Consequently, many people dismiss the discussion and are all for the proposal because it won’t impact their pocketbooks. They may be wrong.
Right now the changes are still in the discussion stage; nothing has been finalized. That being said, I see two red flags that have the potential to dent the pocketbook of many everyday Americans.
First is the often-repeated claim that those earning over a million dollars per year will carry the bulk of the financial burden. On average, that’s about 500,000 people.
It may sound good on paper, but in reality there’s no exclusive club for earners of more than a million dollars a year. It’s an income range that’s very fluid; people move in and out with relative frequency. In fact, a study reported by CNBC showed a tremendous turnover in that income group over a nine-year period.
As a financial advisor, my concern is for the one-hit wonders. Those are the small business owners that devoted their lifetimes and put their hearts and souls into building their business and now want to sell and retire.
I recently spoke to a small business owner who did exactly that. He was unhappy that Uncle Sam would be taking about 25 percent of his gain. But he’d be outraged with what Uncle Sam is considering now.
Under the new proposals, the government would tax about half of the gains if a business owner sold for a million dollar profit, technically making him or her a millionaire. That’s not what I would call a “fair share.”
I think it’s an extremely steep price for sweat equity. It hurts those that fall into that income bracket just once because they sold a business they had built and worked in over a lifetime. For many business owners selling the business is their retirement plan. By contrast, most people who spent their careers as employees pay far less in taxes on their retirement distributions from their pensions and 401(k) plans.
The other red flag that I see is the probable loss of “stepped-up basis” at death. Here’s an example: Your parents were solid middle class and years ago paid $100,000 for a home where you and your siblings lived.
Time passes, as do mom and dad, and the home is now worth $300 thousand.
With the current law, you would receive a “step up” in basis to $300,000, not the original $100,000. Assuming that you sold at $300,000, there would be no capital gains because $300,000 would be the cost basis. So you and your siblings would share the entire amount tax-free.
With the proposed tax law changes there wouldn’t be a stepped up basis at death. You would pay taxes on the $200,000 gain before sharing the proceeds. That scenario would likely hit a lot of middle class pocketbooks.
People want improved infrastructure, especially if someone else pays for it. I’m concerned that so many proponents claim that just the wealthy will foot the bill. But drill a bit deeper into the proposal and you’ll see it’s likely to tap into a lot of working and middle class wallets.
Do you know someone who would like to meet with a financial advisor?
Ken Morris 248.952.1744
E-mail your questions to email@example.com
Ken is a registered representative of LPL Financial. Securities and financial planning offered through LPL, a Registered Investment Advisor, member FINRA/SIPC. Ken is Vice-President of the Society for Lifetime Planning in Troy. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.