us to frame out where the proposed changes stand and clarify the process for the changes to the law. Please expand on that for us.
Gibson: Absolutely. It would be impossible for me to stress what John said too much. The bill is still in the House. I checked on a website called GovTrack – they track all legislation, both houses of Congress, and they rate the likelihood of provisions actually passing in their current form – for the act that we’re going to talk about today. It has an 11% chance of passing in its current form.
Now, ‘in its current form’ is the key phrase. But if I got the vapors every time a new piece of legislation was introduced in the House or Senate, I would probably keep AstraZeneca, who manufactures Prilosec, in business from the reflux. It is a proposal.
As a refresher, for a bill to actually become law, one of the houses of Congress has to first pass it independently. In this case, it would be the House of Representatives. The bill would then go to the other Chamber of Congress, in this case the Senate, where the Senate would most likely make changes to the bill and pass their version of the legislation. The two bills would then have to be reconciled with one another, and then the president would have to sign it. If you’ve been following the news at all for the last couple of weeks, you know that things are not going smoothly for this piece of legislation.
I think the impetus to try to ram this through is twofold. First, historically, the party that is in power from a presidential election tends to lose seats during the midterm. While the Democrats have a majority in the House, it’s razor thin. In the Senate, it’s a 50/50 split. So, this may be their one chance to get this legislation rammed through.
I also think they’re in a hurry because they’re hoping – if it does pass – that folks will forget about it by the midterms next year. I think, were it to pass in its current form, that’s highly unlikely as well.
We’re going to talk about some things that are in the bill as proposals right now, but it’s not time to make knee-jerk reactions. At this point, isn’t even close to being a law.
Scott: Thanks, Tom. And again, we can’t emphasize this enough. There continues to be a great deal of speculation surrounding the proposal and what changes to the law will occur, if any. The theme and reality right now are, it’s time to plan, not panic. Today we want to touch on multiple areas including the proposed tax rate increases themselves, proposed early sun setting, proposed estate tax changes, the proposed changes that could have an impact on estate planning, and any additional areas or information that Tom and Brian feel is essential for us to discuss today. Let’s start with tax rates. Tom?
Gibson: We’ve been talking about Biden’s proposed legislation since October of last year, so we’ve been around this mulberry bush a few times. There were some things that, in October, we thought might be in a bill that actually haven’t come into the bill. There’s no mention in this proposal of doing away with 1031-Exchanges. There’s no mention in this bill about going back to the Pease Amendment limitations, nor is there any mention of raising the $10,000 cap on state and local taxes. So, there are some things, honestly, that we thought would be there that aren’t.
As far as the rates, though, it’s exactly what we expected. We said last October that $400,000 was a magic number in the Biden tax proposal, and that’s pretty much where we’ve landed. On the individual side of things, they are asking that the top rate go from 37% up to 39.6%. That applies if you’re single making more than 400,000, married filing joint, the bracket kicks off at $450,000.
Now, what does that mean? Well, a couple of things. One, obviously the rate is higher, but let me explain one other byproduct of this. Right now, the top rate, if you’re married, filing joint kicks off at $628,300. Under the Biden plan, it kicks off at $450,000. So first of all, there are going to be more brackets. I still believe we’re essentially going back to the Obama tax tables with a little jiggering. But you’re going to hit the top bracket about $178,300 sooner than you do now. That’s one of the major changes.
On the corporate side, right now we have a 21% flat rate for C-corporations. They’re talking about going back to a graduated system. You start out at 18% on the first 400,000, then 21% up to $5 million, and then 26.5% after that. Most folks, particularly small business owners who have C-corporations, are basically bonusing all the profits out at the end of the year anyway, so that’s kind of a moot point for most of our clients.
Capital gains. The Democrats were not able to get what they really wanted, which was to tax long-term capital gains at ordinary income rates for individuals whose income was over a $1 million. That’s not in there. They are talking about raising the rate from 20%, where it is now, up to 25% on long-term gains.
Now this all sounds great, although people’s tax bills are going to go up. When they say, “We’re not going to raise taxes,” if you’re going through the brackets faster, yes, that’s exactly what’s going to happen. It is a tax increase.
