Transcript
Mike:
Welcome to another edition of Mike on Money. I’m Michael Reese, certified financial planner, founder of the prosperity planning system. And, oh boy, I might get a little red in the face today because today we’re talking about this document right here, and this document, it comes from the house ways and means committee. It’s basically the document that they recently sent out that tells us how they want to change the tax code. And you know how I am. Anytime we talk about taxes, I get a little, you know, red in the face. I get a little upset. But that’s what we’re going to talk about. I’m going to share with you, how does this document, if, if if they get what they want, right? And they probably won’t, this will probably be changed a little bit, but if they get what they want, how does it affect you?
Mike:
Let me tell you something. The first thing that I thought when I saw this document was holy cow. It’s only 18 pages and yes, it’s single space, really tight, small, and all government speak, right? So it’s kind of hard to read, but 18 pages. I mean, I can plow through that and I can kind of figure it out. Now, of course, this is just the proposal. Now what happens is this document goes through the house and it goes through the Senate and everybody adds on all their exceptions probably by the time it’s said and done this 18 pages grows to, I don’t know, two or 300 pages. But at least this has the guts of telling you what they want to do. And you know, if you remember in, you know, every time they talk about taxes and changing the taxes, who are they going to affect?
Mike:
Are they going to affect you and me? No, no, no, no. We are only going to tax who, yeah, you’ve got it. The rich, we’re only going to tax the rich. Well, let’s see if that’s true. And, and by the way, before I dive into this document, I was talking to a good friend of mine. Her name’s Becky, same as my wife, not my wife, but same name. And Becky used to be she used to work in Washington, DC with the Congress, she was an aid to Congress people, and, you know, she helped with in committees and help write tax law and all that kind of stuff. Right. Here’s what she told me. Now, keep this in your mind. As we’re going through this document together, she told me, she said, remember what they do in DC. The first thing they do is they float out ideas that are only going to affect the rich it’s like they get their foot in the door and then once their foot’s in the door, they start, you know, bringing it down to everyday people.
Mike:
A good example of this is social security, social security years ago, when it first started was supposed to be tax free, a tax-free form of income, because think about it. You were taxed as your money went into the system to tax you, as it comes back out in payments to you would be considered double taxation. And so for the longest time, no tax on social security income, but then, oh, social security is going broke because you know, it’s a government program. They don’t know anything about basic economics, so it’s going broke. So they decide this in the eighties. Here’s what we’ll do. We will tax the rich. And what we’ll do is if you’re a married couple, if you’re single and your income is over 25,000, if you’re married, it’s over 32,000, your rich, and we’re going to tax up to half of your social security.
Mike:
Now, by the way I know today, those numbers seem ridiculously low. Like who’s rich on 32,000 of income, nobody, but back in the eighties, remember with inflation, that actually was pretty good living. I mean, you were doing pretty well, so we’re only taxing the rich, but they magically didn’t add on an inflation adjustment on that. And so as inflation happened over time, now it affects almost everybody. Well then in the nineties they said, oh, that worked really good. Let’s add another level for the super rich people earning over 44,000 of income, which again, at the time that we could, all, we can debate all day long, whether or not that was super rich, but that’s what they did. And again, they didn’t increase it to inflation. So nowadays these, you know, these tax laws that were supposed to only affect the rich they affect basically everybody.
Mike:
Right? That’s what’s so keep that in mind as we go through this document. Okay. So this document, it basically has four different parts. I’m going to focus in on part two and three. So let’s go ahead and get to part two. And I want to share with you what they’re doing here. So here we go. You can see, I made some highlights here to help me stay on track. Part number two is all about tax increases for high income individuals. Now remember what did Becky talk about whenever they do this, what are they trying to do? They’re getting their foot in the door and so that they can, once they get it in there, then they can start bringing it down. But here we go. These are some of the things that they want to do. They want to increase tax rates for rich people.
Mike:
Basically if you are single and over 400,000 married over 450 they’re going to bump that up to 39.6. That’s not a huge deal. Quite frankly you know, other than the fact that I think it’s ridiculous that they just keep taxing us more. You know, but it’s not that big of a deal. And here’s, here’s the funny thing. It makes them look good, I guess. But the reality is in 2006, the way the tax code is written now, we’re reverting back to that anyway. So this just accelerates that a little bit. I’m not losing a ton of sleep over this, but here’s the one part you want to watch out for? It says if you have a trust, like an irrevocable trust, so maybe you inherited money from your parents and it’s in an irrevocable trust. If your income in that trust from interest and dividends is over $12,500.
