Potential Tax Changes

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Zach – Hello everyone. Zach Holcomb here on Retirement Today. And alongside me we have Michael Reese. He’s a certified financial planner and founder and president of Centennial Advisors. Today we’re talking all about taxes, which I know is Mike’s very favorite thing to talk about It’s a brand new year. We have a new president there’ve been big changes in the house and in the Senate. So let’s talk about how these changes are not only gonna affect your retirement, but your tax picture as well. 

Michael – You know, that’s a great intro Zach. And you know, as you recall what’s our job on this blog or podcast. However you’re watching, you’re listening in, our job is to help you enjoy the three Cs. The first C is control. We want you to feel as though you’re in control of your financial situation. And if you feel in control of your financial situation that leads to the second C, which is confidence I want you to have a feeling of confidence that you’re making the right choices financially speaking. And then of course, if you have control and confidence that leads to the third C, which is comfort. We want you to have a feeling of comfort that no matter what the market’s bring, no matter what the tax code brings, good or bad, that you’re still in the position the great financial position that you wanna be in.

So today we’re talking about taxes, right Zach, and we’re really drilling down on how we have a new president. We have a new power structure I guess we could say in Washington DC, and the people in charge right now they are very eager to increase taxes in a number of ways. And of course, they always tell you, “we are only going to increase taxes,” right here come the air quotes on the rich, the rich. We’re only gonna, don’t worry Zach you don’t have to worry. And as all of you are watching and listening, you don’t have to worry because we’re only we’re only going to change taxes on the rich and you know, they can afford it anyway. Right? So Zach, when, when they talk about only changing taxes or increasing taxes on the “rich” what do you think? Do you think that that’s reality? Do you think that that’s what really happens that only the rich are effected? 

Zach – It’s not because in their eyes the middle class fall into the “rich” quite often. 

Michael – Yeah very often good point. And let’s be honest. There’s a lot of ways in which everyone is affected not just the rich, so let’s maybe go through… Now this is not intended to be an exhaustive list on what they’re talking about doing it’s intended to, I’m just going to highlight some different things. And then we’ll talk a little bit about how it might affect you. So one of the things that they’re wanting to do has to do with capital gains, right? So right now, the way it works is let’s say you buy I don’t know, Amazon stock you invest $100,000 in Amazon stock or let 10,000 say 10,000, $10,000 in Amazon stock. And then it grows over time over the years, right? You hold it for many years and it grows to a hundred thousand. So you paid 10,000 and now it’s worth 100,000. What’s your gain there Zach? 

Zach – 90,000. 

Michael – $90,000 very good. You know what? Let’s make this, the math even a little bit simpler let’s say it grows to 110,000. So that your game is 100,000. That’ll make our math a little bit easier. Now, currently, let’s say that you decide, all right I invested 10, I’m up to 110. I’ve made a hundred grand time for me to cash out, and just take my gains, right? And you’re thinking that, “Yes I’m going to lose some tax to the IRS, but that’s okay. Because I made so much money who cares right?” Under the current tax code you would probably pay somewhere around 15%. So if you do the math, you have 100,000 in gains. You owe the IRS 15%. So Zach, can you do the math real quick for us? So what is 15% of 100,000? 

Zach – 15,000. 

Michael – Yeah, I know that math is that’s why I switched to 100 versus 90, right? Yeah $15,000 and by the way, that was never your $15,000 anyway. So who cares? Like it’s off to the IRS. You’re like, this is great. I started with 10,000. It grew to 110. I sold it. I gave the IRS their share. I kept my share. 95,000 in your pocket. Everything’s fine and dandy. Well, what are they wanting to do in Washington DC these days, they want to increase that tax rate. And it could go from anywhere initially from 15 to 28%. And if you’re a higher end or maybe as high as 39, call it 40%. 

Zach – Wow. 

Michael – So instead of giving the IRS 15,000 now you got to give them anywhere from 28,000 up to $39,000, depending on your income. And so does that affect you if you made gains in the stock? Heck yes. Now good news that says, if your money, is in an IRA a Roth IRA, 401k none of that affects you. This only affects, this would, if they pass this it would only affect you if you are in an after tax account. So if you have gains in an after-tax account you got to keep a close eye on that particular topic this year And we will too, because if they decide they’re going to make that change, guess what?

