Between multiple stimulus bills and last year’s presidential election, there has been a lot of noise on who qualifies for the stimulus checks and who will be subject to potential tax increases that may ride along with the Biden administration.

We are finally beginning to see some clarity in this area and we see that many of these proposals include intricate details that could have significant a impact on your tax situation, and/or tax credits that you may be able to take advantage of.

From our research, we will share some of the most important components we are seeing and actions you can take to put yourself in the best financial position possible for your situation.

Stimulus Cliff

The recent stimulus package is of particular interest. The thresholds are around $150,000 of Adjusted Gross Income (AGI) and what’s different about the latest stimulus package is the phase out ranges are tighter. They are almost cliff-like, meaning items like Roth Conversions or even just a little bit of extra income could lose you a significant amount of money if you aren’t paying attention to those key phase out ranges.

A common mistake we are already noticing is that most people think these tax issues are only going to impact high net worth and high-income individuals. However, this stimulus issue affects even middle-class retirees that might have significant IRA distributions they are required to take, reasonable amounts of income they are earning, or even just that tiny bit of additional income, to lose potentially a few thousand dollars in stimulus checks.

After reviewing these issues our clients, we have already found multiple cases where they are right on the edge of the phaseouts. If you aren’t paying attention to what’s going on and the impact these changes can have on your financial situation, it could cost you significantly.

Tax Proposals

Almost no one we have every met wants to pay more in taxes, but many understand that taxes are likely going up given the level of debt our country is in.  We have started to dig into the recent releases and proposals that are floating out there to give you some of the key changes being considered.

Potential changes include the loss of the step-up basis which is a considerable issue to a lot of the higher net-worth clients who have highly appreciated property they were planning on passing to the next generation. There are also suggested reductions in the gift and estate tax thresholds, annual exclusion amounts being reduced, and the elimination of 1031 exchanges on real estate transactions

We are also watching a whole swath of other potential changes. Higher capital gains rates, higher payroll taxes and higher income tax rates across the board for those on the higher marginal rates structure.

While nothing is set in stone yet, it will be important to keep a close eye on the proposals so you can be proactive in your planning should changes need to be made. 

The Next Step

In previous blogs we have touched on the important of performing a stress test, scenario planning and taking a look at the entire picture. Most people think of their financial advisors as just focusing on the investment portfolio. What we often find has a larger impact on your financial situation is really digging into advanced planning.  This starts with looking at wealth enhancement which is all around mitigating taxes and improving cash flow.  Next, we focus on wealth transfer where we help ensure your heirs are taken care of.  Under wealth protection, we look at strategies to protect your assets from frivolous lawsuit.  Finally, we help you magnify your charitable intent.  All of these come into play with these tax proposals and navigating the stimulus packages.

If you have people in your lives that you care about that would benefit from our stress testing process to determine how these potential tax law changes might impact them and the strategies they can take to stary on track for their goals, please feel free to share this or make in introduction.

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