Proposed Tax Increases with the Build Back Better Plan | The Retirement Income Show

Mark Elliott: Welcome back to The Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial. Troy and his team have over 100 videos out on YouTube. They’re getting great response. I think people are saying, “I’ve got some questions and concerns about where I’m headed in retirement and where the country’s going, and what do I need to do? What do I need to be aware of? How can I retire the way that I want to, the way that we want to?” Troy has a lot of videos. Just search for Troy Sharpe and Oak Harvest. There’s no cost to watch any of these.

I think you’ll find there are some really cool scenarios he’s thrown out there on YouTube as well. You can always find out more about Troy and the team, OakHarvestFinancialGroup.com. The office, 920 Memorial City Way, right off I-10 and Bunker Hill. I’m Mark Elliott. Glad you’re with us today. We’re talking about some of the tax policy changes that are in the Build Back Better plan.

Then we’re going to touch on some of the recent economic changes in our country. Troy, I guess we need to continue on the proposed tax changes right now in the Build Back Better plan, because you certainly spent a lot of time on Roth conversions, which is probably one of the biggest concerns that people have is I’ve got so much money sitting in tax-deferred accounts, IRAs, 401(k)s, I need to lessen my tax burdens somehow, someway.

Troy Sharpe: I wanted to on the first couple of segments here to actually get through some of the other proposals within the Build Back Better legislation, but this Roth conversion piece, it’s so impactful for so many of you listening and I just ended up spending a little bit more time there, but going to flow through some of these real quick. Before I get into some of the economic updates, inflation obviously is surging. People are concerned about that.

The stock market’s hitting all-time highs. People are concerned about that, but we want to help alleviate some of those fears cut through the noise. I also want to introduce you to a new YouTube program that we’re doing, which is very exciting. I watched the first episode the other day and I was cracking up laughing. For those of you with small businesses, ranches, property, family farms, or you’ve just done a really good job investing and saving over the years, the estate tax for a lot of you has not been a concern.

President Trump dropped it or, excuse me, increased it up to if you’re married this year, if you passed away, it was 23.4 million, roughly that you can pass away with before you owe any estate tax. After that, it’s a 40% taxation on anything above that. Now, really quick, important to point out, the estate tax is different from income taxes, is different from investment taxes. We have all these taxes out here. One day I’m actually going to keep track of every single tax that I pay and do a show on that.

That’s going to six million per spouse. Instead of 23.4 million per family, it’s dropping to, it seems it’s going to be around 12 million. The number is actually five, but it has some inflation adjustments in there. It’s not quite finalized, but it looks like it’s going to be around six million per spouse. If you have a net worth, meaning all your real estate, all your land, your business, your assets, everything of more than 12 million and you’re married, you probably have a significant estate tax problem. If you’re above six million and you’re single, you probably have a significant estate tax problem.

Keep in mind your IRAs, they are subject to income tax when you pass away within 10 years. Not only will you pay estate tax on them but they’re also the IRA’s 401(k)s. Those are also subject to income tax. Now, I don’t want to go too far down that rabbit hole here, but if you have a lot of money inside your retirement accounts and you’ve not diversified your tax buckets, as we talk about on this show, and let’s say you own a small business or you own some real estate.

If all you have liquid money is your retirement account, your beneficiaries would have to take out of that retirement account, pay income tax on that distribution to pay the estate tax on everything else. The estate taxes, it really is, it’s confiscatory. If you’re up in that net worth range, you could easily end up paying 60%, 70%, 80%, without planning, of your entire estate to the government.
C corps. We hear a lot about the worry about C corporations. This is mostly your publicly traded stocks. President Trump reduced the corporate tax rate from 35%, which it had been for decades in this country, to 21%. They’re going to increase it to 18%, it looks like, on the first $400,000 of corporate income. This is really going to affect small business owners if you’ve established as a C corp, which most of you probably should not have done. That’s more of a legal discussion. 21% on the next 400,000 to 5 million of income, and then 26.5% for income above 5 million, and then income above 10 million, which will be mostly these publicly traded corporations, a 3% additional tax.

For most of the corporations out there publicly traded, it seems to me, if I’m doing this math correctly, it’s around 29.5% on corporate profits, which is lower than the 35%, but it is significantly higher than the 21%. Now, will this impact the stock market is ultimately what I’m getting at? Will this impact your portfolio? The simple answer is probably not. One, corporations, as I said, for decades were used to paying 35%. Not to mention that corporations have ways to adapt to the corporate tax environment.

One, they can increase prices, they can take depreciation expense, they can expense other items, they can maneuver around. This is not such a huge increase to where corporations are going to be caught with their pants down, or hands behind their back. Maybe that’s a better analogy here. The point is probably not going to impact the stock market that much. Corporations can navigate these higher tax environments. As long as it doesn’t jump up to 45%, 50%, 60%, they can navigate this.

Small business owners. There is changes to the qualified business income deduction. I’m not going to go into the details here, but this is a massive opportunity passed under the Trump administration for small business owners. Most people don’t understand that small business owners are not swimming in cash. They’re not like Uncle Scrooge opening their vault and going swimming in a bunch of gold coins. Most small business owners reinvest any profits they make into their business, whether it’s additional resources, human capital, technology, government costs, taxes, et cetera.

