Will Your Taxes Go Up?

Apr 27, 2021 | Getting Started, Saving & Investing, Taxes

Over the past several years the federal government has been on a spending spree, while at the same time cutting taxes. Does this mean you will be paying more in taxes soon?

Modern Monetary Theory vs. Conventional Thinking

If you borrow money, you have to pay it back. At least that is the way it works for people and businesses. A relatively new economic concept called Modern Monetary Theory suggests that, since the government can print money, it is not bound by conventional economic rules. If the government spends more money than it takes in from tax revenues, it can borrow money by issuing Treasury bonds or just create more money. While economists and politicians in Washington D.C. debate Modern Monetary Theory, conventional thinking still dominates our thoughts about the national debt, which has not been this high as a percentage of our Gross Domestic Product (GDP) since World War II. The Great Recession, tax cuts, and pandemic relief spending have dramatically increased our national debt.

Source: JP Morgan Guide to the Markets Q2 2021

If you are spending more than you are earning, you must earn more, spend less, or both. The United States is spending substantially more than it is earning and that trend does not seem to be ending soon. Which leaves earning more (raising taxes) as a remedy to the debt problem. As a taxpayer, how might this affect you? This is where tax planning comes in (see Tax Planning section below).

Anticipated Tax Increases

What are the Biden Administration’s ideas for raising taxes? Here are some of the considerations:

  • Increase the corporate tax rate, lowered at the end of 2017, from 21% to 28%, with a minimum 15% tax on earnings (some corporations pay no income taxes because of extensive deductions)
  • Increase the top individual income tax rate from 37% to 39.6%
  • Increase capital gains taxes for taxpayers with incomes over $1,000,000 from 20% to 39.6%
  • Change the federal gas tax, last set in 1993 at 18.4 cents per gallon, to a vehicle miles tax based upon the total miles driven per year (making electric vehicle owners subject to highway infrastructure taxes)
  • Lower the estate tax threshold from $11.58 million to $3.5 million per person
  • Eliminate the step-up in basis for those who inherit investments (which removed or reduced capital gains tax on highly appreciated assets)

These are the most talked about proposals at this time. There will be plenty of lobbying and political maneuvering in the days and months to come. Regardless of the details of who will pay and how, some or all of us will have to pay more taxes to increase government revenue to tame government debt. Tax increases may affect more than the wealthiest Americans; they may eventually reach the middle class as well. How much of an impact might the middle class expect? That is the trillion-dollar question. But everyone, not just the wealthiest, deserves a financial plan for any tax scenario that impacts one’s finances and lifestyle. Unless Modern Monetary Theory moves from theory to economic fact, tax increases are unavoidable.

Tax Planning

You file tax returns every year, so why is tax planning important? Because filing and paying taxes every year is recording history of your earnings and giving the government some of your revenue. It is looking through the rear-view mirror. Tax planning is looking through the windshield, helping you navigate and plan for potential hazards ahead. Your Greenup Wealth Advisor, in coordination with your tax specialist, can help you plan for any upcoming tax changes and potentially mitigate the consequences to your income and your legacy. Give us a call to discuss how tax increases may affect your financial plan.

GreenUp Street Wealth Management, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.  Past performance is not indicative of future performance.

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  • The GreenUp Wealth Management Team

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