You bet you might want to accelerate how quickly you’re selling your gains like positions that have gains. you know you might have a stock… I’ve got some clients out there right now Zach, they’ve got over $1000,000 in gains in different positions. Not because they just bought something hot. It’s just, they’ve held it for so darn long. Right? They’ve held it for so long. So this is something that we wanna pay close attention to right? 

Zach – Absolutely, absolutely. 

Michael – That’s part one of the capital gains discussion. There’s another part here. And you might be sitting there like, Oh Mike that doesn’t affect me. You know, all my money’s in an IRA or 401k or a Roth, or you might say, Oh that only affects really people that have big amounts of money. I mean, look, my gains are like $10,000. I mean, who cares? It’s not gonna be a big deal for me. That might be true. But there’s a second piece of this capital gains discussion that they’re trying to you know, as my mother would say, fiddle with. did your parents ever use that phrase, Zach? 

Zach – They have used that phrase. 

Michael – Well, there you go. It’s not so uncommon. My mother would say, they’re trying to fiddle with this. And that is there’s this concept called Step-Up in Basis At Death. So here’s how this works. So let’s imagine that your parents, they bought a house. They live in a home, and when they bought that home it was a hundred thousand dollars. ‘Cause they bought it years and years and years ago, right? Then they die leaving you their home. And that home over the years it’s grown from 100,000 they paid for it, up to current value of say, call it 400,000, right? They leave you the home.

Now in today’s tax code, there’s what’s called a step-up in basis. And what does that mean? It means that you received the home at their death and what the day you received the home it’s worth 400,000. So what the tax code says is, okay, we are going to Step-Up The Basis on that home from 100 that your parents paid up to 400 that it’s worth today. So if you sell it for 400, well then there’s no tax. If you sell it for 450, well then you pay there’s a $50,000 gain that you would pay tax on. But you only pay tax on the little bit, the dip the valuation of what it was worth when you received it versus what you sold it for. How are we doing so far? Does that make sense? 

Zach – Yeah, totally crystal clear. 

Michael – Now here’s what happens. They want to eliminate that step-up in basis. So when you inherit mom and dad’s home that’s worth 400,000, and you sell it for 400,000 they wanna say, Oh well your parents bought it for 100. You owe tax on the gain from a hundred to 400,000. You owe tax on 300 grand when you sell that house, that’s what they wanna do. 

Zach – It sounds a little more than just fiddling Mike. 

Michael – That’s, that’s, no, no that’s just fiddling Zach. And then, but it’s not just that. What if your parents are farmers? and they own a few hundred acres or more that they bought for a song 50 years ago. Right? And now it’s worth $1,500,000 because just the price of real estate has gone crazy. Right? There’s a lot of real estate that sell for $10,000 an acre. You got 300 acres. Gosh, I got to pull my calculator. I think that’s $3,000,000 right? 10,000 times 300 is yeah $3,000,000. What’s gonna happen?

They die suddenly, okay, you got this farm 300 acres worth $3,000,000. Your parents paid like nothing for it. They eliminate the step-up in basis. You’re gonna owe tax on $3,000,000 gain. How are you going to keep that farm? If that’s what you wanna do where are you going to get the money for that? Probably you’re gonna have to sell the farm aren’t you? There’s a lot. They do this family farms, family ranches are going to be sold, left and right when mom and dad die, because people don’t have the money, right? So how do you get around that? Two words, life insurance. Let’s add a couple more words. One more word. Lotsa is lotsa of word? 

Zach – I think so. 

Michael – I don’t know if technically lotsa is a word but as in lotsa life insurance, right? Basically a lot of families. If they pass this law, a lot of families the best way to handle it is to go out and figure out a way to buy a bunch of life insurance. And you might not have the financial resources to buy enough life insurance. And this is where things like there are ways that you can borrow money to buy life insurance, banks will loan money to buy life insurance. There’s gonna be a lot of life insurance sales going on. A lot of people buying a lot of life insurance. If that step-up in basis law is passed. You know, the other place it comes into play. I just recently had this. A client had passed away. I’m sorry. The clients surviving parent passed away.