Mike:
And I did not misspeak $12,500, not a lot, that income is taxed at 39.7%. So you want to make sure you’re taking action or taking steps to avoid that. If you can capital gains rates, they want to bump up capital gains rates for high income earners to 25%. By the way, there were a lot of people in DC they wanted to make that ordinary income. They wanted the capital gains rate to be 39.6 plus you’ve got the Obamacare, basically a 43% tax rate for capital gains. Well, they said, no, we’ll only make it 25%, but what they don’t tell you is that at that income level, you pay a surcharge, they call it the Obamacare tax of 3.8%. So now if you have capital gains above that puts you up 400,000, you’re paying 28.8% on that. That’s a bump up. Now, by the way, does that only really affect the rich?
Mike:
Well, what if you’re, what if you own rental real estate, and you know what real estate prices have been doing and what if, when you sell a property and you cash it out and you’re like, oh, look between the capital gains on the sale and your income. You’re over 400,000, oh, guess what? You just got caught, right? Here we go for you business owners out there for you business owners, oh, how dare you start a business and actually try to help the economy we’re going to have to tax you. And so what they’re saying here is if you actually, as a business owner, if you’re making more than what is it, a 500, 400,000 single 500,000 joint, which by the way, a lot of business owners, that’s not huge income. I mean, think about all the employees that they have to pay, right. But if they’re on that number up, they’re getting hit with, they’re going to get that extra tax as well.
Mike:
They’re going to get hit with that extra it’s called net investment income. Here’s another 4% tax and we’re going to pile on what you already pay. Thank goodness. I’m in Texas. I don’t have to deal with state tax on top of all this. Right. and here we go. This is a big one right here for a lot of people, they call it, this is, notice what they call it. Termination of temporary increase in unified credit. And I know what you’re doing. You’re sitting there like, okay, first of all, what is a unified credit? What is this temporary increase thing? And what does it mean that they’re stopping it? Okay. Here’s let me tell you what this means in English, in English. It says, oh yeah, right now you don’t have to worry about estate taxes anymore. Like when you die, you know, if you have a certain amount of money, you have to give like half, half of the, anything above that amount, half of it goes to the IRS.
Mike:
That’s called estate taxes, used to be a big thing. And then they bumped it up to like right now it’s like $11.7 million per person. It’s some huge number you can, if you’re married, you can die and leave your children like 23 and a half million dollars with no estate tax that’s today. What they’re doing here is they’re saying, no, we want to bump that down to 5 million. We want to bump it down to 5 million. And I know what you’re saying. You’re saying, well, what does that mean? If it’s, it means if you’re single and you die and your assets are over $5 million, roughly half of the extra goes to the IRS. That’s what they want. If you’re married, it’s $10 million, but only if you take the right action. So let me give you an example. I recently had a story of a client where this would affect them.
Mike:
They happen to have some, a couple of hundred acres of farmland, which when they bought it, wasn’t worth a lot of money. And in these, this couple, it’s not like they’re millionaires. I mean, they, they they’re comfortable, but they’re not super rich, but that couple of hundred acres of farmland happens to be in a well, let’s call it a high growth area. And they’ve got people around them selling their farm land, a couple hundred acres for anywhere from five to $10 million. So guess what? If you look at the fair value of their farmland, which they don’t intend to sell, but it’s worth somewhere between five and $10 million. If you compare it to what everybody else is selling their land for, well, they would be affected by this. What if you own lakefront property? I mean, we’ve seen property values go up. It’s crazy. So that’s something that we want to pay attention to.
Mike:
Again, that’s so far all this stuff, though. If you’re watching like, ah, that’s the rich, we don’t care about it affects rich people. They can afford it. Well, just remember, what are they doing? Foot in the door. And once they get it, then they start messing with the rates and they start effecting more and more and more people. Now, now let’s take a look at something that can affect everybody. Modification, We’re in part three now, modification of rules relating to retirement plans. Oh, I mean, all of us are using retirement plans. So by the way, here’s why this got in here. If you’ve been watching my videos you’ll know a little while ago, I’ve shared a story about how the really wealthy people like Peter Thiel, it came out, he has a Roth IRA with it’s worth like $5 billion, right? His Roth IRA, which is a tax-free account is worth like $5 billion.