And for those of you who are business owners, there’s another little nice surprise in the bill. Currently, if you have capital gains, interest and dividend income, passive income from rental properties, buildings or maybe business entities where you’re not actively involved in the day-to-day operations, you already know that this type of income is subject to the net investment income tax. A lot of folks refer to this as the Obamacare Tax. In the proposal, they are saying that income from S-corporations – from your medical practice, your dental practice, your business – is now also going to be subject to the Obamacare Tax, which means you already have a de facto 3.8% tax increase on your business income. If you’re below $400,000, you’re going to get hit with that.
Scott: Thanks. We mentioned estate planning, and we know that that can be complicated. How does this tax proposal impact or change somebody’s plans? Brian?
Shey: I’ll jump in there. But before I do, let me just make one comment on what Tom was saying, because I think A, it bears repeating, and B, it goes across just about all of the different proposals that are in this bill. Tom mentioned, when he was talking about the rates, that you’re going to get to the higher tax rates in the brackets faster. In addition, the rate’s going to be higher. I want everyone to rationalize this. If you read through the proposals, that’s the case on just about every area of the proposal. A, you’re going to get there faster, and B, they’re going to tax you at a higher rate. So again, it’s a proposal, but, in this proposal, they’re actually trying to hit you on both sides. They’re double-dipping us. I wanted to mention that because, as we talk about estate planning and we talk about different alternative investments and we talk about the different strategies in the family office, that every day we’re in the trenches trying to save people money that in every area they’re doubling up on us.
So John, to your point on the estate planning piece, first of all, it’s something that we talk about every day in the family office. It’s critically important. But, because we’re healthy individuals and we’re in denial of our mortality, it’s one of the last things that people get around to. It is critically important to get your will, living will, durable powers of attorney, health care directives, trusts – all of that stuff – in place.
However, and most people hear me say this often, there is no perfect plan when you talk about estate planning. It’s not that you can’t go out there and find a phenomenal attorney, a phenomenal CPA, that will put the plans in place for you. And obviously, we give counsel in that area. However, Congress is going to continue to change the laws just like they’re proposing all of these different changes today. So, while we want to say, “Put together a plan,” understand that it is not an event; it’s a process. It’s an ongoing process that you will always need to go back to, to review your documents, and to make sure that the plan still fits your needs. The nitty gritty.
If you don’t know the term ‘unified credit,’ this is an area that applies to the government and what people know as, or talk about as, the death tax. Currently, my wife and I have a unified credit. Each of us have $11.7 million worth of unified credit, and so does everyone else in the country. As a result, there hasn’t been a huge need for estate planning attorneys in the country for the last number of years due to the fact that the unified credit has been so high. If you add it together, let’s say it’s a $23 million estate. So, if the estate is less than $23 million, then you really don’t have an estate tax problem.
However, Biden’s administration wants to reduce an individual’s $11.7 million down to $5 million. That’s in the proposal. So, a married couple would have a $10 million unified credit. That’s a substantial change. There are quite a few clients that would be affected in this area. And regardless of whether or not this proposal comes in or they’re able to keep that in, in 2026, the unified credit reverts back to $6 million. They’re just lowering it a little bit faster.
In addition, people will hear me talk about sophisticated confusion. You can get a really good attorney to make a very sophisticated plan, but the GRITs and the GRATs and the different trusts and the different areas out there that estate planning attorneys use are also part of this proposal in addition to reducing the amount of gifting ability that each of us have. Tom is very, very nice and he can give just about anybody in the country $15,000 and he doesn’t have to tell anybody about it. I’m still waiting on my check, Tom. So in addition to all of the estate planning stuff that we talk about every day again, a lot of changes, a lot of proposed changes, and very few of them are in the best interest of our clients, which are normally high net worth, high-income clients.
Gibson: And Brian said something there again. There are certainly estate planning documents that you absolutely need to have in place and that you absolutely want to keep updated, primarily your wills and trusts.
