In an effort to pay for
new legislation, the Biden administration has proposed higher taxes for the
nation’s highest earners. The president advocates returning the top tax rate to
39.6% for individuals earning $452,700 or more, and married couples with more
than $509,300 in combined taxable income.
This top tax rate was just reduced in 2017 (to the current 37%),
which emphasizes a very important point: Tax rates are going to rise and fall.
While it may be prudent to make adjustments to income, investments, deductions
and other tax strategies in response to changes, it’s always important to do
what’s best for your circumstances. Making adjustments every few years could
end up derailing your long-term goals. Before making any changes based on proposed
or even enacted tax laws, be sure to consult with experienced financial and tax
professionals to develop a sound strategy that works for the long haul. Feel
free to call us if you’d like to discuss tax strategies.
With that in mind, there
are tactics you can use to help minimize your tax obligations and still remain
aligned with your goals. For example, if you are currently retired and
regularly make charitable contributions, you can use your required minimum
distributions (RMD) to donate directly from your IRA account. Those assets
would no longer be reported as income, so you would not have to pay taxes on
them. It’s a way to continue your charitable goals but minimize your taxes.2
Another asset that could be targeted for higher taxes is an
inherited home. Today, heirs enjoy a step-up in basis, which means the home’s
cost basis is adjusted to market value at the time of the owner’s death. If the
heir sells the home immediately, he or she will owe no capital gains tax. Also,
heirs can defer paying taxes on that value until they actually sell the home.
However, Biden’s proposed inheritance tax would remove the step-up and tax
capital gains upon the death of the parent, as if the home was sold. The
current proposal includes tax exemptions up to $1 million for single heirs and
up to $2.5 million for couples.
That may sound like a lot,
but the heirs may have to sell the property if they don’t have ready cash to
pay the gains tax. For example, say a son inherits his parents’ home. It was
originally purchased for $300,000 and is valued at $1.5 million when he
inherits it. Under the Biden proposal, he can subtract both the original cost
($300,000) and the exclusion rate ($1 million), but that still leaves $200,000
on which he would owe capital gains taxes.3
Another tax strategy being
pursued by this administration is to collect taxes legally owed that are not
currently being collected. According to the IRS, that’s about $1 trillion a
year based on analysis from 2011 to 2013. However, between the proliferation of
virtual currencies and the impressive growth in billionaire wealth just over
the past year, the amount of uncollected tax revenues could be a lot higher
than that now. In fact, IRS analysis has found that illegal and foreign-sourced
income that is not currently being reported would yield an additional $175
billion in tax revenues from America’s wealthiest households. In an effort to
avoid raising taxes on middle and lower-income households, Biden has proposed a
10.4% increase in IRS funding to help enforce tax laws already on the books.4
We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!
1 Kate Duffy. Business Insider. April 29, 2021. “Biden’s tax
hike will hit married couples earning more than $510,000 combined, report
says.” https://www.businessinsider.com/joe-biden-tax-rise-hits-married-couples-earn-less-400000-2021-4.
Accessed May 3, 2021.
2 Steven A. Morelli.
Insurance News Net. April 9, 2021. “Advisors Dealing With A Flood Of Tax
Anxiety.” https://insurancenewsnet.com/innarticle/advisors-dealing-with-a-flood-of-tax-anxiety.
Accessed May 3, 2021.
3 Kate Dore. CNBC.
April 29, 2021. “Biden’s plan for inherited real estate may impact more people
than just the wealthy.” https://www.cnbc.com/2021/04/29/bidens-tax-plan-for-inherited-homes-may-impact-more-than-the-wealthy.html?recirc=taboolainternal.
Accessed May 3, 2021.
4 Aaron Lorenzo. Politico. April 13, 2021. “IRS chief says some $1T in taxes going uncollected annually.” https://www.politico.com/news/2021/04/13/irs-one-trillion-taxes-uncollected-annually-481128. Accessed May 3, 2021.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
Investment
Advisory Services are offered by Imber Financial Group, LLC., a Registered
Investment Adviser firm. Insurance services are offered through Imber Wealth
Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are
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