Biden tax hikes dominate adviser-client discussions

As proposals to increase taxes on wealthy Americans and high-income earners to fund government spending initiatives proliferate in Washington, preparing for tax hikes has become a top priority for investment advisers and their clients.

“This is the world I’m living in,” said Joanne Burke, founder of Birch Street Financial Advisors. “That’s a conversation I’m having probably on a daily basis with clients. Everyone I talk to has the general sentiment they’re going to have a tax increase.”

Silvia Manent, founder and managing partner at Manent Capital, talked to a client on Thursday morning about tax strategies.

There’s a sense of urgency to those discussions, she said, because now is the time to make moves such as converting a traditional individual retirement account, where money is taxed when it’s withdrawn in retirement, into a Roth IRA, where contributions are taxed but withdrawals in retirement are tax-free.

“Taxes will never be as low as they are today,” Manent said.

That kind of thinking has been spurred in part by the $2.3 trillion infrastructure and environmental package President Biden released on Wednesday. It contains a proposal to increase the corporate tax rate from 21% to 28%.

Although Wednesday’s initiative did not mention raising individual or capital gains tax rates, those ideas could come into play to pay for another big social spending package that Biden will unveil later.

Earlier this week, Sens. Chris Van Hollen, D-Md., Cory Booker, D-N.J., Bernie Sanders, I-Vt., Sheldon Whitehouse, D-R.I., and Elizabeth Warren, D-Mass. introduced a bill that would end the ability of heirs to step up the cost basis of inherited property to its value at the time of its previous owners death. Last month, Warren introduced a bill that would impose a wealth tax on Americans who have more than $50 million in assets.    

TAX ANCHOR DRAG

Jeremy Finger, founder and chief executive of Riverbend Wealth Management, said his clients have been doing a lot of tax planning. In addition to Roth conversions, they are considering harvesting capital gains to pay those taxes now and stepping up contributions to health savings accounts, which offer several kinds of tax breaks.

“If someone is not talking about taxes right now, then, truthfully, they’re dragging anchor,” Finger said. “It’s like trying to paddle a boat with the anchor out. Put the anchor in the boat and lessen the drag on your financial life.”

Barry Federici, founder of Family First Wealth Management, said his clients are bracing for higher taxes.

“I have recently been asking my clients and prospects for their opinions regarding this matter,” Federici said. “Most of the time, their response is that tax rates will head higher. If so, I use that response to make recommendations — specifically, using a Roth.”

ESTATE TAX WORRIES

Advisers with clients in metropolitan areas with high costs of living are especially wary of potential tax increases. Noah Damsky is principal at Marina Wealth Advisors in Los Angeles. In addition to the elimination of stepped-up basis, lowering the estate tax exemption could mean that many of his clients will easily bump up against the threshold just based on property values in Southern California.

“It’s going to be a real hit on folks with high income and significant assets,” Damsky said. “I’m throwing the idea of higher taxes out there so that if we have to plan for that, it’s not a surprise.”

A potential drop in the estate tax exemption from the current $11.7 million for individuals is top of mind for Jonathan Blattmachr, director of estate planning at Peak Trust Co.

“The most important message is that for everyone who has any significant wealth, it would be great to make large gifts now," Blattmachr said. "It’s use it or lose it.”

Jason Ray, founder and chief executive of Zenith Wealth Partners, expects that more tax-increase proposals will be coming out because the corporate rate probably won’t go all the way up to 28%. Instead, more revenue will have to be found in retirement accounts and elsewhere. “I think they’re going to need to be more creative,” he said.

It’s difficult to predict what kind of tax policy will emerge from the legislative process, which forces compromises. But the consensus among advisers is that their clients will face higher tax bills in the future.

“The bottom line is that rates are going up,” Federici said.