You may be fielding calls from clients rattled by prognosticators screaming (and tweeting), “Taxes are going up! Inflation is going to run away with your retirement nest egg!”
It can be difficult to lower clients’ blood pressure. But you can, and you should. I don’t think there is cause for clients to worry or make moves today. But as debate rages in Congress and in the media, this is an opportunity to share some lessons I learned over four decades of studying the markets under the tutelage of my father, Paul A. Samuelson, a Nobel Laureate in economics.
He and I talked often, especially in challenging times, about taxes and inflation, the enemies of wealth accumulation and maximizing retirement income. I can share some of what I learned from him, so you can help educate your clients. In future columns, I’ll expand on how you can help clients maximize their income in retirement by coordinating multiple accounts and how to deal with inflation.
Four Tax Proposals And What They Mean To Your Clients
President Biden’s first proposal involves taxing dividends and capital gains at the same rates as ordinary income. This strategy would be unwise, as it would incent companies to retire equity and issue risky debt. High leverage almost invariably leads to poor operating performance.
Your clients need to avoid risky, high-yield bonds. Period. They also need to avoid realizing capital gains now, because current tax rates may be lower than next year’s but still higher than their tax rates in retirement.
A second proposal is more likely to move ahead. It involves increasing tax rates on interest income and capital gains for very high-income households. The Medicare Investment Tax currently adds 3.8% in taxes to support Medicare, and a proposed Childcare Investment tax of 5% could support childcare programs. Increased tax rates should also encourage some investors to substitute municipal bonds for taxable bonds.
Of course, my father would have envied how low even proposed investment tax rates are compared to what he paid during most of his adult life.
A third proposal would increase tax rates on ordinary income for high-income households. Again, should this be enacted, you can guide your clients toward options to decrease their tax liabilities. Those options include maximizing qualified contributions to 401(k) accounts and accelerating charitable donations of appreciated stock.
A fourth proposal involves a higher corporate tax rate and a minimum tax rate on earnings shifted to low-tax countries. This may increase taxes for some companies, but your clients have no obvious way to trade on it.
My Advice: Pivot Client Conversations To How To Reduce Their Taxes
Clients should stay focused on ways to reduce their taxes while they are working. Wage earners in all federal tax brackets can maximize 401(k) contributions and gifting appreciated stock. Households in low (10% and 12%) and medium (22% and 24%) federal tax brackets use deductions to absorb some of their tax liability.