Another provision that we were almost absolutely sure was going to be in the bill was doing away with the step up at death on items in a decedent’s estate. As Brian was saying, they’re looking at the trust and the various different types of more sophisticated structures that folks use for estate tax planning. Had that provision gone through, it would’ve undone about three decades worth of estate tax planning because so much of what folks have done is predicated on the fact that their heirs are going to get that step up in basis, and that’s what’s going to help in terms of the death tax.
But yes, there are things that you can do, things I think that might stand the test of time a little bit better than diving off the deep end with some of the attorney solutions. Or you could just do what George Steinbrenner did and try to time your death for a year when the estate tax isn’t around. That worked out great for his kids!
Shey: Tom, let me make one other point. I hear all the time, “I have a trust, so there’s no way I’m going to have to pay taxes.” Let me address that.
Just because you have a trust does not mean that you’re not going to have a tax problem with estate taxes. The only way that works is if you move assets into what is called an ‘irrevocable trust,’ which means you’ve given up control of those assets. Therefore, by default, those assets can be moved outside of your estate.
I also want people to understand, if you don’t know what ‘income with respect to decedent’ is, look it up. I’ve been talking about it for 20 plus years. Nobody knows about it. And then to Tom’s point, when Congress changes the law, it can blow up decades worth of planning for high-net-worth income people. That happened back in 2019 – I talk to people about the SECURE Act of 2019 – and that literally blew up almost 35 years of tax planning or estate planning for people because of the way the Congress is going to treat IRA accounts.
Everyone’s individual needs are different. You have to get a meeting scheduled with us individually. But again, you need to understand that just because you have a trust does not mean you’re going to sidestep the death tax or estate taxes or whatever may be.
Scott: Is there any chance there may be a change to the provisions of the SECURE Act and the required distributions of IRAs?
Shey: Great question. I love the wording, “Is there any chance?” Yes, is the answer, certainly. Depending on whose numbers you believe, there’s somewhere around $30-$35 trillion wrapped up in traditional IRAs or what people know as the 401(k) plan in the country. If you think about that, none of those dollars have ever been taxed. That’s a target for the IRS and for the government. I think that they look at the $35 trillion wrapped up in 401(k) plans as collateral against the national debt. At any particular time, if they change the law, they can start tapping into that money. And they do it all the time. The SECURE Act was the latest back in 2019.
In addition, to that, now they’re talking about eliminating after-tax 401(k) plan conversions and increasing the distribution percentages for the people over 72 that have to start taking what we call the RMD, or required minimum distributions. You can round it all up and put a nice, pretty bow on it and just say it this way: The government is going to put a target on dollars that have never been taxed. If they can get them a little bit sooner, they will. If they can tax them a little bit higher, they will. We’ve talked a lot about this. If you believe marginal income tax rates are going to be higher in the future, and you’re working with us, it doesn’t make any sense to defer paying taxes today, so you can pay them later on in life when everything that’s going on in the country shows that taxes will most likely be higher.
Scott: Thanks. You alluded earlier, Brian, to alternatives. I think there are a couple of things on people’s mind with respect to this topic. First of all, are there alternative strategies that our clients should be looking at? And secondly, what should we think about some of those strategies, the alternatives, that our clients currently employ?
Shey: Let me bullet point a few. Tom will take a couple, and I’ll take a couple. I’ll just start out.
We talk a lot about using captive insurance plans, we talk a lot about using qualified opportunity zones. I’m in the trenches every day talking about getting money out of your traditional IRA plans and the 401(k) plans and moving it over into the Roth. The terminology we use is the Roth conversion and the backdoor Roth. Again, right now the window is open for us to convert those dollars from IRA accounts over to the Roth. Alternatives that I specialize in and talk with people about every day are the Roth IRA and permanent life insurance.
