As a financial advisor, staying informed about tax policy changes is essential, especially as we approach an election year. Tax policies can significantly impact personal finances, investment strategies, and overall economic conditions. This article explores current tax policies and how potential changes in government could affect them.
Income Taxes: Possible Adjustments
One of the central elements of any tax policy discussion is the structure of income taxes. The current system in the U.S. has seven federal income tax brackets, with rates ranging from 10% to 37%, depending on income levels. While neither political party has unveiled specific proposals yet, previous elections have shown that income tax rates are often subject to change following an election.
For Individuals
Proposals that focus on adjusting income taxes may tend to affect taxpayers differently based on their income levels. Taxpayers in higher brackets may face potential increases, while those in lower and middle-income brackets might see tax relief. In the past, tax cuts have been a tool for stimulating economic growth, while tax increases for high-income earners have been proposed to fund public services or reduce the national debt.
For Families
Tax credits and deductions, such as the Child Tax Credit and Earned Income Tax Credit (EITC), have historically been key elements of tax policy for families. Changes in these areas may result in either an expansion or reduction of benefits, depending on the direction tax reform takes after the election. Families should pay attention to potential modifications to these credits, as they can directly affect disposable income and financial planning.
Capital Gains Taxes: Potential Shifts
Capital gains taxes are another area that might see shifts depending on the outcome of the election. Currently, long-term capital gains are taxed at 0%, 15%, or 20%, depending on income levels. Short-term gains are taxed at ordinary income rates. There has been speculation in the past about whether future administrations may raise capital gains tax rates, particularly for higher-income earners.
Impact on Investors
If capital gains tax rates are increased, it could potentially affect investment strategies. Investors might consider holding assets for longer periods to defer taxable events or shifting portfolios toward more tax-advantaged accounts, such as retirement accounts. Conversely, if capital gains tax remains unchanged, there may be less incentive to alter investment behavior.
For investors, understanding how changes in capital gains tax policy could affect your portfolio is critical for making informed decisions. Working with us to review your portfolio ahead of potential changes may help you mitigate the impact of any increases in capital gains taxes.
Corporate Taxes: A Possible Area of Focus
Corporate tax rates are often a point of debate during election cycles, as they directly affect businesses of all sizes. The current corporate tax rate is set at 21%, which was reduced from 35% following the 2017 Tax Cuts and Jobs Act (TCJA). Whether this rate will remain the same or see adjustments is a question that may hinge on election results.
Business Impacts
Changes in corporate taxes could potentially have a broad impact on the economy, including businesses’ ability to invest in growth, hiring, and innovation. If corporate tax rates are increased, businesses may face higher costs, which could affect profits and potentially lead to reduced stock prices for shareholders. Also, increasing corporate taxes could lead to higher consumer prices. On the other hand, if corporate taxes are reduced or remain the same, businesses might continue to benefit from a more favorable tax environment.
Small businesses and entrepreneurs should be especially mindful of any potential changes to tax credits or deductions that may be affected by corporate tax policies. This includes deductions for research and development (R&D) and other business-related expenses that help lower taxable income.
Estate Taxes: Potential for Changes
Estate taxes, which apply to the transfer of assets after death, may also be subject to changes following the election. Currently, the federal estate tax exemption is $12.92 million per individual in 2024, with a 40% tax rate on amounts above that threshold. There has been discussion in the past about potentially lowering the estate tax exemption, which could result in more estates being subject to the tax.
Estate Planning Considerations
For high-net-worth individuals and families, estate tax planning is a critical aspect of long-term financial strategy. If the estate tax exemption is reduced, more estates may face taxation, which could result in increased costs for heirs. In this case, reviewing estate plans and considering advanced strategies such as trusts or gifting may be important for minimizing tax liabilities.
However, it’s important to note that any potential changes to estate taxes may take time to be implemented. Monitoring the situation closely and consulting with an estate planning professional can help you stay prepared for any potential adjustments.
Retirement Accounts and Health Care: Other Potential Areas of Impact
While income taxes, capital gains, corporate taxes, and estate taxes tend to receive the most attention during election cycles, other areas of tax policy may also be affected by the outcome. Retirement accounts such as 401(k)s, IRAs, and Roth IRAs are often reviewed for potential tax changes. There may be proposals to adjust contribution limits, tax deferral benefits, or required minimum distributions (RMDs).
Additionally, Health Savings Accounts (HSAs) could potentially see changes depending on tax policy decisions. HSAs offer a triple tax advantage—contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are not taxed. Any adjustments to tax policies surrounding health care could have implications for how these accounts are used and managed.
How to Prepare for Potential Tax Policy Changes
While it’s impossible to predict exactly what will happen with tax policy after the election, there are steps you might consider preparing for possible changes:
- Stay Informed: Understanding the potential changes to tax policy and how they may affect you is essential. As the election draws nearer, more detailed proposals may be released, giving you a clearer picture of what to expect.
- Review Your Financial Plan: With potential changes on the horizon, it may be helpful to review your financial plan, especially regarding investments, retirement accounts, and estate planning. Ensuring that your strategy is flexible enough to accommodate tax policy adjustments can provide added security.
- Consider Tax-Advantaged Accounts: Utilizing tax-advantaged accounts such as IRAs, 401(k)s, and HSAs may help protect your savings from potential tax increases. Maximizing contributions to these accounts may offer tax deferral benefits and allow you to manage taxable events more effectively.
- Work with Us: Navigating potential tax policy changes can be complex, and working with us may help you assess how these changes could impact your financial goals. We can guide you through strategies that might allow you to remain tax-efficient in a shifting tax environment.
Conclusion
The upcoming election may bring changes to tax policy that could potentially affect individuals, families, businesses, and investors. While the exact outcomes are uncertain, it’s important to stay informed and consider the potential implications for your financial plan. Tax rates, capital gains taxes, corporate taxes, estate taxes, and other areas may all be subject to adjustments depending on the results of the election.
By understanding the possible changes and preparing for them, you can position yourself to navigate these shifts with confidence.
If you have any questions or want to learn more about taxes and the potential impact it may have on your financial plan, feel free to give us a call. You can also check out Chapter 6 of ‘Wealth on Purpose’ by Bryan Ballentine for more information.
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Sources:
- IRS: “Tax Brackets for 2024.”
- Tax Policy Center: “Analysis of Corporate Tax Changes.”
- Congressional Budget Office: “Potential Impact of Changes to Estate Taxes.”
- Urban-Brookings Tax Policy Center: “Capital Gains and Income Tax Implications.”
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This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
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