So what happened was in this case, their mom passed away first dad was still living. Dad had a portfolio of these individual stocks, and it was worth when and he recently died and they were worth about $1,200,000. And you know, he paid his capital gains and that was like $800 grand, right? So that’s why he never sold it. He didn’t wanna pay the tax. So he’s like, okay. If I sell, I’m going tax on 800,000 of gains. But if I just hold them till I die, my children are gonna get this stock essentially tax-free. And he did recently pass so the children, there were two children. They each got the 1,200,000 split in half, 600,000 each. And they each got it step-up in basis. Tax-free they were able to sell it. No taxes. Right? What would have happened though had this law been in place? Well, they would’ve had to figure out, okay. I got 600,000. Well, the whole stock position was 1,200,000, cost basis 400,000 it’s 800,000 of gains, when they sold the stock so split that in half, 400,000 of gain per child. when they sold the stock, they would have had to pay tax on 400,000 of gain, at an increased rate that we just talked about of anywhere from 28 to 39%. And it’s like, ah huge taxes at death. And look, you don’t have to be rich, right? You don’t have to.

There’s a lot of farmers out there. They wouldn’t call themselves rich. They’re sitting on a lot of property. That’s worth a lot of money, but they wouldn’t call themselves rich. And then their kids get it. And suddenly their kids who might not also be rich, right? Only gonna tax the rich Zach. That’s all we’re going to tax. Well, suddenly all these kids that you know they’re gonna get taxed. So that’s just one little piece of what they’re talking about doing. let me ask you something. Are they only taxing the rich here? Is that what their thoughts are? 

Zach – They are not only taxing the rich. 

Michael – No it’s everybody right? Another thing that they’re looking at doing. So when Trump came into office, President Trump he reduced tax rates. Right? For pretty much everybody. There were… So if you live in a high property tax state like New York or California, you know you might’ve had some problems with what he did, but for most of the country, for 90% of everybody else that tax code reduced your tax rates, or how much tax you owe, Trump was a big believer that Washington DC does not deserve your money. Right? And whereas, you know, now Mr. Biden our president now, he kind of feels the other way. Anyway they just want to get rid of that tax cut. Just reverse it. Go back to the old tax code. So all of your tax rates are gonna go up now what does that mean?

Here’s what it means. If you have a 401k, let’s say you have $500,000 in a 401k. It means that every dollar you take out of that IRA or 401k, suddenly is gonna be taxed at a higher rate. So here’s the thing to think about. Now, always remember this. If you wanna make smart financial planning choices, especially if you wanna make smart tax planning choices with your retirement accounts. And I mean, your IRA, 401k, 403B, 457. Whenever you look at your statement, if you go online and you say, well, how much money do I have in my 401k? And you go online. It’s like, Oh, John Smith, or Jane Smith, 401k, $500,000. I’m like, cool. I got 500,000. No, no you don’t.

Always, here’s a little mental trick for you that that will help you make better choices. Add the phrase and IRS. And so what do I mean by that? You look at your account. It says John Smith, 401k, Jane Smith, 401k. Just add the phrase and IRS. It’s just two words. So it’s John Smith and IRS 401k, Jane Smith and IRS 401k. If you do that now you can make better decisions because the reality is, that’s not all your money. Now if it’s a Roth IRA or Roth 401k, yes it’s all your money, but a regular IRA, a regular 401k a regular 403B, et cetera. It’s your share. It’s a shared pot of money. Some of it’s yours, some of it belongs to the IRS. Now, why do I bring this up? So Zach, if they increase tax rates what happens to your share of the 401k? And what happens to the IRS’s has share of the 401k. 

Zach – My share goes down and the IRS gets more. 

Michael – Exactly. Your share goes down, IRS gets more. And here’s reality right now our federal… as we’re recording this right in late January our federal debt, just the debt is over $27 trillion. The government is projected to run a $3 trillion plus deficit this year. Meaning that by the end of the year the federal debt’s gonna be $30 trillion. I mean, we’re talking, this is we’re right now, today. That’s like $84,000 per citizen, per person. That’s what that number means. By the end of the year it’s gonna be closer to what 92,000 per person, right? It’s within the year after by 2022 it’s probably gonna be over a hundred thousand dollars per person. Does every single citizen in this country, man, woman, and child, does every person have a $100,000 to give to the IRS? 

