Your Retirement . . . with Brian & Bob: ‘Build Back Better Act’ passes economic package with tax changes

“Over time, all Americans should anticipate taxes to increase as more loopholes are cut and current deductions are lowered.”

By Brian Harrigan

An economic package almost $2 trillion in size was approved Nov. 19 by the House of Representatives in what the Biden Administration is calling the “Build Back Better Act.” The fate of this bill, which focuses on social programs and climate change, is now with the Senate which is expected to make a decision this month. Many expect changes to be proposed in order to gain more support of moderate democrats which the chamber needs to pass the legislation. Should a modified version be approved by the Senate, the bill will then be sent back to the House for a final vote.

The original draft of the bill discussed in early 2021 contained a slew of changes to the tax-code that would affect individual investors. Tax changes proposed in the earlier draft included an increase to the top individual income tax rate, increased taxes on income and capital gains, and reductions to the size of inherited assets not currently subject to the estate tax. With many moderate Democrats disapproving of many of the tax increases on individuals, a deadlock transpired as the balance of representatives worked toward seeking compromise.

The revised bill garnered substantial increase in the state and local deductions, a surtax on the wealthiest taxpayers, and a number of changes to retirement savings. For corporations, a new 15 percent minimum tax geared toward eliminating loopholes and imposes a 1 percent tax on stock buybacks. The bill also included provisions for the IRS to boost enforcement and non-payment of taxes. Other areas worthy of mention are expanded healthcare coverage, affordable housing, universal Pre-K schooling and child care programs, expansion of Medicare benefits, and climate change/green energy provisions.

So what does this all mean?

At this time, it is hard to say for sure given the final version is still a work in progress. The wealthy should expect changes that will impact them more substantially than the average American. This sector of the population should be looking at implementing strategies to help address some of these changes.

Over time, we believe all Americans should anticipate taxes to increase as more loopholes are cut and current deductions are lowered. Taking advantage of estate tax limitations as lifetime exemption limits are reduced will become more important to ensure inheritance limits are maximized and legacy goals are met. Tax diversification of assets will likely be more important as time passes. Having different assets with assorted methods of taxation will allow you to maximize your net spendable dollars in retirement. This can substantially reduce the risk of outliving your savings which is a fear of many.

As a result of market volatility, we have seen many consumers shifting a portion of assets to vehicles like annuities. Fixed indexed annuities have increased in popularity as some of these products can guarantee an income stream for life. Third quarter sales numbers, which were more than $13 billion in 2020, have risen to over $17 billion in 2021. With market volatility not looking to slow down any time in the near future and another wave of COVID variant upon us, we would expect the trend of annuity and life insurance sales to continue to rise.

We encourage readers to keep an eye on the changes in legislation and to not procrastinate in planning for the future. Early planning can aid in addressing pitfalls in retirement we see all too often with qualified accounts like IRAs and 401Ks. In addition, not planning for end-of-life medical expenses (longterm care) when you’re healthy is another pitfall we see all too often.

Planning for the worst and hoping for the best is always advisable. If you plan today, it is more certain you will enjoy tomorrow. We wish everyone Happy Holidays and look forward to a prosperous 2022.

Robert Price and  Brian Harrigan own Executive Plan Design in Gilroy. For more information on solutions tailored to your situation, contact them at (408) 767-2572.