President Biden released a proposal this week that would raise the top capital gains rate for millionaire investors. This doesn’t come as a big surprise, as a promise to make sure the wealthiest Americans pay “their fair share” is a key principle of the Biden administration’s tax policy agenda.
Steve Boms, President and Founder of Washington, D.C.-based consulting firm Allon Advocacy, LLC, highlighted this exact theme to our audience while discussing the White House’s tax “wish list” in great detail during our recent webinar, “The Biden Administration’s Tax Plan and Its Impact on Financial Plans.” He broke his analysis down into two sections: What the White House wants versus what the White House will likely be able to make happen against the backdrop of an incredibly tight margin on Capitol Hill.
The Biden White House’s Wish List
First, here are the five top tax agenda priorities of the Biden administration to keep in mind when discussing the current tax policy outlook with clients, according to Steve:
- Principle No. 1: The wealthy must pay their “fair share.”
- Principle No. 2: Cut taxes for working Americans.
- Principle No. 3: Enhance healthcare access through the tax code.
- Principle No. 4: Focus on small businesses.
- Principle No. 5: Address climate change through the tax code.
But, you may also want to remind clients that, given the narrowly divided Congress and the current federal debt nightmare, we shouldn’t expect to see major changes to tax policy or expansions to entitlement programs. Steve says if we are to see any such major changes, they will have to “ride” on must-pass legislation (such as Biden’s expected American Families Plan).
Note: Biden has said that working households making less than $400k will not be impacted by the tax changes, so many clients will feel little-to-no impact from the proposed changes.
Potential Impacts To A Client’s Financial Plan
Of course, when you are working with clients on 40- and 50-year plans, it’s no secret that things are going to change. Last year we had a presidential election; and we could have another 10 or more before the end of your client’s life. Over time, things are going to change from a tax perspective, that is something we know for sure.
How should this impact the conversations you’re currently having with clients around their financial plans? At Envestnet | MoneyGuide, our philosophy has always been to go with what we know today. And our users know that as these things change in reality, our software remains ahead of the ball with continuous system updates.
Here are some recent examples:
- Tax Cuts and Jobs Act of 2017 (TCJA): MoneyGuide reduced tax rates and increased deduction estimates, leaving advisors the option of sunsetting. We made these updates prior to the bill’s official enactment, i.e., once it was approved and passed. Even if incoming legislation is not going into effect immediately, it’s important that the pending changes are in our system to ensure the accuracy of future projections. With the impending sunsetting of the TCJA, many advisors have already been discussing income acceleration with their clients to realize earnings before 2026.
- Secure Act (2019): MoneyGuide increased the RMD age to 72 and changed how inherited IRA distributions would be handled, adding follow-up questions on how clients would take it – whether annually over 10 years or as a lump sum.
- Cares Act (2020): We added the ability to show a client not taking their RMD for the 2020 tax year.
- Annual Updates to Rates/Limits (Ongoing): Each year we update federal income tax brackets, contribution limits, and deduction estimates to current values.
Making Changes To Future Tax Assumptions
If you’d like to anticipate a change in future taxes within a specific client’s financial plan in MoneyGuide, there are options for manual entry that enable you to easily do so. During these types of discussions, here are some strategies that a client may want to consider:
- Roth conversion strategies
- Harvesting capital gains
- Exercising/selling stock options
- Electing out of installment sales
MoneyGuide’s software allows you the flexibility to model these and more types of scenarios based on your individual clients. Within the Taxes and Inflation section, by selecting the “Use my estimate” option, you can manually enter your own figures and estimates. You and your clients can see a breakdown with charts and illustrations that can highlight opportunities to take advantage of potential tax policy changes.
For example, you can compare end-of-plan tax results – showing potential outcomes according to taxes with strategies versus taxes without strategies. This allows you to see potential total lifetime tax savings. Taking it a step further, you can also see what impact that may have on end-of-plan asset values.
For illustrative purposes only. Not based on actual client data.
Whatever policies are being discussed in Washington, D.C., remember MoneyGuide always has you covered. These are just some of the ways our software can help you have deeper conversations with clients around policy discussions that are happening right now.
To learn more about Envestnet | MoneyGuide and utilizing these features, request a free demo today. Already a MoneyGuide user? Contact our Support Team for additional information and training on your MoneyGuide subscription. Take advantage of our special bundle pricing, a retail savings up to $1,000, that includes MoneyGuideElite, MyBlocks, and Yodlee! Open to new and current users through May 31, 2021. To lock in your discounted pricing, contact us at 1-800-841-5312 or sales@moneyguide.com.
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