- Thinking with a tax mindset: While changes in taxes aren't a certainty, if they do happen, investors should increasingly consider thinking about their financial plan and portfolios with a tax mindset.
- Changes in policy should trigger changes in behavior: The recently proposed changes would affect taxpayers differently, or not at all, depending on their income and investments – Let's discuss how this might affect your financial plan.
- Plan ahead and adjust the plan: Whether or not tax laws change now or in the future, investors should always seek to manage their assets as tax-efficiently as possible.
The big story on April 28 was the introduction of President Biden's American Families Plan. The administration has stated the objective of the plan is to help "Americans struggling to meet basic needs and cover basic expenses". Funding for the $1.8 trillion dollar plan comes from proposed income tax and capital gains tax increase on high earning workers, as well as the elimination of stepped-up basis on certain inherited assets.
If the proposal triggered some anxiety, you are not alone. It's important to remember, however, that this is just the beginning of a negotiation that will go through both houses of congress. Whatever changes do materialize, the final law is likely to look different than the original proposal.
So, how will this potentially impact investors?
No matter what happens with the proposed changes, investors should be mindful of strategies to minimize the erosive effect of taxes on their portfolios. While many will feel compelled to act in advance of final rulings, this is a case that warrants careful analysis and collaboration with your advisory team. Utilizing tax-efficient investment vehicles like ETF's and municipal bonds and locating income-producing assets in tax-deferred accounts are all strategies that can help limit the impact of taxes on wealth creation.
It is too soon to tell what proposals are going to become law. Further, as this proposal so clearly illustrates, tax laws don't last forever and tax rates in the future are likely to be different than they are today. To be successful in the long run, investors and advisors should work together to create tax-efficient portfolios and financial plans built to weather uncertainty, while being nimble enough to adjust to changing realities.