If you are filing with a household income that exceeds $400k or has a large net worth with intentions of leaving a legacy, we want to share some perspective on the taxes that could impact your returns. Below we will get into where and what to look for to plan to save money, without getting into any other components of the tax laws or the social and economic impact of such tax changes.
Taxes are often a controversial topic for people. Before your blood pressure gets too high, know that this plan has not been approved and is subject to change without appropriate Congressional support. Regardless of what side of the aisle you favor, when a new administration comes in, they try to make their tax mark. I have met people that are content with paying their fair share of taxes, those who contest, and those who say they are content but silently contest. My perspective on the topic of taxes is simple: We have to play the hand we are dealt, so let’s play it to win.
How do we win? Plan around it! Tax reporting is not tax planning. Typically, when you meet with your CPA for that April 15th deadline (this year, May 17th), you aren’t looking at the impact of those changes in the future. There is much more to tax planning than the immediate gratification of a current-year tax break.
Currently, if your income is between $400k and $418,850 your rate is 32%. If your income is between $418,851-$628,300, your rate is 35%. Above that, you are at a 37% tax rate. The proposed tax plan will consolidate these three brackets, putting any income over $400k at a tax rate of 39.6%. That’s a big jump!
Potentially, long-term capital gains will be taxed as income at the highest rate for income earners over $1M. If you make over $1M, tax-free instruments like municipal bonds, as well as long-term appreciable assets liken non-dividend stocks, could be a more appealing portion of your long-term investment strategy. If you make under $1M, think about the demand for these investments as an opportunity if you get in early on.
There are a few ways to prepare and plan for these changes:
If you have children currently, the more the merrier as far as tax credits go. Those tax credits will be tightening under the new plan.
Estate taxes could go up, lifetime exemptions can go down. Top rates could go up to 45% and limitations can be at $3.5 million. If you have a high net worth and you are looking to leave a legacy, now is the time to plan. We are advising clients with legacy wishes and high net worth to plan around these higher rates while they are here.
We may see some relief from the capped state and local tax deductions of $10,000. That means you won’t get double taxed on any dollars above the current SALT cap to the new SALT cap.
Everyone’s circumstances are different—this should not be construed as tax, legal or financial advice. Use this as an opportunity to speak with your financial team to see what works best for you and your family. If you do not have a financial team, or you have questions and need to talk through them, reach out to us at Green Ridge Wealth Planning to gain some perspective on how you turn the hand you have been dealt into a winning hand!
Contact us at firstname.lastname@example.org or text Bobby at 862-217-5344.