Mike:
Warren buffet. His Roth IRA is worth like hundreds of millions of dollars, right? So these high net worth people understand the value of a Roth IRA and how awesome they are. Right. Roth IRAs are awesome. And they understand that, so they’ve been moving their money to Roth IRA like crazy. Well, the IRS or not the IRS, Congress caught wind of that. And they’re like, oh wow. We can’t have really rich people actually following the tax code to their benefit. We gotta, we gotta do something about this. So here you go. Number one, contribution limits for IRAs. So here’s what they’re saying. Here you go. Under current law, taxpayers can make contributions to IRAs, no matter how much money they make or how much money they already have in retirement plans. And so they’re saying, here’s what they’re saying. We don’t think it’s right
Mike:
That people actually save for their retirement too much. You know, we want to save for retirement, but not too much. That would be horrible. Right. So here’s what it says. If you let’s see, if now, if you’re, I, you add up all your IRAs and 401ks and Roth IRAs, you add all that up. If you have over $10 million, and I know what you’re thinking, you’re thinking I wish, right? This is going to affect like three people. You know, if you have over $10 million, you can’t add money to your IRAs anymore. No more adding money to IRAs. Oh, but here you go. That only applies. It also applies if you’re over 400,000 single 450,000 married, right. Basically what they’re saying is if you’re making a lot of money, you don’t get to keep adding money to your 401k or your IRA or any of that stuff.
Mike:
By the way, the way this is written right now, it’s a little confusing. Like, is it 10 million and 400,000? Do we need to, like, what if you’ve got $12 million in your IRA, but your adjusted income is only a hundred thousand dollars. Can you add more money then they don’t really make that very clear. But basically it’s what is clear is they’re saying, Hey, you got a lot of money in your IRA. We don’t want you to keep adding money to it. And by way, this is classic foot in the door. Cause once they get this one in there and next he knows, and let’s bump it down to 5 million, let’s bump it down to maybe 1 million. Right. That’s what they do. No guarantees they’ll do that. It’s just what they’ve done in the entire history of, of government. Right? Number one, here’s the next one increase in minimum required distributions.
Mike:
So again, if you’ve got, if you’re lucky enough to have 10 million in your IRA or Roth IRA, you are doesn’t matter how old you are. They want you to take half of it out like half of the excess. So what does that mean? Peter Thiel, who has $5 billion in his Roth IRA. They say, actually in his case, he’s over 20 million. He’s got to take out all of it except for 20 million. And then after that, he’s got to take half of it out each year. If he’s over 10 million, it’s like, like, they’re basically saying, Hey, you don’t get to use this as a, a tax shelter. We set up the rules, you followed the rules, we set up, but oh, you’re smarter than us. And you ended up making a lot of money on it. And so we got to create another rule because we didn’t know what we’re doing to begin with. Right. I mean, that’s kinda what’s happening here. But again, I know these are huge numbers. I know they’re huge numbers. I know you’re sitting there. You’re like, yeah, whatever. I wish I had that problem. Hey, me too. Right? We all wish we had that problem again, though. This is foot in the door stuff. Now, here we go. This is the area. Now that affects pretty much everybody with roth or with with retirement plans, rollovers to Roth IRAs. Here we go.
Mike:
Under current law contribution. If you want to add money to a Roth IRA, there are limits. Like if you’re making more than 140,000 as a married-, as a a, for single, and I think it’s like 160,000 married, couple, you couldn’t add money to a Roth if you wanted to, but there are no income limits, if you want to convert from IRA to Roth IRA. So you can take money that’s in an IRA already and convert it to a Roth at any income level. But if you make too much money, you can’t add to the pot, but you know, you could do, you could add, you could add money to a what’s called a non-deductible Roth or nondeductible IRA, and then convert it to Roth IRA the next day. And it’s called a backdoor Roth conversion, right? People have been doing that. Like they want to get rid of that.
