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Proposed Bill Would Change Tax Rates
on Income, Capital Gains
BY STEVE DINNEN
Generally at this time of year, we write about income taxes and how you might plan for them. And generally we have something current to discuss. Well, that is not much of the case – for now. But it will be soon, if tax law changes that are lurking in President Joe Biden’s education and family support bill known as the American Families Plan come to fruition.
How about a top marginal federal income tax rate of 39.6%? The current top rate is 37%, for single filers with taxable incomes exceeding $523,600, and above $628,300 for married filing jointly. A potentially larger shift could occur with long-term capital gains, where the top rate now is 20% of any such earnings. Under this bill, which currently is in Congress, gains would be taxed at the ordinary income level – that 39.6% rate – for filers with adjusted gross income of $1 million and up.
That’s a huge change. But why? Well, it boils down to who’s paying their fair share of taxes, said Kent Kramer (pictured), chief investment officer at west Des Moines-based financial and money planner Foster Group.
“The wealthiest people don’t realize their income as ordinary income, but from long-term capital gains,” said Kramer, and there is a disparity of tax rates between the two. For instance, a wage earner with $1 million of pay would owe federal taxes of $298,000 – a blended tax rate of 29.8%. But someone with long-term capital gains of $1 million would pay just $158,210.
Chances of this becoming law are unknown. But Kramer said people who can realize long-term capital gains now may want to consider doing so before the end of 2021. It’s certainly not likely that rates will be any better in 2022. But selling before year-end put downward pressure on the stock market.
Zach Dalluge, a senior adviser with Foster Group, also noted a proposal to tax unrealized gains – yes, unrealized gains – upon death of the owner of that asset. The first $1 million of gains would be safe, but beyond that is fair game and it’s an immediate tax. There are exemptions for a small business or family-owned farm as long as it stays within the family.
There also are plans to eliminate various loopholes related to carried interest, real estate transactions and business losses. All in all, these proposals would raise around $1 trillion over the next 10 years.
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Understanding Net Investment Income Tax
BY STEVE DINNEN
The highest federal income tax bracket currently is 37%.* If President Joe Biden gets his way, it will rise, this year or next, to 39.6%.* About those asterisks. They signify NIIT – net investment income tax – which is government-speak for a 3.8% surcharge levied against the wealthiest Americans. They came on board in 2012 as a result of Public Law 111-148, aka Patient Protection and Affordable Care Act, aka Obamacare.
Somebody’s gotta pay for this stuff, so Congress slapped this 3.8% extra levy upon income derived from investments such as capital gains, dividends, rents, royalties and annuities. It ensnares both the rich and the striving to be there, kicking in at $200,000 for single filers, and $250,000 for joint returns. It isn’t indexed for inflation.
There are few ways to avoid NIIT, unless you care to just invest less. But you can buy tax-free municipal bonds, or take the conversion tax hit and switch dollars to Roth accounts. Or get into rental real estate where income is offset by depreciation deductions.
The upshot of this is that the true top tax rate now is 40.8%, and perhaps will rise to 43.4%. Too high? Well, it was 94% in 1944, during WW II. And it was 67% in 1917 (11 times the top rate of just four years earlier, when modern income taxes were introduced), as we fought WW I. War is expensive.
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Companies must pivot their brand image and message to find differentiation against their competitors.
... Read more »
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What Should You Consider When Gifting to Children?
BY EMMA KERR for YAHOO FINANCE
Most parents with the ability to give money to their adult children plan to do just that. But it's not only the tax implications of gifting that parents must consider before writing a check or creating a trust.
The timing, amount and method of gifting to adult children can have long-term effects on a family's dynamic and an adult child's future. While gifting is a generous gesture, it can also spell disaster for parents' own finances and retirement plans if not thoughtfully considered. Adding to the complexity of lifetime gifting and inheritance planning are ever-changing tax and estate laws that could turn even the best of plans into costly burdens for parents and children alike.
In 2021, parents can each take advantage of their annual gift tax exclusion of $15,000 per year, per child. In a family of two parents and two children, this means the parents could together give each child $30,000 for a total of $60,000 in 2021 without filing a gift tax return. If the same family were to give beyond this exclusion amount, the parents would need to file a gift tax return and use a portion of their lifetime gift tax exemption, which currently sits at $11.7 million and is subject to change. READ MORE.
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Tips on Teaching Your Gen Z Kids About Money
BY EMERI MONTGOMERY FOR YAHOO FINANCE
There’s not much you can teach Generation Z that they can’t find out themselves. They are digital natives, after all — with YouTube, TikTok, Instagram and more, there’s an answer around every corner. However, who is giving the advice could mean the difference between teaching your child to fish and them being catfished by a fake financial pro online.
To help navigate these waters, GOBankingRates put together the top 10 things Gen Z should know about money.
1. Learn the value of money and how to manage it. Preteens and teens should be learning the value of money, how to save and the importance of money. “I believe learning how to manage money is just as important as learning to read and write,” said Holly Reid, an award-winning author, speaker and financial educator dedicated to coaching school-aged kids and their parents on their journey to creating a financial legacy. “Money management will serve your children well if mastered, or it can work against them if the money lessons are omitted or dismissed.” READ MORE.
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