Chasing Yield, Biden Tax Plan & Social Security
The Chinese developer Evergrande has been in the news, the fear is they are over-leveraged and will soon miss interest payments to investors. This caused a big sell-off in the stock market on Monday and spooked some investors to the sidelines. As I write, the markets have recovered from the one-day sell-off. Investors who invested in over-leveraged products to earn a higher yield are now worried about the return of their principal ouch! The current risk-free return is close to .4% and with 2 plus % inflation the real rate return after inflation is negative -1.5% to -2% on cash, but you still have all your principal to spend yeah! We hear a lot where I can go for yield. Our recommendation has always been to build a spending plan (put those funds in the pantry savings accounts, savings bonds, A-rated bonds), own your house with a 30-year fixed mortgage (hedge against higher interest rates), and build a low-cost diversified stock portfolio (crops in the field). Most investors have done very well with this approach over the last 2 years balancing the negative interest rates with oversized equity returns. Everyone’s situation is unique, and we are constantly making changes so you can enjoy the ride. Legg Mason analyst Raymond DeVoe said it best: “More money has been lost reaching for yield than at the point of a gun.” And as our own Sean Lane likes to say, “Let’s bubble wrap the cash so you can spend your hard-earned savings.”
Biden tax plan – highlights from webinar “The Washington Update” from Andy Friedman
The immediate take away Andy thinks it won’t be 3.5 trillion but be closer to 1.2 & 1.5 trillion still a huge number. President Biden is sticking to his pledge those making less than $400,000 will not see a tax increase. The plan would take effect January 2022 and not be retroactive to 2021.
- Tax rates – top rate moved from 37% to 39.6%
———–a. Over 5 million income 3% excise tax on the amount over
———–b. Major marriage penalty
———————————-i. $400,000 for Single
———————————-ii.$450,000 for Married (War on working couples)
- Capital gains will move from 20% to 25% – not the 39.6% the president wanted on incomes -over $400K (COULD be retroactive to 9/13/2021)
- Phase-out of section 199A 20% business income deduction for incomes over $400K
- Another big hit to small businesses 3.8% Medicare surcharge on Sub Chapter S Income
- Roth conversions and back door Roth’s
————a. For Roth conversions income must be below $400,000
————b. Eliminating back door Roth’s
- The favorable treatment for carried interest will be pared back to require 5 year holding period for long term capital gains
- Legislation will go after “BIG” IRAs value cannot exceed $10 Million amount over must come out & taxed right away. And they just wanted to be funny, if the IRA is over $20 million then 100% is tax immediately – WOW some tax hit in one year with the state tax close to 60%
- Also, for IRA’s only allowed to hold SEC registered investments
- Estate taxes
————a. Looking for a reduction in the exemption from $11.7 Million to $5 Million
————b. Step up in basis will be preserved
- Corporate tax rate will move from 21% to 25%
- Corporations with overseas net income will have to pay 16.5% on those earnings
- No repeal on 1031 exchanges
- To get votes might increase the SALT deduction from $10,000 – for high tax states CT, MA, MD, NJ, NY, CA
We are staying on top of all the changes above. We constantly monitor your unique tax situation and will make changes to stay one step ahead of Uncle Joe.
Social Security Trust Fund In The News
Social Security Trust fund is set to run dry in 2034, one year earlier than last year when it was expected to run out in 2035. We can thank the pandemic. Given the current situation in Washington, DC expect this issue to be pushed out a few years. Potential ways the solve the problem, increase the tax base on income on which Social Security is taxed (Yes, another tax increase on both employers and employees, a double whammy for self-employed) Move the age you can claim benefits from 62 to 65, full retirement age from 67 to 70 & full benefits at age 73. If your income is over a certain amount, you would receive no Social Security. Of course, this would be subject to a phase-in – NO current Democrat or Republican will touch this with a 10-foot pole. It will be a mad scramble as we get closer to 2034.
The number one way younger people can protect themselves is to take full advantage of retirement plans and save, save. If you’re a boomer & see a working millennial or Gen Z, give them a hug. Gen Alpha good luck you’re on your own!