Zach – Absolutely not. 

Michael – To pay off the debt. No way, that doesn’t even include how deep we are in debt with Social Security, and Medicare, and all the federal benefits, like the federal pensions and health insurance and all that kind of stuff. Actually, if you go to usdebtclock.org today, it adds up all of the debt that the government has accumulated. And it says, all right, in order to pay off all the debt the government has to collect $480,000 per citizen in this country. What are the odds that that’s ever gonna happen? 

Zach – Zero. 

Michael – Yeah not going to happen. 

Zach – Yeah. 

Michael – So how’s the government gonna pay for all of this? Increased taxes and printing money, right? You know, that’s going to be the case. They’re gonna have to print more money and they’re going to have to increase taxes. What does that mean for your 401k? If they have to increase taxes even more right now they’re talking about increasing just going back to the old tax code, that’s just a small increase. When they really get going at it, what do you think is going to happen? They’re going to have to increase taxes a lot. What did we say? John Smith and IRS’s 401k. Jane Smith and IRS’s 401k. If they have to increase taxes a lot, what happens to your share of that 401k? 

Zach – It’s going down you might even have to flip the names might be IRS’s and John Smith. 

Michael – That’s not unrealistic. Do you know historically for over a 50 year period from like 1932 to 1982 for 50 years, tax rates the top tax rates were over 50%. So guess what? You grow that IRA or 401k to a large amount. And Zach, what you just said may very well be true. Your share might be the minority share not the majority share.

So what do you need to do about it? You got to get serious about converting these accounts to either Roth IRAs, or if you’ve got really large accounts you might also want to include using a properly designed cash value life insurance, and maybe a combination of that. So you’ve got to get serious about this. You cannot be messing around with this now is the time you must get serious. It’s 2021 stop messing around. Let’s be serious about Roth conversions or moving money to properly structured life insurance or a combination of the two. Capital gains, increased tax rates. Those are just a couple little things that they’re “fiddling with” that are only going to affect. who again Zach? 

Zach – The rich. 

Michael – Yeah, that’s right the rich. Now let me ask you this. If you retire at the age of 65, you worked your whole life, You saved, you’re a good saver, and you’ve accumulated, you know, $800,000, 1,000,0000, $1,500,000 in your IRA. And when you do the math, you figure, Hey, when you retire you’re going to live on, Oh maybe $7,000 a month, 85,000 a year call it. Would you call yourself rich if that were your financial position retirement where you’re essentially living on 85,000 a year are you part of the rich Zach? 

Zach – No, but I think the government would think otherwise. 

Michael – Yeah as far as the government’s concerned and say, you got a million dollars or close to it in your 401k IRA. Yeah you’re rich. And we’re coming after you. You’ve got a bullseye painted on you. So just remember that, you know, when politicians talk about taxing the rich, that is purely for the media, right? And that’s purely positioning, reality is when they talk about taxing the rich 99 times out of a hundred what they really are saying is, we’re gonna tax both anywhere from the lower middle-class all the way up to the wealthy, we’re gonna increase taxes on all of them. The only people that won’t have increased taxes are those who don’t pay taxes anyway which are essentially those who, you know don’t make a lot of money, right. And by a lot of money. I mean, they’re making less than like, you know, 40, 50,000 a year. Everybody else you’re gonna pay more tax. That’s what they’re really saying. How are we doing?

Does that make sense today? All right. So we talked about capital gains. We talked about increased tax rates. I’m gonna just add one more, a third one here. And that has to do with estate taxes. So right now estate taxes truly don’t affect anyone but the rich. So here’s how it works. If you are single, you can pass up to $11,500,000 to anybody you want when you die tax-free, unless it’s in an IRA and then there’s income taxes. But so if you have a if you have real estate portfolio of $11,000,000, that can go to your kids tax free or anybody for that matter. If you’re married multiply that times two, $23 million you can pass to your children tax-free. Zach if someone has more than $23 million of assets, when they’re married, can we agree that they’re probably “The rich” 

Zach – That is the rich in my eyes. 

