A new Presidential administration often means tax overhaul. The 2017 Tax Cuts and Jobs Act (TCJA) reduced ordinary income tax rates, increased the standard deduction, and raised the federal estate tax exemption, among other changes.

Now investors wait anxiously as the new administration is poised to reverse course. To pay for substantial new spending, the President has released the “American Families Plan” – a comprehensive proposal with significant changes. We caution against taking predictive or preemptive actions, because no one knows for certain what will emerge. But it is prudent to plan for what may be the largest tax increase in recent history and perhaps accelerate existing plans.

The proposal would tax long-term capital gains and dividends at ordinary income rates for those with taxable income over $1 million. It would also do away with the “stepped-up” cost basis at death for unrealized gains above $1 million. Both provisions could ensnare not only America’s wealthiest taxpayers, but even middle class.

Many long-term residents in booming real estate markets carry large unrealized capital gains on their homes. A sale before death could push these investors over the proposed $1 million threshold, but heirs and estates may incur a significant tax bill if instead the home is held until death. A recent study found that roughly 350,000 filers age 70 or older might surpass this $1 million threshold if current assets are held until death.

Current capital gains rates are at historic lows. Investors with existing plans to sell appreciated assets in coming months should consider executing such sales by year-end. Unless these changes are made retroactive to January 1, this could “hedge” against any tax changes that could become effective 2022.

Several tax saving devices are likely to survive. Estate planning techniques, such as irrevocable trusts and annual gifting, can reduce one’s taxable estate at death. High earners may also utilize tax-exempt municipal bonds and/or take advantage of the charitable income tax deduction. All wage earners can optimize their use of tax-advantaged accounts such as 401(k)s, IRAs, and HSAs.

To paraphrase Jurassic Park, “markets find a way”. As economist Thomas Sowell has made clear, efforts to boost government revenue via higher tax rates often fail, because taxpayers invariably change their behavior to optimize their after-tax expected returns.

Also In This Issue

New Funds Added To Back Page
Breaking Down The New DFA Funds
Retirement Planning And Home Ownership: An Overview
Minimizing Capital Gains Tax On Sale Of A Home
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles