If you feel like you have spent more time than usual over the past few years hearing about and implementing changes to U.S. tax policy for your family or company, you are not alone. Over the last six years, we have seen four major tax updates, with another on the horizon. Even dependable dates like IRA contribution and tax filing deadlines have been adjusted over the past two years due to COVID and natural disasters.
At BFS Advisory Group, we know the impact taxes can have on your financial success, from cash flow to how much you can save and invest. This focus on tax strategy is one of the reasons that Sergio Garcia joined our firm last year. As both a CFP and an Enrolled Agent, he focuses on educating our clients and the public on the connection between tax policy and investment behavior.
We also recognize that understanding the tax code allows our clients — especially business owners — to define strategies to manage their tax load more efficiently. The following is the first in a series of articles designed to help you make smart decisions about your taxes.
What matters now
In 2015, the Protecting Americans from Tax Hikes (PATH) Act passed thanks to a bipartisan effort. The 2015 tax legislation was designed to set additional protections for taxpayers, raise local economies and help working American families by permanently extending expiring tax provisions. Most notably, it extended the lower earnings thresholds for the additional child tax credit and earned income tax credit. The PATH Act also provided more certainty around tax planning by permanently allowing seniors over 70½ to direct IRA distributions to charity on a tax-free basis.
The Act’s lasting impact is to tax filers claiming either the child tax credit or earned income tax credit with an expectation of a refund. However, those filers will not receive refunds prior to February 15th, regardless of how early they filed.
Passed in the first year of Trump’s presidency, the Tax Cuts and Jobs Act (TCJA) intended to reduce taxes on middle-income taxpayers, spur economic growth and simplify filings for most taxpayers. The TCJA introduced lower tax rates for a majority of taxpayers and significantly increased the standard deduction, reducing the number of filers who itemize their deductible expenses. By increasing the standard deduction, TCJA repealed the personal exemption and limited the itemized deduction for state and local taxes (SALT) to $10,000 per year.
The TCJA also eliminated the individual mandate penalty under the Affordable Care Act, reduced corporate taxes from 35% to 21% and increased the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers.
The SECURE Act of 2019 was designed to make it easier for Americans to save for retirement. Measures encourage small businesses to set up “safe harbor” retirement plans by lowering expenses to stimulate retirement saving and making part-time workers eligible for tax savings on retirement accounts. The changes also deliver additional income tax and estate tax planning opportunities and give taxpayers more time for tax-deferred growth in their retirement accounts by increasing the starting age of required minimum distributions (RMDs) from 70½ to 72 years. And SECURE changed the game for intergenerational and legacy planning when it eliminated the distribution rules for the provision known as the “Stretch IRA,” which allowed beneficiaries to withdraw IRA funds over their lifetime. Now most non-spouse beneficiaries only have a ten year window to withdraw all of the funds.
Currently under consideration, a second bill, dubbed SECURE Act 2.0, goes even further to encourage retirement saving. The proposed legislation delays the RMD start age to age 75. Employers would be allowed to auto-enroll their employees in their sponsored retirement plan, and catch-up contribution limits would increase for employees 50 and older. The proposal would permit SIMPLE and SEP IRAs to allow ROTH contributions, which neither do currently. The bill has strong bipartisan support and could pass in 2022.
To provide immediate relief to Americans and guard against a slowing economy during the pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020 with a $2T stimulus bill. It provided a tax rebate of up to $1,200 for individuals, plus an additional $500 per child. The Act also expanded the ability for taxpayers to borrow from their retirement plans and allowed people to take special disbursements and loans of up to $100,000 from tax-advantaged retirement funds without facing a tax penalty.
The Act’s Employee Retention Credit was intended to encourage employers to retain and pay employees during any quarter when businesses partially or fully suspended operations due to the coronavirus.
The proposed Biden Tax Plan is an effort to pay for economic and infrastructure changes by increasing taxes on high-income individuals, corporations and those with non-IRA assets that have gained value (for example, a tech executive with lots of shares of highly appreciated stock).
The Biden tax policy plan proposes a change to ordinary taxes, increasing the top individual federal income tax rate from 37% to 39.6%. The capital gains tax rate for taxpayers with income over $1 million would increase to 43.4%. Taxpayers in states with higher income taxes would also benefit from an elimination of the SALT limitation.
For corporations, tax rates would move up from 21% to 28%, and foreign income would be subject to a tax of 21%.
The path from a proposed tax plan to changes in the tax code is messy at best, but we believe that if Biden’s tax policy does see the light of day, it will happen by the end of the first quarter of 2022 — well before mid-term elections.
Whether Biden is successful or any other changes are made to U.S. tax policy, we are committed to keeping our clients informed. Over the next few months, Sergio and I will continue to bring you ideas about where tax policy and investment behavior intersect, and how these changes apply to your financial plan. For questions, suggestions, or a discussion about how your taxes are affecting your financial plan, send us a note at firstname.lastname@example.org.
Debra Brennan Tagg and Sergio Garcia are CERTIFIED FINANCIAL PLANNER™ Professionals at BFS Advisory Group. They use their proprietary program, DBT360 Financial Plan, to help their clients prioritize their goals, leverage their resources, and address their risks. The planners at BFS Advisory Group teach the public and the financial services industry about the importance of values-based financial planning and investor education.