Are you aware of the latest news that could affect your money? We recently heard from Federal Reserve Chairman Powell regarding interest rates, plus the Biden administration released a “Green Book” outlining some potential tax-increasing measures. There are several big changes proposed, and if they come to fruition, you may need to review your tax minimization strategy.
The Latest from the Federal Reserve
Powell indicated the possibility of interest rate increases in 2023. The Fed’s projections point to two rate hikes in 2023, but Powell says that’s far from certain. He pointed out that we’re still “far from maximum employment,” and the Fed hasn’t made a decision regarding its asset purchasing program. The Dow dropped about 1% on the day of Powell’s comments.1 Whether it’s interest rates, market volatility, or rising costs in retirement, it’s important to have a financial plan in place to weather storms and help protect what you’ve earned.
How Could the Rules Change?
The “Green Book” includes several potential tax-increasing measures for certain individuals: The top marginal income tax rate would go from 37% to 39.6%, and the long-term capital gains rate of 20% for those making over $1 million would disappear. This means that capital gains would instead be taxed at 39.6%, plus the additional 3.8% Obamacare tax. This effective doubling of the tax rate would retroactively kick in at the date Biden first announced it on April 28th, 2021.2
Why Could Your Estate Plan Be Affected?
Individuals could see up to a 61% tax increase under President Biden’s proposed plan to tax inherited unrealized capital gains – meaning repeal the step-up in basis rule. For example, if someone originally bought a house for $250,000 that is now worth $2.5 million, the house would be subject to the new capital gains tax on $1 million. ($2.25 million appreciation minus the $1.25 million not subject to the new tax rate).3 If someone started a business decades ago that’s now worth $100 million, his or her beneficiaries would immediately owe a capital gains tax of almost $43 million upon death instead of the business being exempt from capital gains because of the step-up in basis. Estate tax would then be added on top of the capital gains tax.
When combined, these tax increases would be the highest in almost a century according to the Tax Policy Research group. If we’re entering an era of higher taxes, persistently low interest rates, and increased market volatility, you may need to be prepared. We can help you create a comprehensive retirement plan that takes potential risks into account, and is tailored to your unique needs. Call our office at (435)773-9444 to schedule your complimentary financial review to get started.
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