Jim Neidelman:
Now for this latest installment of 4 You Money, we’re joined by James Nelson, financial advisor with NelsonCorp Wealth Management. Always good to see you, James.
James Nelson:
Thanks, Jim. Thanks for having me.
Jim Neidelman:
Absolutely. Let’s get to it. We saw a tax proposal from President Biden recently that has the goal of helping pay for some of the increased spending the government incurred. What are the highlights there?
James Nelson:
Yeah, so it’s important to point out that these are just proposals at this point, but it looks like there’s a strong likelihood that some of these changes will come to fruition. The first one being a lot of these new proposals are turning in folks that are over $400,000 in income. For most people, these changes aren’t going to really apply. But for those over $400,000, there’s a pretty significant difference. The first one has to do with capital gain rates. Capital gain rates have always been more favorable than ordinary income rates, especially for those higher earners.
James Nelson:
And right now, if you take the Medicare surtax along with capital gain rates, we’re right at about 23.8% for the current capital gain rates. That could almost double and go to 43.4% if this proposal goes through. That’s only on folks at the highest level. That’s the million dollar threshold. For earners over a $1 million, that capital gain rate basically turns into ordinary income. So no favorable treatment if you’re making a $1 million or more. Those capital gain rates are going to be like making that as far as ordinary income.
James Nelson:
And then the other big one is the step-up in basis where someone can pass away with a taxable asset, and basically that gain and tax liability just vanishes. That’s been talked about and very well could go away all together. For farmers and for people that have had assets that have appreciated significantly through their lifetime, beneficiaries aren’t going to be able to just turn around and sell them and pay no tax. There could be a pretty big tax bill attached to some of those assets.
Jim Neidelman:
Is there a specific area you think investors should be paying particular attention to?
James Nelson:
Yeah, I think capital gains. And I think we’ve got a chart here that illustrates where things are at. Since World War II, we can see back to the historical rates have ranged somewhere between 15 and 35% for capital gain rates, for an average of about 20, 25%, which has been more favorable than ordinary income rates. This proposal again here, looking at the graph would bring that up to 43.4% for those highest income earners. That could be a dramatic change and significantly more tax on some of those appreciated assets for the highest earners. For investors, I think that’s something to really focus on and maybe prepare ahead of time.
Jim Neidelman:
These are based on certainly income levels, as you indicated. What options do investors have to prepare for the potential of higher taxes?
James Nelson:
Yeah, so I think the biggest thing is investors just need to know what they own and the vehicles in which they own. We’ve got a difference between ETFs and mutual funds. Mutual funds are kind of the old version. Maybe not as tax efficient. They distribute capital gains on an annual basis and not as efficient for the investor. ETFs have really changed that world and have become much, much more efficient as far as the tax rate.
James Nelson:
For clients and for viewers, it’s just important to know what you own, and maybe take a look at some of those ETFs and transitioning into some of those positions where the client or the investor has control over their tax situations versus those mutual funds that are just going to be distributed in those gains regardless.
Jim Neidelman:
James Nelson, NelsonCorp Wealth Management. Great advice as always. Thank you.
James Nelson:
Thanks, Jim. Good to see you.
Jim Neidelman:
Absolutely. If you miss any of this conversation, we’ll have it available for you on ourquadcities.com.