Tax Strategies

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.1

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

Content prepared by Kara Stefan Communications.

1 Kate Duffy. Business Insider. April 29, 2021. “Biden’s tax hike will hit married couples earning more than $510,000 combined, report says.” Accessed May 3, 2021.

2 Steven A. Morelli. Insurance News Net. April 9, 2021. “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.” Accessed May 3, 2021.

4 Aaron Lorenzo. Politico. April 13, 2021. “IRS chief says some $1T in taxes going uncollected annually.” Accessed May 3, 2021.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

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.


Content obtained through a PR firm.