Mike:
They say here, we want to eliminate Roth conversions for both IRA and employer sponsored plans. Again, if you make more than 400 or 450,000, and you’re like, oh, that doesn’t apply to me. Doesn’t apply to me. Oh, wait, what about this one? Furthermore, there’s always a furthermore. This section prohibits all employee after tax conversions in qualified plans and prohibits after tax IRA contributions for converted Roth, regardless of any income level. So basically they’re saying this whole concept of doing these backdoor Roth conversions. It doesn’t matter if you make over-. First they say, if you make over 400,000 or as a single person, 450 married, you can’t do it. Then they come down and say, well, actually nobody can do it. It doesn’t matter how much money you make. You just can’t do it. Uthat’s what they’re saying starting next year, you can still do it this year, 2021, but not next year.
Mike:
Right? I mean, it’s like guys I thought we were only texting the rich, oh, let’s keep going. We got more, but wait, there’s more. And this the last one I want to talk about, and this affects like a lot of people, a lot of our clients. This bill prohibits an IRA from holding anything. Anything, if you have to be what’s called an accredited investor, all right, there are a lot of people who would, they, they’re not rich they’re we would call them maybe middle-class or upper upper middle-class. They’re definitely not rich, but they’re maybe their incomes 150 or 200,000. Maybe that’s like you and their investment accounts. They don’t have $10 million. Maybe they’ve got a million or 2 million, lots of people in that area. And if you have over a million dollars saved for retirement, which a lot more and more people have every day, you have access to something called accredited investment options.
Mike:
These are typically investment options that allow you to have, you know, more asymmetrical returns where you get, you know, good upside with limited risk. I could probably do another pot. You know, another video on just those. Well, the IRS or I’m sorry. Congress has decided that again, Hey, that’s for many people in their IRAs, these are really good things to have as part of what they’re doing, right? A lot of our clients have these in their IRAs. They’re great investment tools for them, but these guys are like, we don’t think that you shouldn’t be allowed to have that inside of your IRA or your 401k. You know why, because they’re worried that you might actually make too much money there. And then you have these big accounts again, and then that’s money. They don’t get to collect tax on if you do it the right way.
Mike:
So they want to prohibit everyone at any income level, not just those over 400,000 at any income level, Hey, you can’t use, even if you are an accredited investor, you can’t use it in your retirement accounts. Oh, Hey, I do have I lied? There is one more thing. This is the last one. I promise you. Prohibition of investment of IRA, assets and entities in which the owner has substantial interest. Real estate. People use this all the time. So real estate people. What they’ll do is they’ll use their IRA to invest in real estate, right? That they go out and they buy. And what this tells you is a, and here’s the deal 10%. There’s like a 10% rule. Now it used to be, you couldn’t have, like, let’s say you’re married and it’s your IRA. You make your spouse the the owner or the manager of the real estate.
Mike:
And they’re the manager of that real estate LLC. You’re just a minority investor, blah, blah, blah. And there are just different ways you can work around this. But they’ve made it almost impossible to do that anymore. This makes it so that if you’re trying to invest what they’re doing here, they’re essentially saying, if you invest in real estate inside of your like directly managed held or held real estate in your 401k, in your IRAs, they, they want to get rid of that altogether. That, that, that one right there. I promise you the real estate lobby is going to be up in arms. Right? So anyway, these are all, you know, there’s a whole bunch of other stuff in here. I’ve just kind of covered the parts that apply to the investors for the most part. I mean, if you’re a business owner, there’s a bunch of other crap in here.
Mike:
The reality is in an effort to tax the rich, what they’re really doing is just trying to put their foot in the door. Let’s try it. Most of this stuff, let’s try to hit these higher income people that, you know, most people, they don’t care about them. But remember when they get their foot in the door, then they just start working their way backwards to affect all of us. So let’s try to prevent them from doing that anyway as this becomes law, I’m sure there are going to be changes. When it becomes law, I’ll do another video to let you know, here’s what made it through. Here’s what changed. So that you understand, you know, how it affects you. But for now, those are the proposals. That’s what they’re working on. And you know, we’ll see where this all goes. That’s our episode this week. I know when a long, I hope you don’t mind, but I wanted to fill you in on what’s coming. Right? So you can plan accordingly. Remember as always, if you like the video click, like share, you know, all that good stuff below subscribe, if you haven’t and we will see you next time.
