Raising taxes on the wealthy seems popular again.
In a recent survey, most Americans (including nearly half of Republicans) support raising taxes on people making at least $400,000 while keeping the current tax rates for everyone else. In that vein, President-elect Biden has wants to raise taxes on the wealthy, New York state lawmakers may soon hike taxes on high-net-worth residents to help counter a deficit worsened by Covid, and San Francisco’s new tax slaps an extra levy on companies where executives make 100 times more than the average worker.
“Many states are adopting tax bills similar to San Francisco’s to tax high wage earners, said Michael Winn, Los Angeles-based managing partner at Audent Family Wealth Advisors. “The top 1 percent is under the microscope right now.”
“As we approached the election, the Democrats made tax increases and the redistribution of wealth part of their plan,” said Todd Hoffman, executive managing director and wealth manager at Hoffman Private Wealth Group at Steward Partners Global Advisory in Clearwater, Fla. That’s made an easy target of Republican platforms “because many people were unable to participate in the market increases and were frustrated with the disparity between people who had wealth and those who didn’t,” he said.
Bruce Primeau, CPA and president at Summit Wealth Advocates in Prior Lake, Minn., said his wealthy clients are already tired of paying too much in taxes. “They see the law as it currently stands having offered a little relief … but overall,” he said, “they’re tired of hearing ‘the wealthy need to pay their fair share’.”
The tax rate structure is stacked against wealthy individuals who are taxed at a higher rate and have a tougher time accessing tax credits, said Primeau. “I help my small-business-owner clients live as much of their life through their company as they can within the law,” he said. “Perhaps they can even install a cash-balance plan should the 20% qualified business income deduction get repealed.”
Mary Kay Foss, a CPA in Walnut Creek, Calif., hasn’t heard high-net-worth clients react to potentially rising tax rates. “I think the pandemic response is expensive, and everyone expects that more tax funds are needed to deal with it,” she said.
Potentially “higher tax rates absolutely increase the possibility of slower economic growth, so be realistic about investment market returns,” said Jeff Winn, managing partner at International Assets Advisory in Orlando, Fla. “Nobody would be wise to expect the past few years of market returns to be the new norm, which is true even if tax rates don’t move an iota. Should tax rates move higher … innovation and growth will now be offset by there being fewer available after-tax dollars for research and investment.
“Our work primarily impacts capital gains and estate tax exposure and is less focused on income taxes,” he added, noting that tax opportunities with investment assets can include Opportunity Zones and, for the charitably minded high-net-worth client, a charitable remainder trust.
Other options can include a Roth conversion or accelerating withdrawals from a traditional IRA beyond required minimum distributions while income taxes are still relatively low.