Let me hit the Roth first. In the proposal, because that’s what we’re here to talk about today, the proposal is going to possibly eliminate the conversion of new after-tax dollars down to the end of this year, end of 2021. So, new after-tax money could not be put in and then converted later on in life. We talk a lot about using a SEP-IRA. You can put $56,000 in this year and then immediately convert it to a Roth. That would be an alternative strategy that would go away. And then dollars that people have in traditional IRAs and traditional 401(k) plans, that $30 plus trillion that we talked about, they’re also drawing a line in the sand and only going to allow accounts with money in them today to be converted over to the Roth, up to 2031. Starting in 2022, backdoor Roth and mega-backdoor Roth conversions will be prohibited. We’ve got about a 10-year window left. And that’s substantial. No free lunch. If you convert, you have to pay the taxes now.
However, when you’re working with the family office – and they do a phenomenal job with some of these alternatives; we’re getting people down into the low to mid-20s –you have to ask yourself if you converted $100,000 over to the Roth and had to pay 21%, 22% in taxes on it, now you have all of those dollars in an environment where you can invest them, grow them, over the next 10, 20, 30 years, and never have another tax burden. The Roth and the permanent life insurance piece sidestep what I call ‘provisional income,’ and you won’t be taxed later on in life.
Now let’s talk about permanent life insurance. Nobody wants to talk about it because people have a negative, stereotypical image about using life insurance. But, if you’ve had a cup of coffee with me, I’ve said, “The interesting thing about life insurance is this: it’s been around 300 years, and the government did not invent it. Therefore, we do not have to play by the government’s rules.”
Here’s the answer to the questions, “When’s the last time the government messed with life insurance?” or “Couldn’t the government mess with life insurance?” First, it hasn’t happened since 1998. That’s the last time Congress really stepped in, looked at life insurance, and made some tweaks. But again, if you tell me a politician is going to get elected and stand before the country and say, “We’re going to tax death benefit life insurance that’s going to a widow and the orphans of someone who just died,” I don’t think that’s going to happen.
The nice thing about life insurance, properly designed, properly crafted, properly funded, is it’s a phenomenal tax strategy when properly used. And, for the most part, it will always transfer across generational lines in a tax-free environment.
Gibson: So, closely held captive insurance has been around in the tax code for decades. It’s for those who first own their own businesses and, second, have some legitimate insurable risks. We believe it is still a viable strategy.
Opportunity zones, the same thing. There’s not really anything in this new proposal that impacts opportunity zones.
The other, and honestly the most popular alternative investment that our clients participate in, is the real estate investments that have the potential to go into conservation. There are some provisions in this act that touch upon that particular strategy as well. I want to preface what I’m about to say with a fact. The law has not changed since 2015. That is the last time Congress changed anything regarding this particular provision. Now, at the end of 2016, the IRS came out with a revenue notice, and they said that if a project had a ratio of higher than 2.5:1, it became a listed transaction and required the filing of the form 8886 at the end of the year with the investor’s personal return. Those of you who have been clients for a while are very familiar that. You get it every year with your K-1.
There are two or three parts to the proposal at hand and we’ll deal with it piecemeal. The first is to officially adopt the IRS’s 2.5:1 ratio as being the maximum amount that you can deduct. Again, a little history lesson. Similar provisions have been introduced in both houses of Congress every year since 2017. None of them have come close to passing. If Congress had a desire to adopt this provision, they have had multiple opportunities to do so, and it’s not happened thus far.
A second provision that’s raised a lot of eyebrows is the claw back provision. Not only are we going to adopt this 2.5:1 standard, but we are going to reach back all the way to 2017 and apply that to projects for ’17, ’18, ’19 and ’20. Again, this is something that’s a little bit new. On the face of it – I’m not an attorney – this would immediately be challenged in court. It’s what’s called an ex post facto law. It’s making the law after the fact.
To use an analogy, we’ve talked about them raising the top individual rate to 39.6% for individuals who are married, filing joint once your income hits $450,000. Well, why not make that retroactive back to the beginning of 2017 as well? The reason to not do that would be people prepared the tax returns based on what the law was for that year. You can certainly change a law, and Congress sometimes does make retroactive laws, but typically it’s when they pass something in February or March and then make it retroactive back to the beginning of that year. It would be extremely unusual, first of all, having had the chance to fix this multiple times if that’s what Congress desired to do, to now go back after four years of not fixing it and say, “We need to fix this now.”
