Displaying items by tag: taxes

(Washington)

This is one of the most uncertain times in recent history, and not just because of political divisiveness and the pandemic, but because many of the new administration’s policies are likely to be very different than the Trump administration’s. That extends to taxes, where there is a high degree of anxiety about forthcoming changes, most of which high earners expect to be punitive. Because there is a wide range of possible outcomes, advisors need to work hard to plan for what different scenarios might look like. Accordingly, now is the right time to beef up on tax planning staff, or at the least review your tax planning playbook and keep a close eye on the news.

FINSUM: In a year, when new tax policies are known, you want to be able to tell clients “don’t worry” we have been planning for this and you will be fine. The work to get there needs to start now.

(New York)

Annuities are a widely available and popular product, and they are heavily utilized by retirees whose main focus is income. Therefore, it would make sense that tax planning around that income would be more of a major consideration—especially because annuities have some peculiarities as it regards taxation—but in general it does not seem to be an explicit topic. One of the first things to remember is the difference between qualified and nonqualified annuities—the former being in retirement plans, the latter not. Both require mandatory withdrawals after age 72. It is critical to remember that only interest, not principal is taxable when withdrawing money from a nonqualified plan. This is a big danger zone that some retirees fall into. Two other important notes: annuity interest used to fund long-term care insurance can be used tax free; and spouses can assume ownership of an annuity in the event of the death of their spouse tax-free.

FINSUM: For advisors who readily deal in annuities, this info will be second nature. However, there are a lot of advisors who are just starting to get into annuities and this info will be quite useful.

(New York)

Any way you slice it, 2021 seems like it will be a good year for munis, and not because the financial condition of municipalities is so great (it isn’t!). One of the main reasons why is the incoming administration and Congress. Between Biden’s stimulus plans and the now Democrat-controlled Senate, the odds for large amounts of local and state financial support from the federal government are quite high. This part of equation is well understood, but there is a second aspect of the Democrats’ plans that will also be beneficial to munis: they plan to raise taxes on the wealthy. Higher taxes on the wealthy would directly increase demand for munis bonds, which means they should have a tailwind this year.

FINSUM: The part about increased taxes and how it drives muni demand has not been discussed enough. We think this is an excellent angle and combined with financial stimulus, should set up a couple years of smooth sailing.

(San Francisco)

The wealth management market is already in shock from Democrats’ tax proposal—think top tax rates of over 65% for high tax states. Remember that a large majority of states charge taxes on residents, including big ones like New York and California, where large numbers of America’s wealthy reside. Now, California, the largest and one of the most influential states in the union, has just put out a proposal for taxing wealth, not income. The plan comes from the state’s legislator. Here are the basics of the plan: “The state would apply a 0.4% rate to all net worth above $30 million for single or joint filers. The tax would apply on wealth above $15 million per spouse for married taxpayers who file separately. Net worth would include all assets and liabilities held globally by a taxpayer”, according to Barron’s.

FINSUM: Two eye-opening things here. Firstly, Democrats have a veto-proof supermajority in the state legislature, so passing this will be much easier than elsewhere. Secondly, how much will this influence other states? It was easy to see how left-leaning states influenced others as it regarded state-level fiduciary rules.

(Washington)

Advisors need to start thinking about what the post-election tax landscape might look like for clients, especially high earners. The proposed Biden/Democratic tax package is even more stringent than many think, as when you diver deeper it becomes clear that the increases are quite extensive. One core element that is less understood is Biden’s Social Security Payroll tax of 12.4%, which applies to all income with no cap (all income between $137,000 and $400,000 would be taxed at the same level). Combining that with a raised federal tax rate of 39.6%, and state taxes means that some residents of high tax states could see punitive-levels. For example, in California, which has a 13.3% top tax rate, the total tax burden for high earners would be over 65%! Even in states without state taxes, income taxes could be 52%. Furthermore, Biden intends to eliminate capital gains tax rates for those who earn more than $1m, effectively doubling the capital gains tax rate.

FINSUM: There is good news and bad news here. The bad news is obvious. The good news is that because of the state of the economy and the need for fiscal stimulus, Democrats are unlikely to pass these measure until we re-reach full employment, which could be years.