HikeMay 5, 2021 -
Categorized in: IAG News
Every hike begins with a plan. Pick an idyllic location and gauge how far you or your family can walk. Be prepared with water, nutrition, and any defenses you may need against nature (sun block, insect repellent, or bear spray).
Yet, no matter how much you plan and prepare, unexpected twists and turn can throw you off course.
Last week the Biden Administration laid out its plans for a hike. While we do not know whether the tax hikes below will unfold as planned, we can certainly sense the direction they are heading:
- Increase the top federal income tax rate from 37% to 39.6%
- Increase the corporate tax rate from 21% to 28%
- Increase capital gains taxes from 20% to as much as 39.6%
- Begin charging capital gains taxes on inherited assets when they are sold
- Expand the types of income subject to the 3.8% Medicare surcharge tax
- Provide $80 billion to the IRS for additional enforcement
These proposals are specifically targeted at individuals and families with higher levels of taxable income, but will also impact lower income investors, business owners, and heirs.
However, there are numerous variables that could alter the course of these hikes.
First, more progressive lawmakers are dissatisfied that these tax increases are insufficient and wish to raise additional revenue for additional federal programs.
Second, lawmakers from states with higher state income taxes are pushing hard to include a provision that repeals the cap on deductibility of state and local taxes (currently at $10,000). This could offset some of the intended tax hikes.
Third, with a very narrow majority in the U.S. House of Representatives and the U.S. Senate, the Administration will need to satisfy both the party’s moderate and socialist lawmakers to ensure passage. That is a very narrow pathway.
Finally, if these hikes should pass it is unclear when they would take effect. In the past, Congress has made some tax hikes retroactive to the beginning of a calendar year. Others take effect on the date the bill was introduced or signed into law. Most hikes take effect at the beginning of the next calendar so people can plan ahead.
We will continue to closely monitor these developments and adjust your financial planning strategies as the final destination for these hikes becomes clearer.
Quote of the week: Morgan Housel: “If enough people believe something’s true it’s just as powerful as actually being true.”
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