Robert Cannon Shares the Latest Trends in Investment Tax Planning

Wealthier Americans are going to foot the bill for the long-term economic program of the country. President Joe Biden plans to reverse the 2017 tax cuts that favored those at the top, including corporations.

He revealed plans to increase federal revenues by $2.1 trillion during his campaign trail over the next decade. This increase aims to reverse climate change, improve infrastructure, and offer more aid for more impoverished Americans. The plan is to address inequalities in a tax system that last saw a significant federal tax hike in 1993 while also reducing the need for government debt as a source of funding.

Proposals have also been made to increase corporate income tax to 28% from the current 21%, repealing the changes made by the Tax Cuts and Jobs Act of 2017. This will raise the combined tax rate for corporations to 32.34%. According to the Tax Foundation, this is the highest corporate tax rate in the OECD and G7.

If this proposal is implemented, America will lose its competitive edge. It will also lead to job losses and reduced wages. Unfortunately, it will also increase the investment cost, and many opponents believe it would introduce complexities and inconsistencies in the tax code.

Robert Cannon from Cannon Wealth Solutions discusses the need for investment tax planning to help lighten the burden of Biden’s proposed tax changes. He recently said: “Even if the government tax plans are not fully implemented, the Republican tax overhaul from 2017 is due to expire in 2025. Investment tax planning is an important consideration for those wanting to reduce their taxes on investment returns.”

Higher Capital Gains Taxes

Biden has proposed an increase in capital gains tax from 23.8% to 39.6% for taxpayers earning over $1 million annually. This will end the 100-year-old tax preference in capital gains and bring the rate on par with the ordinary tax rate.

In an article earlier this year, Forbes highlights the history of the various revisions and capital gains tax reforms. This tax has raised many debates since the creation of capital gains preference in the 1920s.

When capital gains were first introduced with the Revenue Act of 1913 after the ratification of the 16th Amendment, profits from property sales were treated like regular income and taxed as such.

Two strategies can be followed to reduce capital gains tax, according to Cannon. One is the delay of selling investments until they qualify for long-term capital gains treatment. The other is known as “tax harvesting” and allows the taxpayer to offset gains from losses each year.  Cannon insists these strategies need to be used carefully with the help of a qualified tax advisor.

Other Planned Tax Proposals

The U.S. News outlined other tax policy changes likely to be enacted. Payroll tax of 12.4% will be reintroduced to people earning above $400,000. Also, everyone falling in that income bracket would see a cap of 28% on itemized deductions and would not qualify for the Internal Revenue Code’s Section 1031 “like-kind exchange.”

Biden also proposes a flat 26% tax credit for 401 (k) investments instead of the current deduction for contributions.

Estate and gift taxes did not escape attention in the proposals. Asset values left to heirs would not be set on the date of death but on sale. This means beneficiaries will pay the current capital gains tax. Proposals for estate and gift tax exemptions reduce a threshold of $3.5 million per person from the current $11.7. According to the plan, the estate tax rate could increase to 45%.

According to Cannon: “Contributions to tax-efficient accounts like traditional IRAs and 401(k)s offer tax-deferred growth but are subject to limited contributions. Tax-free growth potential is offered by Roth IRAs and Roth 401(k)s.” Cannon suggests combining investment account types, including brokerage accounts, to diversify the benefits and minimize taxes on these types of investments.

Other Tax Efficient Investment Strategies

Diversified portfolios offer the best tax benefits but require a good understanding of tax laws. Cannon Wealth Solutions suggest clients make tax-smart investments like municipal bonds, which are generally income tax-free. Often, they are also tax-exempt at state and local levels.  Tax-managed mutual funds, index funds, and exchange-traded funds are also more tax-efficient.  

Choosing the right account type for each type of investment also ensures high taxes do not reduce the generated income. Cannon suggests, “The use of tax-deferred accounts like IRAs is recommended for taxable incomes from investments like stock funds. Unfortunately, this means the money has access restrictions. Tax-neutral investments can be held in a more accessible account type, like a taxable brokerage account.”

Gaining the best potential tax benefit from investment requires a comprehensive approach and diversification. You need to follow a sound investment plan that takes your liquidity into account. Cannon Wealth Solutions offer professional tax advice for tax efficiency in all your investment options.