By Kimberly Woody, Senior Portfolio Manager – GLOBALT Investments.

The Tax “Tail” Proposals Currently on the Table

Repeal 2017 Trump tax cutsIncomes above $400K – The top tax bracket goes from 37.0% → 39.6%
Capital gains rateTax investment income at ordinary rates for those who earn more than $1 million in total (wage and investment) income.

Current top rate with surtax and ex state tax 23.8% → 43.4%.

Estate tax changesEliminates the step-up in basis on death.

Trump exemptions eliminated and exemption returns to 2009 levels.

Payroll tax12.4% on income above $400K
Limited deductionsIndividuals earning more than $400K
Financial transaction taxEquity and bond trades 0.01% – 0.03%
Raising the GILTI taxEffective minimum rate 10.5% to 21%
Raising the corporate tax rate21% to 28%

                                                                                                                                                                                 

Taxes are likely to change meaningfully especially for our higher net worth clients. We try to skate to where the puck is headed, not where it is. There are many investors who have resisted paying capital gains taxes and understandably so. It may make sense to avoid gains if you anticipate your heirs receiving a step up in basis upon transfer. And for some, paying taxes on passive income is just antithetical given the mostly unabated decade long advance in U.S. markets. The result of any tax deferment strategy, however, may result in some investors drifting from their preferred risk parameters – in some cases significantly. These investors can end up with excess exposure to parts of the market that have outperformed, in turn possibly making portfolios riskier than what they originally intended.

The value of our dynamic investment strategy, focused on minimizing downside risk is intended to be most noticeable in times of market turmoil. We position portfolios to participate in rising markets, but still align with an investor’s specified risk tolerance. Investors who have resisted capital gains and inadvertently drifted into riskier asset mixes should consider where the potential tax-change puck is headed. One of our concerns is the tax proposal, if enacted, may result in forced selling, if for no other reason than people want to pay taxes at current rates and to protect as much of their generational transfer of wealth as they can under the new laws. The uncertain timing and magnitude of what actually gets enacted just adds to the risk.

As we look to 2022, we not only consider taxes, but tough comparisons relative to 2021. Unprecedented stimulus came in the form of cash paid directly to Americans. While President Biden’s plan is inordinately large, it is spread over eight years and manifests in the form of projects. Considering the time involved to begin and the inevitable inefficient allocations associated with infrastructure projects, the money may reach Americans at a more measured pace, not an immediate injection. Will the spending be enough to offset the impact of significant increases in taxes? The government will need more revenue, but it’s a delicate operation to extract the funds to pay for all of this without bruising an economy that’s rebounding from the pandemic. Given the divided congress, it is exceedingly difficult, and more importantly, highly likely to be counterproductive, to handicap what measures will get passed and what will not, and taking action ahead of time. It is time to prepare, but not yet time to act.

Sources: Tax Foundation, Whitehouse.gov, Kiplinger.

GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company.  This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training.  Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT’s Chief Compliance Officer, 3400 Overton Park Drive, Suite 500, Atlanta GA 30339.  You can obtain more information about GLOBALT Investments and its advisers by accessing the Investment Advisor Public Disclosure website.

The opinions and some comments contained herein reflect the judgment of the author, as of the date noted.

Investment products and services provided are offered through Synovus Securities, Inc. (SSI), a registered Broker-Dealer, member FINRA/SIPC and SEC Registered Investment Adviser, Synovus Trust Company, N.A. (STC), Creative Financial Group, a division of SSI. Trust services for Synovus are provided by STC.

Regarding the products and services provided by GLOBALT: 

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