As I’ve said, provisions like this have been in bills and they’ve come out. I don’t see, even with this bill, Congress having a great deal of desire to do this.
The other provision that has been kicked about in the proposals is instituting a holding period. They talked, first, about putting in a one-year holding period, which meant you could make the investment and the property could be voted into conservation, but you had to be in the partnership for one year before the partnership could actually make the charitable contribution. At that point, the 2.5:1 ratio comes off, and it’s not a listed transaction.
The provision that we currently have is a three-year holding period. But again, one year, three years, six months, all you’re doing is kicking the can down the road because people can continue to invest. Now, I will tell you, it would make my job a lot harder trying to estimate what your income’s going to be three years from now. But it is basically just postponing something. It’s not really going to accomplish a great deal.
So, of the things that we’ve talked about today, who knows what Congress will do. They do a lot of things that I don’t think necessarily make sense. But this particular provision, if Congress had wanted this to happen, I believe it would’ve happened a long time ago.
Shey: John, let me make one other point. A strategy that we have in the family office but don’t talk to everyone about because it’s a little bit specialized is our asset care strategy. But, because of these proposals, this may be something out there for our clients that we should talk about. This is an insurance-related product, but the partner that we have out of Indianapolis, Indiana, when they patented this product, they patented it with the ability to use qualified IRA and/or qualified 401(k) money. This isn’t the place to get into the details, but basically it allows any particular person and/or married couple to leverage IRA or 401(k) money into unlimited healthcare benefits for the rest of their life. And when I do present it, I always hear, “This sounds too good to be true,” and “Why isn’t everybody doing this?” It’s not too good to be true, and a whole lot of people do it. Because of the changes that are happening with the IRA and the Roth, it something that we should probably talk to more people about. Again, it’s an alternative plan.
Gibson: And let me come back to the Roth issue. If you have been our client at any time since 2018, after the passage of the Tax Cut and Jobs Act, we’ve been working on Roth conversions. Currently, the law was going to have the ability to do that without regard for income until it sunset at the end of 2025.
This new bill actually stretches it out another five years. You might think, “Why in the world would they do that?” Well, I’ll tell you why. It’s because of the way that the Congressional Budget Office scores the impact of spending bills. Brian has it exactly right; there’s going to be a line drawn in the sand as of the end of this year if this were to pass that says, “You can’t fund your retirement plan with after-tax, non-deductible contributions and then roll that to a Roth. It’s going to stay as a non-deductible contribution in the traditional plan.”
But, for money that is in accounts prior to the end of 2021 and regular contributions, under the current proposal, you would still be able to convert that money for up to 10 years. This is because they view that as being a revenue generator, and it’s making this monstrosity of a bill look less expensive. You’ve heard, “Well, this isn’t going to cost the American taxpayers a dime.” Well, of course, it is. It’s going to be about $5 trillion. That’s what it’s actually going to cost. But that’s the rationale behind why we’re going to be able to do Roth conversions even a little bit longer than we thought we were going to.
Scott: So, we’ve talked about tax rates. We’ve touched on capital gains. Speak to something that makes sense for people to take advantage of, the impact, if any according to the proposal, on the qualified business income deduction.
Gibson: There is a change in the bill for QBI. Many of you who are on this call are folks who are in what’s called a specified trade business. So my physicians, my dentists, attorneys, there’s a carve out for you. As you know, when we’re working on your tax planning, we’re trying to get you down into an income range where you’re going to be able to benefit from at least some of the QBI deduction. But once your income goes over about $426,000, QBI is off the table. You’re not going to get it.
There are other business owners, and contractors are a perfect example of this, who are not subject to those QBI limitations. It’s not at all uncommon for me to see clients outside of specified trades of businesses being able to take very, very large QBI deductions. That’s going to change. They’re going to cap the maximum amount of the QBI deduction for single individuals at $400,000, for folks who are married, filing joint, at $500 thousand. This is better than expected. I thought they would probably just do away with QBI entirely.
