The IRS has given everyone an extra month to file this year, which is helpful in dealing with the tax changes from the CARES Act. However, with another stimulus law in the rearview and infrastructure legislation already humming along, tax code changes – and by changes we mean “increases” for many of us – will likely be next.
As you sort through the extended tax season this year, give some thought to preparing for the potential of higher taxes going forward.
Contribution Deadlines Are Extended as Well
The IRS has pushed the deadline to file 2020 taxes to May 17, 2021. This also extends the deadline to contribute to an IRA, an Education Savings Account and a Health Savings Account.
Capital Gains Are Likely to Increase; Income Is the Name of the Game
The original Biden tax plan called for an increase in the capital gains tax from 20% currently to as much as 39.6% for high earners. The difference comes from treating capital gains as ordinary income. Income producing investments do not suffer as much because they are already taxed as income and the top income tax rate would only move to 39.6% from 37%. When after tax returns are factored into the asset allocation decision, you may discover that shift some of your portfolio into income producing assets makes sense. This move doesn’t need to be a shift entirely comprising bonds, which have been suffering from low yields. There’s a whole spectrum of credit alternatives that can provide higher levels of income.
Trusts Can Shield Assets While You Retain Income
Setting up a trust has upfront costs, but they are an incredibly flexible financial tool. With estate taxes also proposed to increase – to as much as 45% -- they can be enormously effective at removing assets from your estate while you are living, while still allowing you to enjoy the benefits. A good trust structure also leaves you more to pass on, and depending on the structure you choose, it can be a great way to put your vision for charitable giving into action.
The Bottom Line
Things are changing quickly – stimulus, infrastructure, markets, and even how we live our lives all seem to be shifting. A solid financial plan that covers your investments, your taxes, and your future plans can keep everything on track as we get through this unprecedented period.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA