With the Democratic Party and its lawmakers winning major victories in races for both chambers of Congress, in addition to reclaiming the White House, sweeping changes are afoot in the nation’s capital — not to mention the U.S. at large. Many of those policy shifts have already been implemented only a few months removed from Inauguration Day. More are on the way, from growth in infrastructure spending to rejoining various international agreements.
Included among these changes are taxes and corresponding tax brackets. The amount that high-net-worth individuals and business owners pay to the government could change in the 2021 fiscal year and beyond.
Changes of any kind can bring a lot of uncertainty and apprehension, but this is especially true when they can affect you and your family financially.
As a high-net-worth individual and/or business-owning professional, do you have a plan in place to shore up your wealth-preserving defenses once the new tax proposals become law? Global Financial Distributors can provide you with the proper tools and advice so your savings aren’t taken out to sea.
$4 trillion tax revenue increase may be around the corner
According to analysis conducted by the Tax Policy Center and reported by The Wall Street Journal, the Biden administration intends to raise taxes by as much as $4 trillion over the next 10 years. Already, the highest income earners pay the vast majority of income taxes in the nation. But should President Biden’s proposed rules be approved by congressional lawmakers, they would pay even more than they do now. Indeed, the top 1% are expected to shoulder 74% of the new taxes levied. This would result in a net income drop by as much as 17% in 2021. In actual dollars, that’s the equivalent of $300,000.
Additionally, should Biden’s tax plan be installed without any adjustments, the tax brackets would also be adjusted. As the Journal reported from the Tax Policy Center’s findings, it would shift from the current 37% to a 39.6% tax rate for individuals who earn the most. What deductions — and amounts – that tax filers can claim may also be scaled back for those earning $400,000 per year or more. Those who earn less than this threshold, which accounts for 95% of the American public, according to the Tax Policy Center, are not expected to see their taxes climb. However, there has been speculation that this assurance may be specific to couples rather than to individuals.
Two-thirds would not be surprised by paying more income taxes
The fact that taxes are due to increase, at least among high-income earners, does not come as a surprise to people earning seven-figure annual salaries. Indeed, in a recent poll of 750 respondents — whose investable assets were greater than $1 million — slightly less than 66% said they anticipate spending more in taxes in the months and years ahead, CNBC reported from its Millionaire Survey. Around 43% of the same respondents said they felt like they paid beyond what could be considered their fair share, and 8% said their tax bill was too low.
Spectrum Group CEO George Walper told CNBC that high-income earners, for the most part, see the writing on the wall, given the amount of money that has been spent by the federal government in response to the coronavirus crisis and restoring the economy.
“I think the wealthy look at the spending for stimulus and the impacts of the virus and they recognize that some form of their taxes will increase for many years,” Walper explained. “They’re realistic.”
While it remains unclear to what degree taxes will rise for high-net-worth individuals — and when they will go into effect — most financial advisors, economists and political commentators acknowledge that it’s not a matter of if taxes rise, but when. In the meantime, here are a few basic strategies you can employ that help you reduce your tax burden or suppress the ongoing effects.
1. Do your research
You may be someone who prefers to hand over all your tax documents, invoices, receipts and W-2 forms to your accountant so they can handle the annual task. If you can, consider learning as much about your specific tax situation as you can. A great online resource that is very useful is the Tax Foundation. At the top of the page, you’ll find a wealth of resources that are relevant to income taxes, payroll taxes, estate and gift taxes, tax compliance, and tax brackets. As previously noted, as a high-net-worth individual, your tax rate is presently 37%, which is applicable to single individuals who make $523,601 per year or more. For married couples or those filing a joint return, the top tax bracket is $628,301.
Do you have questions about how capital gains and losses are treated? The Tax Foundation has some excellent insight on this tax topic as well.
2. Look for ‘diamonds in the rough’
Although high-income earners are anticipated to see most changes in how they’re taxed, reports suggest that the Biden administration seeks to repeal the cap on certain state and local tax deductions, The Wall Street Journal reported separately. If this became a reality, high-income earners would stand to benefit.
It’s also possible the White House may decide to trim the 39.6% tax rate to something closer to what it is now, since these proposals occurred before the recession triggered by government lockdown measures.
In other words, a lot remains up in the air so it’s important to work in tandem with your tax and wealth professional so you can adjust accordingly and leverage the tax solutions as they’re announced.
3. Take advantage of the delayed filing deadline
Taxes are traditionally due in mid-April, but after a considerable amount of speculation about pushing the date back, the IRS made it official on St. Patrick’s Day. Now, the federal income tax filing deadline won’t be until May 17.
While the taxes filed are of course for 2020, the added time will give you more of an opportunity to meet with your wealth adviser and map out a plan for actions you can take now that may affect how you approach 2021 and beyond.
From setting up a trust to other estate and wealth planning strategies, Global Financial Distributors can help you shore up your defenses when the tax tide rolls in. Contact us today to learn more.