No law change would be better for our clients, but what they’re proposing wouldn’t materially affect our folks who are in specified trades or businesses. It would have a big impact if you fall outside of that category because you’re going to be capped on how much you can take.
Scott: And just to clarify, we discussed a little bit about S-corporations and, of course, that’s a flow through. How about C-corporation taxes?
Gibson: With the C-Corporation, we’re going back to the same regimen that we were under before. In the past, the C-Corporation tax rates have been graduated, or it’s a progressive system just like the individual rates where you have brackets that you go through. Since the beginning of 2018, the C-Corporation tax rate was a flat rate; it was 21%, period. If you had taxable income, it was taxed at 21%.
They’ve gone back to a progressive system. The first $400,000 in income is taxed at 18%, up to $5 million. Between $400,000 and $5 five million, it’s taxed at 21%, which is the current rate. Once you go over $5 million, you’re paying 26.5% percent. If you have a C-corporation, you’re leaving the money in there to be taxed. You actually get a little break if you’re under $400,000. It would be taxed at 18% as opposed to the current 21%.
Scott: We’ve covered a of turf today in a short amount of time, and we’ve answered many of the questions that are coming through. Before we get into additional questions, what additional information, as I mentioned before, that either you, Tom or you, Brian, categorize as essential?
Gibson: I want to ask a theoretical question, Brian, because you brought up a great point a few minutes ago. And you were absolutely right. Typically, at the federal level, we are getting folks effective or average tax rates down into the 20%s. From a planning standpoint going forward, if this comes into place, does it make sense to still defer income into 401(k)s and SEPs as opposed to just investing it and paying the tax now? What does this do to qualified retirement money going forward for our clients? For a lot of people, it still may have a place, but….
Shey: I want to start with the fact that we’re recording this, and now we have it on record that Tom said that I said something that was perfectly accurate. I’m so happy about that.
Like Tom mentioned, we’ve spent the better part of 18 months, almost to two plus years now really, digging deep and talking about converting money to Roths and getting money out of qualified investments, the traditional IRAs, the 401(k) plans. Tom brought up a great point. One of the provisions in this plan, one of the proposals, is to eliminate an employee’s ability to convert to a Roth 401(k) plan using after-tax contributions. As we’ve spent the better part of the last two years under a different law, we’ve been telling people, “Take all the free money that your employer is going to give you. If you happen to be working or your practice or something like that matches well, then take the match. Take free money.”
But when we ask people, “What are you deferring into your plan?” we often hear “Well, I’m deferring 6%, but my employer’s not matching any,” or “I’m maxing out my traditional 401(k) plan.” That’s what Congress wants you to do because then they get to tell you what percentage they get later on in life.
To Tom’s point, you have to sit down and look at what’s happening. I just got an email yesterday from a couple of physicians who said, “We eliminated our contributions to the 401(k) plan because there was no match.” They understood that they were going to get a raise, they were going to bring more money home in their paycheck. To Tom’s point, bring more money home, pay your taxes today, and then let’s get it invested in some type of alternative environment where it can grow over the next 10, 20, 30 years. And later on in life, when you’re no longer working and there’s no new cash coming in, you don’t have to pay taxes on the dollars that you’re taking out of those other environments.
There are strategies to do this; you just have to get your head wrapped around them. If you believed something that wasn’t true, when would you want to know about it? And the blanket that the government pulled over this country’s eyes back in 1978 when Ted Benna invented the 401(k) plan, he did that in an era where the highest marginal income tax rate was 70%. It made sense in 1978 for high-income earning individuals to find an environment to put money away pre-tax because inevitably they would be in a lower tax bracket later in life. That is not the environment we’re in. That’s not the environment we’ve been in for two decades. We happen to be in a decent environment. It’s just going to get a lot worse, in our opinion.
Gibson: One other thing, however. Some of your employees still will be able to make contributions to Roth retirement arrangements, as well as your kids. What happens with mom and dad’s after-tax retirement arrangements is one thing. And that’s part of the reason we like permanent life insurance for the kids. There’s a lot of overlap in tax treatment between a Roth and permanent life insurance plan. But the kids are still definitely able to participate in Roth arrangements if you would like them to, and that’s something, of course, that you know we’re huge fans of.