I remember when we first started having to pay significant taxes, that took up a lot of our liquid capital in the beginning years. It was very, very difficult to not only grow the company but then pay those tax bills. This qualified business income deduction change is happening to it. I encourage you to look it up, talk to your CPA. It doesn’t impact enough people listening to the show right now for me to go into detail, but if you are a business owner, I do strongly encourage you give us a call. As a business owner myself, this is an area where absolutely a lot of planning can be done.

We talked about Roth conversions. They are going to go away. You cannot convert your IRA to a Roth, if you’re single and make more than 400,000 or married and make more than 450,000. Capital gains going to 25% plus the net investment income tax of 3.8, which is going to raise the top capital gains rate to 28.8%. For those people that have income of 445,000, single 501,000 married filing jointly. It is going to be retroactive, it seems, to September 13th of this year, 2021.

Top rate on ordinary income or income you would earn from wages, salaries, tips, et cetera is jumping from 37% to 39.6% next year, 2022. That threshold will be 400,000 to 450,000 if you’re single or married filing jointly. Another one for small business owners. If you have an S corp, if you have a limited partnership, if you have an LLC, the 3.8% surtax that was created under the Obamacare legislation, the Affordable Healthcare Act, that applied to investment income is now going to apply to normal income for anyone who makes more than $400,000 or $500,000 in modified adjusted gross income.

If you’re a small business owner, this pass-through income is going to be subject to this 3.8% net investment income tax, it seems, which again, is going to put, if you’re a successful small business owner, very possibly you could be looking at 45% to 50% total taxation on any small business profits, depending on what that level of income is. It is pretty significant for small business owners, for sure. We need to do some planning around that.

Then if you make more than 5 million or 10 million, there are some additional taxes. I’m not going to spend too much time going into those because again, they do not impact the majority of our listeners. That’s it. It’s a quick rundown, it’s a quick summary that is, as of today, it’s around, I believe today’s November 10th.

Mark: Are all these things that you just went through, are all of them in the plan that’s right now in front that’s supposed to be voted on this week or next week?

Troy: This is in the Build Back Better. No. This one has not passed yet. This was just the proposed changes. It seems they will be up for negation, but they’ve been negotiating for, I believe all year, honestly. I’d be shocked if Pelosi didn’t have most of these things prewritten one, two, three years ago and it’s just a matter of negotiating back and forth.

Mark: The key then right now is to be looking at what can we do to lessen taxes moving forward. Is that your number one takeaway?

Troy: Yes. A lot of this, again, some of you absolutely will be impacted by this. The main takeaway is we talked about the debt. We talked about where we are as a country. We talked about where you are as far as how much money you have in your retirement account, how much money you have in that tax-infested 401(k) or IRA. You have two choices when it comes to retirement, and none of those choices are “pay no tax”. Unless you just don’t have any money. The choice that you have is how much tax do you pay. The other choice is when do you pay it.

When we start to set as a country, these are introduced, these new taxes for people at these arbitrary thresholds of modified adjusted gross income or taxable income, when we start to set these new arbitrary thresholds at some point in the future, it’s my belief, again, it’s my opinion, but once they’re introduced, it becomes a lot easier for future administrations to lower those thresholds.

Now, someone with $150,000 of income, $200,000 is subject to these 3%, 4%, 5%, 6% excise taxes.

You introduce the legislation, you introduce these different thresholds, you introduce these new taxes and then you start to nibble away. Then you start to nudge. Then you start to really bring these down to more middle-class people. That is the fear and that is the concern. Right now they are primarily focused on those making more than $400,000 or $450,000 of income, but indirectly, many of us will end up paying more because those costs a lot of times will be passed through, and that’s part of what we’re seeing right now with some of the inflation data. That’s really what we’re going to talk about and how it impacts your retirement.

Next. The Federal Reserve made some really big announcements that will absolutely impact the stock market over the coming years. We are going to go through those. Again, on the Retirement Income Show, everything that do, we tie it back to how it impacts you, how it answers those big questions. Do you have enough? Can you retire securely? How long will your money last? How do you pay less tax? If something happens to you, will your family be okay?

That is what our Oak Harvest Retirement Process process answers, those questions. Give us a call, 1-800-822-6434. Check out the YouTube channel. We’re getting hundreds of thousands of views on these videos because we’re doing powerful financial planning case study videos. We’re going to talk about Chris Perras, our chief investment officer, his new segment, when we come back after this break.

Mark: A lot of things to consider as you move forward and watch this Build Back Better plan when it all gets approved and pass, and what areas really will affect you. The easiest thing to do would just be to sit down with Troy and the team at Oak Harvest find out where you are in all of this, 800-822-6434. There’s no cost. There’s no obligation to chat with Troy and the team. They’re here to help, they just don’t know if they can until they hear your situation. What would be the best way for you moving forward? 800-822-6434.
The Fed, the markets, inflation, a lot of economic things going on right now. That’s where we’re headed next. Stay with us, this is the Retirement Income Show with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group.