There has been much speculation about the possibility of higher taxes on the horizon to pay for the recent stimulus and potential infrastructure bill. President Biden has released a $1.8 trillion American Families Plan (AFP), and a bill has been introduced into Congress titled “For the 99.5% Act.”

Biden’s plan and the proposed Congressional act are far from becoming law. There appears to be very little consensus within Congress about AFP, and if it were to become law, there would be extensive negotiations; the final bill may look drastically different and potentially watered down from the current proposal. We are staying apprised of the tax negotiations so we can be proactive rather than reactive if changes occur. We will be ready to help you.

We do not believe there is extensive planning to be done today in response to the potential bill, but we do want to share some of the potential tax changes that are being discussed. It is likely that taxpayers will have time to implement strategies if they become law. 

1. Taxpayers making less than $400,000 per year probably will not see an increase in their taxes. Most of the proposed increases appear to target higher-income households. Many middle- to low-income households may see their tax bills decrease. 

2. Under the AFP, taxpayers making more than $400,000 could see their marginal rate increase from 32% (married filing jointly) and 35% (single) to 39.6%. For those who itemize, there may be opportunities to increase charitable deductions and reduce tax liability.

3. Capital gains over $1 million also may be taxed at the 39.6% marginal tax bracket; the proposal creates a fourth capital gains tax bracket. The remaining capital gains rates of 0%, 15% and 20% would still exist. 

4. The step up in basis on inherited assets could be removed for estates with gains over $1 million ($2.5 million for married couples). This would not apply to family businesses or farms. If passed, this change would impact estate planning and gifting strategies. 

5. Notably absent from the AFP is a provision to lower the estate tax exemption from the current $11.7 million per person ($23.4 million for a married couple). At death, this amount can pass free of federal estate taxes. However, the proposed “For the 99.5% Act” would reduce the federal exemption from $11.7 million to $3.5 million per person. At this point, the current exemption will sunset back to the previous limit of $5.49 million (inflation adjusted) in 2025. 

So, what can we learn from all this?  It is important to remember that the American Families Plan is only a proposal and the “For the 99.5% Act” is not a law. Changes can and will occur, and there is no guarantee that these proposals will become law. As of today, we believe a wait-and-see approach is the best path forward until we have further clarity. However, concern about changes in estate tax law is a good reason to consult with estate attorneys. We will be ready and proactive if tax law changes occur.

From an investment portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, not making investment decisions based on where we have been. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value. 

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Source: Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with CD Wealth Management. Investor Disclosures: https://bit.ly/KF-Disclosures