Shey: That’s a really good point, Tom. We pride ourselves in not only the immediate or the next year or two, but legacy planning.
Scott: I have a question, here. And I think we covered this, but we have a request for clarification on the individual tax rates under the proposal. When would those go into effect? Is there any speculation on the date?
Gibson: Well, in the proposal they were envisioning it passing by the end of this year, which means the new rates would be effective January 1st of next year. The only exception to that are the capital gains rates. It says the capital gains rates would be effective the day the measure was introduced, so possibly as early as September 12, 2021, would be subject to the 25% rate.
The market has kind of been in the dumper for the last couple of weeks. But I know a lot of you were asking, “Should I go ahead and take my gains and pay tax this year?” That was the question. That’s an investment decision. You’ve all heard me say, “We can’t let taxes become the tail that wags the dog.” If it is a good decision from an investment standpoint and you think the rates are going to be higher next year, then it makes a lot of sense. Even at that, use the opportunity zone. Use some of the other things to mitigate that.
I know we’ve said it two or three times now, but this is just a proposal at this point. True story. This came up last year. I had a client who panicked and did a big sell off when the market was down and has regretted it ever since. So decisions made in haste are oftentimes just not good decisions over the long term. And panic never, or almost never results in a good decision.
Scott: Thanks, Tom. As we’ve weaved in here multiple times, it’s speculative, it’s a proposal, and planning is absolutely essential. So what other closing thoughts might you have before we close?
Gibson: I have seen this movie, at this point, about five or six times over my career. Two weeks ago, I passed my 30th year as a CPA in Tennessee. A lot of this is things that are similar to what we’ve seen before. There are some new wrinkles. I know there are provisions regarding the real estate investment. I have a lot of folks concerned. We want to do everything we can to plan for all the eventualities. But, at the same time, right now the law is exactly what it has been. If that changes, obviously, we change some of the strategies, change some of the way we do things.
My fondest hope for this year was that we could get past the end of this year because I really don’t think Democrats want to run on a $3.5 trillion tax increase on working Americans and on small businesses. If you want to sum the bill up, that’s exactly what it is. I don’t think they want to run on that in the midterms. It’s like I said earlier, I think they want to get it over with and hope people forget. I think it was Thomas Sowell, an economist, who said, “What we should do is hold the federal elections on April the 16th every year.” And I think that would be a great idea. But we’ll monitor this. If we need to make some adjustments, we certainly will. But like I said, don’t go out and do things because you’re afraid something might happen. That’s a mistake.
Shey: John, I would jump in from a summary standpoint. You’ve heard me say this. The conventional wisdom of whatever you want to call it – financial planning, retirement planning, estate planning, tax planning – the conventional plan and the conventional wisdoms out there, they’re just wrong. The people that believe tax rates are going to go down, that is just hard to rationalize. But there are still people out there who actually believe that rates will be lower in the future.
Now, I’m not sure how they get there, and I don’t submit to that theory. But it’s the mature simplicity road of earn income, pay the taxes, get into the alternative strategies, reduce your provisional income where you don’t have to pay taxes in the future. There are people in their mid to late 60s, early 70s that we meet with who are telling me that they’ve never paid any more taxes than they are today. And obviously, they take a trip down memory lane, and they think, “When I retire, I’ll be in a lower income bracket, so I’ll pay lower taxes.” Remember, the people who told you that is Congress, and they set the tax brackets. So, get with our team, sit down. Everyone’s individual situation is different. We have people that are looking to retire soon. We have people that are looking to sell their practices, sell their businesses. And there are strategies that we can at least get you exposed to, if not get you into, that will offset those burdens and position you for what you want and what all of us want, which is peace of mind and just a better quality of life.
Scott: Thank you, Brian.
Time for planning, not panic. I want to thank both of you, gentlemen. Thank you, Brian. Thank you, Tom. I want to thank our clients. If you have follow-up questions for Brian or Tom, or you have need of our family office services, we encourage you to contact us at (772) 257-7888.