Michael – I’ll give them that, right? I’ll give them that. But what are they talking about doing in this new administration? They’re saying, “yeah we need to tax more people than that.” So they’re talking about reducing that 11,000,000 number, down to maybe… potentially as low as a million. You know, it might only be anywhere from 1,000,000 to 5,000,000, somewhere in that range. Let’s say they go all the way to the million number which a lot of them wanna do. Now, I’m not saying they’re going to, right? I’m just saying, they’re talking about it. 

Zach – Right. 

Michael – If you are a married couple $2 million has all your assets add up all your assets. What if you have a 401k or you’ve done good job saving, and you’ve got a million in your 401k, you’ve got a house worth, maybe 500,000, That’s 1,500,000. Maybe you have 500,000 of life insurance right? Oh, suddenly we’re at 2 million already, right? And then the IRS comes in and says, “we’re roughly going to take, when you die half of everything above that number, you got to pay us. Or your kids will have to pay us.” That suddenly that affects not just the rich, but affects let’s be honest, a lot of your middle class or your upper middle-class. It affects a lot of people who don’t call themselves rich. What if you’re fortunate enough that you bought a house on Lake Travis, many, many years ago and maybe you paid 150 or 200,000 for it but you’ve got a house in Lake Travis. Your house alone maybe we’re 2 million today, right? It’s I mean, just because of lakefront property add in some life insurance, add in your 401k and your IRA, right?

Add in maybe another piece of property you might’ve bought along the way. I mean, suddenly your kids are paying the estate taxes. Just another money grab for the IRS. Zach I know we’re running out of time. We got to wrap this up but here’s the core message that I want to share. The new power in Washington, the new power structure in Washington DC, they are very, very pro tax. Meaning they love the idea of increasing taxes on everyone. I don’t care what they say. Politicians are liars. I don’t care what they say. They’re gonna increase… That’s their goal.

They want increased taxes on almost everyone. They feel like you will agree with them if they call it only taxing the rich. That’s why they say that, reality is they are gonna tax pretty much everyone. So the question that you have to ask yourself is this, are you the kind of person that’s going to just sit back and take it and get pummeled? Or are you the kind of person that is going to take action and actually take a hard look at your tax planning this year and say, all right, you’re gonna ask the question. What can you do this year to better protect yourself against the actions that the people in Washington DC are almost certainly going to take against you? What can you do this year? And then are you gonna do it? That’s really, you’re gonna be one of those two people. You’re either gonna be person a who sits back and just takes it. And then guess what? Quite frankly, you’re gonna get what you deserve, or are you the person that takes action does something about it.

Guess what? You will also get the outcomes that you deserve. And I promise you there’ll be a lot better than the other person, right? So there you go. That’s our message this week. Taxes are arising. This is a great time to do something about it. And here’s the thing. If you’re a client, you got nothing to worry about because we’re on top of this for you. We’re gonna be helping you to do a lot of tax planning this year. But if you’re not a client this is a great time for you to pick up the phone. Call our office at 265-5000. It’s a great time for you to go to our online calendar link. It’s talktomike.com. Give us a shout. Let’s engage in a conversation, and let’s find out if we can help you save a boatload of taxes going forward for the, you know, in your financial future. That’s our message this week Zach any final thoughts before we wrap up? 

Zach – It’s a great one Mike. If you’re listening, now’s the time to take action. Like you said, reach out to us. 

Michael – Yep give us a call. I like the online calendar link, talktomike.com. Easy way to do things. And here’s the deal folks. Again, if you’re driving in the car you wanna call us 265-5000. Easy to remember, just ask for Zach. He handles the calendar, but let’s have a conversation. Let’s see if we can help you save some taxes. And there you go. It’s about those three Cs, controlling your finances, having confidence you’re making the right decisions, and the comfort that you’re gonna be in great shape, no matter what. All right, I know our goal. Get those three Cs and you’re gonna live a prosperous financial future. Retirement will be the best time of your life. Your best is yet to come. Let’s make sure you can take advantage of it. Zach have a great day. And as you’re listening, I hope you also enjoy the rest of your week. We’ll talk to you again soon. 

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