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Adapting Your Financial Plan Ahead of Changing Policy

February 1, 2021
By: Chris Powers, Senior Vice President and Managing Director, Girard, a Univest Wealth Division

Married couple looking at financial plansMany people are unsure how the new administration’s economic policy will impact them and are concerned about the potential for rising taxes. While Biden has committed to not raising taxes for individuals earning less than $400,000 per year, it may be a good idea to adapt financial plans to accommodate shifting tax policy.

Two key tax changes planned by the Biden administration include:

  • Taxing long-term capital gains and dividends at the ordinary income tax rate of 39.6% for annual incomes greater than $1 million.
  • Reducing the amount of funds an individual can transfer tax-free to $3.5 million for federal estate taxes and $1 million for federal gift taxes.
These potential changes have a lot of people asking, “Will my taxes go up?” Here is a little insight into how Americans’ finances could be impacted and what to do about it:

Estate taxes
It’s important to consider President Biden’s tax plans. Currently, the federal estate and gift tax exemption is very high, with individuals only paying estate or gift taxes on transfers exceeding $11.7 million (for 2021). Biden’s plan to reduce the thresholds for federal estate and gift taxes could affect many people who plan on leaving a financial legacy.
How to prepare: To prepare for potentially higher estate or gift taxes due to a lowered threshold, individuals may consider the use of various types of trusts, as well as other strategic planning, to transfer property and funds in a tax efficient manner. Individuals may also attempt to reduce estate settlement costs at death by removing certain assets from the probate process. For example, this can be accomplished through naming individual beneficiaries (such as spouses or others) on contract assets, such as retirement accounts and IRAs. With taxable accounts, individuals can utilize a stipulation called a “transfer on death” that essentially allows those assets to avoid probate and be given directly to the listed account beneficiary. By employing tactics like these, people can work toward reducing estate settlement costs and or taxes they may otherwise pay.

Capital gains

In the past, long-term capital gains were taxed at a lower rate than short-term capital gains. But the Biden administration’s plan to increase long-term capital gains taxes to 39.6% on annual incomes greater than $1 million means many Americans could face higher taxes on their investment returns. This tax increase may be unavoidable for many investors, but there are a few ways to potentially offset it.

How to prepare: One of our year-end planning tips comes in handy here: offsetting capital gains with capital losses. Investors can offset any gains during the year with losses, in order to lower their overall gains and decrease the funds exposed to a higher capital gains tax. Tax-deferred retirement plans can also be utilized, but ultimately, it’s important to work closely with your financial advisor and tax planner to solidify a tax and financial strategy that best suits your specific needs.

Many people can become worried about the implications of potential tax policy changes, or hopeful about the possibility of future tax breaks. However, it’s important to always plan defensively and remain adaptable, rather than make your financial security reliant on fiscal policy modifications that may or may not happen.

If you have any questions about adapting your financial plan to address future concerns, the advisors at Girard are here to help. Contact us to have a conversation about creating a comprehensive and adaptable plan for your financial future.

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This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial, tax and/or legal professionals before making any financial or tax related decisions.