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Potential Tax Changes

This week’s article is going to be a break from NUA. Don’t worry as we will return to your regular Net Unrealized Appreciation (NUA) broadcasting soon. 

Today, I wanted to share some quick thoughts I picked up on a recent webinar regarding the potential tax changes coming our way. As always, a few disclaimers.  The first is nothing is set in stone with taxes until the ink is dry on the approved and signed legislation. Also, these are tidbits I picked up from a live webinar. I haven’t had a chance to relisten to the webinar yet so this is what I was able to quickly write down. 

With that, it was a tax webinar hosted by Jeff Levine and Michael Kitces. They are two of the big financial planning nerds in my world (that is what they call themselves). Jeff’s specialty is taxes so he led. 

The first point they mentioned is taxes can go retroactive. I know this topic comes up anytime there is a change in tax law. Jeff mentioned this has been permitted for years and years. I guess it was even done in 1993, but I was in school so forgive me for not noticing. Personally, I don’t see it happening due to the political fallout from it. However, it is possible. 


They spent quite a bit of time talking about capital gains. Jeff mentioned there are really three options with capital gains.  

  • First is nothing happens. Basically, everything in place right now stays that way (I don’t see that happening).
  • Next, changes go into effect retroactively. Not sure how you can do any sort of effective planning for retroactive changes.
  • Finally, the changes would go into place in the future, which is most likely.

Jeff spent a bit more time talking about what he expects to happen in the world of inherited assets. The main area here was on the topic of the current rule of a step-up in basis at death. As a refresher, if you inherit taxable assets, primarily stock, upon someone’s death, the new cost basis for you is the value at the date of death of the previous owner. So, if you inherit Berkshire Hathaway stock your Great Uncle bought decades ago at $10,000 a share, your new cost basis would be something like $420,000. So, you would avoid having to pay the taxes on the $410,000 of growth. When you sell it the gains would basically treat it as though you paid $420,000 for the stock. Think of it as a giant reset button. 

This topic has been a hot one recently as the ultrawealthy have used (and possibly abused) this concept to avoid taxes forever. There was a series of articles on this topic from ProPublica recently. I won’t go into the specifics as we could spend forever here. Rather, let’s cover what Jeff mentioned. 

The expectation is there will be some sort of a base level to provide a limited step-up in cost basis. It can be difficult to find complete records on inherited stock when dealing with step-ups. There have been proposals to provide a limited step-up of $1 million per person, or $2 million for a couple. So, following the example before of the inherited Berkshire stock, if your Great Uncle left you 10 shares of BRK for a total value of $4.2 million, your new basis would be $1 million and you would owe taxes on the additional $3.2 million in value. Again, just a proposal at this point. 


Next, and this is probably what you are here for is what about individual taxes. I agree with Jeff’s take this is most likely going up. Reality is the current tax rates are going up in a few years anyways. The tax changes that happened in 2017 were permanent for corporations and temporary for individuals. It is simple enough to say this isn’t really a tax increase. It is simply letting what would have normally happened go ahead and happen a few years earlier. 

Now, the most likely changes will be those who make more than $400,000 annually. Jeff feels tax increases for those making less than $400,000 are low. Again, I agree here as this was a constant theme during the campaign. And because this question came up on the webinar and I’ve already been asked it – the definition of income for $400,000 is not known at this time. No clue if it is gross, AGI or some other unique way to measure income. 


A few final points. First, the question of Direct Indexing came up and whether it would be beneficial for individuals. Michael did not think this would be a hotter topic. I disagree, especially for those making more than $400,000 and saving significant assets in taxable accounts. The ability to keep more of what you make is easier through Direct Indexing. His reasoning was it has been around for years. Part of my reasoning it is now cheaper and more readily accessible for investors. Click here for a refresher on Direct Indexing

Next, more details will continue to come out as we progress through the year. I expect this to happen in 2021 since 2022 will be a campaign year, but what do I know. My point here is twofold. First, I expect elected officials to say more on this topic over the next few months. I saw a blurb over the weekend that one key Democratic Senator is now on board for a higher corporate tax rate as well as increasing the highest capital gains rate to 28%. 

More importantly, assuming these changes happen in 2021 and begin January 1, 2022 (I’m just making up dates here for my example), do NOT wait until the last minute to make any changes. Assuming there is enough time between when the legislation is signed and when it goes into effect get with your CFP, CPA and attorney before New Year’s Eve. 

Again, these are quick notes from a live webinar. Take your time to talk with your tax professionals before making any big changes to anything. 


The one thing we know with tax law though is it provides specific guidelines of what we are permitted to do, once the ink is dry. And, being smart about our taxes is a great way to improve our financial picture as opposed to hoping to find the next hot stock.  Or, to quote another big tax planning expert in my world – “Taxes are a matter of fact. Investments are a matter of belief.”